April 7th, 2017

Why Retailers and Manufacturers Should Address Unauthorized Online Sellers

Employment Law 0

Authored by Whitney Gibson

People are increasingly shopping online, and they are spending more than ever before.   In fact, according to a Business Insider report from November, the number of people shopping online grew by almost 20 million from 2015 to 2016.

The estimated 224 million online shoppers are, unsurprisingly, spending more money online and more often.  Business Insider projects that U.S. consumers will spend $632 billion online in the year 2020.  Despite this growth, product diversion and unauthorized online sales are plaguing retailers and manufacturers across the country – potentially to the tune of an aggregate of tens of billions of dollars in legitimate revenue.

Retailers and manufacturers should consider taking steps to protect their online distribution channels, trademarks and brands.  A failure to do so can result in any or all of the following: loss of sales, brand erosion/reputation damage, upsetting authorized distributors and difficulty attracting new ones, shrinking profit margins, an increase in pressure to lower prices when not desired, and the disruption of minimum advertised price (MAP) policies, among other things.

For years, companies have contracted with distributors to sell their products on an exclusive basis. But as technology has evolved, it has become easier for anyone to sell products online. Thus, product diversion to unauthorized sellers is increasingly threatening companies of all sizes.  Most companies are not sure how to cope with unauthorized online sales.  They might be able to remove certain sellers initially, only to see those unauthorized sellers reappear using different names or selling on entirely different online websites/marketplaces.

It is important for manufacturers to be prepared to stop unauthorized sales and sellers.   This can be accomplished in two steps: 1) illegalizing the unauthorized sales and 2) taking systematic enforcement efforts to efficiently and effectively reduce the unwanted online sales.  The remainder of the article focuses primarily on the former.

Illegalization of and enforcement efforts to stop unauthorized sales

When retailers and manufacturers have agreements in place with their authorized distributors, they can enforce them through breach of contract claims.  However, they typically will not have legal claims against third-party unauthorized sellers who are typically more problematic than authorized distributors.

Many unauthorized sellers are wise enough to know that someone who purchases a trademarked product ordinarily acquires the right to re-sell that same product – without incurring liability for trademark infringement.   This is the basis for what is known as the First Sale Doctrine defense.

Fortunately for manufacturers, there are exceptions to the First Sale Doctrine.  And these exceptions can serve as the foundation for being able to stop widespread unauthorized sales.  Various courts have found that resellers are not immune from trademark liability if they are offering goods for sale that are “materially different” from the genuine products of a trademark holder.  In other words, manufacturers should distinguish their products from those that could be sold outside the authorized distribution channels.

For instance, a manufacturer might provide a particular warranty, guarantee or return policy that an unauthorized seller cannot match.  Similarly, an unauthorized seller may be unable to deliver certain customer service or repair offerings, special promotions or discounts, or other post-sale services.

In addition to this “material difference” exception, manufacturers also have a right to control the quality of their product distribution.  In other words, when manufacturers have legitimate quality controls in place, unauthorized sellers can be liable if they distribute products that do not adhere to them.   Thus, manufacturers should implement at least one or two quality controls that make sense for their particular business.  These could include anything from specific product recall procedures to maintaining certain storage conditions.

Additionally, manufacturers might consider adding language to their authorized seller agreements that will support tortious interference with contract claims against third-party unauthorized sellers.  Once manufacturers establish potential legal claims against unauthorized sellers, they can move forward with actual enforcement.  It is up to each manufacturer and its enforcement “team” to determine how exactly to accomplish this.

However, in Vorys experience, our attorneys have found that combining the skills and expertise of attorneys, investigators, and technology/monitoring companies can be effective.   One way to do this involves 1) identifying all instances of unauthorized sales of a manufacturer’s product(s), 2) determining which unauthorized sellers to target, 3) sending cease and desist letters, based on the established legal claims, 4) identifying the remaining unauthorized sellers and sending cease and desist letters to their respective addresses, and 5) taking the appropriate legal action against any remaining non-compliant sellers.

Regardless of the actual process, it is crucial for manufacturers to work to limit the negative effects that unauthorized sellers can have on their brands.

To learn more about the Vorys online seller enforcement group, visit www.onlinesellerenforcement.com.

About the Author: Whitney Gibson is a partner at Vorys and leader of the firm’s group that focuses on internet brand and reputation issues, including both illegal online sales enforcement and internet defamation.  He can be reached at wcgibson@vorys.com.

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