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Gray Market Clothing Distribution

The importation of gray market branded clothing into the U.S. and other countries has created a significant disadvantage for authorized distributors, who have to pay substantially higher prices for the same branded clothing, but which is being sold for less by gray marketers.

“Gray market” is the term used to describe the sale of new, used, surplus and refurbished products through unauthorized resellers or channels.  In the apparel industry, for example, branded clothing is often designed in the United States, manufactured abroad, and then sold to customers all over the world.  While much of the branded clothing is intended to be sold in a specific geographic territory pursuant to exclusive distribution agreements, a third party importer can circumvent this distribution channel by purchasing the clothing abroad and then reselling it.
Those trying to prevent the importation of gray market goods into the U.S. may invoke unfair competition, tort, patent, copyright and trademark laws, depending on the circumstances.  An overview of potential remedies was the subject of an earlier post on this site.
Gray marketers are successful because they can severely undercut the prices that authorized distributors can offer because the branded clothing is usually sold to the authorized distributor for a higher price than that for which it is sold to a foreign, unauthorized distributor, which usually occurs when the product can be purchased for a much lower price in another country.  This is possible because these unauthorized foreign distributors often do not need to invest the same amount of resources into branding, taxes, packaging, advertising, labor and warranties as an authorized distributor does.  It is often argued that unauthorized distributors are free-riders on the goodwill of the trademarks that the authorized distributors invest in.  In many situations, an unauthorized distributor can still make a significant profit by purchasing branded clothing from a U.S. manufacturer and then importing the branded clothing back into the U.S. to be sold at a price that significantly undercuts the prices an authorized distributor selling the same branded clothing can afford to charge.  Consumers are attracted to the lower prices and authorized distributors cannot fairly compete.  Because authorized distributors cannot fairly compete with the prices offered by gray marketers, the distribution relationships between the trademark owners and authorized distributors (who have often devoted substantial resources to creating a legitimate distribution infrastructure), can be severely disrupted.  This puts substantial pressure on manufacturers to stop the importation of gray market goods.

The Internet and on-line auction sites such as eBay have made it even easier for gray marketers to circumvent traditional distribution channels, which makes it difficult for authorized distributors and trademark owners to monitor and control the re-importation of branded clothing into the U.S.  Some companies such as Zepol and MarkMonitor have made a business out of monitoring and tracking the flow of gray market goods and assisting textile and apparel manufacturers identify counterfeiters and unauthorized distributors.  MarkMonitor, for example, claims to have saved Under Armour, a popular sports apparel manufacturer, approximately $2 million attributed to eliminating gray market sales by helping to identify and prosecute unauthorized distributors.

The largest volume of importation of counterfeit and gray market goods appears to come from countries such as China, Malaysia and India.  Moreover, the global impact of gray market importing extends to far more countries than the U.S.  Authorized apparel distributors in the E.U. and in countries such as Japan and Canada also experience significant problems with gray market importation undercutting their prices and diluting their trademarks.  Well funded organizations such as the Alliance for Gray Market and Counterfeit Abatement are devoted to stopping the importation of gray market goods, but unless a comprehensive international treaty is adopted and enforced, adequately regulating the importation of gray market branded clothing into various countries is almost impossible.

Andrew P. Holland, Intellectual Property Group