Gray marketing, the selling of trademarked products through channels of distribution not authorized by the trademark holder, can involve distribution of goods either within a market region or across market boundaries. Gray marketing within a market region (“channel flow diversion”) occurs when manufacturer-authorized distributors sell trademarked goods to unauthorized distributors who then sell the goods to consumers within the same region. For example, quantity discounts from manufacturers may motivate authorized dealers to enter the gray market because they can purchase larger quantities of a product than they themselves intend to stock if they can sell the extra units through gray marketing channels.
When gray marketing occurs across market boundaries, it is typically in an international setting and may be called “parallel importing.” Manufacturers often produce and sell products in more than one country and establish a network of authorized dealers in each country. Parallel importing occurs when trademarked goods intended for one country are diverted from proper channels (channel flow diversion) and then exported to unauthorized distributors in another country.
Trademark owners justifiably argue against gray marketing practices since such practices clearly jeopardize the goodwill established by trademark owners: consumers who purchase trademarked goods in the gray market do not get the same “extended product,” which typically includes pre- and postsale service. Equally important, authorized distributors may cease to promote the product if it becomes available for much lower prices through unauthorized channels.
Current debate over regulation of gray marketing focuses on three disparate theories in trademark law that have been variously and confusingly applied to parallel importation cases: universality, exhaustion, and territoriality. The theory of universality holds that a trademark is only an indication of the source or origin of the product. This theory does not recognize the goodwill functions of a trademark. When the courts apply this theory, gray marketing practices are allowed to continue because the origin of the product remains the same regardless of the specific route of the product through the channel of distribution. The exhaustion theory holds that a trademark owner relinquishes all rights once a product has been sold. When this theory is applied, gray marketing practices are allowed to continue because the trademark owners’ rights cease as soon as their products are sold to a distributor. The theory of territoriality holds that a trademark is effective in the country in which it is registered. Under the theory of territoriality, trademark owners can stop gray marketing practices in the registering countries on products bearing their trademarks. Since only the territoriality theory affords trademark owners any real legal protection against gray marketing practices, I believe it is inevitable as well as desirable that it will come to be consistently applied in gray marketing cases.