January 4, 2016

Using Graduated Enforcement Systems to Better Control Authorized Distribution, Stop Product Diversion Online


Control authorized distribution

For years, brands have contracted with distributors to sell their products on an exclusive basis in an effort to control authorized distribution. However, unauthorized online sales are challenging this business model and causing numerous problems.

Many brands prohibit online sales by third-party sellers. However, most of these companies will still find unauthorized sellers listing their products for sale online, including on popular websites like eBay.

Companies' attempts to control authorized distribution will fail if they do not try to identify and remove these unauthorized online sellers. When there are products all over the internet, authorized sellers will see these products (typically at low prices). Moreover, companies cannot realistically sell the idea to the prospective seller that they will be exclusive sellers when there are products are all over the internet.

In short, controlled distribution models where brands control authorized distribution do not work for most companies today without comprehensive enforcement against product diversion committed online by unauthorized sellers. Fortunately, enforcement systems have proven to be effective.

While there are variations between specific programs, generally a company should adopt a graduated enforcement system that includes the following elements:

  1. unauthorized seller monitoring;
  2. sending electronic cease and desist letters;
  3. further investigating the identities of sellers;
  4. terminating distribution agreements and/or sending physical cease and desist letters; and
  5. utilizing certain legal tactics, if necessary.

Enforcement system elements

First, regarding monitoring, companies can potentially utilize software intended to efficiently and more cost effectively obtain the desired information. The ideal software will scan the internet, find unauthorized sellers and rank them based on volume, assist in providing outlets for providing legal notice, and further monitor the progress of removals.

Second, we recommend taking information from the monitoring reports and sending electronic cease and desist letters, or “eC&Ds.” eBay has online messaging systems, for instance; alternatively, companies can utilize any contact information provided by the seller to send an eC&D. These e-C&Ds can be sent either by attorneys or by the companies themselves; we often recommend that law firms handle the e-C&Ds for high volume sellers.

Third, further investigation might be necessary if the products have not come down from the website or websites. Cyber investigators are often useful, as they have various tools they can utilize to get identifying information about the sellers. Alternatively (or additionally), lawyers can prepare and serve subpoenas on the websites (e.g. eBay) or affiliated entities (e.g. PayPal, which operates the most common payment method utilized in eBay transactions). Serving subpoenas do require first filing a lawsuit.

Fourth, once a company identifies the sellers, it can terminate the relevant seller agreements and/or send physical cease and desist letters to get them to cease their activity.

Fifth, if all else fails, a company can utilize a number of legal tactics such as sending a draft of a complaint. A draft complaint indicates that the company is prepared to file a lawsuit if the sellers do not take action. A company might also be able to obtain a temporary restraining order to get assets from a PayPal account frozen, for example.

Enforcement is and should be customizable. However a brand might choose to handle enforcement efforts, it should know that a graduated enforcement system can go a long way to help maintain a controlled distribution model.