Protecting against the Gray Market in the.docx
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ProtectingagainsttheGrayMarketinthe
ProtectingagainsttheGrayMarketinthe
NewEconomy
COMMENTS
PROTECTINGAGAINSTTHEGRAYMARKETINTHENEWECONOMY
I.INTRODUCTION
Agraymarketgoodisalawfulproductthatisprotectedby
intellectualpropertylawsandintendedforsaleoutsideofits
manufacturingcountry.1Despitethemanufacturer'sintentthatits
productbeconsumedabroad,"graymarketeers"lawfullyacquire
theproductabroad,importitbackintothemanufacturingcountry,
andselltheproducttoconsumersatacostlowerthanthenongray
marketproduct'scost.2Manufacturersareconcernedabout
thegraymarket,especiallybecauserecentcourtrulingshave
practicallyevisceratedmanufacturers'useofintellectualproperty
rightstoprotectproductsfromenteringthegraymarket.
Additionally,thegrowingpresenceofelectroniccommerce(ecommerce)
heightensmanufacturers'concernsaboutthegray
marketduetotheInternet'seaseofuse,accessibility,andability
toconnectconsumerswithproductsuppliersworldwide.3
ThepurposeofthisCommentistodiscussthegraymarket
concernsmanufacturersfaceintheneweconomy,explainhowecommerce
amplifiestheseconcerns,andsuggestmeasures
manufacturersmaytaketopreventtheirproductsfromentering
thegraymarketeconomy.PartIIprovidesanoverviewofthegraymarketandhowe-commercefacilitatesgraymarketing.Parts
IIIandIVoutlinelegalandothermethodsmanufacturersmay
employtopreventtheirproductsfromenteringthegraymarket.
Finally,PartVarguesthatnon-intellectualpropertyrights
protections,suchascontractlaw,branding,and/orcannibalism,4
maybethemosteffectivemethodsavailabletokeepproductsout
ofthegraymarket.
II.BACKGROUND:
ANOVERVIEWOFTHEGRAYMARKETANDECOMMERCE
Graymarketproductsaregenuineproductsprotectedby
intellectualpropertyrights.5Graymarketproductsareusually
soldbyproductmanufacturersorauthorizedresellersviaeither
salescontractsorlicensingagreements.6Somewhereinthischain
ofdistribution,however,someofthesegenuineproductsarereimported
intotheUnitedStatesforresaleagainstthe
manufacturers'andresellers'wishes.Graymarketeerstypically
purchasegenuineproductsabroadatadiscountandre-import
thembackintotheUnitedStatesforgraymarketconsumption.
Graymarketeersthenprofitablysellthegraymarketproductsfor
lessthanconsumerswouldpayhadtheypurchasedtheproducts
throughauthorizeddistributionchannels.7Thediscountedprice
maystemfromfluctuationsincurrencyexchangerates,
advertisementcosts,manufacturers'multi-tieredpricingschemes,
taxdifferences,ordifferingconsumerpreferences.8
Undertraditionalretailsalesmethods,consumersareoftenat
adisadvantagewhenmakingpurchasingdecisionsbecausetheydo
nothavethesameinformationaboutproductsasdo
manufacturersandresellers.Consequently,manufacturersand
resellersoftenmaintainlargeprofitmarginsbecauseconsumers
remainunawareoffactssuchasproducts'wholesalecostsor
competitorswhocarrythedesiredproducts.9TheInternetis
changingsuchpricingpractices.Today,consumersincreasingly
controlretailsalesbecausetheInternetprovidesinformationthat
promotesnationaland,inthefuture,globalcompetitionbetween
manufacturersandretailers.
E-commerceallowsconsumerstopurchaseawidevarietyof
goodstwenty-fourhoursaday,sevendaysaweek,10usuallyat
priceslowerthanretailers,whodonotengageine-commerce,
offer.Becauseofthesebenefits,e-commerceisgrowingata
remarkablerate.11Althoughe-commerceprovidesconsumers
withalargerdistributionofgoodsandlowerprices,product
manufacturersindevelopedcountries,suchastheUnitedStates
andUnitedKingdom,areconcernedabouttheirproductsbeing
soldontheburgeoninggraymarketviatheInternetbecausegray
marketeersundercutmanufacturers'pricesontheirown
products.12
A.TheU.S.andUK.Markets:
HowBigIstheProblem?
TheannualU.S.andU.K.graymarketeconomiesexceed$10
billionand£1.63billion,respectively,andaredrivenbythe
countries'relativelyopeneconomicmarketsandtheirpeoples'
insatiableappetitesforconsumerproducts.13IntheUnited
Kingdom,graymarketproductsaresopopularthatsomeU.K.
residentscrosstheNorthSeatopurchasenewautomobilesinthe
Netherlandsforlowerprices.14Individualswhoengageinthispracticecansavealmost£8,000,includingtravelexpensesincurred,
onafive-doorLandRoverDiscoverysportutilityvehicle,which
sellsforapproximately£30,000intheUnitedKingdom.15This
createsagraymarketbecauseindividualscanpurchase
automobilesintendedforforeignmarketsatlowcostandthereby
createcompetitioninthedomesticmarket.Thepopularityofsuch
consumerpracticesspawns"car-cruises"andwebsitesallowing
U.K.citizenstopurchasenewautomobilesatafractionofthe
U.K.prices.16
B.OpponentsofGrayMarkets
Manufacturersdislikethegraymarketeconomybecauseit
destroystheirprofessionalgoodwill,brandimage,17andprofit
margin.Theycontendthatgraymarketproducts'popularityarises
frommanufacturers'orauthorizeddealers'establishedreputations
andtheprotectionintellectualpropertyrightsprovide.18Gray
marketeersderiveprofitsbytakingadvantageofaproduct's
reputationwithoutinvestingthecapitalassociatedwith
establishingsuchareputation.19
Graymarketeers'businesspracticeserodeconsumergoodwill
becauseaproductslatedforforeigndistributionoftendiffers
materiallyfromthesameproductdesignedfordomesticconsumption.20Forexample,goodsmanufacturedforforeign
consumptionarefrequentlytailoredtocomplywithdifferent
healthandsafetycodes,regionaltastes,orlanguages.21Such
differenceserodeconsumergoodwillbecausetheproducts'
differencesdisappointconsumers.22Forthesereasons,
manufacturerssufferinjuriesfromthegraymarketeconomy.23
Graymarketproductsalsocreateconsumeranimositytoward
authorizedresellersandmanufacturersbecausetheyappearto
profitexcessivelyfromlegitimatesales.24Goodwillisfurther
damagedwhenconsumersperceivemanufacturersasoffering
substandardcustomerservicebyrefusingtohonorgraymarket
products'warranties.25
Productmanufacturersarealsoconcernedaboutthegray
market'seffectonbrandimage.26The"brandimage"ofaproduct
istheemotionalorpsychologicalconnectionbetweenconsumers
andthemanufacturers'products.27Manufacturers,particularly
luxuryproductsmanufacturers,spendmillionsofdollarsannuallyonbrandingtheirproductsasprestigious.28Brandimage,
however,deteriorateswhenaluxuryproductissoldinthegray
marketbecausetheproductsellswithoutitsemotionalappeal.29
Consequently,manufacturerslosemillionsofdollarsannuallyin
salesandadvertisingbecausetheirproducts'brandimageslose
effectiveness.
Graymarketeersjustifytheirbusinesspracticesonnumerous
grounds.First,theyclaimthattheproducts'licenseholdersare
notharmedbygraymarketpracticesbecausethegraymarket
allowsconsumerstoreapthebenefitsoflowerpricesandalarger
selectionofproducts.30Second,graymarketproponentscontend
thatthegraymarketpreventsmanufacturersfromdiscriminating
againstwealthyconsumers,suchasthoseintheUnitedStatesand
theUnitedKingdom,becausethegraymarketgivesthose
consumerstheoptiontopurchasethegoods'graymarketversions
atlowerprices.31
C.TheInternet'sEffectonGrayMarketing
TheInternetallowsconsumerstoplayproactiverolesin
obtaininggraymarketproducts.Traditionally,aconsumerwould
experiencedifficultyinfindingvendorswhoregularlyreceive
productsthroughthegraymarket.ByusingtheInternet,however,
customersactivelysearchforandfindvendorswhocarrygray
marketgoodswithoutleavingthecomfortoftheirhomes.
Furthermore,Internetofferings,suchaselectronicbulletinboards
andon-lineauctionhouses,promoteconsumerparticipationin
graymarketeering.32
TheInternetprovidesavirtualmarketplaceallowinggray
marketeerstoreachbuyersandunderminemanufacturers'
profits.33TheInternetalsoallowsgraymarketeerstoexploitthe
vastinformationavailableontheInternettoobtaincompetitive
pricinginformation.34Graymarketeerscanthenusepricing
informationtodetermineproducts'marketpricesandundercut
manufacturerandauthorizedresellerprices.35Electronicbulletin
boards,on-lineauctions,andintelligentagentsarefeaturesonthe
Internetthatfacilitategraymarketeering.36
1.ElectronicBulletinBoards
ElectronicbulletinboardsontheInternetfacilitategray
marketeers'abilitytolocatebuyersandsellersinoverseas
markets.37Thesebulletinboardsprovidebuyersandsellerswith
"easyandlowcostaccesstothe[Internet]andtheimmediacyof
reachingbusinessallovertheworld"inhopesofstreamlining
internationalcommerce.38Thereisarecentproliferationof
"verticalmarketplaces,"whichare"bulletin-boardandauctionoriented
sitesthatrenderintra-industrytransactionsfaster,
cheaperandsmarterbygatheringbuyersandsellersintoone
virtuallocale."39Forexample,theFederationofInternational
TradeAssociationwebsiteofferselectronicbulletinboardsinan
attempttoestablishatrueglobalmarketplace.40Intheory,
electronicbulletinboardsprovideacommontradinggroundfor
graymarketeerstopurchaseandsellgraymarketproducts.41
Whethergraymarketeersandconsumersactuallyacceptelectronic
bulletinboardsasameansoffacilitatingtraderemainsunsettled.
2.On-lineAuctions
On-lineauctionhouses,suchase