Gray Market Goods

Are Gray Market Sales Legal in the US market?

The issue of gray market goods presents significant legal and economic challenges for brand owners, authorized sellers, and consumers. The gray market, also known as parallel imports, involves the sale of genuine products through unauthorized sales channels. These gray market activities are distinct from counterfeiting, as they involve legally obtained products that are resold in markets outside the authorized distribution channels. While these products are often sold at cheaper prices, they can undermine brand integrity, disrupt a brand's pricing strategy, and impact customer relationships.

This article discusses the legal framework governing gray market goods.

Defining Gray Market Goods

Gray market items are products that bear a valid trademark but are imported or sold outside the official distribution channels established by the brand owner. Unlike counterfeit goods found in the black market, these products are authentic but may not be intended to be sold in specific geographic regions. For example, Chevrolet manufactures vehicles that are intended for foreign markets, such as Canada. If the Chevrolet vehicle is sold into the US, it is a gray market vehicle for the US market. It is not a counterfeit or knockoff vehicle. It is manufactured by Chevrolet for a foreign market, but is still a Chevrolet vehicle.

Gray market goods may differ from their US equivalents in various ways. For example, the goods may have different prices, they may have different features, the branding may differ somewhat, and the products may be manufactured to meet the requirements of a particular country other than the US. In the case of cars, a vehicle manufactured for a foreign country may not meet various requirements for the US market such as the Federal Motor Vehicle Safety Standards (FMVSS) and emissions standards set by the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA).

Online marketplaces such as Amazon have contributed to a rise in gray market issues. These online marketplaces facilitate gray market sellers, since they provide such a broad international consumer base. Such gray market products originate from foreign countries, which can result in different prices from the US equivalent goods, variations in product quality, and issues with compliance with local regulations.

Legal Framework Governing Gray Market Goods

The regulation of gray market goods involves multiple statutes, including key provisions of the Lanham Act. Courts have addressed the applicability of the Lanham Act to such goods, particularly when the imported products are "materially different" from those intended for the U.S. market.

The Lanham Act

1. Section 32 of the Lanham Act (15 U.S.C. § 1114) prohibits the unauthorized use of registered trademarks in a manner likely to cause confusion among consumers. While gray market goods are not counterfeit, they may still infringe a trademark owner's rights if the goods sold differ materially from those authorized for sale in the U.S. When consumers expect a specific level of quality or attributes associated with a trademarked product, the sale of materially different gray market goods can lead to confusion and harm the trademark owner's goodwill. If the gray market goods are the same product sold in a parallel market, the gray market goods would not violate Section 32.
2. Section 42 of the Lanham Act (15 U.S.C. § 1124) bars the importation of goods that "copy or simulate" a registered U.S. trademark. This provision is crucial in preventing foreign-manufactured products from entering the domestic market when they bear marks identical to those owned by U.S. trademark holders but lack the same quality control or product specifications. Customs authorities enforce this section by blocking unauthorized imports that do not conform to the trademark owner's U.S. product standards.
3. Section 43(a) of the Lanham Act (15 U.S.C. § 1125) prohibits advertising and misleading commercial practices. Gray market goods that contain differences in formulation, packaging, instructions, or warranty coverage can mislead consumers into believing they are purchasing a product identical to the authorized U.S. version. This misrepresentation can constitute unfair competition under Section 43(a), giving trademark owners grounds for legal action.

The "Materially Different" Standard Applied to Gray Market Products

In Lever Brothers Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993), the court ruled that gray market goods could violate trademark law if they are "materially different" from authorized products. The case involved imported soap that, although bearing the same trademark as the U.S. version, contained a different formula and lacked assurances of U.S. quality control. The court held that even subtle differences, such as variations in formulation or packaging, could create consumer confusion and diminish the trademark owner's goodwill. Thus, under the "materially different" standard, unauthorized imports that deviate in any meaningful way from the authorized domestic version may constitute trademark infringement.

The application of the Lanham Act to gray market goods underscores the importance of maintaining product integrity and consumer expectations. Trademark owners can rely on these statutory protections to prevent unauthorized imports that undermine their brand reputation and create confusion in the marketplace.

The Tariff Act

1. Section 526 of the Tariff Act (19 U.S.C. § 1526) prohibits the importation of goods bearing an American trademark unless authorized by the U.S. trademark owner. This provision is intended to prevent unauthorized parallel imports from entering the domestic market and competing with goods authorized for sale in the U.S. by the trademark owner. Customs regulations, however, allow exceptions under specific circumstances.
2. Customs regulations provide an exception to Section 526 for gray market sellers if the products meet the "common control" standard, meaning they are produced by the same parent company or an entity under common ownership. If the foreign and domestic trademark owners are controlled by the same entity, the restriction under Section 526 does not apply, allowing the importation of gray market goods.

Common Control Standard

In K-Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988), the Supreme Court addressed restrictions on parallel market goods that did not meet the "common control" standard. The case involved the importation of goods bearing American trademarks but manufactured abroad without U.S. trademark owner authorization. The Court upheld restrictions on these imports, ruling that Section 526 bars unauthorized parallel imports unless they meet the common control standard. This decision reinforced the principle that trademark owners retain control over their marks and can block imports that do not comply with U.S. quality and distribution standards.

The application of the Lanham Act and the Tariff Act to gray market goods underscores the importance of maintaining product integrity and consumer expectations. Trademark owners can rely on these statutory protections to prevent unauthorized imports that undermine their brand reputation and create confusion in the marketplace.

The First Sale Doctrine

The first sale doctrine provides that once a trademarked product is lawfully sold, the trademark owner's control over that particular product typically ends, allowing subsequent resale. However, this principle does not apply when material differences exist between the authorized and gray market versions of the product.

The first sale doctrine is a judicially created principle that allows the resale of trademarked goods once they have been lawfully sold. Under this doctrine, a legitimate purchaser of a product may use, dispose of, or resell it without infringing the trademark owner's rights. Courts have ruled that "the right of a producer to control the distribution of its trademarked product does not extend beyond the first sale of the product." Bluetooth SIG Inc. v. FCA US LLC, 30 F.4th 870, 872 (9th Cir. 2022).

However, the first sale doctrine does not protect resellers in all circumstances. Courts have carved out key exceptions, particularly when resales create consumer confusion or when goods are materially different from those sold by the trademark owner. A product is not considered "genuine" if it lacks manufacturer warranties, is repackaged without disclosure, or has altered quality standards.

For example, in RFA Brands, LLC v. Beauvais, No. 13-14615, 2014 WL 7780975 (E.D. Mich. Dec. 23, 2014), the court held that a reseller could not invoke the first sale doctrine without proving that the goods were originally authorized for sale. Similarly, courts have ruled that materially different goods—such as those with altered serial numbers, different formulations, or unauthorized modifications—are not protected under the doctrine. Zino Davidoff SA v. CVS Corp., 571 F.3d 238 (2d Cir. 2009).

Additionally, the doctrine does not shield resellers who falsely imply affiliation with the trademark owner. For instance, businesses that promote themselves as "authorized dealers" or misuse trademarks in advertising may be liable for infringement. The first sale doctrine also does not apply if repackaging or relabeling misleads consumers about the source and quality of the goods.

Thus, while the first sale doctrine limits trademark owners' control over downstream sales, courts recognize exceptions where resale activities undermine brand integrity and consumer expectations. By enforcing these limitations, courts strike a balance between maintaining market competition and protecting trademark owners from unfair exploitation.

Impact of Gray Market Goods

Brand Protection and Intellectual Property Concerns

Gray market activities can erode brand reputation by introducing products that fail to meet local regulatory or quality standards. For example, cosmetic companies may find that their gray market products lack required labeling or safety compliance for a specific country, leading to consumer complaints or legal repercussions.

Selective distribution agreements allow brands to maintain control over their sales channels, ensuring that only authorized distributors sell products in designated geographic regions. This helps prevent dilution of brand value and preserves the integrity of customer service and warranties.

Consumer Confusion and Product Quality

Gray market goods can differ significantly from authorized versions in terms of quality, warranty, and compliance with local regulations. For instance, electronics brands often include different voltage requirements or software updates that are specific to a region. Consumers unaware of these differences may experience functionality issues or an inability to receive manufacturer support.

Negative experiences with gray market products can harm brand loyalty. If a consumer purchases a gray market smartphone that is incompatible with local networks, they may associate the poor experience with the brand rather than the unauthorized seller.

Economic Implications

Gray market products are typically sold at lower prices, undercutting authorized sellers and disrupting brand pricing strategies. While some consumers may seek lower prices, they often face risks such as a lack of warranty or the inability to return defective goods.

In industries like automotive parts or pharmaceuticals, gray market imports can raise safety concerns. For example, tires manufactured for different climates may not perform adequately in regions with extreme weather conditions, potentially endangering consumers.

Trademark owners must actively monitor and address gray market activities to protect their brand reputation, maintain pricing strategies, and ensure consumer safety.

Strategies for Trademark Owners

Supply Chain Control

The gray market operates in a fine line between lawful commerce and trademark infringement. While consumers may benefit from discounted prices and lower prices, brand protection remains a critical concern. The legal framework provides remedies to brand owners, allowing them to combat unauthorized sales and enforce distribution agreements to sell products exclusively through authorized dealers and authorized retailers. By understanding distribution channels, price discrepancies, and supply chain control, brands can mitigate the effects of gray market sales and meet local regulations.

Customs Enforcement

U.S. Customs and Border Protection (CBP) allows trademark owners to record their marks with the agency to prevent unauthorized imports. By recording a trademark with CBP, brand owners can request seizures of infringing gray market goods at the border. This proactive measure helps mitigate the influx of unauthorized imports that do not meet U.S. product standards.

Litigation Against Unauthorized Dealers

Trademark owners can take legal action against unauthorized sellers under the Lanham Act, particularly if the products differ materially from authorized versions. Courts have recognized that selling materially different products under the same mark can create confusion and constitute trademark infringement. In addition to trademark infringement claims, brand owners may also pursue cases under unfair competition laws, alleging deceptive business practices that mislead consumers.

Consumer Education and Awareness

Educating consumers on the risks associated with gray market goods is another critical strategy. By clarifying the differences between authorized and unauthorized sellers, brands can help consumers make informed purchasing decisions. Companies can highlight risks such as lack of warranty coverage, non-compliance with local safety regulations, and absence of manufacturer support.

Implementing product authentication features, such as holographic seals, serial number verification, and digital tracking systems, can also deter gray market sales. These measures help consumers verify the authenticity of their purchases and reinforce the value of buying through authorized channels.

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The attorneys at our firm have decades of experience in handling trademark matters. If you have an issue involving gray market goods or other trademark matters, contact our office for a free consultation.

© 2025 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.