How to Stop Grey Goods

By Louis S. Ederer and Andrew Bernstein

Published in Brand Management Focus 2004, April 2004.

The liberalization of international trade means big challenges for IP rights owners. Louis S. Ederer and Andrew Bernstein of Torys LLP analyze how brand owners can combat grey goods in Canada using trademark and other laws.

The liberalization of international trade in the past decade has been of tremendous benefit to North American businesses. However, it has also posed certain challenges, particularly for trademark owners whose products are sold in many countries. A trademark owner has the right, among other things, to authorize the making and selling of its products in particular countries, through particular trade channels. But trademark owners have been unable to control the diversion of goods, originally intended to be sold only in certain countries, to other countries where they were not intended to be sold. When imported into countries such as Canada and the United States, where they were not intended to be sold, these diverted products are known as grey market goods.

Trademark law, which ordinarily permits only a trademark holder (or his designee) to sell goods bearing its marks within a particular territory or country, will not typically prevent the sale of diverted grey market imported goods that were originally authorized to be made or sold only in another territory or country. The doctrine of exhaustion or the right of first sale generally means that once legitimate goods bearing a mark are sold anywhere in the world, the purchaser has the right to import or resell them. This permits an unauthorized entrepreneur to purchase trademarked goods in a low-price jurisdiction, and import and resell them into a high-price jurisdiction.

This, of course, can have serious adverse consequences for businesses. By depleting the products in the low-price jurisdiction, grey marketing elevates local prices, making the product less attractive to local buyers. More important, grey market products imported into a high-price jurisdiction compete at a low price with the manufacturer's own products and diminish the manufacturer's control over its own brands. Hence, businesses with widespread international sales have a strong interest in resisting and controlling grey marketing.

This article analyzes the avenues available to businesses seeking to challenge grey marketing in Canada, using trademark law as well as some other available legal regimes.

Resisting grey marketing on the basis of trademarks

Under Canadian law, the sale of grey market goods does not typically constitute trademark infringement. In a nutshell, that is because of the underlying purpose of trademark law, which is intended to protect consumers from confusion about the source of goods (that is, ensuring that the cola inside the can marked Coca-Cola is actually made by The Coca-Cola Company or its licensee). Because, by definition, grey market goods originate with or are ultimately authorized by the mark holder or a licensee (over whom the mark holder must assert quality...