Combating Gray Market Goods in a Global Market: Comparative Analysis of Intellectual Property Laws and Recommended Strategies

By Swanson, Tait R. | Houston Journal of International Law, Winter 2000 | Go to article overview

Combating Gray Market Goods in a Global Market: Comparative Analysis of Intellectual Property Laws and Recommended Strategies


Swanson, Tait R., Houston Journal of International Law


I. INTRODUCTION

Gray goods, also called parallel imports, pose a significant threat to multinational companies (MNCs) that enter foreign markets.(1) Gray goods are genuine goods sold through unauthorized channels in direct competition with authorized distributors.(2) Gray goods comprise three categories: "unintended" goods, "licensed" goods, and "distress" goods.(3) Unintended goods are those goods authorized for sale in one country, but then redirected to another country, often in direct competition with authorized distributors in that country.(4) Unintended goods may be further divided into goods manufactured domestically, and those manufactured abroad by an entity under "common control" or a foreign license.(5) Licensed goods are those goods manufactured pursuant to a trademark license but sold through unauthorized channels.(6) For example, a licensee may sell to a gray marketer for a better price or because authorized distribution channels are closed due to a canceled license.(7) Distress goods are those goods dumped by an otherwise authorized dealer, who typically has an excess supply or outdated goods.(8) Whatever the scenario, intellectual property owners may find themselves competing against their own "genuine" goods, effectively reducing their profits.(9)

Case law in various countries, including the United States, is inconsistent on the issue of gray goods.(10) The trend toward international business operations, international trade, and high technology makes intellectual property protection critical to MNCs.(11) Uniform protection is necessary to fully protect intellectual property rights, otherwise parallel importation may be permitted in one country and prohibited in another, thereby deterring international trade and business.(12) The gray market arguably benefits the consumer by providing low cost goods in competition with the copyright holder,(13) yet it may also harm the intended country by reducing the supply of those goods.(14) Inferior goods may also enter the gray market, such as goods from a foreign licensee that were not approved by the licenser.(15)

The gray market exists primarily due to price differentials between products marketed abroad and those products sold domestically.(16) Differences in currency exchange rates, product quality and characteristics, warranties, and services offered all contribute to the gray market.(17) Entering a new foreign market requires a business strategy, such as differentiation of a product, usually by price, quality, or service.(18) An MNC may decide to enter the market at a deep discount competitive with local products to capture market share.(19) If the discount is large enough, it may be profitable for a gray marketer to purchase the discounted goods and redirect them to a more profitable market such as the United Stats.(20)

Gray goods are said to benefit the consumer at the expense of the intellectual property owner.(21) Opponents argue that gray goods undercut prices offered by authorized dealers, confuse consumers, and even reduce consumer goodwill when the products materially differ from those intended for U.S. distribution.(22) Goods intended for a foreign market may comply with different regulations; include instructions in a foreign language; or even look, smell, or taste different, having been adjusted for the targeted foreign market.(23) Consumers may become disappointed in so-called "luxury" goods when they are retailed at a discount.(24) Furthermore, gray marketers are said to have a free ride on the U.S. intellectual property owner's advertising and promotion, further fueling the gray market.(25) Proponents argue that consumers benefit from the gray market due to increased competition and choice between serviced and no-frills products.(26)

The primary controversy regarding gray goods concerns the doctrines of first sale and exhaustion of rights in the international context.(27) The first sale doctrine mandates that once an intellectual property owner makes a first sale, he has exhausted his intellectual property rights with respect to the goods sold.

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