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USING THE LANHAM ACT TO PROTECT YOUR CLIENTS
Gray market goods include products with legitimate trademarks that are intended for sale and use outside the United States, but which are imported and sold in the United States without the consent of the U.S. distributor of like domestic goods. While estimates of gray goods vary by industry, the value is substantial. A 2003 KPMG report estimated the gray market for IT products alone to be $40 billion in sales, with $5 billion in lost profits annually for U.S. distributors. Unlike counterfeit (black market) goods, however, gray goods may be lawfully sold in the United States if they are identical to their U.S. cousins. Gray goods that are materially different, however, may violate § 32, 42, or 43 of the Lanham Act, and, thus, cannot be sold in the United States.
In a down economy, the importation of gray goods increases because they are sold at a substantial discount. Gray marketers are able to purchase gray goods abroad well below the wholesale cost of their U.S. counterparts. Manufacturers, particularly of expensive goods (i.e., high-end watches or construction equipment), often sell like products cheaper overseas because the gray goods (1) do not come with the standard U.S. warranty; (2) contain cheaper components; and/or (3) do not meet U.S. safety and/or environmental standards. The domestic price also includes marketing/advertising and warranty/service costs, which the gray marketer does not have to pay for, but benefits from. Price differentials also can occur as the result of currency fluctuations (i.e., the value of the dollar to the Japanese yen).
Gray goods pose serious threats to U.S. distributors, which spend substantial sums to develop their goodwill and build loyal distribution and service networks. Gray sellers reap the benefits of this goodwill without the costs. Gray marketers use low prices to undersell U.S. distributors, resulting in lost sales and unhappy dealers. Likewise, because gray goods often materially differ from domestic goods, including quality control, product characteristics, labeling, and other key elements, U.S. consumers may be disappointed by the gray goods, resulting in a loss of the U.S. distributor's goodwill.
Tips for Monitoring the Gray Market
U.S. distributors have several routes to monitor the gray market. Because most gray market sellers use the...