Protecting against the Gray Market in the.docx

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