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The Gray Market: What Can Unauthorized Dealers Get Away With on Amazon (and Beyond)?

June 5, 2017

Sale of counterfeit goods remains widespread on online marketplaces like AliBaba, eBay, Etsy and Amazon. But brand owners are increasingly concerned about a related and, in some ways, more intractable problem: the unauthorized distribution of genuine merchandise.

Policing knock offs may feel like a Sisyphean endeavor, with a new counterfeiter popping up the moment another is shut down in an endless game of ecommerce Whack-a-Mole. But it can be done. The bigger platforms typically have an outlet for intellectual property owners to report infringement, such as AliBaba’s AliProtect or Amazon’s Report Infringement form. These infringement reports often achieve faster and more satisfactory results when made by a credible legal representative, but they are theoretically straightforward enough for business owners to navigate themselves. If they can demonstrate that the cited goods are indeed counterfeit (it often helps to have made a test purchase as proof), they can usually get the offending listing removed and/or the seller’s account revoked.

So-called “gray market” goods are another story.

 

The classic gray market product is one that is sold by an authorized dealer in

another country and then (re-)imported without permission. However, goods can slip out of a manufacturer’s control in a variety of ways. They might have been bought at a discount during a clearance sale or obtained from a wholesaler breaching their distribution contract. Perhaps they were even stolen.

 

Regardless of how they leave authorized distribution channels, gray market goods can present brand owners with serious heartburn. Authorized dealers who are contractually saddled with price floors are likely to find themselves undercut by competitors who face no such constraints. Even if they can adjust their

 

prices, they may be unable to compete with unauthorized sellers who can operate with minimal overhead thanks to online platforms like Amazon. If nothing else, the downward pressure on prices created by the increased competition is sure to threaten the margins of both manufacturers and their authorized distributors.

 

The problem is especially acute for manufacturers whose business model relies on exercising any level of price discrimination (offering products at different price points in different markets or to different consumers) or imposing conditions in their distribution contracts that drive up costs for their business partners, such as shared responsibility for marketing, quality assurance or customer service. It also makes it much more difficult to maintain control of a brand and of consumers’ experience of a product more generally.

 

 

Gray market goods are easy to find on eBay, Etsy and other online marketplaces. Just check out the listing for nearly any popular product on Amazon, and you’ll find a helpful link directing you to dozens of “Other Sellers” offering the same product, often at a lower price. While the occasional black-market counterfeit might sneak in among these Other Sellers, the chances are that the alternative merchants to which Amazon is directing consumers are all offering identical merchandise, technically genuine but obtained and marketed outside the manufacturer’s authorized distribution channels.

 

So, if you’re a manufacturer or brand owner, what can you do tamp down on the flow of unauthorized goods? From another perspective, if you’ve been accused of selling unauthorized goods, what are your liabilities and how can you mitigate them? Unfortunately, in terms of intellectual property law, the gray market can be a bit of a gray area.    

 

The Trademark Angle

 

Brand owners sometimes like to act as if no one is allowed to display or use their trademarks in any way without asking permission, regardless of the context. In reality, trademark rights are much narrower than that.

 

The essence of trademark infringement is consumer confusion (or at least the likelihood thereof). Counterfeit goods present the clearest case of trademark infringement: someone trying to pass off one product as a different product. When the goods are exactly the same as those sold by authorized dealers, though, consumers aren’t generally confused. They’re buying just what they thought they were buying. Courts have therefore consistently held that sales of genuine goods, whether or not the trademark owner approved the sales, do not give rise to a claim for trademark infringement.

 

In order to leverage their trademark rights against gray market sellers, then, a brand owner needs to show that the goods are somehow no longer “genuine.” In general, this is done by demonstrating a “material difference” between goods that come from authorized and unauthorized dealers.

 

For example, if a product sold in a foreign market is made to different standards or specifications than the U.S. version of the product, that would probably be a material difference, though if the non-conformity is clearly flagged for consumers (think of the hipster cachet attached to Mexican Coke) that might complicate the issue.

 

Even if the goods themselves are identical, however, tangential differences in packaging, documentation or support might give rise to claim for trademark

infringement. One of the most cited cases involved Cabbage Patch Kids dolls imported into the U.S. without authorization from Spain. Though the beady-eyed figurines were themselves indistinguishable from their American counterparts, their novelty “birth certificates” were in Spanish rather than English, and, unlike dolls purchased through authorized channels, the 

manufacturer refused to process the novelty “adoption papers” for the gray market dolls or to send them annual “birthday cards.”

 

An especially common tactic for manufacturers is to rely on differences in warranty policies. Many companies adopt warranties that are expressly voided by purchase from unauthorized dealers. Not only does this incentivize consumers  to avail themselves of official distribution channels,  it can also provide a basis for claiming that the warranty-less goods are materially different and that their sale therefore constitutes trademark infringement. However, resellers may be able to mitigate this risk by not marking the goods as “new” and/or clearly notifying purchasers of the voided warranty.

 

 

Another theory that manufacturers and their authorized distributors sometimes use is that gray market goods are not subjected to the same quality assurance procedures as their authorized equivalents. Thus, even if seemingly identical in every way, the goods sold by unauthorized dealers are materially different in that they present consumers with a greater risk of getting something defective. For example, in a case where an unauthorized distributor was attempting to sell Halls cough drops that had passed their freshness expiration guidelines, the court found that this infringed the HALLS trademark, even though Halls’ quality control measures did not entirely prevent the sale of stale cough drops through authorized channels.

 

Whether it’s customer support or a warranty or quality control supervision that the gray market goods allegedly lack, a trademark owner may have to show that these features are legitimately related to the value of their brand and not simply pretextual. But, theoretically, these are viable strategies for tamping down on unauthorized dealers.

 

Copyright, First Sale Doctrine and Use of Promotional Materials

 

While trademark law is usually the most effective weapon for controlling unauthorized distribution, copyright also often comes into play.

 

Not every product sold in commerce is subject to copyright protection, but creative works like books and movies are protected by copyright, as are goods that have non-functional creative elements such as toys that could be characterized as miniature sculptural works. Works subject to copyright normally can’t be imported or distributed without the authorization of the copyright owner.

 

Nevertheless, the resale of such products is permitted under an aspect of U.S. copyright law called the First Sale Doctrine. Under the First Sale Doctrine, the lawful owner of a particular copy of work is allowed to dispose of that copy as they please. The Supreme Court recently clarified that the First Sale Doctrine applies even to copies obtained outside the U.S. and imported without permission.

 

The First Sale Doctrine doesn’t permit the production or distribution of derivative works, so a claim for copyright infringement may still exist if the work has been somehow altered prior to sale. It’s also problematic to apply to digital works, since their distribution often necessarily entails reproduction rather than simply disposition of a single copy. For the most part, though, it means that no copyright license is necessary to resell lawfully obtained products.

 

Yet, copyright can be tremendously important in another respect. Unauthorized dealers often copy and use the manufacturer’s promotional materials, such as product photographs and descriptions, incidentally to reselling the goods. These materials are covered by copyright, and the First

Sale Doctrine generally doesn’t apply because they’re being copied not purchased-and-resold.

 

One advantage to relying on copyright as a first-line defense against gray market goods is that it is relatively straightforward to enforce. Online platforms hosting infringing promotional images or text can be sent a notice pursuant to the Digital Millennium Copyright Act (DMCA) and must act relatively expeditiously to remove the content or risk being held liable themselves. The strategy may not address the underlying concern (the sale of the goods themselves), but professional product photos and ad copy represent a substantial investment that might act as a de facto market barrier. If a reseller produces its own promotional content, there might not be much a manufacturer can do from a copyright perspective, but the lack of official pictures and product descriptions can at least serve as a differentiator between authorized and unauthorized dealers.

 

One important caveat to the copyright approach, however, is that if a manufacturer or an authorized distributor is selling on the same online marketplace as the unauthorized distributor, the platform may, as part of its terms of service, have obtained a license to any promotional content that’s been uploaded. For example, Amazon demands a permanent license to all material used to create a detail page for a product. It then grants a sublicense to other sellers to use this material to sell identical products.

 

If you’re a brand owner concerned about counterfeits or unauthorized resellers on Amazon, eBay, AliBaba, Etsy or any other online marketplace or if you’re an online retailer who’s had your account shut down due to claims of IP infringement, contact Knowmad Law or book a consultation, and we’d be happy to go over your options: info@knowmadlaw.com 831-275-1401

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