BRIGHT IDEAS: David Sugden on Gray Markets

Gray_Markets2.JPGToday’s Bright Idea comes from David Sudgen. David is a partner at Call, Jensen & Ferrell, where he specializes in intellectual property, trade secret, copyright, technology, business torts, and brand protection. His book, Gray Markets, (Oxford University Press) goes into an area that trademark folks should, but may not, know about: the way in which globalization has affected the use of trademarks and the enforcement of trademark rights. As the description puts it “From cars to cigarettes to pianos to pharmaceuticals, products that were manufactured to be sold in other countries are finding their way back to the United States where they are sold through unauthorized and illegal channels. This unauthorized economy – the ‘gray market’ – is growing in size and scope at an alarming rate: information technology manufacturers alone have estimated losses at $40 billion in annual sales. In Gray Markets: Prevention, Detection, and Litigation, David Sugden provides the first comprehensive analysis of the gray market as well as a blueprint for attorneys and businesses to prevent, detect, and litigate gray market cases.” As someone who once enforced trademarks and now questions the trademark system, David’s book intrigues me as it provides valuables examples of experiences, problems, and how trademark holders react to the changing business landscape.

So here is David Sugden explaining how he came to write a book about the world of Gray Markets.


Relatively early in my career, I did a great deal of work enforcing trademarks and copyrights against those in the business of stealing or knocking off branded goods. Among the challenges in these cases is catching the wrongdoers in the act. Because companies in the business of faking goods are also in the business of secrecy, we had to employ the tools of litigation that would allow us to surprise defendants and catch them red-handed.

In civil litigation, the usual practice requires serving a defendant with a summons and complaint and affording it between twenty and thirty days to respond. If the defendant is dishonorable, it can take advantage of this window by doing everything possible to cover its tracks; documents will be shredded, electronic evidence will be scrubbed, and any other indicia of wrongdoing will disappear. To prevent the destruction of such evidence in counterfeit cases, we would often request the Court to grant us the ability to conduct a surprise search and seizure of the defendant’s premises.

To obtain such an order, we would file the complaint under seal to prevent public disclosure of its contents. We would simultaneously submit a motion that outlines – with evidence – why the defendant is liable and why the defendant could not be trusted to preserve evidence of its culpability. Once satisfied with our evidentiary showing, the court would issue an order allowing us, with the assistance of law enforcement and forensic computing experts, to execute a surprise search and seizure of all counterfeits, knock-offs, stolen goods, and supporting documentation. Over the years, I was involved in such seizures all over the country; California, New Jersey, Florida, Texas, Oklahoma, and Georgia.

When we would execute these orders, I was often surprised to see how often counterfeit goods were comingled with genuine branded goods. Even though these businesses had no right to sell genuine goods, their inventories would often contain large quantities of genuine goods alongside large quantities of inferior imitations. In fact, the defendants would often argue that they were not guilty of selling counterfeit goods – they would argue, albeit falsely, that they were simply involved in the lawful secondary (i.e., gray) market.

This gray market vexes brand owners because goods intended for overseas distribution are finding their way back to the United States through unauthorized sales channels. Authorized distributors and resellers are similarly annoyed because they must compete against unauthorized resellers selling the same products at lower prices. And, of course, consumers can suffer if the gray market goods are comingled with counterfeit products or if the genuine product is otherwise compromised by inferior packaging, transporting, or servicing.

As I examined the strategies and existing laws, I thought a great deal about what brand owners could do to prevent the gray marketing of their products from occurring in the first place. Beyond courtroom strategies, I considered actions to prevent brand abuse and avoid the time and expense of civil or criminal prosecution. I also observed an absence of any treatise or other authority that had synthesized the existing body of gray market law. It was these factors that lead me to the idea of writing Gray Markets: Prevention, Detection & Litigation.

In Gray Markets, I introduce a variety of strategies that brand owners can use prevent genuine goods from unauthorized distribution channels. From educational and contractual methods that communicate the importance of gray market abstinence, to on-site security and modern tracking technologies, and to the use of private investigators and even “dumpster dives,” the book then offers specific methods to detect the existence of brand abuse. And, finally, the book provides a summary of the legal theories and authorities that are relevant in gray market litigation.

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2 Responses

  1. A.W. says:

    Well, i have long said that the illegal immigration problem is profoundly misunderstood. what it really is, is a black market for labor. And it is the inevitable result of an overregulated market. this grey market stuff is a different head of the same beast.

  2. Mark Seecof says:

    Sugden: “…these businesses had no right to sell genuine goods…”

    Come again? No right to sell genuine goods?

    It’s one thing to fight the sale of counterfeit goods. We’re all in favor of that– the whole point of trademarks is to identify the origins of goods and counterfeiting trademarks is properly reviled and combated.

    But, it is an abuse of US process to try to stop the sale of genuine goods. US courts have no business acting as free* enforcers for manufacturers’ various price-discrimination schemes. (Does Sugden also think consumers have “no right” to dispose of no-longer-wanted (genuine) goods at garage sales?)

    Sugden: “…information technology manufacturers alone have estimated losses of $40 billion in annual sales…”

    I’ll omit the usual criticism of how bogus those “estimates” typically are. That doesn’t matter, because sales of genuine goods by re-importers do not represent “losses” to manufacturers at all. Remember the First Sale Doctrine? When a manufacturer sells a good (and, let us note, cheerfully books the revenue from that sale!) he’s done with it. The fact that a subsequent purchaser resells that good somewhere down the road for more (or less) does not give the manufacturer a loss (or gain). Only in the intentionally-misleading grammar of propaganda does a manufacturer take a “loss” when he sells a good to some foreigner who incidentally resells it to an American for more money. If the manufacturer had wished to do so, the manufacturer could have sold the good in question to the American for the same price as the foreigner did. (Or, for completeness, the manufacturer could have sold the good to the foreigner for the same price as he would have sold it to an American.)

    But, Sugden writes, the “gray market vexes brand owners…”

    Ooooh! Brand owners are vexed! What Sugden means is, brand owners seeking to maximize profits through price discrimination are annoyed when arbitrageurs undercut their schemes by moving goods from low-price zones to higher-price zones. Since such arbitrage is an unalloyed benefit for consumers and a perfectly ethical business practice, it is also quite lawful.

    When Sugden labels such arbitrage “brand abuse” and suggests it deserves “civil or criminal prosecution” he shows either considerable ignorance of his own subject or a remarkable degree of identification with his clients.

    Of course, Sugden points out that anti-competitive arrangements between manufacturers and resellers may be disrupted by gray-market transactions (in genuine goods). The only proper response to that is “so what?” Business should be competitive. If some manufacturer can’t persuade his own business partners to uphold some anti-competitive scheme without government intervention, he has no one to blame but himself.

    I look forward to reading Sugden’s book, but if he wrote it just to defend the anti-market practices of his clients he’s not going to win many plaudits.

    *Of course nothing is free. From the summary here presented, it appears Sugden thinks taxpayers should pay US police, prosecutors, courts, etc. to assist manufacturers to cheat those very same taxpayers via pestilential price-discrimination schemes. Imagine if the police existed to force schoolboy victims to suffer lunch-money-stealing bullies– that is approximately what Sugden seems to be asking for.