Gray market goods (also called parallel imports or diverted goods) are marketed through distribution channels other than those authorized by the manufacturer or producer. Generally they are items manufactured overseas and imported into the US without the authorization of the trademark holder. By definition, gray market goods will always be genuine.They bear a trademark which has been applied with the approval of the trademark holder, but the approval to use the mark is intended to apply to sale in a country other than the US. Often this occurs when there is a significant price discrepancy for the item in different countries. While not considered counterfeit, there may be differences between those items and those manufactured for sale in the US (i.e. warranties may differ, requirements with US laws, such as labeling requirements may be different, or rebate offers may not apply.)
Gray market goods comprise 3 categories:
Unintended goods-- Unintended goods are goods authorized for sale in one country but then redirected to another country, and may be in direct competition to authorized distributors.
Licensed goods-- Licensed goods are goods manufactured through a trademark license but sold through unauthorized channels.
Distress goods- Obsolete inventories, excess or damaged goods may also be sold in the gray market.
The effect of selling gray market goods may be that a similar item will be available for sale in the US at different prices.
Gray market goods are allowed entry into the US and are not illegal, except to the extent that the trademark holder has entered into a contractual agreement with a foreign manufacturer that agrees not to import the goods into the US.
For legally restricted items, such as drugs, the unauthorized importation of these goods would be categorized as “black market”. Black market goods are illegal.
With regard to warranties, a manufacturer may deny upholding warranties on a gray market item, on the grounds that the non-gray market reflects a higher level of service, not contemplated by the manufacturer, i.e., the manufacturer may not have a service center in that country which was factored into the retail price. A US manufacturer, asserting that there is no privity of contract between the manufacturer and the consumer, may refuse to uphold the implied warranty of fitness or the implied warranty of merchantability. See APPA Webpage on Warranties.
Practical Ways to Prevent Gray Market Goods
By adopting uniform pricing structures you can take away the incentive to sell goods at a reduced price. However, this is not always feasible.
Labeling- Products with bar coding can assist in identifying the source of production and their authorized distributors. Advising on the product label that this product is for sale only in a specific country may also help, such as “authorized for sale only in the US.”Some advise to label a product to be sold in a foreign market solely in that language to avoid diverting the product back into the US.
Licensing and distribution agreements may include prohibitions on resale. Policing outgoing inventory with incoming sales figures may also help.
Vigorous enforcement of trademark rights to restrict advertisements for the product may discourage gray market sales.
US Customs and Border Protection (CBP) Gray Market Goods rule
Owners of U S trademarks have some protection against the importation of gray market goods, if the goods are “physically and materially” different from the authorized goods intended for sale in the US.For example, a product with the same name, with US trademarks, but being sold in different countries with different formulations geared to local tastes, must bear a disclaimer if the product is imported in to the US without a restriction of importation.This is called the “Lever- rule protection”.The disclaimer must say “this product is not the product authorized by the US trademark owner for importation and is physically and materially different.”This disclaimer must be on the label in close proximity to the legitimate trademark.Under this regulation, where this label is placed on goods which would be excluded under Lever‑rule protection, the goods could then enter into the US.
To establish these protections, those with registered patents and trademarks can choose to record their rights with the CBP to ensure effective enforcement at US borders.
U.S. Customs and Border Protection’s Office of International Trade has developed a new online trade violation reporting system called eAllegations to provide concerned members of the public a means to confidentially report suspected trade violations to CBP.
