February 16, 2016

A Zero Tolerance Policy to Prevent Product Diversion and to Stop Unauthorized Sales


Companies seeking to stop and prevent product diversion should consider adopting zero tolerance policies. In essence, a zero tolerance policy amounts to using actual consequences to mold authorized distributors’ behaviors.

The goal of an anti-diversion policy is deterring authorized distributors from engaging in product diversion. In other words, companies must convince their authorized sellers that there are serious consequences if they divert the companies' products and sell them outside the authorized distribution channels. Otherwise, prohibiting product diversion will merely be words in an agreement and/or the companies' websites.

If an authorized sellers knows that a company will simply give them a warning—a slap on the wrist, essentially—this will not strike any fear in the sellers and cause them to stop diverting the products. In fact, an authorized seller who is diverting products will have leverage if he or she knows that the company will be too scared of the financial impact of losing his or her sales and not terminate the authorized seller's account in spite of his or her action.

Unauthorized sellers are typically aware of the First Sale Doctrine (which generally permits people to re-sell others’ genuine trademarked goods). If they become aware of others engaging in the unauthorized selling of a company's products with minimal consequences, they will surely assume that they will not face any consequences either.

This is analogous to the Federal Trade Commission catching bad actors for misleading or deceptive advertising, but then doing nothing more than a public reprimand. There is often not much of a deterrence effect.

In short, not enforcing an anti-diversion policy creates a situation where a company can put a lot of time, effort and money into monitoring for violators, tracking diverted products, and taking some enforcement-type actions (including sending cease and desist letters), yet for practically nothing if there are no actual consequences.

Therefore, a brand that is serious about ending the unauthorized reselling of its products should enact a zero tolerance policy. This includes taking legitimate action to prevent product diversion in the future.

We recommend implementing a graduated enforcement system. This system should combine technology, investigation and legal tactics to go after unauthorized sellers. By utilizing such a system, a company can send out strongly-worded cease and desist letters to authorized sellers explaining their enforcement system and then actually backing up their words with action if any product diverters do not change their behavior.