market in greyscale

Examples of Gray Marketing and Why it Matters to eCommerce Retailers

By John DiGiacomo

In general terms, “gray marketing” exists when legitimate, trademarked, non-counterfeit goods or products are sold legally, but outside of the distribution channels that are authorized by the owner of the trademark with respect to the goods or products. Gray marketing often involves goods manufactured outside the United States which are imported and sold in the United States without the consent of the trademark holder. For example, some pharmaceuticals are manufactured in India and authorized to be sold in Mexico. But instead, shipments are diverted to US retail outlets or sold online to US consumers. Other examples include what is called parallel importing. In those cases, products like fine jewelry or clothing are authorized for sale in the US, but only by certain retailers. However, products are bought in foreign markets and then imported to the US to be sold in non-authorized outlets. These are both forms of unlawful gray marketing. But gray marketing is not always about foreign-made products. Gray marketing can also involve trademarked domestic goods sold by unauthorized retailers or through unauthorized channels or where their sale is not authorized at all.

Being unlawful, gray marketing should be a concern to any online retail outlet. Gray marketing is a form of trademark infringement and can cause your eCommerce business to be sued under the US trademark laws. If it can be proven that the gray marketing was knowing and willful, enhanced damages can be awarded along with punitive damages. Under many circumstances, gray marketing can also cause your eBusiness to be terminated by your online platform for infringement of IP rights.

Note that there is a difference between gray marketing and reselling. As an example, imagine you buy a pair of shoes from the manufacturer’s retail outlet in your local town. Then you sell them online. Because you purchased the shoes from an authorized retail outlet, you are engaged in reselling, which is lawful commerce. By contrast, imagine you travel to the shoe factory and buy a pair of shoes from one of the workers. Then you return home and try to sell the shoes online. Now, you are engaged in gray marketing because the original purchase was not through an authorized retail store or method.

Consider a couple of real world examples of gray marketing. Imagine a greeting card company which closes a production and distribution center. The company has truckloads of out-of-date surplus greeting cards that the company wants destroyed. The company sells the surplus cards to a paper pulping company. However, rather than destroying the excess greeting cards, the pulping company sells the truckloads of greeting cards to a retailer, which subsequently begins selling the greeting cards online. This is an example of unlawful gray marketing and, legally, the greeting card company can sue to prevent the cards from being sold. As noted, gray marketing is often a form of trademark infringement. This particular example comes from the case of Hallmark Licensing, LLC v. Dickens, Inc., Case No. 17-cv-2149 (E.D.N.Y. October 21, 2020). In that case, the court ruled that the pulping company and the reseller had infringed Hallmarks’ trademarks.

Another common example of gray marketing involves authorized and licensed production facilities making extra products to sell without the knowledge or permission of the trademark owner. A real world example of this type of gray marketing comes from the case of Coty, Inc. v. Cosmopolitan Cosmetics Inc., 432 F. Supp. 3d 345 (US Dist. SD New York 2020). In that case, a group of perfume and cosmetic companies successfully sued Cosmopolitan Cosmetics (“Cosmopolitan”) for violating their trademarks. Cosmopolitan was/is in the business of selling fragrances to retailers and other distributors. From some unidentified production source, Cosmopolitan obtained large quantities of the plaintiffs’ fragrance products and then obscured, removed or otherwise masked the factory production codes. These so-called “decoded” products were then re-sold to various retail sellers including many online sellers. Except for being “decoded,” the packaging and contents of the perfume bottles were the same as if the perfumes were purchased in an authorized retail or online store. This is a common form of gray marketing and is unlawful under the US trademark laws. As noted, the perfume companies sued Cosmopolitan for trademark infringement and were successful.

For more information on how to avoid gray marketing or if your IP rights have been violated by eCommerce retailers engaged in gray marketing, contact the trademark litigators and trusted internet lawyers at Revision Legal at 231-714-0100.

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