Is Gray Marketing Legal? A Look at the Law

Updated: Jan 9, 2019

What does gray market mean?

Gray market refers to the sale of a product that has intellectual property rights, without the intellectual property owner’s permission in that market. Gray market goods are genuine rather than counterfeit goods. Grey marketing is also known as parallel importation.

To read more about it, check out our previous blog posts:

  • Gray Markets: A Growing Concern
  • Examples of Grey Marketing Activities

Trademark law

Trademark registration protects brand owners, and helps to prevent consumer confusion. This is easy to see in the case of counterfeit goods, when the seller is trying to convince consumers that their product is the real thing although it’s not.

With gray market goods, consumers buy genuine goods.

In the EU, case law at the European and national levels determined the instances when gray marketed goods are permitted and the case when they are not. To determine if an infringement occurred the following will be examined:

  1. Whether the trademark owner gave his consent to the first sale
  2. Where the goods were first put on the market
  3. Whether the use of the trademark by the unauthorized seller is fair

In the U.S.A., companies combat unauthorized resellers through the federal Lanham Act. For that, right holders must show:

  1. They own a valid trademark
  2. The defendant used the trademark in commerce without the company’s consent
  3. The Defendants’ use created a likelihood of consumer confusion.

 

What is ‘The First Sale’ doctrine?

The First Sale Doctrine, also called the Exhaustion Doctrine, simply says that a distributor has the right to resell a branded item in an unchanged state. This means it is generally legal to resell a trademarked item after it has been sold in an authorized sale by the IP owner, even if the trademark owner does not consent to the resale.

In the EU this is true if goods are put on the market in the EEA with the brand owner’s consent, and then resold. If goods were put on the market outside the EEA or sold without owner consent to the first sale, the question of whether the use of the trademark is fair is crucial to the existence of infringement.

The exhaustion doctrine agrees with U.S. trademark law since the resale of a genuine product is generally not confusing for consumers. Therefore, the lack of consent by the trademark owner doesn’t constitute a trademark infringement.

Exceptions to The First Sale doctrine

In order to gain protection, trademark owners may show that the first sale doctrine does not apply to them.

The doctrine does not apply to genuine goods which have been altered. This can be the case if there’s a “material difference” between goods that come from authorized vs. unauthorized sellers.

Courts have held that associated benefits (such as warranties and money-back-guarantee) and quality controls for a particular product are essential for what consumers expect to receive from a manufacturer. If those are not met by an unauthorized seller, then the first sale doctrine may not apply.

1. Products sold by unauthorized sellers that are “materially different” from products by authorized sellers
In case the trademark holder is able to establish that there is a material difference between its authorized products and the products sold by unauthorized sellers, then the first sale doctrine may not apply and they may have the protection of trademark law.

For example, courts in the U.S. have said that consumer confusion can occur when unauthorized resellers offer the same products without the same benefits. Therefore, a difference in warranty becomes a material difference. Trademark right holders rely on such differences. They may even have warranties that become voided by purchase from unauthorized dealers. This practice helps brand owners both incentivize consumers to buy from authorized distributers, and lay the basis for a material differences claim. Resellers, on the other hand, may choose to notify buyers of the voided warranty and explicitly offer their warranty.

Another example is a product made for a foreign market to be sold there that is made to different standards or specifications than the version of the product sold in another market, such as smartphones made for China and brought into the EU. In this case, this would most likely constitute a material difference.

Material differences may also arise through a difference in packaging, support and documentation.

A well-known U.S. case involved Cabbage Patch Kids dolls, manufactured in Spain under a restrictive license from the trademark owner and imported to the U.S. The dolls were genuine but there were some seemingly minor differences, such as the fact that the dolls that were imported to the U.S. through the gray market, were accompanied by “adoption papers” in Spanish. The court held that although the dolls from Spain were not physically altered, their sale in the U.S. does not comply with the expectations of U.S. consumers, and makes it equal to an alteration of the doll, and a violation of the mark owner’s right to control the quality of its product.

2. Difference in product quality controls
The first sale doctrine may also not apply when unauthorized sellers resell trademarked products that are outside of the trademark owner’s quality controls. For this, the rights holder must show that:

  1. It has established quality assurance procedures that are legitimate, substantial, and not pretextual,
  2. It abides by its quality control procedures, and
  3. The unauthorized seller is not abiding by the procedures and its sales of non-conforming products will harm the value of the trademark and create a likelihood of consumer confusion.

This means that products that are almost identical but sold by unauthorized dealers are not genuine if they do not abide by the brand’s quality controls. In this case, the products may pose a greater risk to consumers by not being of the same quality or having defects.

Whether it’s a warranty, quality control, customer support or other differences, if they are related to the value of the product or the brand, and lacking from the gray market goods, this can be helpful for the trademark owner who wants to reduce gray marketing.

Copyright law

Copyright law may also be applicable to gray market issues.

Creative works like books and movies are protected by copyright. Copyrighted works generally cannot be imported or distributed without the copyright owner’s consent.

However, in most cases no copyright license is necessary to resell lawfully obtained copyrighted works or products. Under the first sale doctrine, the lawful owner of a particular copy of work such as a book is allowed to resell it. This is true if the work has not somehow been altered prior to sale.

Promotional materials, such as product descriptions and photographs, are also protected by copyright. When unauthorized dealers use them, the first sale doctrine doesn’t apply to them because they are not being purchased and resold, they are being unlawfully copied.

In the case of infringing promotional images or text, in the U.S. they can be removed under the Digital Millennium Copyright Act (DMCA). This means that even if products can be resold, unauthorized sellers cannot use the brand’s photos or text to do so. And if they don’t use them, it may affect their sales as well as help to differentiate the authorized sellers from the unauthorized ones.

It’s important to note that when a trademark rights owner or an authorized distributor sell on the same online marketplace, they may not be protected. Marketplaces, such as Amazon, require permanent license to all material used to create a product’s detail page. Then Amazon may allow other sellers to use the product detail page to sell identical products.

Gray market protection

When it comes to understanding gray markets and how to fight them, Wiser Market has both the knowledge and the expertise to help your brand online.

For a true solution to brand owners and manufacturers around the world, Wiser Market is proud to deliver its Parallel Import Control System (PICS), a solution for eliminating parallel import activity.

With Wiser Market’s PICS you can detect leaks in your distribution chains, identifying distributors and resellers who sell outside their assigned territories.

Want to STOP grey marketing activity? Contact us to learn more.

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