What Are 'Gray Market' Goods, and Are They Illegal
For example, a sneaker company may make and sell different styles of sneakers in a foreign market as compared to sneaker styles in the U.S. marketplace.
Consumer preferences regarding sneakers' appearance, design, materials, workmanship, consumer safety standards, relative quality and packaging can differ between U.S. and foreign markets.
Because the sneakers are intended to be marketed abroad, their packaging may contain text mostly written in Spanish, Chinese or another non-English language, and measurements and sizes may be only provided in metric units.
Pricing for the sneakers may also may vary in different markets based on differences in the relative incomes of consumers in international markets, and also will reflect the cost to make and sell the sneakers.
The proliferation of gray market goods can create a problem for many companies. Although they are technically authentic products, these sneakers could still erode a brand's goodwill in the U.S. market. This can occur when the 'materially different' foreign products enter the U.S. under the company's brand, and are sold to U.S. consumers who may be unaware that they were intended for foreign markets.
Also, gray market goods can damage a company's contractual relationships with authorized U.S. distributors who may be forced to compete with lower-priced authentic foreign products.
Additionally, the company could see losses in sales and profits when its own sneakers are purchased relatively cheaply overseas by unauthorized third parties and then resold in the U.S. marketplace, thus hurting the company's U.S. sales.
Those who sell gray market goods do so to profit from differences across markets, such as currency fluctuations, tax differences and the manufacturer's differing pricing structures.
Nonetheless, most gray market goods are generally considered legal, as long as they do not differ in any material way from the U.S. version of the producer's goods. If the gray market product is materially different from Under those circumstances, a company may institute a trademark action to obtain relief against gray market products sold in the U.S.
Courts have typically considered differences in quality, formulations (such as in the case of pharmaceuticals), alteration of serial numbers and non-English labels and instructions to be material differences justifying exclusion from the U.S. marketplaces.
When these or other differences that consumers will likely consider material are present, a trademark owner may legally seek exclusion of the gray market goods under the federal Lanham Act.
In the case of our hypothetical sneakers, the company manufacturing the sneakers should have a strong, consistent and enforceable strategy to deal with the recurrence of gray market sneakers appearing in the U.S. marketplace.
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