Request for Ruling pursuant to Title 19, Code of Federal Regulations, Part 177; Conditions for admissibility of gray market restricted goods; foreign trade zone; bonded warehouse; removal of cellophane from cigarette cartons where cellophane-wrapped individual packages remain intact.

HQ 466891 June 18, 1999 RR:IT:IP 466891 GFM CATEGORY: Trademark Barry M. Boren, Esq. LAW OFFICES OF BARRY M. BOREN Dadeland Towers, Suite 412 9200 South Dadeland Blvd. Miami FL 33156 RE: Request for Ruling pursuant to Title 19, Code of Federal Regulations, Part 177; Conditions for admissibility of gray market restricted goods; foreign trade zone; bonded warehouse; removal of cellophane from cigarette cartons where cellophane-wrapped individual packages remain intact. Dear Sir: We refer to your letter of October 27, 1998, in which you request a ruling relative to the above-referenced matter. In your letter, you request a ruling regarding the admissibility of cartons of cigarettes into the United States where the cartons' cellophane wrapping has been removed. You state that the cigarettes being imported are, for the most part, gray market goods. That is, they are importations of foreign-made articles bearing a trademark identical to one owned and recorded by a citizen of the United States, or a corporation or association created or organized within the United States. Thus, you state the goods bear registered trademarks which are placed on the goods by either the owner of the trademark or its authorized licensee, and are sold outside the manufacturer's regular distribution channels. You state that although most cases will involve goods of foreign manufacture which were purchased abroad and are being imported into the United States for the first time, in other cases, the cigarettes will have been manufactured in the United States which are being re-imported as American goods returned. You request that we address both types of importations in our rulings.  FACTS: The requestor states that the contemplated importations involve cartons of cigarettes which have been purchased abroad and are being imported into the United States under Surgeon General "Warning Label Rotation Plans" submitted to the Federal Trade Commission ("FTC") as required by 15 U.S.C. § 1333. These plans, which are to be approved by the FTC and implemented by the importers, require, among other things, that importers file a list of ingredients used in the manufacture of tobacco products with the Department of Health and Human Services ("HHS") as required by 15 U.S.C. § 1335(a). The requestor states that documents verifying that each such prospective importer is in full compliance with these laws will be kept on file with the U.S. Customs Service in Miami. The requestor states that in the vast majority of the contemplated cases, the cartons of cigarettes are to be imported into the United States with the original health warning label placed on each pack as affixed by the original manufacturer. The cellophane on each individual pack is to remain intact as wrapped by the manufacturer and this cellophane is to remain intact from the time of manufacture, until the goods are sold to the ultimate consumer. At the time of importation the cellophane, on either the cartons or the individual packages, is neither torn nor tattered and the label matches the packages' color scheme. While the individual packages virtually always have health warning labels placed on the goods by the manufacturer (under the cellophane as required by law), in most instances, the cigarette cartons, will not. The FTC requires that the cartons, as well as the packs, contain the Surgeon General's Health Warning Label. In order to comply with the FTC requirements, importers of such goods must place a warning label sticker on each carton. Pursuant to the FTC statutes, these stickers cannot be placed over the cellophane, but must be placed directly on the box. Each importer, as part of its rotation plan, has certified to the FTC that they place such a sticker on every carton they import. The requirements as to the size, color and location of the stickers are mandated by statute (15 U.S.C. § 1333), and the individual rotation plans are approved by the FTC for each importer. There is no legal requirement that either packs or cartons of cigarettes be cellophaned; that is a decision that is made by the manufacturers and their customers. When manufacturers export cartons of cigarettes from the United States, in most cases, the off-shore account is given the option of having the cartons enclosed in cellophane or not. The requestor alleges that cigarettes manufactured for sale in the United States are never sold with cellophane around the cartons and the reason for this has nothing to do with the freshness of the packages. Every state in the United States requires that state revenue stamps be placed on each individual pack of cigarettes sold in that state. In order to apply the revenue stamp, a state stamping agent must open each carton of cigarettes, stamp each pack in the carton, return all 10 packs to the carton, and reseal the carton. According the requestor, since removing cellophane from the cartons would require extra work and expense for the stampers, cellophane is not used on domestic product. In most cases, when cartons of cigarettes are exported from the United States either wrapped in cellophane or not, they are returned to the United States in the same condition. The normal procedure is for this merchandise to be admitted into an Foreign Trade Zone (FTZ) where the cellophane is removed and a Surgeon General's Warning is placed on the cartons. Once the merchandise is in full compliance with the FTC requirements, a consumption entry (CF-7501) is filed for the merchandise. When the goods have cleared Customs, the merchandise is either shipped and sold to state revenue stampers, or if the importer is licensed by the state to do so, he/she may place the revenue stamps on each package in his/her own warehouse. The merchandise is then shipped to the retailer and sold to the customer without cellophane on the cartons in the same manner as cigarettes that never left the United States. ISSUES: 1. Does the admission of cartons of cigarettes into an FTZ with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but with the cellophane from the cartons removed, in and of itself constitute a violation of the Lanham Act (15 U.S.C. § 1125(a))? 2. Does the entry of cartons of cigarettes into a Customs Bonded Warehouse (CBW) with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but with the cellophane from the cartons removed, in and of itself constitute a violation of the Lanham Act (15 U.S.C. § 1125(a))? 3. Does the subsequent entry for consumption of cartons of cigarettes from an FTZ with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but the cellophane from the cartons removed in the FTZ immediately prior to entry for consumption, (for the purpose of placing labels on the cartons), in and of itself constitute a violation of the Lanham Act (15 U.S.C. § 1125(a))? 4. Does the entry of cartons of cigarettes where cellophane was never placed on the cartons by the manufacturers, but where there is intact cellophane on each individual pack (as placed on the goods by the manufacturer), in and of itself constitute a violation of the Lanham Act (15 U.S.C. § 1125(a))? LAW and ANALYSIS:  The disposition of the cases contemplated herein have involved enforcement relative to the Lanham Trademark Act (Act of July 5, 1946), notably chapter 540, Title VII, § 42 (60 Stat. 427), codified at 15 U.S.C. 1124 et. seq., notably section 1125(a) of the Act. In its current form, the “Act of July 5, 1946", the Lanham Trademark Act, at 15 U.S.C. § 1125(a)(1) provides that: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol or device...which: is likely to cause confusion...as to the affiliation, connection or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, or another person’s goods, services, or commercial activities shall be liable in a civil action by any person who believes that he or she is, or is likely to be damaged by such act. 15 U.S.C. § 1125(b) further provides that: Any goods marked or labeled in contravention of the provisions of this section shall not be imported into the United States, or admitted to entry at any customshouse of the United States... In recent years, Customs has issued two ruling letters and one memorandum relating to the issue of re-labeled cigarette packages. The ruling letters are HQ 455953 (SFW, dated August 5, 1993)(referred to as "Ardath 1") and HQ 459298 (SFW, dated March 1, 1995)(referred to as "Ardath 2"). The memorandum, HQ 465499 (GFM, dated April 14, 1998)(referred to as the "1998 Memorandum") was issued in response to a Customs-Port of Miami request for Internal Advice. Ardath I: In Ardath I, Customs was asked whether the Surgeon General's Health Warning Labels could be applied to cigarette packages in a Foreign Trade Zone ("FTZ") or in a Customs bonded warehouse ("CBW") before the goods were entered for consumption. It was Customs determination that, if the stickers are applied to the cigarette packages prior to importation or applied in an FTZ prior to entry, then such alteration may take place and that the cured cigarettes would be permitted entry. We concluded that the same would be true for cigarettes imported into a CBW under a valid rotation plan. Further, we stated that if the alteration occurs in a CBW without having been approved under a valid rotation plan, Customs may seize the goods when they are withdrawn for consumption entry (19 U.S.C. § 1595a(c) for violation of 26 U.S.C. § 5713) but must release them if they are withdrawn for exportation. Ardath II:  In Ardath II, the manufacturer asked whether slicing open the cellophane wrappers of individual cigarette packages and applying a Surgeon General's Warning Label constituted a violation of the Lanham Act (15 U.S.C. § 1125(a)). While Customs acknowledged that such a case did not involve violations of the gray market statutes, as enunciated in various court cases and in 19 U.S.C. § 1526(a) and (b), Customs did find a violation of 15 U.S.C. § 1125(a). In Ardath II, the importer sliced open the cellophane surrounding each pack of cigarettes. This created a rectangular hole in the cellophane which allowed them to place the Surgeon General's warning label on each pack. The cellophane surrounding the pack was left torn and tattered and a label was used which did not match the package's color scheme. The manufacturer contended that this damaged the products and gave consumers the mistaken impression that Ardath (the manufacturer) dealt in "seconds" and "rejected products," thereby damaging the company's reputation. Customs agreed with Ardath's assertions and went on to say: Damage to the wrapper will, most likely, have an effect on product quality. Gray market goods often take longer than authorized goods to reach wholesale/retail outlets. Gray Market goods also often travel circuitous routes from point of manufacture to point of sale. In Customs opinion, it is likely that the cigarettes whose wrappers are cut will be stale when sold to customers. In addition, Customs acknowledges that the possibility of insect infestation rises when the wrapper is torn. Impairment of product quality adversely affects Ardath's reputation as well as the consumers' interests. The ruling letter goes on to state that, Despite these problems, however, there can be no violation of the Lanham Act absent a likelihood that consumers will be confused as to the source of the cigarettes. [Emphasis supplied.] In summary, Customs found that 'the practice of mutilating the cigarettes' packaging violated 15 U.S.C. § 1125(a)." However, Customs expressly limited this decision: only to situations in which unauthorized parties, outside the trademark owner's established channels of distribution, alter a product's packaging in a manner that results in damage to the product itself. 1998 Memorandum: Subsequent to the issuance of these two rulings, Customs in Miami asked Headquarters for a clarification as to whether or not the restrictions pertaining to the removal of cellophane from cigarette packages also applied to the removal of cellophane from cigarette cartons. In requesting said clarification, it was explained by local Customs officers that such imported cigarettes were typically exported, American-made cigarettes which were being imported in cartons in which the cellophane wrapping had been removed prior to their undergoing a sea voyage. While the 1998 Memorandum followed and reiterated the holdings and findings of two Ardath rulings, in the final sentence, Customs stated that: Importations of uncellophaned cartons of cigarettes, the trademarks of which have been recorded for protection with U.S. Customs which have undergone such alteration of packaging, shall be held to have damaged the trademark owner's reputation and created a likelihood of consumer confusion as to the source or sponsorship of the cigarettes, in violation of 15 U.S.C. § 1125(a) and 19 U.S.C. § 1595a(c)(2)(C). (emphasis added) As Customs stated in the 1998 Memorandum: Generally, a Section 1125(a) violation cannot occur unless two conditions exist. First, the unauthorized distribution of goods must result in damage to the trademark owner's reputation. Second, there must exist a likelihood that consumers will be confused as to the source, origin, or sponsorship of the goods. It is contended by the requestor that neither of these conditions exist in the contemplated cases. It is contended that consumers are presented with a package identical to the package they would buy if they were buying domestic cigarettes which never left the United States. There are no torn labels or wrappers and the labels placed on the cartons with the Surgeon General's Health Warnings are in FDA compliance with all statutory requirements of 15 U.S.C. § 1333, and the rotation plan approved by the FTC. In virtually all instances, the labels are identical to the labels the manufacturer places on the product for domestic consumption and placed in the same location. The requestor contends that there is nothing which would give consumers of the product the impression that these goods were seconds or otherwise rejected merchandise, nor is there anything about these cigarettes which would damage the company's reputation. The requestor further points out that Customs held in Ardath II (at footnote 10) that the “cellophane wrapper around the pack keeps the moisture from the tobacco in the product.” To this, the requestor retorts that “since the moisture is retained within the pack's cellophane barrier, whether or not there is also cellophane around the carton makes no difference in the way the cigarette burns, nor are such cigarettes more uncomfortable to inhale than usual. There is no evidence to show that removing the cellophane from the cartons results in damage to the trademark owner's reputation when the cellophane around the packs remains intact.”  Requestor also remarks that: “In Ardath 1, Customs recognized this issue and stated that for goods altered in a CBW or FTZ: The proximity of the place of alteration and the points of importation and distribution further minimizes the possibility of moisture damage...and...insect infestation.” The requestor contends that, if this is true when the cellophane is cut, it is also true when the cellophane around each pack remains intact. The requestor submits that there is no damage to the product when the packs are wrapped and there is no cellophane on the cartons, or when the cartons are double wrapped on the outbound shipment and single wrapped on the inbound shipment. Lastly, requestor asserts that even if it is assumed that the double wrapping in cellophane serves a purpose, there is no evidence to show how long this double cellophane must remain on the goods to confer this benefit. To presume damage to the product and to presume a § 1125(a) violation in such a case, without any empirical evidence to support such a conclusion, it is contended, exceeds any authority granted to Customs under the Lanham Act. In applying the requestor’s arguments to cases in which the double cellophane is intact even after the merchandise arrives in an FTZ, it is advanced that the goods are exposed to single cellophane status for less time than domestically distributed product. When manufacturers ship goods to domestic warehouses, the cigarettes leave the manufacturer with only one layer of cellophane. In the contemplated cases, the merchandise arrives at the (FTZ) with two layers of cellophane. It is only after its arrival that one layer of cellophane is removed. For these reasons, the requestor submits that when cellophane around the carton is removed in an FTZ after its return to the United States, there is no basis for refusing entry to this merchandise under the Lanham Act. The other issue upon which the requestor seeks guidance relates to whether merchandise without the double cellophane can be admitted to an FTZ. Even if it is assumed that the lack of double cellophane on the return voyage to the United States might cause damage to the product, and for this reason, Customs may prevent its entry for consumption, it is still contended that Customs has no right to prevent the products' admission into an FTZ. It is contended that cigarettes not in the proper condition at the time of admission into the FTZ are not prohibited, but restricted merchandise, or in the alternative, conditionally admissible merchandise, both of which are admissible into an FTZ. FTZs operate under the authority of the FTZ Board (19 U.S.C. § 81b) which is empowered by law to carry out and enforce the FTZ Act (19 U.S.C. § 81a(b)). It is the responsibility of Customs to guard the zones, provide for the entry of merchandise, and protect the revenue (19 U.S.C. § 81d). What can be done to merchandise is specified in 19 U.S.C. § 81c(a) which provides that: Foreign and domestic merchandise of every description, except such as is prohibited by law, may, without being subject to the customs laws of the United States, except as otherwise provided in this chapter, be brought into a zone and may be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, or otherwise manipulated, or be manufactured except as otherwise provided in this chapter, and be exported, destroyed, or sent into customs territory of the United States therefrom, in the original package or otherwise, but when foreign merchandise is so sent from a zone into customs territory of the United States, it shall be subject to the laws and regulations of the United States affecting imported merchandise. [Emphasis added.] In Ardath I, Customs specifically held that: Cigarettes that do not bear the required markings are considered restricted, not prohibited, merchandise. They are considered restricted because cigarettes not permitted entry for labeling violations may be entered if a defect in labeling is cured. The FTZ Act allows merchandise to be reconditioned, relabeled, repacked, etc., within a FTZ. If merchandise is not in compliance with the law, it can be brought into an FTZ to either be brought into compliance, or exported. To allow Customs to prevent these acts from taking place because either a boat or plane landed outside the perimeter of the zone, and is then brought to the zone in bond makes the entire FTZ Act a nullity. The Act specifically says that non-admissible goods can "be brought into the zone." Such goods are moved in bond and remain in Customs custody until admitted into the zone. 19 U.S.C. 1552; 19 CFR 18.11, 18.12 and 146.11. The language contemplated that goods will first have to land and be transported to the FTZ. The FTZ Act does not forbid such transit and does not nullify the right to bring such non-conforming goods into the zone. If a defect in labeling can be cured in an FTZ, then there is no reason why merchandise without cellophane cannot be brought into an FTZ, and be manipulated and checked to see whether or not the product has been damaged by the lack of double cellophane. If damage is found, then the product can either be exported or destroyed. If no damage is found, there is no violation of 15 U.S.C. § 1125(a). Even in the case of a bonded warehouse, Customs distinguishes between prohibited goods which cannot enter (i.e.; counterfeit goods, etc.) and goods which are permitted entry for warehousing into a CBW. In the bonded warehouse manual § 4.2(b)(1) Customs states that: Merchandise whose importation is prohibited may not be entered for warehouse. However, merchandise whose entry into the U.S. commerce is prohibited may be entered for warehousing for exportation or for manipulation to be put into condition to be eligible for U.S. consumption. The importation of this merchandise is not prohibited; it is only refused entry into U.S. commerce if it is not in a condition eligible for U.S. consumption. For these reasons, we conclude that even merchandise without cellophane on the carton must be allowed admission into an FTZ and the owner allowed to either bring the merchandise into condition for U. S. consumption, or to export or destroy the merchandise. HOLDINGS: 1. The admission of cartons of cigarettes into an FTZ with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but with the cellophane from the cartons removed, does not, in and of itself constitute a violation of the Lanham Act (15 U. S.C. § 1125(a)) where product or package degradation does not exist. 2. The entry of cartons of cigarettes into a Customs Bonded Warehouse (CBW) with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but with the cellophane from the cartons removed, does not, in and of itself constitute a violation of the Lanham Act (15 U.S.C. § I 125(a)) where product or package degradation does not exist. 3. The entry for consumption of cartons of cigarettes from an FTZ with the cellophane on each individual pack intact (as placed on the goods by the manufacturer), but the cellophane from the cartons removed in the FTZ immediately prior to entry for consumption (for the purpose of placing labels on the cartons), does not, in and of itself constitute a violation of the Lanham Act (15 U. S.C. § 1125(a)) where product or package degradation does not exist. 4. The entry of cartons of cigarettes where cellophane was never placed on the cartons by the manufacturers, but where there is intact cellophane on each individual pack (as placed on the goods by the manufacturer), does not, in and of itself constitute a violation of the Lanham Act (15 U.S.C. § 1125(a)) where product or package degradation does not exist. Sincerely, Michael L. Smith, Acting Chief Intellectual Property Rights Branch