Daily RC Article 29

Gray marketing

Paragraph 1

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.

Paragraph 2

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.

Paragraph 3

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.

Paragraph 4

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.

Topic and Scope:

Gray marketing, a practice that involves the sale of trademarked products through unauthorized channels.

Purpose and Main Idea:

At first, the passage is merely descriptive, but the author reveals his true feelings in the third paragraph, setting forth an argument to establish that gray marketing should be curtailed.

Paragraph Structure:

The first couple of paragraphs give us some general background information on gray marketing, basically defining it and then telling us how it occurs within a specific region and across international boundaries.

Only in the third paragraph do we begin to get a sense of what the author thinks about gray marketing, when he or she argues that it’s unfair to trademark owners, essentially by stating that their opposition to it is justified.

In paragraph 4, the author reviews three legal theories for regulating gray marketing activities, and concludes that only the last of them—territoriality—is both workable and just. The final sentence clearly reveals the author’s position: He thinks it’s “inevitable” that the territoriality interpretation will win the day.

The Big Picture:

  • Generally, passages in which the author’s point of view isn’t apparent early are harder to handle than passages that have a clear purpose in paragraph 1. Consider saving them for later in your section.
  • This is a very dense passage, and it makes no sense to try to absorb all of the details as you read through it. But notice how neat its structure is. The first two paragraphs discuss how gray marketing works, the third describes why it’s unfair, and the last evaluates proposed legal remedies. That’s what you should be getting out of the text: full comprehension of the structure, not the content. If you identify and keep this structure in mind, you shouldn’t have any trouble relocating details when necessary.

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