Practice Pointer: Parallel Markets – Three States With Additional Consumer Protection

The parallel market, also known as the gray market, is the name given to the market that develops in goods sold outside of their authorized channels of trade, often referred to as gray goods.  For example, if a manufacturer of fragrances sells a perfume in the United States and in France, and a third party purchases a large quantity of the fragrance in France and imports it for resale in the United States, this is a parallel market transaction. 

Sometimes the gray goods are different from the domestic product either in their content or in their packaging.  In the case of electronics, manufacturers sometimes refuse to honor warranties for goods sold in the gray market.  These variations can create problems for the consumer who wants the lower price but may not be aware of the problems related to the purchase of the gray market goods. 

U.S. trademark and copyright laws impose certain restrictions on the importation and sale of parallel market goods which do not necessarily protect the consumer regarding these concerns.  As a result, three U.S. states – California, Connecticut, and New York – have developed their own laws specifically directed at gray goods. These laws share two things in common: They apply to the retailer, and they attempt to provide the consumer with adequate notice of what he or she is buying. Their goal is to dispel any confusion by notifying the consumer that the goods, while not counterfeit, may not be fully conforming with the domestic product.

The first and most comprehensive of these laws is California Civil Code §1797.81, titled “Retail Sellers; disclosures; tickets, labels or tags.”  It requires every retailer who sells gray goods to post a sign at the point of display and to affix to the product or its package a notice setting forth, as appropriate for the product, whether:

• The item is covered by the manufacturer’s warranty in the U.S. (unless the reseller provides his own warranty and provides proper notice thereof)
• The item is compatible with U.S. electrical currents
• The item is compatible with U.S. broadcast frequencies
• Replacement parts and compatible accessories are not available through the manufacturer’s U.S. distributor
• The item is accompanied by instructions in English
• The item is eligible for manufacturer’s rebate (if any)
• The item has any incompatibilities or non-conformities with relevant domestic standards.

A similar disclosure has to be included in any advertisement for the product. Cal. Civ. Code §1797.82. A violation of these statutes entitles the consumer to return the product and constitutes a violation of the California Unfair Competition and Deceptive Trade Practices Act.

California law goes further than its two sister states and prohibits the decoding of “personal property.” Cal. Penal Code 537e.  Manufacturers often code their products in order to track the source of parallel goods. Parallel market resellers sometimes remove these codes to protect their sources. When the removal defaces the products, it violates existing case law. The California statute reaches decoding that does not deface: any removal of a “manufacturer's serial number, identification number, electronic serial number, or any other distinguishing number or identification mark” is punishable by fine and imprisonment.

Connecticut’s restrictions are not as intrusive or extensive. Connecticut General Statutes Section 42-210 requires every retailer who knowingly sells parallel market goods to post conspicuously, on a sign attached to the item itself, on a sign affixed to each cash register or point of sale at which the goods are offered for sale, or on a sign situated to be clearly visible to the buyer from the register, that either some of the products or a specific product are not:

• Accompanied by the manufacturer's warranty valid in the United States;
• Accompanied by instructions in English; or
• Eligible for a rebate offered by the manufacturer.

Mail order vendors (but not retailers) must also make these disclosures in their written advertising. Failure to abide by the statute entitles the consumer to return the product within 20 days and constitutes an unfair or deceptive trade practice. As in California, the Connecticut retailer can avoid the warranty issue by offering his own warranty of equal or greater coverage.

New York’s statute focuses on the warranty issue. New York General Business Law Section 218-aa provides that a retailer who knowingly sells gray market goods must conspicuously post on a sign attached to the item and on each cash register or from a place visible from each cash register, a disclosure stating whether the product:

• Is accompanied by a manufacturer’s warranty,
• Contains instructions in English, and
• Qualifies for a manufacturer’s rebate in the US.

As in Connecticut, if a New York retailer fails to comply with the statute, the consumer may return the product within 20 days. The New York statute goes further, however, by providing that the Attorney General can obtain an injunction against the retailer without proving actual injury and a civil penalty.

Keep tabs on parallel market legal developments at Jorge’s blog: http://www.thegrayblog.com.