Grey Market

Disha Agrawal | ICFAI Law School, Hyderabad | 24th June 2020

What is Grey Market?

Grey market/parallel market is where genuine or authentic products are sold through unauthorized distribution channels usually at a lesser price without the consent or knowledge of the manufacturer/owner. The purpose of grey market or parallel import is to take unfair advantage of the price arbitrage. It is referred as ‘grey market’ as the goods manufactured and sold are legal but the distribution channels through which they are sold are unauthorized or illegal. There are usually two types of grey markets: The one where imported goods are expensive; they are unavailable or there is shortage with respect to the same and the second where unissued securities are traded in the market. 

Parallel importing is generally considered as a trade practice and Indian legal regime provides for parallel importing under different legislations of Intellectual Property rights and Competition law. Grey market/Parallel importing is explicitly prohibited under Designs Act, 2000. India still follows principle of national exhaustion with respect to Copyrights Act. Under the Patents Act, 1970 Section 107A (b) deals with parallel imports and Section 30(3)(b) of the Trade Marks Act, 1999 also provides for the issue of parallel importing. Grey market is mostly prevalent with respect to Trademark and Copyright. The practice of Grey market/Parallel Importing is intricately linked to the doctrine of exhaustion. Principle of exhaustion states that owner/manufacturer of a product ceases to have exclusive control over the further sale after the first legitimate sale of the product subsequently. According to this principle, the owner/manufacturer cannot prevent further sale of his product and cannot claim any profits with respect to the same. National Exhaustion is wherein rights of the owners/manufacturers are exhausted for a specific territory or domestic market where the goods have been put for its first valid sale with the consent of the brand owner in that specific territory or domestic market. International Exhaustion is based on the assumption that the entire world is one market and once the owner/manufacturer has put his goods for sale anywhere in the world, his rights as to exclusivity are exhausted. International Exhaustion system is adopted by India.^[1]

The principle related to exhaustion is provided under Article 6 of Trade-Related Aspects of Intellectual Property Rights (TRIPs), which provides discretion to the states whether to permit or prohibit parallel importing within its legal framework. In “Xerox Corporation v Puneet Suri” ^[2]The Court observed that import of second hand goods does not amount to infringement as there was no impairment with respect to the machines and proper documentation was adduced. Thus, protection under International exhaustion covered under the ambit of Section 30(3) was provided to the defendants. Provisions under Copyright Act are not explicit as to the application of international or national exhaustion principles. The Courts have delivered ambiguous interpretations with respect to same.^[3] Courts have upheld certain principles with respect to import of foreign goods such as prominently display that the goods being sold by them are imported from abroad and the warranty is provided by them personally without any affiliation with the brand owner so as to protect the reputation of the brand owner.^[4] Thus, it has been settled through various judgments that parallel importing amounts to infringement only when it has been acquired through illegal means and there has been material alteration or modification in the quality of the product. 

How to combat grey market?

• Consistent surveys to be carried out by the owner/manufacturer in order to keep a track of the stock and locate suppliers.
• Manufacturers can use various techniques such as – bar coding, DVD region codes so as to differentiate their goods from the goods sold in the grey market.
• The manufacturers have to constantly keep a track on the local counterfeiters in the domestic market.
• To keep a track of their products through serial number monitoring and the wide network of distribution channels diverted throughout the country.
• To carry out random test purchases from similar markets in the domestic market so as to identify unauthorized distributors. 
• To create awareness among their consumers about the grey market, its consequences etc – by displaying on their website.
• Manufacturers can create an intelligence platform where all the data, visual images, reports, documents, emails, websites and other form of unstructured data can be stored and compiled. Constant update of the same will reveal suspicious date if any.
• It is also important that manufacturers aggrieved by such activities initiate legal proceedings against the people involved in grey marketing/parallel importing and adduce evidence with respect to the same.
• It is also essential that the Government takes necessary steps to enhance regulatory mechanisms like increase of penalties. It is also essential that more powers are vested with the investigative agencies to carry out their activities efficiently. 

Grey marketing/parallel importing has both economic and legal ramifications. Economically it is helping the customers by supplying goods at lower prices but on the other hand there is no quality assurance which causes damage to both manufacturers and customers. Legally, it is imperative to prevent deception/confusion among customers and protect the rights of the manufacturer/owner. Thus, the practice of grey market is not healthy for the overall functioning of the economy. In near future, due to the paradigmatic shift in the economy towards protection of IP rights grey market investigations will play a prominent role in combating the menace of grey market. Therefore, it is essential for manufacturers to take necessary steps to combat grey market.

^[1] Kapil Wadhwa v. Samsung Electronics 2013 (53) PTC 112 (Del.)

^[2] CS(OS) No. 2285/2006

^[3] Warner Brothers Entertainment Inc. v. Santosh V.G MANU/DE/0406/2009

^[4] Kapil Wadhwa v. Samsung Electronics 2013 (53) PTC 112 (Del.)