Gray Markets: A Growing Concern
Updated: Sep 10, 2019
What are gray markets?
“Gray market” is the term used to describe the sale of goods through unauthorized channels, such as resellers. Gray market goods are branded goods protected by trademark, patent or copyright, which are sold into a market without the consent of the intellectual property owner in that market. Gray market goods include products that are legally manufactured by the brand owner or under license from them. Therefore, they are genuine articles, not counterfeit items. Gray market goods are also referred to as “parallel imports”.
Looking at the sellers, parallel import sellers may be unauthorized sellers utilizing a legal loophole allowing re-sale of purchased goods, but may also be authorized sellers selling out of their territory.
Why parallel import?
Parallel importing occurs as a part of international trade and as such may be inevitable to some extent. The size of gray markets continues to expand, making it a growing concern. This expansion is the result of different factors, mainly the increasingly global nature of commerce, and today’s online channels of sale and distribution.
Parallel import may involve any goods, but high-end branded goods such as jewelry, electronics, watches, designer clothing, and pharmaceuticals are more vulnerable than others. These goods may be in the market, and steered by a retailer to unauthorized vendors in the same region. Even more harmful is when goods are brought into a market by an unauthorized distributor, wholesaler, or retailer, and typically sold at a lower price compared to authorized channels, therefore creating direct competition.
When brands apply different pricing strategies in different territories, it becomes worthwhile for the gray market seller to buy in a lower priced territory, and sell in a higher priced territory, where the goods are already marketed, at a reduced price. This may be as simple as making many orders of a discounted product, and reselling the products without authorization from the manufacturer.
For example, a watch company may sell in Mexico. To grow its market share, the company may decide to introduce a new design into the Mexican market at a discounted price compared to the price of the same watch in the U.S. If the discount is substantial enough, U.S. sellers may purchase watches in Mexico and import them to the U.S. for resale at a lower price than the authorized distributor.
Another example may be when a manufacturer chooses to limit retail to upscale markets, as part of the brand’s strategy. Retailers who look to sell these upscale products may find them abroad at discounted prices, and bring them into the territory to be sold in downscale outlets rather than boutique shops.
Is parallel import legal?
Parallel import is a consequence of the exhaustion of intellectual property rights or first-sale doctrine. According to the exhaustion of intellectual property rights principle, once a product has been sold into a particular jurisdiction under the authorization of the IP owner, the owner of this product’s intellectual property rights cannot maintain control over the re-sale of that product.
This means that parallel import is generally legal, allowing sellers to exploit the situation and sell branded goods at a discount.
However, in some situations, parallel import may be unlawful in specific territories.
For example, in the USA, the IP owner is able to object to the resale of a product if it is materially different.
Based on the trademark law principle of preventing consumer confusion, most U.S. courts hold that when “material differences” exist between gray market imports and authorized goods, the sale and distribution of gray market goods is unlawful. And to protect consumers from the potential of being misled or confused about the product in question, courts have ruled that material differences may be subtle. They can be a difference in warranties offered for the products. Variations in labeling, packaging, or quality control can also be sufficient if they are likely to affect purchasing decisions.
U.S. courts do take into consideration corporate affiliation between foreign manufacturer and U.S. distributor, but don’t hold it to be determinative. In some court rulings, the material differences test was not applied when the U.S. distributor was a wholly-owned subsidiary of the foreign manufacturer.
Who is hurt by gray markets?
When goods are offered for sale in competition with the same goods offered through authorized channels, it may adversely affect manufacturers in different ways.
First, profits are lost due to competition. Secondly, unauthorized resellers are free-riding on the brand’s reputation, advertising and marketing expenses and efforts. It may also diminish customer satisfaction and dilute the brand. Authorized distributors or licensees may have contractual obligations, such as customer service or inventory of service parts. This is not the case with parallel importers. However, consumers may associate the lack of service, for example, with the branded product, damaging its hard-earned reputation. In addition, differences in specifications between countries may cause legal liabilities for the manufacturer.
Parallel import may also damage the relationship between manufacturers and their authorized dealers, especially if they are exclusive distributors.
Parallel import may also hurt unsuspecting consumers. A U.S. resident, for example, may get a great deal on a new phone online, and order it. When the phone arrives, he may find out that it was manufactured for the Chinese market, not the U.S. market. This means that this phone has no warranty service or technical support in the USA, as it made its way through gray market channels. Also, it may not be in compliance with U.S. regulatory requirements.
Manufacturers sometimes have reasons for looking the other way when it comes to gray markets. This may be beneficial in the short term, but is likely to eventually create product cannibalization or harm them in other ways.
How to fight parallel import
Laws and remedies for gray market goods are country specific and should always be examined in the relevant territory.
Since parallel import is mostly legal, it may seem there is no way to fight it. Yet, strategic actions by IP owners have effectively countered importation of gray market goods.
There are various strategies that may prove helpful in fighting parallel imports. For example, manufacturers can strengthen their authorized dealers or cut prices together to take out the incentive of gray market. More proactive ways may be setting one price
for all territories. In some cases, creating a differentiation in packaging or name may prove effective.
While the above strategies help to reduce the problem of gray market selling, they will not completely eliminate it. An online brand protection company can help brands and manufacturers further fight against gray market sellers.
Wiser Market takes a proactive approach, tracking the sources of gray market sellers and taking countermeasures such as removing listings of parallel importers, in order to ensure that your brand is protected.
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