names, trademarks and service marks from blurring or tarnishing (without the need for showing consumer confusion -a hallmark of traditional trademark claims).
In the Hewlett-Packard case, HP was able to use traditional common law theories of liability and the underlying reseller agreement to redress its gray market claims, which in that case involved an existing authorized second tier distributor or reseller.
The reseller had agreements with HP for both printers and laptop computers (through Compaq, which was purchased by HP), which provided for the purchase by the second tier distributor from first tier distributors at deep discounts, and resell the products only to customers in the U.S.
The pricing programs required the second tier reseller to support in writing the reasons for the deep discounts, which the second tier distributor did allegedly in cahoots with its customer. HP believed, and alleged, that the second tier reseller purchased the products with the intent to sell, and in fact sold, the products to purchasers in Saudi Arabia.
HP asserted claims of common law conspiracy, fraud and unjust enrichment, plus breach of the reseller agreement against the second tier distributor and its alleged customers, plus the presidents of each business, as individuals are always liable for individual tortious acts.
Discounts Drive Market
The gray market is ill-defined and can range from legitimate goods intended for sale elsewhere being sold in an unauthorized area (like the heavy equipment and luxury auto examples), to outsourced manufacturers who generate more product than that ordered by the OEM, to goods that are remanufactured or reconfigured after use (like the products of the members of the AGMA), to pure piracy, where the goods and parts are counterfeit, or where legitimate distributors with access to product look for creative ways to obtain and resell at large profits.
Either way, deeply discounted prices are the driving force for the distribution of shadow goods, which has negative implications across the supply chain. As long as there is a buck to be made, shadow or gray market brokers will look to generate sales, irrespective of deficiencies in the products sold, and to the detriment of those who participate in authorized distribution.
Regardless of the industry, manufacturers, distributors and those in the shadows will likely see an increase in effort and creativity by suppliers and their counsel to target and eradicate gray market activities.
For more information, please contact Fred Mendelsohn at firstname.lastname@example.org or 312-840-7004.
The gray market is ill-defined and can range from legitimate goods intended for sale elsewhere sold in an unauthorized area, to outsourced manufacturers who generate more product than that ordered by an OEM, to goods that are remanufactured after use, to pure piracy. Here's a look at a recent case between a manufacturer and distributor.
Recently, Hewlett-Packard resolved a gray market" lawsuit that it filed in a federal district court in Tennessee against one of its by-then terminated distributors and one of the distributor's customers.
In essence, HP claimed that its distributor violated the terms of its authorized reseller agreement by purchasing products at deep discounts and then selling the products to a customer not authorized by HP.
The distributor allegedly worked with one of its customers to "cook up" false reasons for ordering extra products in order to sell them to an unauthorized customer. As a result of this conduct, HP filed suit against the distributor, the customer involved, its president, and the distributor's president. According to reports, the suit settled for upwards of eight figures.
Defining Gray Market
The gray market is of course not new to distribution, but it means different things to different people, depending in large part on the industry involved, and takes on several forms.
In a case I filed on behalf of a large supplier of heavy construction equipment, the gray market refers to the importation into the U.S. of heavy equipment destined for other countries (e.g., China), and not authorized for sale in North America (the supplier's general exclusive territory), much like the importation of non-American bound luxury cars.
In the luxury car market, importers take advantage of exchange rates and the generally lower prices of cars destined for sale in places like the European Union, modify the cars to meet U.S. safety and emission standards, and sell them at a deeply discounted price -all to the chagrin of the authorized luxury automobile dealers.
Similarly, the parallel importation of unauthorized heavy equipment leaves the purchasers without the benefits of authentic goods, such as warranty protection or regulatory review, and without the support of the supplier's customer service organization.
Of course, this "gray market iron" has additional risks: It may not have interchangeable component parts, may pose additional liability exposure to the user, may have illicit or counterfeit parts, and may have higher failure rates and require greater levels of service than legitimate equipment.
In many gray market cases (unlike the black market), the transactions are not illegal, but are not authorized by the manufacturer. As such, suppliers do not always have legal redress and have to resort to other tactics to address the issue.
For example, some years ago, NEDA initiated an authorized supplier communications and advertisement campaign, and several of the large, electronic suppliers (Cisco Systems, Nortel Networks and others) formed the Alliance for Gray Market and Counterfeit Abatement to combat the gray market.
In the heavy equipment case, the supplier has a remedy, in part because the units that surfaced in various places in the U.S. bore fictitious serial numbers. Under federal unfair competition laws, this type of shadow product distribution is illegal, especially because it causes confusion among end-users as to legitimate product and shadow product.
Is it protected by warranty? Can purchasers obtain authentic replacement parts, intended for these non-authorized imports? Do the units comply with U.S. safety and emission standards?
Other remedies are found in the damage to the goodwill and trade name and/or trademark of the goods themselves, including under anti-dilution statutes, which generally protect certain famous trade