Brand Wars: The Rise of Grey Product

14 January 2020

Brand Wars: The Rise of Grey Product

According to lawyers across Asia, grey goods are problematic worldwide.

“There is such a market in almost every Indian city, let alone grey goods being the points of discussion in courts. Being a huge country with numerous ports of entry also adds complexity to the issue,” says C.A. Brijesh, an IP litigation partner at Remfry & Sagar in Gurugram. “Additionally, with the growth of e-commerce, the market for grey goods has increased multi-fold because there is no way for the end seller to verify that the goods sold are genuine and not grey. Some e-commerce platforms, however, have deployed various methods of verifying the authenticity of both the product and the seller – the magnitude of grey goods can be determined from the fact that corporations in the mobile phone industry face a loss of Rs25 billion (US$350 million) as claimed by the India Cellular and Electronics Association.”

 

Affected industries

All sectors are impacted by grey goods, but the situation is particularly bad for some, including the automotive and electronic sectors.

“Car dealers that are not authorized by carmakers to officially sell and service their cars can freely do the selling and servicing, affecting the sales of the authorized dealers and sometimes causing problems in terms of servicing,” says Rutorn Nopakun, a partner at Domnern Somgiat & Boonma in Bangkok. “In the automotive industry, after-sale services are an essential part of the business. Some parallel importers of cars are not fully equipped to provide the services and, in many cases, buyers of parallel-imported cars have to seek services from authorized dealers. Such problem can become a burden for the authorized dealers, which aren’t willing to provide their services to owners of parallel-imported cars.”

Andy Leck, principal and head of the IP practice at Baker McKenzie Wong & Leow in Singapore, agrees that grey goods are prevalent in the automobile, automotive spare parts, and consumer goods industries. “This is due to the demand for such goods and the higher costs of their authorized counterparts.”

“We have seen the electronics industry being affected the most,” Brijesh says. “Most grey goods cases reaching the courts pertain to electronic goods.”

“We’ve also seen a lot in terms of consumer products, probably because there will always be young people without money who want the same brands that the ‘cool kids’ have. Moreover, these items are easily portable,” says John Eastwood, a partner at Eiger in Taipei. “There are brick-and-mortar stores in Taipei that get filled with parallel imports brought in in the luggage of people who can fund a trip to the US off the jackets, shirts, shorts and pants that they can cram into a pair of big suitcases. A few blocks from our offices, the police raided a shop that claimed to be all grey and seconds, but when we arrived, we could see the shirts spelled ‘New York’ as ‘New Vork.’”

 

Greys can be fakes

Despite theconvenience, the risk of receiving grey goods or even counterfeits in online marketplaces is high.

“With the rise in e-commerce, proliferation in C2C online marketplaces in Singapore, and the low barriers to entry for doing retail online, many have taken to selling their goods there – not only brand owners and authorized retailers, but also unauthorized small-time entrepreneurs offering parallel imports, and those looking to make a quick buck by selling counterfeits,” says Leck.

As for counterfeits, according to statistics released by the Singapore Police Force, there were more than 1,400 cases of e-commerce scams in Singapore between January and June 2019. This is an increase of about 40% over the same period in 2018; over 80% of the cases in 2019 involved online marketplaces, says Tony Yeo, managing director of IP at Drew & Napier in Singapore. “While not all of these cases necessarily involved counterfeits, it can be inferred that the selling of counterfeits is fairly common in online marketplaces. Still, local popular online marketplaces have begun to establish anti-counterfeiting programmes and thousands of listings have been taken down as part of these anti-counterfeiting programmes.”

It happens quite a bit because disreputable online sellers pretend to be selling grey goods when they are actually selling counterfeits, Eastwood says. “Along the way, they’re using the manufacturer’s original product photos, so there’s no way for consumers to tell. A shopper sees a legit-looking shirt because that photo was taken in a studio somewhere in Europe of a legit product – what arrives a few days later can sometimes be a blatant fake.”

To assist identifying, avoiding and reporting counterfeits, the United States government hosts a website, www.stopfakes.gov, to lower the risk of receiving grey or counterfeit goods. “A trademark owner can register its marks with the Customs and Border Protection to have grey goods seized,” says Christopher Rourk, a partner at Jackson Walker in Dallas. “The Better Business Bureau also provides guidance on identifying and avoiding grey goods, and some states have consumer protection laws that address grey goods, such as requirements to disclose when grey goods are being sold and whether they are covered by warranties or qualify for rebates.”

Rourk also notes that online merchants which only sell their own products with return policies or guarantees have a much lower risk of selling grey or counterfeit goods than those who resell. “Even if the reseller is tracked and rated by the online merchant, there is usually no guarantee that any single item could not be counterfeit, and obtaining a refund from the reseller might be difficult, depending on the specific website terms and conditions. Most major credit cards offer a dispute resolution process that allows a purchaser to dispute a charge if the goods are not accurately represented or are counterfeit, so the risk of buying online from a reseller can be managed by asking the reseller to represent that the goods are not grey or counterfeit, and by paying with a credit card that provides a dispute resolution process.”

 

Legal grounds addressing the grey issue

According to the Agreement on Trade Related Aspects of Intellectual Property Rights, “nothing in [the] agreement shall be used to address the issue of the exhaustion of IP.” Each jurisdiction can thus handle its grey issue however it wants.

In India for example, the legal provisions that govern grey goods can be understood to be of two categories – the Trade Marks Act, 1999 and the Customs Act, 1962.

“The former provides for an action for infringement owing to sale of goods and profits from goods bearing a registered mark without the consent of the proprietor,” Brijesh says. “The defendants ordinarily rely on Section 30 of the act, wherein, an act would not constitute infringement if the importer can prove that the import or sale of the product had occurred after such product was already made available in the market by the registered proprietor or authorized distributor.”

This defense is, however, subject to the fact that the products have not been changed or impaired after being put on the market. “The Indian courts have ruled on material alteration of grey goods on several occasions such as erasing of serial numbers, effacement and repairs. The registered proprietor would then be entitled to claim infringement,” he says. “Other legitimate reasons pertain to disparities in services and warranties, advertising and promotional efforts, packaging, quality control, pricing and presentation as well as the language of the product literature.”

The IPR (Imported Goods) Enforcement Rules, 2007 formulated under the Customs Act provide that a right holder must register a customs watch notice for interdictions. However, in 2012, the Central Board of Excise & Customs issued a Circular on Enforcement of Intellectual Property Rights on Imported Goods, which states that parallel importation is not prohibited unless:

  • The goods bear a false trademark as specified in Section 102 of the Trade Marks Act; or
  • The goods bear a false trade description within the meaning of Section 2(1)(i), in relation to any of the matters connected to the description, statement or other indications of the product, excluding those specified in Sections 2(1)(ii) and (iii).

 

Do consumers care about greyness?

Most consumers knowingly purchase grey goods for lower prices or products that are out of reach to them, says Ruey-Sen Tsai, a partner at Lee and Li in Taipei. “Some companies have taken measures to prevent their customers from accidentally buying grey products by having specific notifications of authorization.”

However, this could present additional costs and logistics challenges for companies, says Leck.

“While consumers don’t care about whether their goods are grey, they do have key criteria which may be impacted if the product they purchase is a parallel,” says Stuart Adams, principal and Russia country manager at Rouse. “Firstly, consumers want the reassurance of knowing that what they purchase can be returned, repaired or exchanged if it turns out to be faulty. However, this expectation will vary depending on the product – consumers expect much more in relation to an expensive electronic such as a tablet than they do from a cheap piece of clothing. It is, therefore, right holders of such big-ticket items who have the best chance of persuading consumers to be wary of grey goods. Insufficient or even no after sales support, and/or the lack of warranty, will heavily influence purchasing decisions where the price is high. Consumers are also much more likely to do some research before purchasing high cost items, thus giving brand owners the opportunity to present reasoned arguments against grey goods, such as lack of manufacturer’s warranty.”

Secondly, consumers want the product they buy to “perform.” “So, it first must be appropriate for the market in which they purchase it, which is another area where brand owners can work on raising awareness. There may be many products which are suitable for some markets but will perform badly, or not at all, in others,” Adams says. “Some car parts, for instance, may be perfect for some climactic conditions but would fail in others.”

Eastwood concurred with an example. “We had a client who used to state that anything not bought through their authorized distribution chain wouldn’t have warranty protection – they were sick of being asked to repair years-old products that had perhaps spent thousands of miles in cargo containers subjected to extreme temperature or moisture conditions.”

 

Broken arrow

When grey goods are found, does that mean some parts of supply chains are broken? The answer is yes.

Yet, it is difficult to trace the grey goods’ suppliers, says Tsai.

“Sometimes a retailer or distributor goes out of business, and a whole bunch of sunglasses or T-shirts suddenly get into the hands of a liquidator,” Eastwood says. “Nearly all of my clients in the fashion industry have had problems with organized pilferage – boxes that ‘fell off the truck’ or where there’s been a shortpack.”

While some companies have systems in place to detect the breaches in their distribution chains, it is still a prevalent issue that has not been handled by government bodies, as grey goods are not illegal.

In fact, the Singapore legislature has adopted an approach that is generally in favour of grey goods. The rationale is to enable Singaporeans to have a wider choice of products which they can purchase and also at cheaper prices, as printed in the Singapore Parliamentary Debates of August 25, 1994 (Volume 63, columns 413–416).

Therefore, businesses generally cannot take action against grey goods, unless the condition of the goods is changed or impaired after they have been put on the market, and there has been dilution in an unfair manner of the distinctive character of the trademark, says Ren Jun Lim, principal at at Baker McKenzie Wong & Leow.

Companies can, however, have potential legal recourse against their authorized distributors who break the authorized supply chain and supply grey goods to unauthorized parties. “In most cases where large scale grey sales are involved, the source of the grey goods is typically an authorized distributor from another territory,” Lim says. “Since distribution contracts typically provide that authorized distributors are not to sell outside authorized territories, product manufacturers may take legal action against errant distributors for breach of contract, insofar as such restraints aren’t deemed to be anti-competitive in the relevant jurisdictions.”

That being said, the challenge lies with ascertaining the source of the grey goods, so as to identify the distributor against which to take action, he says. “For goods of lower value such as FMCG, there are often no identification features such as serial numbers from which the manufacturer can link a particular product batch to the distributor. Even if such features are present, there are additional evidentiary hurdles in proving that the grey seller had obtained the products directly from the authorized distributor.”

Separately, where grey goods are regulated, such as electronics requiring a Safety Mark, or pharmaceutical products under the purview of the Health Sciences Authority, there may be additional legal recourse by way of regulatory infractions by the grey sellers, he says.


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