December 30, 2015

How Unauthorized Sellers Are Getting Products and How They Can be Stopped


Unauthorized sellers are causing problems for many brands. Most brands, however, are unsure how to stop these sellers and their impermissible sales. Others simply attempt to combat the unauthorized sellers in an ineffective manner. This can be because the “leaks” in their authorized channels may be coming from a number of sources. Determining how unauthorized sellers get products can be frustrating!

Below is a list of several ways third-party unauthorized sellers (or authorized sellers who go rogue) obtain these products in the first place. We also include recommendations for how to stop them:

  1. Authorized sellers often sell products online in violation of their contracts: Companies can help prevent this with “strong teeth” in contracts. For instance, companies might clearly prohibit online sales, Companies might also include liquidated damages clauses. It is also beneficial for companies to provide a document to authorized sellers, separate from their distribution agreements, that addresses product diversion. Having an authorized seller sign this document is better than burying the relevant language in a potentially lengthy distribution agreement.
  2. Employees of authorized sellers may take samples or products and put them online: A company should clearly spell out its anti-diversion policy in a document that management-level personnel should be required to sign and then distribute that document to company employees.
  3. Authorized sellers might give products to someone else to sell them online: Companies should ensure that their contracts clearly state that authorized sellers cannot sell quantities greater than typically purchased for consumption. Further, they should stipulate that their sellers cannot sell products to people who intend to re-sell the products. These companies should also consider placing tracking codes on products and additionally audit their authorized sellers to see who they are selling to and in what amounts.
  4. People steal products from a company: It is important that companies maintain good records of all products and product inventory. Moreover, companies should clearly communicate the anti-diversion policy to employees, such as by email or a physical letter. They should also provide an explanation of the consequences of taking products and selling them online.
  5. Competitors might buy out stock when they convince distributors to switch accounts: It is important for a company to communicate to its authorized sellers that they cannot provide bulk products to competitors. Instead, authorized sellers should return the products if they switch accounts.
  6. Consumers will take products and try to re-sell them: Companies can monitor online sales and have a company letter sent out to consumers explaining that they cannot sell the products online, as well as the importance of the integrity of the product. They can also put certain language on product packaging, such as “NOT FOR RESALE.”

Additionally, a company can have a zero tolerance policy through which they can terminate non-compliant sellers. As referenced above, companies can include liquidated damages provisions, requiring product diverters to pay high fines. Companies can also have a strong enforcement system in place that includes a multi-tiered program consisting of monitoring, investigation, and legal tactics.

A company should also clearly communicate this to authorized sellers. This serves to both stop unauthorized online sales and deter them upfront.