The unauthorized sales dilemma
E-commerce continues to grow substantially each year. And this annual growth has positively affected brands in many ways. However, it has led to an increase in grey market internet sales.
The point of entry for unauthorized third-party sellers is very low: virtually anyone that can get a hold of a manufacturer’s products can sell them online.
They do not need to create a website or worry about driving traffic. All of this has been addressed with the rise of the online marketplace. If a grey market seller can compete on price, he or she can usually earn sales.
Of course, third-party sellers selling for cheap online is causing harm to manufacturers and their brands. Specifically third-party unauthorized sales can result in the following:
- authorized sellers dropping their prices to match the unauthorized sellers’ prices;
- authorized sellers negotiating lower prices, which reduces company profit margin;
- authorized sellers becoming upset, potentially refusing to engage in future sales; and
- consumers having a lower perception of the brand.
It is, therefore, critical that manufacturers address grey market sellers.
Ten tips for fighting grey market sales
There are three main components for addressing unauthorized sellers: 1) creating a proper legal foundation for enforcement, 2) developing a sales strategy and policies that they can control, and 3) implementing a graduated enforcement system.
We have written at length, on this blog, about creating a foundation for legal claims, developing a strategy for addressing online sellers, and implementing the enforcement program.
But as seen in the video above, Whitney Gibson, leader of Vorys’ group focused on online brand and reputation issues offers the following list of suggestions for stopping unauthorized online sales:
- Conduct an analysis to determine the strength of your legal claims;
- Implement service benefits or quality controls that unauthorized sellers cannot deliver;
- Collect evidence to support quality controls and material difference claims;
- Limit the amount of resellers on marketplaces;
- Create an automated process to remove 80-90% of unauthorized sellers;
- Gather evidence of counterfeits and demonstrate to marketplaces there is a counterfeit problem with your brand;
- Implement internal policies that will help with identifying diverters and unauthorized sellers;
- Use internet investigations to uncover identities of unauthorized sellers;
- Shutdown stubborn unauthorized sellers for good; and
- Enlist an online marketplace reseller who will assist with channel management.
The First Sales Doctrine Defense
Items #1-3 go hand-in-hand, and each involves establishing potential legal claims. As written about numerous times, most unauthorized sellers will try to rely on the First Sale Doctrine defense. However, there are exceptions to this defense, which manufacturers can rely on to establish legal claims.
Thus, manufacturers must first ask some key questions and then decide what steps they must take to implement legitimate benefits and quality controls that unauthorized sellers cannot deliver or replicate.
In addition to revamping their policies and agreements, manufacturers should collect evidence to support these quality controls and material difference claims. Essentially, they want to preserve evidence for future use (i.e. support of consumer confusion claims) during enforcement efforts.
For example, this might include asking their customer service departments to track people who call about products purchased from third-party sellers.
Limiting the Sale of Product
With regard to item #4, manufacturers can typically benefit from limiting the sale of their products over the internet to a small number of resellers. Not only does this reduce intra-brand competition, but it is easier to control pricing when highly motivated/incentivized sellers are the ones promoting their brands and products.
Graduated Enforcement and Specific Tactics
Item #5 goes towards enforcement, which we often illustrate through our recommended funnel approach. Once legal claims are established, manufacturers want to systematically (i.e., efficiently and effectively) tackle unauthorized online sale.
Items #6-10 cover other more specific things manufacturers should consider outside of the broad concept of illegalizing unauthorized sellers and engaging in enforcement efforts
This includes, as seen from the list above, the importance of manufacturers being able to demonstrate to online marketplaces the efforts they are taking to curb unauthorized sales; the many different ways in which Vorys’ enforcement team attorneys attempt to identify these; and how to shut down unauthorized sellers and stop them from engaging in future sales.
We encourage you to check out the webinar replay above for a more in-depth look at combating unauthorized sales.