If grey market dealers have been acquiring your inventory and reselling it without your permission, you’re in good company. According to the nonprofit Alliance for Grey Market and Counterfeit Abatement (yep, that’s a real organization), billions of dollars a year in tech products alone are sold on the grey market. The story is similar for other industries: apparel, jewelry, toys, software, even medical equipment and pharmaceuticals.
But if you think dealing with grey market sellers is just a cost of doing business your company is stuck with, we have good news for you.
A recent federal court ruling (ADG Concerns v. Tsalevich LLC) strengthened key exceptions to the first sale doctrine, one of grey market dealers’ favorite defenses against their shady practices.
This post will give you a few ideas for capitalizing on this new ruling. First, though, let’s quickly review the first sale doctrine and the exceptions that a court just bolstered.
How grey market dealers exploit the first sale doctrine
The idea behind the first sale doctrine is that a brand’s trademark or other intellectual property allows the company to control the sale of its products only once. After that first sale, the new owner of the product may legally do with that specific item whatever they choose—including resell it or give it away. This is why it is legal to resell a used copy of a published book on Amazon. You can’t make copies of the book and resell those (that would be copyright infringement), but you may sell the actual copy of the book you own.
Grey market sellers often exploit the first sale doctrine to defend against acquiring a manufacturer’s products (sometimes through dishonest means) and then retailing those products without the manufacturer’s permission or knowledge. They argue that once they buy the inventory, it becomes their property, and they are free to dispose of it however they want.
But intellectual property law also recognizes that some grey market practices amount to exceptions to the first sale doctrine, such as materially changing a product before reselling it or failing to uphold the trademark holder’s quality control standards. When resellers engage in these practices, courts sometimes (although not always) find they are indeed guilty of trademark infringement.
3 elements you can add to your products to slow down grey marketers
One real-world example of this is the recent trademark-infringement case of ADG Concerns v. Tsalevich LL. In that case, supplement maker ADG accused Tsalevich of acquiring its products without permission and reselling them in violation of the quality control standards the company requires of its authorized dealers (which Tsalevich was not).
The court found in favor of ADG, and this is an excerpt of the judge’s ruling:
The complaint alleges Tsalevich is selling non-genuine, materially different products that are not subject to Health Concerns’ quality controls and are in fact of a degraded quality. The public interest weighs distinctly in favor of enjoining Tsalevich’s unlawful acts. Upholding the law is inherently in the public interest, and an injunction further enhances this interest here by protecting consumers from degraded products that are confusing at best and harmful at worst.
The ruling underscores that manufacturers can legally pursue grey market sellers for failing to uphold the quality control standards the company enforces with its legitimate resale partners.
In other words, one way to make it much harder for grey marketers to legally selling your inventory is to build quality control demands into your process that they won’t be able to follow. Here are a few suggestions.
1. Add a warranty available only to customers who purchase your products through authorized dealers.
One quality control measure that will clearly allow your authorized dealers to distinguish themselves from grey marketers is to offer a warranty on your products, one that you will honor only if the customer buys from your authorized sellers.
Moreover, include a physical copy of the warranty in the product itself (or even a note pointing the customer to a digital copy on your company’s website). If a grey marketer opens the package and removes the warranty before reselling it, you can also raise the “material difference” exception to the first sale doctrine.
2. Establish a quality control checklist for your resellers’ handling of your products—and vet their compliance regularly.
ADG Concerns’ legal case rested largely on the quality control demands the company placed on its resellers. ADG insisted on certain processes, for example, in how resellers stored its products in warehouses and shipped them to customers. They also required regular inspections of the inventory to make sure the resellers holding it were keeping it in good condition.
Let’s say you create such a set of quality control measures and require your authorized retail partners both to abide by them and to regularly submit compliance reports to your company.
A grey marketer isn’t going to send your company compliance reports showing they are regularly inspecting the inventory they’ve bought. They won’t want your company to know they’ve acquired your inventory in the first place.
This means if you catch such a grey market dealer selling your inventory, you will have a built-in legal claim against them for violating the quality control exception to the first sale doctrine.
3. Offer rebates, credits toward your brand’s products, and other incentives to customers who buy through your authorized resale channel
You can also isolate grey market dealers and make it more difficult for them to resell your products by offering rebates or other incentives to customers who purchase your goods through your authorized sellers.
If after purchasing from grey marketer a customer can’t redeem your rebate or other incentive, then by definition that grey market dealer has sold the customer a “materially different” product from the one you’ve developed for your authorized resale channel. That gives you a clear and strong legal case against the seller.
These measures aren’t just for legal protection—they’re smart business, too
Finally, it’s worth pointing out that these measures all have benefits beyond their ability to strengthen your legal position against a grey market dealer. They’re good business moves in their own right.
For example, helping authorized dealers distinguish themselves from shady retailers will help you improve your relationships with your key resale partners. Implementing the quality control measures discussed above will help protect your brand from the bad customer experiences that can result from even a well-meaning reseller making mistakes in how they handle your inventory.
So there are many reasons to take the quality control measures we’re suggesting here, and the potential for scaring away grey market dealers is just one of those reasons.
If you’d like help planning your strategy, contact the brand protection experts at TrackStreet.
