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gray market n. a market employing irregular but not illegal methods; especially : a market that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.

~Merriam-Webster’s Dictionary of Law

A gray market (or grey market) is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. Unlike black market goods, grey-market goods are not usually illegal. Instead, they are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this form of parallel import occurs when the price of an item is significantly higher in one country than another. Only physically and materially different parallel imports are banned.

In the gray market, diverters buy the products from the low-end market and re-import them back to the high-end market. With foreign products, such diversion results in cheaper unauthorized imports from the low-end market competing with more expensive authorized imports in the high-end market. Thus, gray market goods are also known as parallel imports. The big price difference between the two markets enables the diverters to sell the product at a price that is lower than the market price in the high-end market and still make a big profit.  Gray markets thus reduce the profitability of price discrimination by leveling price difference in different market segments.

The Ninth Circuit looked at gray markets as a question of trademark infringement or unfair competition under the Lanham Act, which generally require a showing of likelihood of consumer confusion.  Thus, when the goods are identical but merely imported from another market, the likelihood of confusion cannot be established because the consumers received exactly what they expected and were not confused.

In the new book “Gray Markets: Prevention, Detection and Litigation” by David Sugden, the author claims that such a market causes  estimated losses of $40 billion in annual sales for technology manufacturers alone. Sugden provides a comprehensive analysis of the gray market as well as a road map for handling gray market cases.

Divided into four sections, the book provides an introduction to gray markets with examples of its effect on a variety of industries.  One example shows the case of Fagan v Amerisourcebergen Corp. et al.  Fagan suffered personal injuries as a result of repeated injection of counterfeit Epogen used to treat anemia.  Fagan continued to receive and inject counterfeit Epogen even after the counterfeits were discovered.  He brought proceedings for personal injuries against the manufacturer (Amgen), the wholesale distributor (Amerisourcebergen), and the retailers (CVS Corporation and ProCare Pharmacy).  Fagan claimed that all the defendants were aware of the problem of diversion of drugs and had failed to take appropriate steps to secure the distribution chain.

The US District Court found that the wholesale distributor was in the best position to control movement of drugs and therefore in the best position to protect the trade from counterfeit drugs entering the market. It was foreseeable that in purchasing products on the gray market, counterfeit drugs might enter the distribution chain. The wholesale distributor was therefore required to take steps to protect the distribution chain. Similarly, the retailer had failed to exercise “the highest practicable degree of prudence, thoughtfulness and vigilance and the most exact and reliable safeguard to the system with reasonable conduct of the business”.

The fact that pharmaceutical prices can vary significantly between countries, particularly as a result of government intervention in prices, continues to make gray market drugs a very substantial segment.

The second section of the book deals with ways of reducing the potential gray market, particularly through what is called Gray Market Abstinence.  In words that apply to many situations, Sugden notes:

As an initial matter, it is better to be proactive than reactive.  Preventing a problem is invariably preferable to responding to a problem.  In the context of brand abuse, this self-evident principle is especially fitting.  In today’s global marketplace, an unmonitored gray market can devastate a brand’s esteem.  Waiting for the problem to surface may be too late.

Sugden then details methods for monitoring the supply chain and the legal strategies for countering gray market goods after discovery.  There is lots to gain from how to apply theories of copyright and trademark liability to state laws and international approaches.  It is a cat-and-mouse game that can pit brand name manufacturers against teenagers, grandmothers and mobsters.  In an ever-flattening world of Globalization 3.0, this chase will only intensify.

About the Author

David R. Sugden is a partner at Call, Jensen & Ferrell, where he specializes in intellectual property, trade secret, copyright, technology, business torts, and brand protection. In addition to serving as lead counsel in any number of legal enforcement actions, he has successfully executed numerous surprise search and seizures in which he, with the assistance and protection of law enforcement, has entered the premises of defendants suspected of piracy, black market or illegal gray-market activity.

“Gray Markets: Prevention, Detection and Litigation” by David Sugden (Oxford U. Press, 2009 | 360 pages | 9780195371291) is available through Amazon.

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