The Grey-Market: Are the Benefits Worth the Costs?
February 2, 2009 by Julian Ho (IPilogue Editor)Grey market goods are legally-produced goods obtained in a foreign country which are imported into a domestic market via an unauthorized distribution channel. These parallel-import goods are typically obtained in a country where the cost of such goods are low enough so that the importer can sell them at a price lower than the domestic price but still make a profit.
Canadian Law Perspective
Such practices are legal under Canadian Trade-mark law. In Consumers Distributing Co. v. Seiko, [1984] 1 S.C.R. 583, the Supreme Court of Canada held that because the trade-mark owner first placed the goods on the market, no distinction is to be made between such goods and the goods sold by authorized distributors. That is, the doctrine of exhaustion of rights applies – the manufacturer’s rights have been exhausted when the goods were first sold, wherever that may be.
However, this has not stopped trade-mark owners from trying to use other legal tools to stop grey-market goods. For example, in Euro-Excellence v. Kraft Canada, 2007 SCC 37, an authorized distributor of chocolate bars unsuccessfully claimed copyright infringement in the logo on the packaging of the goods to stop the parallel imports. Also, trade-mark owners typically use restrictive contracts with their foreign distributors so as to penalize them if their goods enter grey-markets.
These examples show how much of a problem this is for trade-mark owners and authorized distributors. Specifically, it shows the extent to which they are willing to go to stifle a grey-market.
Why is Parallel-Importing Not Illegal?
From a policy standpoint, there are competition and consumer-interest reasons to maintain the grey-market. In most instances, the grey-market goods are identical to their authorized counterparts so there is no possibility of confusion in the mind of the consumer as to the actual origins of the goods. Thus, the grey-market allows consumers to purchase goods at cheaper prices.
Counting the Costs
Where problems arise is when counterfeit goods can’t be distinguished from legitimate grey-market goods. In a recent article in Lawyers Weekly, Teresa Scassa described 3 scenarios when goods are seemingly grey-market, but are in fact counterfeit: (1) when trade-mark owners outsource manufacturing to a factory, and the factory runs an illegal extra shift to create unauthorized goods; (2) when rejected first quality goods are to be destroyed, and such goods end up being sold; and (3) when second quality goods are sold without adhering to the disposal requirements (such as black-lining trade-marks on tags and labels).
The problem is an inability to ascertain, at the time of import, the legitimacy of the way in which the imported goods were acquired. To that extent, The Gray Blog noted in the U.S. that “at least some portion of … seizures are genuine parallel market goods which [U.S. Customs and Border Protection] detains under dubious claims that they may be counterfeit.”
Thus, Professor Scassa points out the problem of illegitimate goods being sold illegally in the grey-market to the detriment of the trade-mark owner. In contrast, The Gray Blog points out the opposite problem: legitimate goods being prevented from entering the legitimate grey-market. Accordingly, the legitimate grey-market opens up the trade-mark owner to the possibility of loss, and legitimate anti-counterfeiting measures create uncertainty of delay for grey-market importers.
Is it worth it?
Are the disadvantages of potential loss and uncertainty worth the supposed benefit of increased competition? Would it not be better to create an exception to the doctrine of exhaustion of rights and eliminate the grey-market completely?
In such a scenario, although consumers may be left without the cheaper grey-market alternatives, the resultant certainty and efficiency in the ability of trade-mark owners to crack down on counterfeit goods may very well result in cost-savings that may help them to be more efficient. Is this enough to offset the loss of cheaper consumer prices? Maybe, maybe not. But the question remains: are the benefits worth the costs?
3 Responses to “The Grey-Market: Are the Benefits Worth the Costs?”
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Any approach, be it legal or political, that would tend to reduce competition (here, by restraint of trade) should be viewed with a very skeptical eye.
The default position should always be that trade should not be restrained. Only where a strong case can be made – and not only by those who would immediately benefit from such government intervention – that such restraints are necessary for the benefit of the general welfare should we permit our government to intervene in such a manner.
Generally, the goal of enacting any legislation that relates to IP issues is to strike the proper balance between all the stakeholders in the matter. However, how this proposition is put into practice is always tricky. Prior to the current economic crisis, I was a firm believer that the market should be left to operate with as little regulations as possible and I would have certainly supported the propositions made in the previous comment. However, some economists believe that the insufficient regulation of the market in the past decade is the main culprit for the current economic crisis in the US. This makes me question whether we should aim for the least interference with the free market when we are deciding to regulate grey market goods.
“This makes me question whether we should aim for the least interference with the free market when we are deciding to regulate grey market goods.”
I am not an economist, but it does not appear that grey market goods had any role to play in the current economic downturn.
However, it is a tenable position that “a strong case [has been] made…that such restraints are necessary for the benefit of the general welfare” as regards regulation of certain activities of the financial sector. That said, it would be specious to equate the necessity of greater regulation in the financial sector with a necessity of regulating importation of grey goods.
I submit that government intervention that would tend to diminish competition (and not simply “change the rules” for an entire sector) should be subject to heightened scrutiny.