Osawa & Co. v. B & H PHOTO

OPINION AND ORDER

The owner of U.S. trademarks pertaining to goods of foreign manufacture seeks by this action to enjoin others from independently importing and dealing in goods of the same manufacture, bearing the same marks lawfully applied abroad by the foreign owner of the marks. The commerce against which this action is directed is colloquially named the “grey market”.

Plaintiff Osawa & Company, a Delaware corporation, is the registered owner of United States trademark rights for the Mamiya marks, 1 which are used on high quality medium-format photographic equipment manufactured in Japan by the Mamiya Camera Co. (“Mamiya Co.”). Mamiya Co. is the owner of the Mamiya marks in Japan,' where it lawfully places those marks on the camera equipment it manufactures. J. Osawa & Co. Ltd., a Japanese entity (“Osawa-Japan”), is the exclusive worldwide distributor of Mamiya Co.’s products. *1165 It has granted exclusive U.S. distribution rights to the plaintiff, to whom it sells. Osawa-Japan and Mamiya Co. own, respectively, 93% and 7% of plaintiffs stock. Osawa-Japan owns 30% of Mamiya Co.’s stock. Under the “Genuine Goods Exclusion Act,” 19 U.S.C. § 1526, in May 1982 plaintiff, as the owner of the U.S. trademark rights, was granted by the U.S. Customs Service an order of exclusion barring the unauthorized importation of goods bearing the Mamiya marks.

The defendants B & H Photo and Tri State Inc. are New York discount camera dealers. They are alleged to have imported cameras and related equipment bearing the Mamiya marks to the United States without plaintiff’s authorization and in violation of the Customs order of exclusion.

Plaintiff moves for a preliminary injunction barring the defendants from advertising and dealing in such Mamiya-marked equipment. Plaintiff alleges that its right to such an injunction is conferred by the Exclusion Act as well as § 42 of the Lanham Act, 15 U.S.C. § 1124, by §§ 32 and 43 of the Lanham Act, 15 U.S.C. §§ 1114, 1125, forbidding trademark infringement and unfair competition, and by state law principles of unfair competition and trademark dilution.

This is plaintiff’s second effort to obtain an injunction against grey market importation and sale of Mamiya-marked products. On the first occasion, plaintiff, then using its predecessor name Bell & Howell: Mamiya Co. (reflecting that at the time it was 50%-owned by Bell & Howell Company), brought a similar action in the U.S. District Court for the Eastern District of New York against another dealer, Masel Supply Co. Judge Edward Neaher, finding trademark infringement and a substantial likelihood of confusion, granted a preliminary injunction. Bell & Howell: Mamiya Co. v. Masel Supply Co., 548 F.Supp. 1063 (E.D.N.Y.1982). The Court of Appeals ruled that plaintiff had not adduced sufficient evidence of likelihood of confusion to carry its burden of showing irreparable harm and vacated the injunction. Bell & Howell: Mamiya Co. v. Masel Supply Co., 719 F.2d 42 (2 Cir.1983).

In the Masel action, plaintiff had proceeded on the theory that proof of infringement would entitle it to injunctive relief and therefore offered no substantial evidence of harm. The hearing in this action was held after the Court of Appeals’ reversal of Masel. At this hearing plaintiff remedied the deficiency, offering substantial proofs of irreparable harm.

“To obtain a preliminary injunction in this circuit, a party must make ‘a showing of (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.’ Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) (per curiam);” Bell & Howell: Mamiya Co. v. Masel Supply Co., 719 F.2d at 45. I find that the standard has been thoroughly and convincingly met. I find that plaintiff has proved entitlement to the preliminary injunction under the Exclusion Act, 19 U.S.C. § 1526, and, although it is unnecessary at this stage to decide on additional grounds, under the trademark laws as well.

I. Facts

Plaintiff is the duly registered owner in the United States of the Mamiya marks. Although a controlling interest of plaintiff’s stock is owned by Osawa-Japan, plaintiff functions as a legally separate entity with its board of directors and executive staff. For a number of years it has been the exclusive distributor of Mamiya products in the United States. Over these years (including also the period during which plaintiff was 50%-owned by Bell & Howell Company), plaintiff has devoted extensive expenditures, activities and energies to the successful development of goodwill for the Mamiya marks.

The Mamiya equipment is sophisticated and expensive, designed for use by professional photographers and advanced amateurs. Accordingly it includes a wide *1166 range of peripheral equipment designed for special applications. In order to be able to supply promptly the needs of its professional photographer customers, plaintiff maintains at all times a stock of all such peripheral equipment.

Plaintiff purchases advertising and incurs other public relations expenses. To educate users, dealers and potential customers in the advantages and complex capabilities of its equipment, it organizes seminars, which are conducted in various parts of the country. To stimulate sales, it occasionally offers rebates, sometimes consisting of a free piece of peripheral equipment to one who purchases a Mamiya camera during a specified period.

Plaintiff distributes the Mamiya equipment through authorized camera dealers who apply for dealerships. Plaintiffs sales policy is based on its perception of a fundamental difference between equipment of such complexity and a simple amateur’s camera. Because of the high cost and complexity of the equipment and because of the sophisticated demands of purchasers, plaintiff foresees a continuing relationship between dealer and customer involving advice, service and the future purchase of specialized peripheral equipment expanding the capabilities of the camera. According to its perception, a purchaser of a Mamiya camera who was unable to obtain such support from his dealer would soon be a dissatisfied customer. Accordingly, plaintiff has been unwilling to distribute its equipment through any camera store but will authorize and sell only to those dealers who demonstrate a willingness to take in an adequate full line stock so that they will be both able and motivated to service future needs of their customers.

Plaintiff also devotes considerable care to handling, including inspection on arrival. It offers free warranty repairs, performed either by its employees or by authorized service representatives, who must receive training in the equipment.

Defendants are discount camera dealers, offering camera equipment often at prices substantially cheaper than are available at other stores. Defendants advertise in national photography magazines. These advertisements characteristically are concerned with price; they set forth, mostly in small print, items of available equipment with prices. They sell by mail and by telephone to credit card purchasers, as well as over the counter. Defendants formerly were authorized Mamiya dealers purchasing from plaintiffs. Their dealerships were terminated as a result of the dispute over grey market merchandising.

Defendants advertise and sell Mamiya equipment that has been imported in violation of the Customs exclusion order. They are found also to have imported such merchandise. 2 They sell this equipment at retail prices far below the prices of authorized dealers. In some cases they sell at prices cheaper than those at which plaintiff offers its merchandise to its dealers.

The reasons for the price disparity have not been fully shown by the evidence. Defendants contend it is because Osawa-Japan, the worldwide distributor, discriminates against the U.S. consumer by selling to plaintiff at arbitrarily higher prices than it charges to distributors in other countries. However, defendants have offered no proof that this is true. Nor have they shown in which countries their equipment is purchased or from whom.

Plaintiffs point to several possible factors explaining price differences. One is currency fluctuation, especially the recent strength of the U.S. dollar as against certain European currencies. Another possible explanation suggested by plaintiff is price differences set by Osawa-Japan that *1167 are not arbitrary or discriminatory but are justified by differing cost factors. 3

Third, plaintiff has convincingly proved that in support of the Mamiya trademarks it incurs substantial costs that defendants do not have. These include the whole range of activities described above in which plaintiff engages in order to create, maintain, protect and enhance the goodwill of the Mamiya marks. 4

Defendants seek to undercut this proof by showing that they too incur expenses of similar nature. But their contentions miss the point and do not alter the conclusion. For example, defendants point out that they also advertise, contending that this undermines plaintiffs argument as to its advertising expenses. Indeed defendants place ads, but they do not undertake advertising to publicize the quality of the Mamiya products. To the extent their ads mention the Mamiya name, it is only to show, in a one-line-per-item listing, how cheap their prices are. Thus it misses the point to say they have advertising. The expense they do not have is advertising to support the Mamiya marks.

Similar observations are pertinent as to handling expenses. No doubt the defendants incur some handling expenses. But defendants have no incentive to support the goodwill of any mark they sell; their sales are based solely on price advantage. It stands to reason that they conduct their operations as cheaply as possible and do not undertake the same degree of care (equals expense) in inspection and handling as plaintiff does to insure consumer satisfaction with Mamiya products.

Defendants’ response is also inadequate on the subject of inventory costs. It was noted above that plaintiff maintains a vast inventory of related peripheral gadgets of special application to be able to satisfy promptly the needs of its professional photographer customers. Plaintiff contends convincingly that this is another cost not incurred by defendants. Defendants try to counter this point by showing that their purchase invoices over a substantial period have included every item in plaintiff’s catalogue. This altogether misses the point. Defendants may well have sold every catalogue item at one time or another. That does not show that defendants maintain an inventory. Defendants have no reason to engage in such an expensive practice, and there is no evidence that they have done so.

Defendants of course have borne no warranty service expense. This is a particularly significant item in several respects. First, plaintiff has not only borne warranty expenses on its own merchandise but has also provided warranty service on grey market equipment sold by defendants. Defendants argue that the latter injury is self-inflicted. Plaintiff has no obligation to warranty defendants’ sales and could refuse the service. Defendants also argue that plaintiff could handle the packaging and warranty cards in such a way as to make the purchasing public better aware which cameras were warrantied and which were not. These observations are factually correct but miss the point. Plaintiff gives warranty service on defendants’ grey market sales not out of stupidity or neglect but because plaintiff’s management perceives that dissatisfied purchasers of Mamiya cameras will damage the reputation of the Mamiya mark, which is the most significant asset on which plaintiff’s business is founded. The customers do not know the cameras they purchased are from the grey market because defendants do not tell them. Thus, as to warranty repairs, not only are defendants operating free of a *1168 significant cost that plaintiff bears, but their sales increase plaintiff’s cost.

Similarly, it is all very well for defendants to argue that plaintiff can protect itself to a degree by spending additional money so as to better warn the public which cameras carry, and which do not carry, warranties. It seems to me a significant equitable factor that defendants could also have undertaken to warn their customers that their merchandise was not imported by the authorized U.S. Mamiya distributor and carried no warranty protection. Instead the opposite has been done. B & H has delivered to its customers a notice that falsely advises that the merchandise is protected by the manufacturer’s warranty and instructs the customer that “if you bring or send the [defective] item to a manufacturer’s authorized service agency, your item will be repaired at no cost to you.” See Plaintiff’s Exhibits 79, 80, 85. This aspect of the defendants’ conduct can be properly characterized as bad faith. It deceives the public and conceals the significance to the customer of the double market structure defendants have created. Defendants tell the customers the good news about their cheap prices. But they conceal or affirmatively misrepresent the bad news. Plaintiff is left with the choice of providing free warranty service on defendants’ merchandise or suffering damage to the reputation of its marks.

Defendants now state that they will offer their own warranty service on their grey Mamiya merchandise. Apart from the fact that this is a newly contrived litigation strategy designed to deal with a glaring weakness in defendants’ position, it is also an unsatisfactory resolution that (in ways discussed below) risks to increase, rather than solve, the problems of trademark confusion.

II. Irreparable Harm

I turn now to the issue of likelihood of confusion and irreparable harm, which was insufficiently proved in Masel, but which here was proved in abundance. Plaintiff has shown consumer confusion, damage in consumers’ eyes to the reputation of the mark, and devastating effects on plaintiff’s business resulting from defendants’ grey market imports.

Plaintiff has shown a drastic decline in its sales in 1983 as compared with average levels over the past nine years. Concommitantly, it has laid off a large part of its personnel, including a significant part of the repair force, and has suffered consequent delays in time needed for warranty repairs. The advertising budget for the Mamiya mark has been severely slashed. Competition from grey marketers has caused demoralization, disaffection and misunderstanding among authorized dealers, 40% of whom have dropped the Mamiya line since 1980. There is evidence that some dealers have misunderstood the cause of the problem, believing that plaintiff was granting preferred price treatment to their competitors.

Another aspect of the harm is that plaintiff’s advertising expenditures and public relations efforts are incurred largely for the benefit of its competitors, the grey market sellers, who free ride on plaintiff’s publicity.

Also in order to avoid consumer confusion, disaffection and resentment, plaintiff has performed warranty repairs and honored rebate offers on grey market cameras, essentially furnishing free service and benefit to support the sales of its competitors.

A number of the circumstances mentioned above as harmful to plaintiff’s business also cause damage to its goodwill and to the public reputation of its Mamiya marks. Naturally, a reduced advertising budget means reduced opportunity to publicize the marks and consequently further reduced sales. The widespread disaffection among authorized dealers by reason of the grey market price competition creates a substantial risk of loss of enthusiasm or bad-mouthing (where it matters most since buyers are likely to look to dealers for advice on brands and equipment). Delay in performing warranty repairs as a result of staff reductions also creates resentment directed against the brand. Plaintiff’s rep *1169 utation also suffers when defendants perform inadequate inspections of merchandise. For example, grey market cameras have been found to contain instruction manuals written in foreign languages, which causes understandable consumer dissatisfaction.

The issue of warranties, discussed above, is of significant importance on the subject of irreparable harm and confusion. For such an expensive, complicated and sensitive piece of equipment, a prospective purchaser wants assurance that a responsible organization stands behind and guarantees the equipment. The submission to plaintiff of grey market cameras claiming for warranty repairs is significant evidence of consumer confusion. If plaintiff refuses to honor these claims, further confusion will result, coupled with public mistrust of the mark. If it does honor these warranty claims, it is subsidizing its competitors’ business. As noted above, B & H’s misleading assurance that the goods are warranted by the manufacturer has unnecessarily increased such confusion. Similar confusion arises when grey market cusomters apply for the benefits of plaintiff’s offers of rebates. Again its choice is essentially to risk the confusion and resentment (which defendants have done nothing to obviate) or to subsidize defendants’ sales by honoring the claims.

Consumer confusion also arises from the wide price disparities between legitimate and grey imports. Consumers will wonder why the same equipment can be purchased so much more cheaply at one place than at others. Many will no doubt assume the explanation is that plaintiff is gouging, which will engender hostility to the mark.

Counsel for B & H has conducted an extraordinarily vigorous and imaginative, although ultimately unpersuasive, defense. As to each item of harm, defendants contend that it is either exaggerated or attributable to a different cause, in many cases self-inflicted. Of course, in economic analysis, no single answer is ever complete or sufficient. There is undoubtedly a measure of validity to some of counsel’s arguments, but they do not undercut the essential persuasiveness of the plaintiff’s ease.

As to confusion over the warranty obligation and rebates, defendants argue (and the Court of Appeals in Mosel suggested) that the confusion can be avoided or diminished if plaintiff includes in its packages forms essential to claim these benefits. Defendants show that Hasselblad, a medium-format competitor, has adopted the use of such forms. While it is no doubt true that by reliance on such forms plaintiff might diminish confusion and reduce its receipt of warranty claims for grey cameras, this would -not deal adequately with the problem of confusion and loss of goodwill. Many purchasers of grey goods would not realize they lacked warranty protection until they sought to claim. The realization would come too late and would engender hostility.

Furthermore, the argument sits ill in the mouth of B & H since it has gratuitously contributed to the confusion in the manner described above.

As noted above, B & .H has developed a new strategy in litigation and now undertakes that it will warrant the grey Mamiya merchandise that it sells. (It also offers to parallel all Mamiya rebate offers by similar offers of its own.) This ingenious stratagem, however, offers only a superficial solution. More realistically it can be seen as aggravating the problem. For the warranty is of value to the goodwill of the mark only if offered by one who has the incentive to uphold the reputation of the mark. B & H would have no such incentive. Plaintiff would have no assurance that B & H’s warranty repairs would be properly performed or that the obligation would be graciously accepted. It would be constantly subject to the risk that B & H would disavow the obligation or perform inadequate repairs. Disparities between plaintiff’s and defendants’ performance of warranty work would further confuse the marketplace as to the standing and meaning of the Mamiya mark.

I note, in response to a question raised by the Court of Appeals in Mosel, that *1170 plaintiff cannot be adequately protected by the remedy of accounting. An accounting could not purport to protect against consumer confusion, loss of goodwill and injury to the reputation of the marks. Even as to transfer of the grey marketer’s profits, the remedy is inadequate in these circumstances. For grey marketers operate at (or outside) the fringes of legality. Their operations are in large part held in secrecy, as evidenced by the defendants’ refusal to furnish essential disclosure in the discovery proceedings. Their business records, to the extent here disclosed, are scanty and informal. Furthermore, it appears that there are numerous dealers in grey market merchandise. It would be both difficult and expensive for plaintiff even to know their identities, much less to attempt to monitor their sales. In short, there is no way plaintiff could rely on an accounting to give it any reasonable protection.

I find that within the meaning of the Masel case and the numerous prior precedents, plaintiff has proved that it has suffered irreparable harm and will continue to suffer' it if a preliminary injunction is not granted pending final resolution on the merits.

III. Balance of Hardships

The balance of hardships tips decidedly in plaintiff’s favor as does the balance of the equities. The principal undertaking of plaintiff’s business is the promotion of the Mamiya marks in connection with the importation and distribution of Mamiya equipment. Plaintiff has already suffered great injury to that business and will continue to suffer if grey marketing continues. It has incurred big losses and contends convincingly that its survival is threatened.

The hardship that would be imposed on defendants by a preliminary injunction is of a comparatively trivial order. Defendants are dealers in all manner of photographic equipment. Undoubtedly they are realizing significant profits from dealing in Mamiya grey goods, but there is no suggestion that an injunction foreclosing this element of their profits would have any serious impact on the overall conduct of their business.

Defendants furthermore have no expectation of making such profits a continuing aspect of their business. These profits are available to defendants only because they have been willing to violate a U.S. Customs order. If the lawfulness of the Customs order is sustained in the final resolution of this litigation, defendants will of course be barred from further pursuing those profits. And even if they win the litigation and procure a judgment voiding the Customs order of exclusion, that will also deprive defendants of the opportunity to earn these profits. For then they will face open competition from those who are now deterred by sensitivity to the illegality of such importing, whereas now the competition is restricted to those prepared to violate the Customs order. It is therefore clear, balancing not only the weight of the hardships but the equities as well, that the balance tips decidedly in plaintiff’s favor.

IV. The Merits

Although the Court of Appeals’ discussion in Masel focused on proofs of harm and included no discussion or ruling on the substantive legal questions, it could be construed to express skepticism as to whether an infringement action can lie against goods genuinely marked abroad. 5

I respectfully believe that when the issue presents itself for full review, any such doubts will be resolved, see A. Bourjois & Co. v. Katzel, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923); A. Bourjois & Co. v. Aldridge, 263 U.S. 675, 44 S.Ct. 4, 68 L.Ed. 501 (1923) (per curiam); Model Rectifier Corp. v. Takachiho International, Inc., 221 U.S.P.Q. 502 (9 Cir.1983); Sturges v. Clark D. Pease, Inc., 48 F.2d 1035 (2 Cir.1931) (A.N. Hand, J.); E. Leitz, Inc. v. Watson, 152 F.Supp. 631, 635-37 (D.D.C. *1171 1957), aff'd, 254 F.2d 777 (D.C.Cir.1958); Roger & Gallet v. Janmarie, Inc., 245 F.2d 505 (C.C.P.A.1957). I find likelihood of success on the merits (and a fortiori a fair ground for litigation), and I accordingly grant a preliminary injunction.

A. Universality, Territoriality and a Separate Local Goodwill

A hundred years ago the view was widely held that if a trademark was lawfully affixed to merchandise in one country, the merchandise would carry that mark lawfully wherever it went and could not be deemed an infringer although transported to another country where the exclusive right to the mark was held by someone other than the owner of the merchandise. See Derenberg, Territorial Scope and Situs of Trademarks and Good Will, 47 Va.L.Rev. 753 (1961). This view, sometimes referred to as the “universality” principle, underlay a series of decisions of the Circuit Court under which U.S. trademark owners holding contracts for the exclusive right to import foreign trademarked goods were held powerless as against others who purchased abroad goods genuinely marked abroad and imported them to the U.S. for sale. See Apollinaris Co. v. Scherer, 27 F. 18 (C.C.S.D.N.Y.1886); Fred Gretsch Mfg. Co. v. Schoening, 238 F. 780 (2 Cir.1916); A. Bourjois & Co. v. Katzel, 275 F. 539 (2 Cir.1921), rev’d, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923).

However, the Court of Appeals’ Bourjois decision was overturned both by Act of Congress, see Tariff Act of 1922, Pub.L. No. 67-318, tit. III § 526, 42 Stat. 858, 975 (1922), and by the Supreme Court, see A. Bourjois & Co. v. Katzel, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923). In Katzel, plaintiff had purchased the U.S. business and the U.S. trademark rights for JAVA, a French cosmetic powder. The defendant purchased genuine JAVA powder in France, imported it to the U.S. and sold it under the JAVA mark. The district court had granted plaintiff an injunction. The Court of Appeals vacated the injunction, holding that since defendant’s merchandise was genuine French JAVA powder there could be no infringement. In an oft cited opinion of Justice Holmes, the Supreme Court reversed and reinstated the injunction, explaining that the true significance of the trademark was not to indicate the origin or manufacture of the goods, but rather to signify the local business goodwill of the domestic owner of the mark. See 260 U.S. at 692, 43 S.Ct. at 245. The genuine French JAVA powder was found to infringe the U.S. owner’s exclusive right to that mark.

Later that year, in A. Bourjois & Co. v. Aldridge, the theory of Katzel was extended to § 27 of the Trademark Act of 1905, the predecessor of § 42 of the Lanham Act, 15 U.S.C. § 1124, which excluded from entry into the U.S. marks that “copy or simulate” registered U.S. marks. The Supreme Court ruled, in favor of the same plaintiff, that the Collector of Customs was required to exclude from entry genuine goods bearing the French “manon Lescaut” mark, because the French mark was held to “copy or simulate” the assignee’s identical U.S. mark.

While Katzel was pending in the Supreme Court, Congress likewise acted to overturn the decision of the Court of Appeals. In 1922, it passed the Genuine Goods Exclusion Act, § 526 of the Tariff Act of 1922 (later reenacted as § 526 of the Tariff Act of 1930), 19 U.S.C. § 1526. This statute made it illegal to

import into the United States any merchandise of foreign manufacture if such merchandise ... bears a trademark owned by a citizen of, or by a corporation ... created or organized within, the United States ... unless the written consent of the owner is produced at the time of making entry.

Since Holmes’ decision, the universality principle has faded and been generally supplanted by the principle of “territoriality,” upon which the Bourjois rulings were based. This principle recognizes that a trademark has a separate legal existence under each country’s laws, and that its proper lawful function is not necessarily to *1172 specify the origin or manufacture of a good (although it may incidentally do that), but rather to symbolize the domestic goodwill of the domestic markholder so that the consuming public may rely with an expectation of consistency on the domestic reputation earned for the mark by its owner, and the owner of the mark may be confident that his goodwill and reputation (the value of the mark) will not be injured through use of the mark by others in domestic commerce. See A. Bourjois & Co. v. Katzel, 275 F. 539, 543-44 (2 Cir.1921) (Hough, J., dissenting). See also Sturges v. Clark D. Pease, Inc., 48 F.2d 1035 (2 Cir.1931); E. Leitz, Inc. v. Watson, 152 F.Supp. 631, 635-37 (D.D.C.1957), aff'd, 254 F.2d 777 (D.C.Cir.1958); Roger & Gallet v. Janmarie, Inc., 245 F.2d 505, 509-10 (C.C.P.A.1957). The territoriality of trademark rights is reflected in several Supreme Court opinions, which ground the doctrine in the independent sovereignty of nations, see Ingenohl v. Walter E. Olsen & Co., 273 U.S. 541, 544, 47 S.Ct. 451, 452, 71 L.Ed. 762 (1927); Baglin v. Cusenier Co., 221 U.S. 580, 594-97, 31 S.Ct. 664, 672-74, 55 L.Ed. 863 (1911); see also George W. Luft Co. v. Zande Cosmetic Co., 142 F.2d 536, 539 (2 Cir.) cert. denied, 323 U.S. 756, 65 S.Ct. 90, 89 L.Ed. 606 (1944), as well as in the view that trademark rights arise out of use of the mark in a particular geographic market, see United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 98, 39 S.Ct. 48, 51, 63 L.Ed. 141 (1918); Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 415-16, 36 S.Ct. 357, 361, 60 L.Ed. 713 (1916); see also La Societe Anonyme des Parfums LeGalion v. Jean Patou, Inc., 495 F.2d 1265, 1271 (2 Cir.1974).

The universality principle upon which the older cases had been decided was flawed in several related respects. First, it failed to recognize that legal rights within one sovereignty are creatures of that sovereignty’s law. The establishment by A of legal rights to exclusivity in one country could obviously not satisfactorily be squared with B’s establishment of exclusive right in a second country, if either right (much less if both) were thought to extend across the world universally. The principle was perhaps based on an idealistic view of the world as a single marketplace. That view, however, did not conform to reality or to international treaty. While it might have been possible to imagine the development of a unified world marketplace, organized on the same set of assumptions that have dominated the creation of a single marketplace among the United States, the development between nations did not occur in that fashion. See Paris Convention for the Protection of Industrial Property, March 20, 1883, as revised, art. 6, quater, 21 U.S.T. 1583, 24 U.S.T. 2140, T.I.A.S. No. 6923, 7727 (authorizing territorial assignments of trademark rights subject to national law); General Inter-American Convention for Trade Mark and Commercial Protection, Feb. 20, 1929, art. 11 (authorizing territorial transfers given reliable proof, subject to national law of transfer and registration). See generally Derenberg, Current Trademark Problems in Foreign Travel and the Import Trade, 49 T.M.R. 674, 690-96 (1958).

A second flaw, an outgrowth of the first, is the failure to recognize that, within one country, a mark may represent a factually different goodwill from that which the mark signifies elsewhere. A few examples illustrate the importance of the distinction between the goodwill associated simply with the product name and that of the domestic distributor.

(a) Suppose a manufacturer makes in Japan and sells under his trademark X a fine computer; the reputation of the X mark is high in the country of manufacture and in certain other countries, where it is distributed and serviced under equally high standards. However, the U.S. distributor and owner of mark X conducts its business' in a shoddy way: fails to inspect the equipment for damage upon importation; handles it without care in distribution; fails to stock and make available a broad inventory of needed parts and attachments; fails to provide user instruction programs; establishes no maintenance and repair ser *1173 vice; provides grudging, slow and incompetent warranty service or no warranty at all. It is readily perceived that mark X will have an altogether different value and significance in the U.S. than elsewhere, because the mark does not merely identify the manufacturer; it signifies the goodwill (or in this example the bad-will) of the U.S. owner.

(b) Keeping the same basic example but altering certain facts, suppose the local owner of the X mark earned an excellent reputation not only by selling quality equipment under the mark but also by conscientiously providing all the peripheral services whose absence was noted in (a). Then the mark will come to represent an excellent public reputation. It is easy to see, in connection with the present dispute, how the reputation attached to the mark of a conscientious domestic distributor could be seriously injured if strangers were free to import and sell the computer under its brand name. For they would be trading on X’s earned domestic reputation and would have no incentive to insure the continuing goodwill of the mark. Purchasers from the grey market importers, although buying essentially the same equipment, might receive damaged goods, unsatisfactory warranty protection or inadequate service, etc. The reputation of the X mark would inevitably be damaged at the markholder’s expense for deficiencies over which he had no control.

(c) The point is still more clearly made if the foreign markholder and the domestic markholder seek to develop the goodwill in different directions. Suppose that the mark had originally applied to conservative, costly, French high fashions and continued to be used only in that manner in the U.S. with great success, but that in the meantime the French trademark owner finds for whatever reasons that his profits are dwindling in the French market and decides to use the famous mark on a new line of low-priced clothes of daring fashion catering to the young and wild. Third parties then import the cheap, young and wild clothes bearing their “genuine” French mark to the U.S., where the mark has been developed by its local owner as a status symbol catering to the wealthy and conservative. If the U.S. mark owner were powerless to prevent the marketing of the new French line in the U.S. under his mark, he would promptly suffer a destruction, or in any event a drastic alteration, of the goodwill associated with his U.S. mark.

These examples illustrate that a mark may have not only a separate legal basis but also a different factual significance in each separate country where the local mark owner has developed an independent goodwill. That is the basis of the territoriality . principle recognized by Justice Holmes in the Bourjois decisions. The principle has become still more solidly implanted in United States law by the 1962 amendment to § 32 of the Lanham Act, 15 U.S.C. 1114, which repealed the requirement that a plaintiff in a trademark action show confusion as to “source of origin” of the goods. See Syntex Laboratories, Inc. v. Norwich Pharmacal Co., 437 F.2d 566, 568 (2 Cir.1971). 6

The universality decisions were superficially and deceptively consistent with the trademark doctrine of “exhaustion.” Under this doctrine, as applied within the borders of a sovereignty, a markholder may no longer control branded goods after releasing them into the stream of commerce. After the first sale, the brandholder’s control is deemed exhausted. Down-the-line retailers are free to display and advertise *1174 the branded goods. Secondhand dealers may advertise the branded merchandise for resale in competition with the sales of the markholder (so long as they do not misrepresent themselves as authorized agents). See Prestonettes, Inc. v. Coty, 264 U.S. 359, 44 S.Ct. 350, 68 L.Ed. 731 (1924); Trail Chevrolet, Inc. v. General Motors Corp., 381 F.2d 353 (5 Cir.1967); Chrysler Corp. v. Thayer Plymouth Center, Inc.,