Did The Sale of "Gray Goods" Mushrooms Infringe a Grower's Trademark?

February 14, 2014

Hokto USA is a subsidiary of Japan-based Hokuto Co. Ltd. Hokuto Co. grows non-organic mushrooms in Japan. Hokto USA produces the same mushroom varieties in the United States as Hokuto Co. does in Japan, but Hokto USA's products are certified organic. To earn organic certification, Hokto USA's plants are state of the art and employ robotic machines in temperature controlled environments, all of which are computer controlled. Unlike other growers, Hokto USA does not use manure in its fertilizers. It uses a "sterilized culture medium made of sawdust, corn cob pellets, vegetable protein and other nutrients."

For a time, Hokto USA imported mushrooms from Hokuto Co. These mushrooms were grown in Japan but in a controlled environment so as to meet the requirements for US organic produce. The packaging was in English and not Japanese. A small amount of goods, however, was not organic, but the packaging for those items was obviously different, and identified Hokto USA as a distributor of Hokuto Co.

After obtaining trademarks in Japan, Hokuto Co. sought US trademark registration for word and design marks.

For a number of years, Concord Farms imported Hokuto Co.'s non-organic mushrooms into the United States. Because the purchases were placed through intermediary companies, Hokuto Co. was unaware of Concord Farms. Hokto USA learned that Concord Farms was sometimes marketing the goods it imported from Hokuto Co. as organic and as "made in the USA" although it displayed a Japanese-language label displaying the name of Hokuto Co. Those mushrooms were neither organic nor made in the USA. Concord Farms refused to cease selling these mushrooms and Hokto USA filed suit. Among the arguments made by Concord Farms was that the mushrooms it sold were "gray goods" meaning, that the goods were manufactured by Hokuto Co., and the sale of those Hokuto Co. goods were the actual goods. Concord Farms also argued that because Hokto USA sold some non-organic goods, Concord Farms to do the same. Hokuto Co. prevailed before the trial court, and Concord Farms appealed.

The Ninth Circuit appellate court, in affirming, noted that these issues "implicate[] the set of trademark principles governing so-called 'gray-market goods': goods that are legitimately produced and sold abroad under a particular trademark, and then imported and sold in the United States in competition with the U.S. trademark holder's products." The court decided that Concord Farm's items were not true gray goods because they were not genuine goods. The court recited the general rule that "genuine goods" are excluded from trademark protection and may be sold by any party so long as they are genuine, meaning that they were properly obtained and sold without modification. The court found that the goods sold by Concord Farms were not "genuine goods" and were thus covered by the trademark laws. As such, Hokuto Co. was within its right to force Concord Farms to stop selling the infringing goods.

More broadly, "genuine goods" are defined as those goods bearing a trademark that do not differ in any material way from the goods sold by the trademark holder. These are often referred to as "gray goods." Gray goods can fall into this category because the goods sold in the US and the goods sold overseas are sometimes the same (but are many times not). If material differences are found, they cannot be deemed "genuine" and the sale of the gray goods may infringe on the trademark. This makes sense in the scheme of trademark law. The purpose of a trademark is to ensure that the public recognizes that a product or service meets a specific standard by associating the trademark with the product. The purchaser, recognizing the trademark, relies on the branded item to deliver the expected level of good or service. If the trademark is used by another, but delivers an inferior product or service, that trademark, improperly used, has been damaged as it no longer represents the standard expected by the consumer. The consumer may therefore no longer purchase the trademarked item.

Here, the court noted the rigorous rules and standards under which Hokto USA grew its organic mushrooms. It also noted the absence of any of those rules for Concord Farms' goods. Concord Farm's goods were not organic and carried labels identifying the goods as produced in Japan. In short, the Concord Farms mushrooms were not produced to be organic, were not maintained using the rigorous rules in place at Hokto USA's plants, and the labels were misleading. Therefore, the court found that consumers could be confused by Concord Farms' products and could believe that Concord Farms was selling actual Hokuto Co. or Hokto USA's goods. A bad experience by one buying Concord Farm's goods would negatively impact the goodwill and brand reputation of the trademark holder.

Concord Farms attempted to argue that the trademark itself was defective, either because it was overbroad, to cover items not sold by Hokto USA, or because Hokuto Co. did not properly supervise Hokto USA, so it could not argue that the trademark brand would be damages by a lesser quality product. The court rejected all of these arguments.

They issue of gray goods is interesting because the line separating permissible and impermissible goods is often "gray." A review of the goods' manufacturing, marketing and sales is necessary, while considering elements of trademark law, to determine whether infringement is a viable claim.

Hokto Kinoko Company v. Concord Farms, Inc. (9th Circuit 2013)