Many brands today are noticing that unauthorized third party sellers are selling large amounts of their products over the internet.
Some of these brands are working hard to stop product diversion and the related unauthorized online sales. Others, however, are not — or they simply do not know how to deal with the issue.
It is important that businesses are not ignoring unauthorized online sales, however, due to the problems they can create. For example, they can inhibit a business’s earning potential through the sale of its products; interfere with a business’s ability to attract and keep legitimate distributors happy; and/or tarnish its products’ trademarks and goodwill built up over time.
We discuss these issues in more detail below.
The sale of a company’s products outside its intended distribution channels makes it difficult to maximize revenues.
By selling below retail value, as most unauthorized third party sellers do, websites like eBay become populated by products below a business’s intended retail price. This often occurs in the beauty industry, such as with salon products.
When there is a large number of diverted products being sold for lower prices online, businesses might need to lower their retail prices or otherwise sell fewer retail price products.
Upsetting legitimate distributors
When products are being sold at lower prices online (perhaps in violation of a MAP policy), consumers will typically choose to buy these lower-priced products, rather than from the authorized sellers who are selling at the suggested retail price.
Fewer sales can lead to upsetting the authorized sellers. Similarly, prospective authorized sellers, seeing the prices of the products being sold online, might be reluctant to sign on with the business in the first place.
In other words, unauthorized sellers can damage both a business’s ability to keep authorized sellers happy and to attract new sellers. The ease with which consumers can go online and buy products at lower prices is a turn-off for both existing and prospective authorized sellers.
Moreover, those who buy from authorized sellers may be frustrated to find out that the same products they bought are being sold for less online; they may even seek to return the product.
Damaging trademark and brand value
Finally, a third major concern for businesses is that unauthorized online sales can damage their trademarks and brands. Unauthorized sellers often do not adhere to businesses’ quality control standards. This means a consumer purchasing a product might end up with a damaged, lower quality product that is potentially unsafe.
Companies often intend for trained professionals to distribute certain products. This is frequently the case in the medical or beauty industries.
Most companies go to great lengths to register their trademarks, establish certain quality controls, and to control distributions. This is often necessary to overcome the First Sale Doctrine defense. The First Sale Doctrine generally permits buyers to resell others’ trademarked goods without incurring any liability. However, it does not apply when a reseller sells goods that are materially different from a trademark owner’s genuine goods.
In short, businesses are spending significant time and money to protect their brands. They can ill-afford to have unauthorized third party sellers compromise the quality of their goods.
Fortunately, there are various strategies that companies can apply to stop unauthorized sellers. These begin with structuring their businesses such that unauthorized online sales infringe on their trademarks.