Gray-Market Issues & Solutions

Gray-market goods are genuine products imported into the US without the trademark owner's consent, often bypassing authorized channels. Gray-market activity leads to lost sales, brand dilution, and compliance risks.

The Gray-Market Challenge

Unlike authorized goods sold legitimately or counterfeit items like knockoff watches, gray-market goods are legitimate but distributed outside planned channels. This matters because legal rights and business risks differ.

The economic impact of gray-market goods is substantial, with an estimate placing the US market size at over $63 billion annually in 2009. In 2011, gray-market goods were believed to cost individual high-tech companies about $1.4 billion each year. By 2016, gray-market sales made up 20% of the global luxury watch market. These illegal imports exploit price differences between markets, undermine minimum advertised price programs, and increase warranty and service costs for authorized distributors. Reputation risks and the loss of control over product quality can have lasting effects on brand value and profits.

Gray-market activity often arises from varying international prices, foreign licensees exceeding territorial boundaries, online marketplace resellers, diverted inventory, and unauthorized manufacturing. These entities exploit gaps in supply chain oversight and regulatory inconsistencies, making it challenging for brand owners to maintain control over their products and distribution channels.

Brand owners face significant risks from gray-market goods, including brand dilution, potential product liability for products that don’t meet US standards, disruption of distributor relationships, and regulatory violations with agencies such as the US Food and Drug Administration, the US Federal Trade Commission, and the US Consumer Product Safety Commission. These dangers can result in financial losses, legal liabilities, and damage to long-standing business relationships.

US Legal Tools and Precedents

A variety of federal statutes, judicial doctrines, and key cases shape the legal landscape for addressing gray-market goods in the United States.

• Trademark & Customs Statutes: The US legal framework for gray-market goods is anchored by the Lanham Act, which prohibits trademark infringement, false designation of origin, and restricts unauthorized imports. The Tariff Act and Customs and Border Protection regulations provide mechanisms for detaining and excluding gray-market goods. The International Trade Commission also plays a role through investigations targeting unfair import-related competition.

  
  

• Material-Differences Standard: The material-difference standard says that any difference likely to be significant to consumers—whether physical or non-physical, like warranty and post-sale services—can support exclusion or enforcement.

• First Sale Doctrine & Territorial Exhaustion: The first sale doctrine exhausts trademark rights after an authorized domestic or foreign sale. For gray market imports of goods first sold abroad, trademark owners may invoke the tariff act to block entry at the border.

Enforcement Strategies & Pathways

 A range of enforcement mechanisms is available to brand owners seeking to combat gray-market goods, each with its own advantages, challenges, and procedural requirements.

One of the main tools is US Customs & Border Protection, which allows trademark owners to record their marks with CBP and, for domestic trademark owners, to submit petitions that provide evidence of key differences through side-by-side product analysis, warranty matrices, and expert affidavits. CBP may detain or exclude gray goods at the border. Effective engagement with CBP is a fundamental part of a successful enforcement strategy.

In addition to CBP, the International Trade Commission can issue exclusion orders to prevent gray goods from entering the United States. To obtain an order, the complainant must demonstrate a domestic industry and that all or substantially all authorized goods are materially different from the gray good imports. ITC proceedings are typically faster than federal court actions and offer broad discovery tools and presidential review, making them a powerful option for brand owners.

Federal courts also play a significant role, providing a forum for trademark owners to seek monetary damages, injunctive relief, and other remedies under the Lanham Act and the Tariff Act. Additional claims may include tortious interference and breach of contract, especially where distributorship agreements are disrupted.

Beyond these judicial and administrative channels, additional regulatory options are available. Agencies like the FDA and CPSC can refuse entry or hold noncompliant products. State unfair competition laws may offer further remedies, especially in cases of consumer deception or harm. Moreover, gray-market goods that raise safety or warranty concerns may give rise to consumer class actions or state-level consumer protection claims.

Finally, digital and online marketplaces pose unique challenges for brand owners, as unauthorized resellers can operate at large scale and with relative anonymity, often employing sophisticated tactics to avoid detection. Although most major platforms provide intellectual property protection programs and notice-and-takedown procedures, their effectiveness varies, and persistent infringers might exploit loopholes or delays. Effective enforcement requires proactive monitoring, collaboration with platform operators, and the use of technology to spot unauthorized sellers, along with consumer education about the risks and limitations of gray-market goods.

Taken together, these enforcement strategies offer a comprehensive toolkit for brand owners to combat evolving threats from gray-market goods and safeguard their intellectual property and market share.

Risk Mitigation

To reduce exposure to gray-market risks and enhance brand protection, companies should adopt a range of proactive risk mitigation strategies and operational best practices, including, but not limited to:

• Internal Housekeeping: Conduct cross-border sales audits to detect pricing and supply chain irregularities. Enhance volume forecasting and order-to-cash controls with overseas affiliates to prevent unauthorized diversion. Establish recall and warranty carve-outs for unauthorized imports to limit liability and ensure expectations are clear.

• Product-Side Measures: Use jurisdiction-specific physical signs like UL marks, organic seals, traceable batch codes, and serialized holograms to help identify authorized products. A differential formulation or packaging that complies with US regulations, such as FDA-compliant nutritional facts and allergen disclosures, further supports enforcement and consumer safety.

• Contract: Use export-control covenants and audit rights in foreign distribution agreements to manage downstream sales. Use MAP policies and reseller authorization programs, and require proof of purchase from approved sources to deter unauthorized resellers and maintain channel integrity.

• Customs & Regulatory Engagement: Record US trademarks with CBP and submit Lever rule evidence (where such protections are afforded). Filings should be updated as product lines evolve. Work with CBP’s Intellectual Property Rights office to develop a Product Identification Training Guide that can enhance enforcement effectiveness.

• Monitoring & Enforcement: Use advanced technologies like AI-driven monitoring tools, performing sample test purchases, establish serial number tracking and authentication systems to aid in detecting and managing unauthorized sales. Develop an escalation process—from cease-and-desist letters to seizures, International Trade Commission actions, and civil litigation—that ensures an appropriate response to violations.

• Crisis Management & Communications: It is essential to prepare clear messages for retailers and consumers about warranty restrictions on unauthorized products. Working closely with public relations teams helps prevent negative stories, such as claims of price-gouging, and safeguards the brand's reputation.