July 25, 2019
Gray market goods, in general, are simply manufactured goods that are made in the United States but not meant for the sale in the United States. In the course of designing products, manufacturers will typically create different products for different local markets. The actual differences in the products can be slight or significant. However, one thing is clear, having the products go to and be sold in their intended markets are of utmost importance for manufacturers.
For an example, an automobile manufacturer, after conducting valuable consumer research, learns that different markets prefer certain warranties, features parts in their automobiles. Alternatively, local regulations may require that certain warranties, features or parts be included in their automobiles. To meet these demands, the manufacturer will create different versions of its automobiles for different markets. This results high consumer satisfaction and overall, increased profitability.
However, there are those who seek to profit from the fact that different versions of the products exist. For an example, if a product manufactured in the United States but intended for sale in Germany is purchased by a distributor in the United States, that product will be purchased at a lower cost, since the product cannot be sold in the United States. The distributor, seizing on this price differential sells the German-intended product at a higher profit margin in the United States. The problem is that American consumers have now been exposed to products having features that are intended for German consumers, not U.S. consumers.
Fortunately, there are a series of laws and regulations that protect manufacturers against this illegal profit taking as long as there is a material difference between the goods that are intended and unintended for that particular market. Examples of material differences can be altered serial numbers, differences in manuals, lack of a manufacturer’s warranty, and differences in composition or appearance.
In the event that there is a material difference between the goods intended for that particular market and gray market goods, manufacturers have the following options to combat gray market goods: (1) Cease and Desist Letters; (2) U.S. Customs (“CBP”) Injunctions; (3) International Trade Commission (“ITC”) Proceedings; and (4) Federal Court Litigation.
Preparing and sending cease and desist letters to infringers is the fastest and the most inexpensive way to combat against gray market goods. However, those letters are often disregarded by infringers.
Another way to combat against gray market goods is to register trademarks with the United States Patent and Trademark Office (“USPTO”) and record such trademarks with the U.S. Customs and Border Protection (“CBP”). Once trademarks are registered and recorded, manufacturers are able to report illegal trade activity through an informal complaint known as an e-Allegation and work with the CBP to seize the gray market goods at the border.
Additionally, manufacturers can bring a claim with the International Trade Commission (“ITC”), which is a good alternative to federal court litigation. The ITC is a federal agency responsible for adjudicating commercial and trade disputes, and is equipped to handle gray market goods issues. One of the benefits of the ITC proceeding is that the proceedings are typically shorter than federal court litigation. This makes the proceedings more cost effective.
Alternatively, federal court litigation can completely stop infringers from selling or distributing gray market goods in the unintended market. Here, manufacturers may be entitled to injunctions, money damages and/or attorney’s fees in an exceptional case. However, federal litigation can take up to 3 years, and the costs can be relatively high.
Manufacturers must take great care to ensure that the proper products are sold in the proper intended market. This is because consumers in different markets may prefer different versions of products. The products may also need to comply with local regulations. For manufacturers with an international footprint, to be the most profitable, manufacturers should look into different legal options they can take to stop the flow of gray market goods.
Jason S. Nardiello is a partner and Sang Eun “Jennice” Lee is an associate with Bell Nunnally in Dallas. They can be reached at firstname.lastname@example.org and SLee@bellnunnally.com, respectively.