Avoiding the pitfalls of grey market sales

This article is brought to you by Retail Technology Review: Avoiding the pitfalls of grey market sales.

By Tom Collins, Associate, and Camille Arnold, Trainee, at Stevens & Bolton.

In a ruling that has been welcomed by brand owners, the Supreme Court recently confirmed that the sale of 'grey goods' can constitute a criminal offence. It is therefore important for retailers to understand the potential consequences of dealing with such goods, and the steps that can be taken to minimise the risks of liability.

What are grey goods?

Grey goods are genuine branded products which have been manufactured with the brand owner's consent, but not authorised for onward sale or distribution. This could be because the manufactured goods do not satisfy the brand owner's quality standards, or perhaps where goods have been manufactured in excess of the amount authorised.

Grey market sales can also arise where goods are put on international markets outside the European Economic Area (EEA) by brand owners, but are then resold into the EEA by third party sellers without authorisation. This situation arose in a prolonged legal battle between Levi Strauss and Tesco, after the supermarket giant purchased Levi jeans from wholesalers in the US, Canada and Mexico at much lower prices, and then resold the cut-price jeans in the UK without consent. The court ruled in favour of Levi, recognising that the trade mark owner was entitled to prevent such imports from outside the EEA without their consent.

It is important to distinguish these situations from branded goods that have been put onto the EEA market with the trade mark owner's permission, which are then resold without further approval. In these circumstances, subject to certain exceptions, the trade mark owner cannot object to circulation of their goods throughout the EU. This can still create commercial difficulties for brand owners, as it creates an unofficial channel for the goods to be resold. However, this remains a legitimate practice due to rules on free movement of goods, therefore brand owners have limited options to police such sales without falling foul of competition law.

Criminal sanctions: New weapon for brand owners?

Although brand owners have previously been able to bring civil proceedings against those dealing with grey goods, the question before the Supreme Court in R v C and others was whether the criminal provisions in the Trade Marks Act 1994 (TMA), which have traditionally been used in the context of counterfeits, could also apply to grey market sales.

The case concerned the bulk importation and sale of clothing bearing trade marks of brands including Ralph Lauren, Fred Perry and Jack Wills. Whilst many of these items had been manufactured with the brand owner's consent, their sale in the EU had not been authorised and the court confirmed that such sales fell within the criminal provisions of the TMA. Although this case did not specifically address the situation of parallel imports from outside the EEA (as in the Levi case), the judgment indicates that such trade is now likely to be caught by the criminal provisions.

This ruling has therefore cleared the way for trade mark owners to pursue criminal prosecutions against those handling grey market goods, and those found guilty could face penalties of up to 10 years imprisonment. Of course, this is likely to remain an extreme option, reserved for the more flagrant offenders, and a defence will be available to those charged if they can show that they believed (on reasonable grounds) that the use did not infringe. However, such a defence requires the accused to have made reasonable inquiries, and the level of investigation needed to discharge this burden is likely to increase for commercially sophisticated members of a supply chain.

Practical implications

This decision will be particularly relevant for retailers who do not obtain goods directly from the brand owner, but instead rely on assurances as to the origin and legitimacy of the goods from those further up the supply chain. In these circumstances, retailers should implement robust procurement processes to ensure that they minimise the risk of unlawfully dealing with grey goods and facing civil or criminal liability. This might include:

• Carrying out due diligence checks on suppliers.
• Obtaining satisfactory written evidence of the trade mark owner's original consent for the goods to be sold in the EEA (particularly where products may have been sourced from outside the EEA).
• Requesting appropriate warranties and indemnities from suppliers as to the origin of the goods and right to sell.
• Inspecting products upon delivery to check for indications that the products may not have been authorised by the brand owner for sale. This might include deficiencies in quality, lack of product identifiers (e.g. serial numbers), or other non-EU product features (e.g. packaging language).

Taking such steps, and making any further necessary enquiries, will help retailers to establish a sufficient level of comfort that the goods have been authorised for onward sale by the brand owner, therefore avoiding the dangerous pitfalls of the grey market.