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Iberia Foods Corp v. Romeo ( 1998 )


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  •                                                                                                                            Opinions of the United
    1998 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    7-30-1998
    Iberia Foods Corp v. Romeo
    Precedential or Non-Precedential:
    Docket 97-5424
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1998
    Recommended Citation
    "Iberia Foods Corp v. Romeo" (1998). 1998 Decisions. Paper 178.
    http://digitalcommons.law.villanova.edu/thirdcircuit_1998/178
    This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
    University School of Law Digital Repository. It has been accepted for inclusion in 1998 Decisions by an authorized administrator of Villanova
    University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
    Filed July 30, 1998
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 97-5424
    IBERIA FOODS CORP.
    v.
    ROLANDO ROMEO, JR.
    d/b/a ROL-ROM FOODS
    Rolando Romeo, Jr., t/a
    Rol-Rom Foods,
    Appellant
    On Appeal from the United States District Court
    for the District of New Jersey
    (D.C. No. 93-cv-01690)
    Argued Monday, April 27, 1998
    BEFORE: ALITO, RENDELL and GARTH,
    Circuit Judges
    (Opinion filed July 30, 1998)
    Stephen L. Baker (Argued)
    Stephen L. Baker, P.A.
    359 East Main Street
    Somerville, New Jersey 08876
    Attorney for Appellant
    John G. Gilfillan, III (Argued)
    Kenneth L. Winters
    Carella, Byrne, Bain, Gilfillan,
    Cecchi, Stewart & Olstein
    6 Becker Farm Road
    Roseland, New Jersey 07068
    Attorneys for Appellee
    OPINION OF THE COURT
    GARTH, Circuit Judge:
    This is a trademark action brought by Iberia Foods
    against Rolando Romeo, Jr. and his company, Rol-Rom
    Foods (collectively, "Rol-Rom"), to enjoin Rol-Rom's sale of
    household cleaning products under the Mistolin trademark
    owned by Iberia. The district court granted summary
    judgment in favor of Iberia, and Rol-Rom has appealed.
    Because the Mistolin products sold by Rol-Rom are
    "genuine" under Section 32 of the Lanham Act, 15 U.S.C.
    S 1114, we will reverse.
    I.
    Iberia Foods is a Brooklyn-based wholesale distributor of
    grocery store products that owns the United States
    trademark to Mistolin household cleaners. The line of
    Mistolin products includes soaps, tile cleaners, and laundry
    detergents, and is offered for sale at grocery stores and
    supermarkets both in Puerto Rico and in certain
    metropolitan areas in the United States for a few dollars a
    bottle.
    Mistolin products are manufactured exclusively in Puerto
    Rico by Mistolin Caribe, Inc. ("Caribe"). In addition to
    selling Mistolin to Iberia for resale in the United States,
    Caribe markets Mistolin directly to distributors in Puerto
    Rico for resale in the Puerto Rican market. Although both
    Iberia and Caribe sell Mistolin products, the two companies
    service entirely separate markets: Caribe sells Mistolin only
    in Puerto Rico to Puerto Rican distributors, and Iberia sells
    Mistolin only in the continental United States.
    2
    The business arrangement between Iberia and Caribe
    dates back to 1988, when Iberia acquired the United States
    trademark to Mistolin from Caribe's parent company,
    Mistolin Dominicana, C.A. ("Dominicana").1 Although the
    legal effect of the 1988 agreement is disputed, its terms
    granted Iberia "all the rights, title and interest in and to
    [the Mistolin] trademark insofar as they relate to the United
    States." In exchange for ownership of the Mistolin
    trademark, Iberia agreed to purchase Mistolin exclusively
    from Caribe.
    The defendant in this case, Rol-Rom Foods, is a New
    Jersey-based distributor of household cleaning products
    that purchases Mistolin products on the open market in
    Puerto Rico and sells them in New York and New Jersey.
    Although Rol-Rom has never purchased Mistolin products
    directly from Caribe, it is undisputed that the Mistolin sold
    by Rol-Rom was originally sold by Caribe for resale in the
    Puerto Rico market. By obtaining Mistolin in Puerto Rico
    and selling it in New York without Iberia's involvement, Rol-
    Rom has been able to offer Mistolin for sale in direct
    competition with Iberia at a substantial discount from
    Iberia's price.
    II.
    In April 1993, Iberia filed a four count complaint against
    Rol-Rom seeking injunctive relief and damages. The
    principal count in the complaint alleged that Rol-Rom's sale
    of Mistolin products constituted infringement of Iberia's
    trademark in violation of S 32 of the Lanham Act, codified
    at 15 U.S.C. S 1114.2 Rol-Rom's answer denied that it had
    infringed Iberia's mark, alleged several affirmative defenses,
    and added a number of counterclaims. Following discovery,
    _________________________________________________________________
    1. Although Caribe is technically a subsidiary of Dominicana, for the
    sake of simplicity we will refer to Caribe rather than Dominicana when
    discussing the 1988 agreement. This substitution has no effect on our
    resolution of this appeal.
    2. The remaining counts against Rol-Rom alleged violations of common
    law trademark and service mark infringement, common law unfair
    competition, and New Jersey statutory unfair competition under N.J.S.A.
    56:4-1.
    3
    both parties moved for summary judgment on the federal
    trademark infringement count.
    Before the district court on summary judgment, Iberia
    argued that Rol-Rom had clearly infringed Iberia's
    trademark. According to Iberia, the 1988 agreement
    between Iberia and Caribe had transferred the rights to the
    Mistolin trademark in the continental United States to
    Iberia, but had allowed Caribe to retain the trademark
    rights to Mistolin in Puerto Rico. By buying Mistolin in
    Puerto Rico and selling it in the continental United States,
    Iberia contended, Rol-Rom had circumvented the quality
    control measures enforced by Iberia on all the Mistolin
    products it sold. Accordingly, Iberia claimed, Rol-Rom's
    Mistolin was not "genuine," and Rol-Rom's sales constituted
    infringement of Iberia's trademark because it injured the
    goodwill Iberia had invested in the mark.
    Rol-Rom's view of the case contrasted sharply with
    Iberia's. According to Rol-Rom, the 1988 agreement had
    transferred all of Caribe's United States trademark rights to
    Iberia. Because Puerto Rico is considered part of the
    "United States" for the purpose of federal trademark law,
    see 15 U.S.C. S 1127, Rol-Rom claimed that the 1988
    agreement had granted Iberia the Mistolin trademark rights
    in Puerto Rico as well as in the continental United States.
    According to Rol-Rom, Iberia's longstanding failure to
    challenge Caribe's sales of Mistolin to Puerto Rican
    distributors provided Rol-Rom with two affirmative defenses
    to Iberia's action. First, Rol-Rom argued that Iberia's failure
    to exercise control over its mark constituted a"naked
    license" that had led to de facto abandonment of the
    Mistolin trademark.3 Second, Rol-Rom claimed that Iberia
    had impliedly consented to Caribe's sales of Mistolin in
    Puerto Rico, such that Iberia had relinquished its
    _________________________________________________________________
    3. Rol-Rom's pleadings describe its abandonment argument as a
    counterclaim, rather than as an affirmative defense. Abandonment,
    however, is generally considered an affirmative defense to infringement,
    rather than the type of actionable wrong that would sustain an
    independent claim or counterclaim. See, e.g., Exxon Corp. v. Oxxford
    Clothes, Inc., 
    109 F.3d 1070
    , 1075-76 (5th Cir.), cert. denied, 
    118 S. Ct. 299
    (1997). For the sake of simplicity, we will refer to Rol-Rom's
    abandonment argument as an affirmative defense.
    4
    trademark rights to the Mistolin sold by Rol-Rom pursuant
    to the "first sale" or "exhaustion" doctrine.4
    On March 26, 1996, the district court entered an order
    denying Rol-Rom's motion for summary judgment and
    granting Iberia's summary judgment motion. Addressing
    Rol-Rom's defenses first, the district court held that Rol-
    Rom's first sale and abandonment defenses were meritless
    because the uncontroverted evidence in the record made
    clear that neither Caribe nor Iberia had intended that Iberia
    would possess the right to prevent Caribe from marketing
    Mistolin in Puerto Rico. When Caribe and Iberia had agreed
    to transfer the Mistolin trademark rights to Iberia "insofar
    as they relate to the United States," the district court held,
    they had intended to transfer only the rights covering the
    continental United States, where Iberia was already
    distributing Mistolin products. Because Iberia had no right
    to control Caribe's sales of Mistolin in Puerto Rico, it had no
    ability either to authorize Caribe's "first sale" of Mistolin or
    to grant Caribe a "naked license" to sell it in Puerto Rico.
    Accordingly, the district court held that the first sale
    (exhaustion) and abandonment doctrines were inapplicable.
    In any event, the district court noted, the Mistolin
    trademark had clearly not been abandoned because the
    mark continued to have significance among purchasers in
    the continental United States.
    Having dispensed with Rol-Rom's affirmative defenses,
    the district court turned to Iberia's motion for summary
    judgment. Here, the district court referenced its prior
    discussion of Iberia's view that the Mistolin sold by Rol-Rom
    was not "genuine" because it never passed through Iberia's
    post-manufacture quality controls. In that discussion, the
    district court had also noted the presence of "record
    evidence showing that [Iberia] has in fact instituted some
    quality control procedures over products it received from
    _________________________________________________________________
    4. According to the "first sale" or "exhaustion" doctrine, a trademark
    owner's authorized initial sale of its product into the stream of commerce
    extinguishes the trademark owner's rights to maintain control over who
    buys, sells, and uses the product in its authorized form. See, e.g.,
    Sebastian Int'l, Inc. v. Longs Drug Stores Corp., 
    53 F.3d 1073
    , 1076 (9th
    Cir. 1995).
    5
    Caribe." In its motion for summary judgment, Iberia argued
    that this evidence entitled Iberia to summary judgment on
    its federal trademark infringement count. The district court
    agreed, although it did not specify the basis for its implicit
    conclusion that Rol-Rom's Mistolin was not "genuine."
    The litigation regarding Iberia's remaining claims and
    Rol-Rom's counterclaims continued until June 4, 1997,
    when the district court acceded to the parties' request to
    enter a final order and injunction that would allow Rol-Rom
    to pursue an appeal without further delay. The final order
    enjoined Rol-Rom from selling Mistolin products that had
    not first been distributed by Iberia, and ordered that if Rol-
    Rom violated the injunction it would be held in contempt,
    fined, and forced to pay Iberia's attorney's fees. Further, the
    final order stated that Rol-Rom's counterclaims and Iberia's
    claim for damages were withdrawn with prejudice, subject
    to the right of the parties to reinstate their claims if the
    district court's March 26, 1996 were to be reversed on
    appeal.5
    Rol-Rom filed a timely appeal. We will reverse.
    III.
    On summary judgment, we exercise plenary review,
    construing all evidence and resolving all doubts raised by
    affidavits, depositions, answers to interrogatories, and
    admissions on file in favor of the non-moving party. See
    SEC v. Hughes Capital Corp., 
    124 F.3d 449
    , 452 (3d Cir.
    1997). Our task is to identify and explain the substantive
    law governing the action, and then in light of that law
    determine whether there is a genuine dispute over
    dispositive facts. See Ciarlante v. Brown & Williamson
    _________________________________________________________________
    5. Although we need not reach such issues to resolve Iberia's S 32 claim,
    we think it is proper in light of the district court's arrangement and our
    remand to note that we agree with the district court's conclusion that
    the 1988 agreement transferred to Iberia only those trademark rights
    relating to the continental United States. Thus, we agree with the
    district
    court that Iberia owns the trademark rights to Mistolin in the continental
    United States; that Caribe retains the rights to Mistolin in Puerto Rico;
    and that Rol-Rom's abandonment and "first sale" arguments are
    meritless.
    6
    Tobacco Corp., 
    143 F.3d 139
    , 145 (3rd Cir. 1998) (citing
    Anderson v. Liberty Lobby, Inc., 
    477 U.S. 242
    , 248, 106 S.
    Ct. 2505, 2510, 
    91 L. Ed. 2d 202
    (1986)). If upon review of
    cross motions for summary judgment we find no genuine
    dispute over material facts, then we will order judgment to
    be entered in favor of the party deserving judgment in light
    of the law and undisputed facts. See 
    Ciarlante, 143 F.3d at 145-46
    .
    IV.
    Although the parties have devoted their attention to the
    merits of Rol-Rom's affirmative defenses, we consider the
    primary question raised by this appeal to be one addressed
    only in passing by the parties. The question is: has Iberia
    established that the Mistolin sold by Rol-Rom is not
    "genuine" according S 32 of the Lanham Act? Because we
    conclude that Iberia has failed to establish that the Mistolin
    sold by Rol-Rom is not "genuine," we hold that Rol-Rom is
    entitled to summary judgment, and that the order of the
    district court must be reversed.
    A.
    Iberia's federal trademark claim proceeds under S 32 of
    the Lanham Act, 15 U.S.C. S 1114.6 Under the sway of
    Justice Holmes's landmark opinion in A. Bourjois & Co. v.
    Katzel, 
    260 U.S. 689
    , 
    43 S. Ct. 244
    (1923), courts have
    construed this statute to grant trademark owners the right
    to enjoin the sale of products containing the owner's
    _________________________________________________________________
    6. This statute states in relevant part that:
    (1) Any person who shall, without the consent of the registrant--
    (a) use in commerce any reproduction, counterfeit, copy, or
    colorable
    imitation of a registered mark in connection with the sale,
    offering
    for sale, distribution, or advertising of any goods or services on
    or
    in connection with which such use is likely to cause confusion, or
    to cause mistake, or to deceive . . .
    . . . shall be liable in a civil action by the registrant for the
    remedies hereinafter provided.
    15 U.S.C. S 1114 (1997).
    7
    authentic mark when the products offered for sale are
    similar but not identical to those offered by the trademark
    owner. The need for such protection has arisen most often
    in the context of so-called "gray goods" cases. In such
    cases, holders of United States trademarks affixed to
    products manufactured abroad have used S 32 of the
    Lanham Act as a means of preventing the sales of inferior
    parallel imports. See, e.g., Original Appalachian Artworks,
    Inc. v. Granada Elecs., Inc., 
    816 F.2d 68
    (2d Cir. 1987)
    (owner of Cabbage Patch Kids trademark entitled to
    injunctive relief from sales in United States of Spanish
    version of dolls without "adoption" feature). The scope of
    the action is not limited to gray goods cases, however. The
    same theory has been used to enjoin the sale of domestic
    products in conditions materially different from those
    offered by the trademark owner. See, e.g., Warner-Lambert
    Co. v. Northside Dev. Co., 
    86 F.3d 3
    (2d Cir. 1996) (owner
    of Halls cough drops trademark entitled to injunction
    against sale of Halls cough drops past their expiration
    date).
    As a matter of doctrine, a trademark owner attempting to
    use S 32 to prevent an infringement must establish that the
    products sold by the alleged infringer are not "genuine."
    See, e.g., Weil Ceramics and Glass, Inc. v. Dash, 
    878 F.2d 659
    , 671-73 (3d Cir. 1989); El Greco Leather Prod. Co. v.
    Shoe World, Inc., 
    806 F.2d 392
    , 395-99 (2d Cir. 1986); Shell
    Oil Co. v. Commercial Petroleum, Inc., 
    928 F.2d 104
    , 107-08
    (4th Cir. 1991). The test for whether an alleged infringer's
    products are genuine asks whether there are "material
    differences" between the products sold by the trademark
    owner and those sold by the alleged infringer. See Societe
    Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 
    982 F.2d 633
    , 638 (1st Cir. 1992); Martin's Herend Imports, Inc. v.
    Diamond & Gem Trading USA, 
    112 F.3d 1296
    , 1302 (5th
    Cir. 1997). If there are no material differences between the
    products sold, then the products offered by the alleged
    infringer are "genuine" and an infringement action under
    S 32 of the Lanham Act must fail. Whether differences are
    material so that an alleged infringer's products are non-
    genuine is a matter of law that we review de novo. See El
    
    Greco, 806 F.2d at 395
    ; Casa 
    Helvetia, 982 F.2d at 642
    ,
    642 n.9.
    8
    The purpose of the material differences test is to
    determine whether the allegedly infringing products are
    likely to injure the goodwill developed by the trademark
    owner in the trademarked goods. See Weil 
    Ceramics, 878 F.2d at 671
    . When the products sold by the alleged
    infringer and the trademark owner contain identical marks
    but are materially different, consumers are likely to be
    confused about the quality and nature of the trademarked
    goods. See Casa 
    Helvetia, 982 F.2d at 641
    . Characteristics
    of the alleged infringer's goods that are not shared by the
    trademark owner's goods are likely to affect consumers'
    perceptions of the desirability of the owner's goods. See
    Weil 
    Ceramics, 878 F.2d at 671
    ; Martin's 
    Herend, 112 F.3d at 1302
    . Sales of the alleged infringer's goods will tarnish
    the "commercial magnetism" of the trademark, injuring the
    trademark owner. Mishawaka Rubber & Woolen Mfg. Co. v.
    S.S. Kresge Co., 
    316 U.S. 203
    , 205, 
    62 S. Ct. 1022
    , 1024
    (1942) (Frankfurter, J.).7 In such circumstances, the alleged
    _________________________________________________________________
    7. A few examples may prove helpful here. In Original Appalachian
    Artworks, Inc. v. Granada Elecs., Inc., 
    816 F.2d 68
    (2d Cir. 1987), the
    Second Circuit granted an injunction to the owner of the United States
    trademark for Cabbage Patch Kids dolls against the importation of
    Cabbage Patch Kids dolls manufactured in Spain for the Spanish
    market. Although the Spanish dolls looked very similar to the domestic
    ones, the Spanish dolls lacked certain features (in particular, the
    ability
    to be "adopted" by the owner) that had sparked consumer interest and
    sales in the United States. The court held that the domestic trademark
    owner was entitled to an injunction because the domestic trademark
    owner's goodwill was injured by consumer association of its mark with
    the less desirable Spanish dolls. 
    See 816 F.2d at 73
    .
    In Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 
    982 F.2d 633
    , 638 (1st Cir. 1992), the First Circuit granted an injunction to the
    owner of the United States trademark for Italian-made Perugina
    chocolates against the parallel importation of Venezuelan-made Perugina
    chocolates. The court catalogued a series of differences between the
    Venezuelan imports and the products sold by the trademark owner,
    including differences in the composition of the chocolate, the packaging,
    the price, and the conditions under which the chocolates were
    transported and stored. The court held that the differences were likely to
    result in consumer confusion and that the trademark owner was entitled
    to injunctive relief. 
    See 982 F.2d at 644
    .
    9
    infringer's goods are considered "non-genuine" and the sale
    of the goods constitutes infringement.
    In contrast, when the differences between the products
    prove so minimal that consumers who purchase the alleged
    infringer's goods "get precisely what they believed that they
    were purchasing," Weil 
    Ceramics, 878 F.2d at 672
    ,
    consumers' perceptions of the trademarked goods are not
    likely to be affected by the alleged infringer's sales. See
    Casa 
    Helvetia, 982 F.2d at 641
    . Although consumers may
    be unaware of the precise avenues that a given product has
    traveled on its way to the supermarket shelf, the authentic
    trademark on the alleged infringer's goods is an accurate
    indicator of their nature and quality. Cf. Prestonettes, Inc.
    v. Coty, 
    264 U.S. 359
    , 368, 
    44 S. Ct. 350
    , 351 (1924).
    Thus, the goods may be considered "genuine." This does
    not mean that the trademark owner suffers no economic
    harm from the alleged infringers' sales, but it does mean
    that S 32 of the Lanham Act does not offer a remedy to the
    trademark owner. See Weil 
    Ceramics, 878 F.2d at 672
    .
    Because consumer preferences are as fickle and diverse
    as the human imagination, it is impossible to devise an
    exhaustive list of the types of differences between products
    that can be considered material for the purposes of the
    genuineness test. Compare Granada 
    Elecs., 816 F.2d at 73
    (holding that imported Cabbage Patch Kids dolls are
    materially different from domestic dolls because imported
    dolls cannot be "adopted" by domestic owners) with Shell
    
    Oil, 928 F.2d at 107-08
    (holding that bulk oil purchased
    _________________________________________________________________
    Finally, in Martin's Herend Imports, Inc. v. Diamond & Gem Trading
    USA, 
    112 F.3d 1296
    , 1302 (5th Cir. 1997), the Fifth Circuit enjoined the
    parallel importation of Hungarian Herend porcelains brought to the
    United States over the objections of the United States trademark owner.
    The court held that there were material differences between the
    porcelains sold by the trademark owner and the alleged infringer
    because the trademark owner had chosen to sell only select items in the
    United States. The alleged infringer, in contrast, sold many items that
    were not offered by the trademark owner. In light of the delicate task of
    maintaining goodwill in high-end artistic products, the court held, this
    difference was enough to entitle the United States trademark owner to
    an injunction against the parallel importation. 
    See 112 F.3d at 1302
    .
    10
    from Shell and resold by oil wholesaler was not genuine
    because it was not stored according to Shell's
    specifications). Any differences that are likely to damage the
    goodwill developed by the trademark owner can be deemed
    material.
    B.
    Iberia argues that material differences exist between the
    Mistolin sold by Rol-Rom and that sold by Iberia because
    Iberia conducts a "quality control" inspection of every
    shipment of Mistolin on receipt from Caribe. 8 According to
    the record, Iberia inspects every box of Mistolin it receives,
    and rejects products that do not meet its specifications.
    Iberia contends that its rejection of substandard goods has
    raised the quality of the Mistolin sold by Iberia so that it is
    materially different from the uninspected Mistolin sold by
    Rol-Rom.
    When a trademark owner arranges to have its mark
    placed on a product manufactured by another company,
    the owner's rigorous quality control and inspection
    procedure on receipt from the manufacturer has often been
    recognized as the basis of a material difference between
    products sold by the trademark owner and those offered by
    another company without the trademark owner's stamp of
    approval. See, e.g., El 
    Greco, 806 F.2d at 395
    (shoes); Casa
    
    Helvetia, 982 F.2d at 642
    (chocolates). The reason for this
    is evident. Because the quality of a manufacturer's output
    can be uneven, and consumers can be expected over time
    _________________________________________________________________
    8. In the "Statement of the Case" portion of its brief, Iberia remarks in
    passing that Rol-Rom has sold Mistolin products, and in particular,
    Mistolin All Purpose Cleaner, "which Iberia has discontinued and/or has
    determined not to sell under the Mistolin mark." Appellee's Br. at 8. Were
    this statement supported in the record, it might have provided the basis
    for a material difference between the Mistolin products sold by Iberia and
    Rol-Rom. See, e.g., Martin's 
    Herend, 112 F.3d at 1302
    (holding that
    parallel importer's porcelain figurines were materially different from
    trademark owner's figurines because "at least 50 percent" of the
    figurines sold by the parallel importer were not sold by trademark
    owner). Here, however, the record fails to support Iberia's statement: the
    record indicates that both Iberia and Rol-Rom discontinued selling
    Mistolin All Purpose Cleaner. See App. 167 (Iberia); App. 281 (Rol-Rom).
    11
    to notice the quality of the products they purchase, a
    trademark owner's inspection on receipt from the
    manufacturer may be a necessary part of maintaining
    consumer goodwill associated with its mark. Cf . Casa
    
    Helvetia, 982 F.2d at 643
    .
    Because quality control measures may create subtle
    differences in quality that are difficult to measure but
    important to consumers, courts do not require trademark
    owners to show that the actual quality of the inspected
    goods is measurably higher than that of the uninspected
    goods. See, e.g., El 
    Greco, 806 F.2d at 395
    ; Shell 
    Oil, 928 F.2d at 107
    . At the same time, "quality control" is not a
    talisman the mere utterance of which entitles the
    trademark owner to judgment. See, e.g., Polymer Tech.
    Corp. v. Mimran, 
    37 F.3d 74
    , 78-80 (2d Cir. 1994) (rejecting
    trademark owner's claim of infringement based on
    circumvention of owner's quality control efforts). Rather,
    the test is whether the quality control procedures
    established by the trademark owner are likely to result in
    differences between the products such that consumer
    confusion regarding the sponsorship of the products could
    injure the trademark owner's goodwill. See Warner-Lambert
    Co. v. Northside Dev. Co., 
    86 F.3d 3
    , 6 (2d Cir. 1996)
    (trademark holder must show that it uses substantial and
    nonpretextual quality control procedures such that non-
    conforming sales will diminish the value of the mark).
    According to Jesus Garcia, the chairman of the board of
    Iberia, Iberia's inspection of Mistolin upon receipt from
    Caribe consists of looking for "external self-evident
    problems." App. 139. First, the exterior packaging of the
    deliveries is inspected to make sure that the boxes are not
    damaged. Second, an Iberia employee takes a "random
    sample" of Mistolin and looks at it. If the packaging is
    damaged or there is "something wrong" with the sample,
    Iberia destroys the goods and receives credit from Caribe.
    Iberia has no standard explaining when there is"something
    wrong" with a sample, however: the employee simply looks
    at the Mistolin and smells it to determine whether or not it
    seems "off." Although Garcia stated in his deposition that
    Iberia sends products to a laboratory for inspection if
    something seems "wrong" with a shipment of Mistolin,
    12
    Garcia could not recall any time within the previous ten
    years when this was actually done. App. 136-40.
    The reason that Iberia's inspection is limited to looking
    for obvious defects is that since acquiring the trademark in
    1988, Iberia has never made any efforts to learn how Caribe
    manufactures Mistolin products or what ingredients they
    contain. App. 92 ("Iberia Foods Corp. has no knowledge as
    to what are the contents or ingredients used in the
    products manufactured by Mistolin Caribe Inc.") (statement
    of Jesus Garcia). Iberia simply orders Mistolin products
    from Caribe, and assumes that the bottles it receives
    contain "Mistolin" cleaner. In fact, Iberia's sole participation
    in the design or manufacture of any Mistolin product
    entailed helping Caribe design new U.S. labels when federal
    law began mandating that labels contain new product
    warnings. App. 147-48. Otherwise, everything about
    Mistolin, from its ingredients to the U.P.C. symbols placed
    on its bottles, has been determined by Caribe. The result of
    Iberia's "hands off " approach is that its quality control
    process is limited to determining whether the Mistolin
    products it receives from Caribe have been damaged during
    shipment, and whether random samples look and smell
    "right."9
    We conclude that Iberia's quality inspections are
    insufficient to create a material difference between the
    inspected Mistolin sold by Iberia and the uninspected
    Mistolin sold by Rol-Rom. By limiting its inspection to "self-
    evident" defects, Iberia does no more than weed out those
    bottles of Mistolin that are entirely unsaleable on the open
    market. This "weeding out" is insufficient because bottles
    so obviously defective as to be unmarketable are not likely
    to reach consumers in any event. First, distributors will
    generally try to catch such blatant defects to keep their
    _________________________________________________________________
    9. In the one instance in which Iberia rejected Mistolin sent by Caribe
    for
    a defect that was not obvious, Garcia conceded that the defect had not
    been discovered during Iberia's inspection. This occurred in 1993, when
    Caribe sent Iberia a shipment of Mistolin that looked normal when it first
    arrived, but later deteriorated in the bottle. Although Garcia did not
    explain how this defect was eventually discovered, he did state that it
    was not detected when the shipment underwent Iberia's quality control
    procedures. App. 136.
    13
    retailers happy: this is as true when the distributor
    happens to be the trademark owner as when the distributor
    is another company such as Rol-Rom. See App. 285 ("[W]e
    don't sell anything that's damaged or broken . . . because
    our clients wouldn't stand for it.") (statement of Rolando
    Romeo, Jr.). Those defects that do pass by the distributors
    will be caught by retailers, who are unlikely to place broken
    bottles of Mistolin on their shelves if they expect to stay in
    business for long. Because unmarketable Mistolin products
    will not generally reach consumers regardless of whether
    Iberia catches the defects first, Iberia's limited inspection is
    insufficient to create a material difference between the
    Mistolin offered to consumers through Iberia and that
    offered to consumers through Rol-Rom.
    The limited scope of the inspection performed by Iberia
    distinguishes this case from other cases in which a
    trademark owner's quality control mechanism created a
    material difference between the products offered by the
    trademark owner and the alleged infringer. In those cases,
    the trademark owner's inspection reflected a deliberate
    effort to ensure that the quality of the product matched the
    high standards set by the trademark owner. For example,
    in El Greco, the trademark owner's agent would inspect the
    manufacturer's product before shipment. Unless the agent
    issued an inspection certificate stating that the
    manufacturer's goods fully complied with the trademark
    owner's standards and specifications, the goods were never
    shipped to the trademark owner for sale. 
    See 806 F.2d at 395
    . In Casa Helvetia, the trademark owner conducted
    laboratory tests on the chocolates it received from the
    Italian manufacturer, destroyed those chocolates that were
    beyond a fixed expiration date, and transported its
    products in special refrigerated containers. Even the alleged
    infringer conceded that its quality control procedures
    differed "radically" from the strict regimen followed by the
    trademark owner to maintain the quality of the products
    sold. 
    See 982 F.2d at 642-43
    .
    In both El Greco and Casa Helvetia, the trademark
    owner's inspection was an integral part of a careful effort to
    ensure that the quality of the product matched the high
    standards set by the trademark owner. Circumventing that
    14
    inspection threatened the trademark owner's efforts to
    maintain the goodwill that consumers associated with the
    mark. In this case, however, Iberia has hardly set any
    standard at all: rather, it has deferred almost entirely to
    Caribe's judgment of what Mistolin products are and how
    they are to be manufactured. Iberia's "hands off " approach
    has reduced its quality control inspection to a de minimis
    check designed to make sure that the products it receives
    from Caribe are not obviously unmarketable. We are
    satisfied that such an inspection is insufficient to create a
    material difference between the products sold by Iberia and
    those sold by Rol-Rom.
    V.
    Because there is no material difference between the
    Mistolin sold by Iberia and that sold by Rol-Rom, we hold
    that the Mistolin sold by Rol-Rom is "genuine" and that
    Iberia's attempt to use S 32 of Lanham Act to block Rol-
    Rom's sales must fail. Because buyers of Rol-Rom's Mistolin
    get precisely what they believe that they are purchasing,
    see Weil 
    Ceramics, 878 F.2d at 672
    , the goodwill associated
    with Mistolin products is not harmed by Rol-Rom's sales.
    We therefore reverse so much of the district court's June
    4, 1997 order as entered judgment for Iberia on the federal
    trademark infringement count, and direct the district court
    to enter judgment for Rol-Rom on this count. Pursuant to
    the terms of the June 4, 1997 order, which directed the
    reinstatement of remaining claims if the district court's
    order were reversed, we will remand to the district court for
    further appropriate proceedings.
    A True Copy:
    Teste:
    Clerk of the United States Court of Appeals
    for the Third Circuit
    15