The Use of Online Marketplaces for Grey Marketing

Grey marketing occurs when genuine trademarked products manufactured to be distributed in a particular market are diverted to a different market through unauthorized distribution channels. This is also called parallel import.

The growth of eCommerce has created many opportunities for companies to sell their goods, but it also poses many challenges to companies who need to protect their intellectual property rights. Grey marketing is one of the most significant challenges in eCommerce since it is not usually illegal, but can have adverse effects on legal distributors and IP owners.

Why does grey marketing occur?

There are different reasons for parallel importation, but it mostly occurs due to price differentiation across international markets, usually maintained by the manufacturer by choice. When this happens, sellers can purchase products at cheaper prices in countries that are priced lower, and resell them at substantial discounts in higher priced markets, such as in the U.S. or EU markets. Price differences may also be the result of currency exchange rates and taxation.

Most IP owners, manufacturers, and trademark owners are not protected from grey marketing. This affects a wide range of industries such as pharmaceuticals, consumer electronics, and even vehicles.

How does grey marketing work?

Grey marketing usually includes one of the following:

  1. Authorized distributors selling outside of the manufacturer’s list of retailers and resellers.
  2. Goods purchased in stores somewhere around the world, sometimes with hundreds of items bought at clearance prices, and later offered on online marketplaces such as Amazon.
  3. Manufacturers who have too much stock and less demand choose to sell the surplus stock to outside distributors.
  4. Manufacturers or factories who produce for the IP rights owner make extra products to sell to outside distributors without the IP rights owner’s knowledge.
  5. Distributors who are compelled by manufacturers and distribution agreements to purchase more than they can sell, resell the goods to others.

How does eCommerce affect grey marketing?

In eCommerce, the internet is used as the channel of distribution. As a result, grey marketing is thriving online.

Due to its global nature, eCommerce transcends physical distances, territory barriers and time zones. For grey marketing to be successful, grey market sellers must have access to a product source, and the consumer must have access to the grey market reseller selling the product. Online space gives easy access to both: foreign markets and customers.

There is also the fact that online retail has very low entry barriers. It costs little to create a website, at least on a small scale. This is useful for small businesses, less so for IPR holders.

As a result, carefully planned distribution channels, authorized distributors and exclusive territories are no longer guaranteed. Even authorized distributors in a certain territory may choose to expand into unauthorized territories. This is not too difficult to hide from the manufacturer through registering a different company, opening a website, and selling there.

Is there grey marketing on online marketplaces?

Grey marketing is a big part of online marketplace sales. Marketplaces such as Amazon.com, eBay, Alibaba.com, and Etsy offer sellers low-cost, direct access to consumers.

Looking at online marketplaces, we see an explosion of grey marketing goods. Many sellers choose to sell grey market goods for the competitive advantage while not breaking the law.

This means that authorized dealers, who usually have contractual obligations and minimum prices, are likely to find themselves undercut by grey market competitors who have no obligations. Even if authorized dealers lower their prices, they may still be unable to compete with unauthorized sellers who operate on marketplaces alone, with minimal overhead. The pressure to lower prices may damage profitability for both manufacturers and their authorized distributors.

Since they are not generally illegal, grey market products pose a greater challenge for IP owners.

For example, the grey market for consumer electronics is huge. This is mainly due to price differences between territories, the fact that consumers shopping in this category are very price sensitive, overall growth of online retail sales of electronics, and little

protection against parallel importation of such products.

Cameras, for instance, have extensive parallel import market from the Far East, later sold on eBay for less. As for watches, they are often bought in bulk from local distributors and sold overseas. They are offered for consumers to purchase on many different online channels, including social media.

Let’s look at two main online channel examples, Amazon and eBay.

Grey market goods on Amazon

As an authorized distributor of products on Amazon, you may find other sellers on your Amazon listing, offering your products for a lower price.

Knowing these sellers are not authorized, you may buy one of their products to test and find out that they are genuine. This is most likely a grey-market product, identical to your authorized product. However, you may notice differences such as lack of warranty or instructions written in another language.

Amazon is all about consumers, and grey market goods are usually genuine products sold for lower prices. And lower prices are better for consumers.

But Amazon is now also focusing on brands. This means that Amazon is willing to have less sellers on its marketplace to have better control over who sells which brand and the number of sellers on each listing. This may be helpful, although Amazon does not enforce brand preferences or agreements.

Grey market goods on eBay

With eBay, generally sellers are allowed to sell items that they legally own. In fact, most sellers on eBay are not authorized distributors. For consumers, this often means no manufacturer’s warranty.

eBay has created the VeRo Program to help intellectual property owners report IPR infringements. However, this does not include most grey market goods.

Following are 4 ineligible reasons to report a listing for rights violation on eBay:

  • Wanting to control where a product is resold by trying to enforce contracts or distribution of goods to authorized sellers (selective distribution).
  • Not allowing the sale if items are below a controlled price point (minimum advertised pricing or MAP).
  • Any terms a brand puts into their contracts that controls the way items are resold (contractual issues).
  • Government-controlled items that are illegal to sell (regulatory compliance issues).

Is there a difference between buying from an authorized dealer vs. an unauthorized dealer?

The same product may be bought from the same listing on the same marketplace either from the authorized distributor or an unauthorized reseller. In this case, the biggest differences will most likely be warranty and customer service.

Generally, authorized dealers offer manufacturers’ warranties. To be more competitive, sellers mostly state that they provide a one-year in-house warranty. This warranty is not necessarily compatible with the manufacturer’s warranty, but the seller does not have to comply with any distribution agreement.

To combat grey marketing, the manufacturers may also decide that parallel imported products be charged an extra fee for authorized servicing. However, this may not always be enough for consumers to pay more upfront.

Marketplaces address the issue of warranties mainly by referring consumers to the manufacturer. For example, Amazon states that manufacturer warranties may not apply in all cases, depending on factors like the use of the product, where the product was purchased, or from whom you purchased the product. Amazon’s suggestion is to contact the manufacturer directly or visit their website for manufacturer warranty.

When does grey marketing violate IP rights?

Grey marketing does not change IP laws. Therefore, grey market sellers must not infringe on IP rights. For example, using a logo without permission is not allowed, nor is creating a logo that is too similar to another logo in a way that may be misleading to consumers. Same goes for brand name misuse.

As for warranties, listings that contain a misrepresentation regarding an item’s warranty are in violation of trademark laws. Information relating to the warranty of a product is considered material information and should never be misrepresented.

As for copyrights, using someone else’s image or description without permission could violate copyright laws. And of course, selling unauthorized copies of media, software, movies, or paintings violates copyright laws.

How can one combat grey marketing?

Legal options to combat grey marketing are available for specific cases of IP rights violation or in certain industries, such as prescription drugs and tobacco.

Although it’s otherwise difficult to combat grey marketing, it’s not impossible. Distribution agreements, pricing, packaging, and more can be helpful in the battle against online grey marketing. Another way is through utilizing technologies to track unauthorized product diversion online. PICS is Wiser Market’s innovative solution that allows brand owners to identify products’ end-sales point.

PICS automatically detects parallel import sales, flagging them and providing brand owners with information on rogue sellers.

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

 

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