As technology has evolved over time, it has become increasingly easy for people to sell products online – including the unauthorized selling of a company’s goods.
Unauthorized sellers create a number of problems, including:
- Upsetting a company’s authorized distributors
- Making it difficult to attract new distributors
- Increasing price pressure
- Lowering profit margins
- Damaging to a company’s goodwill/reputation
- Eroding the brand
- Losing sales
Following are the five most common types of people engaging in unauthorized sales and product diversion that companies should be aware of:
1) Authorized Distributors
Yes, otherwise “authorized” distributors are among the most common people engaging in “unauthorized” sales. Some distributors do not realize they are not permitted to sell the products online, while others blatantly disregard the agreements, viewing websites like Amazon and eBay as an opportunity to sell more products. Often family members or other close associates might take the products and sell them online themselves.
2) Professional Resellers
There are a variety of “professional” sellers who might engage in unauthorized sales. Some of these bad actors include those acquiring products in large amounts from authorized distributors and reselling them online. Some even use specifically designed software to pick up products from other storefronts to resell at inflated prices. These sellers either rely on customers who do not research product prices well enough or, alternatively, they can offer a specific service that others cannot (e.g., shipping internationally at low rates).
3) One-off Sellers
While this type of unauthorized seller is extremely common, the one-off seller is usually rather harmless. One-off sellers, of course, list only one product (or a very small number of products) and the product listing disappears once the listed product has been sold. A one-off seller might go to Amazon or eBay because he or she purchased a product but no longer wants it or received it as a gift and will not use it – but the intent to profit really is not nefarious.
4) Professional Schemers
These sellers, unlike the one-off sellers, have a lot to gain financially through unauthorized sales. The so-called “professional schemers” often contact authorized distributors and work with those authorized sellers to purchase the products at very low prices. Then, the “schemers” resell the products slightly below retail on unauthorized websites to generate a profit, while the authorized distributors make money based on what is effectively a commission instead of pure product sales.
5) Sellers Using Stolen Credit Cards to Purchase (Then Distribute) Products
This type of seller lists products at significantly reduced rates, uses stolen credit cards to purchase the products from the company, and then ships the products to the buyer. The unsuspecting purchaser, in this scenario, pays for the product legitimately through Amazon or eBay, but the scammer takes the money as their entire profit. Given that the unauthorized seller has used a stolen credit card, they are not out any money – regardless of the price of the product (even if it is three or four times the amount for which they sold it). The company only becomes aware of the unauthorized purchase when they receive a chargeback from the credit card, but at that point the product has already shipped out How to Combat Unauthorized Sellers
Critical Issue for Direct Sellers
Companies at risk of having their products sold without authorization online should be aware of product diversion and each of these specific types of unauthorized sellers. As stated above, there are a number of issues that unauthorized sales can cause, so it is critical that companies work to stop them and the specific sellers. Otherwise, they risk being continuously (and perhaps significantly) harmed by this impermissible activity. The following is my recommended approach for dealing with unauthorized online sales.
Step 1: “Illegalize” online selling in your policies.
The first step that a company should take in attempting to stop unauthorized sales is to conduct a thorough review and analysis of its own policies and procedures. One of the main reasons for this is to determine whether the company has legal grounds to stop third-party resellers, who are ordinarily protected by the “First Sale Doctrine.” The First Sale Doctrine generally provides that someone who purchases a trademarked good acquires the right to resell that product, including on websites such as eBay or Amazon.
However, courts have held that resellers may not sell (or offer to sell) trademarked products that are materially different from the products sold by the trademark owner. Both customer benefits (e.g., warranties, guarantees, return policies and promotions offered to customers purchasing exclusively from authorized distributors) and quality controls (e.g., certain packaging, storage and shipping protocols) have been found to qualify as material differences. Therefore, it is important that companies essentially create potential material differences by adopting certain policies and procedures that unauthorized sellers will not, or potentially cannot, follow.
It is also beneficial for companies to add language to their distributor agreements that will support tortious interference with contract claims against third-party resellers. By way of illustration, imagine that an authorized distributor is not permitted to sell products to someone who intends to then resell that product. If someone purchases the product from the authorized distributor and then does resell the product online, he or she has arguably induced a breach of contract between the company and its authorized distributor.
Step 2: Implement an enforcement system.
Once a company’s policies, procedures and agreements are adequately set up, it is important to create and implement a cost-effective and efficient enforcement system that incorporates technology, cyber investigation and legal enforcement. In short, such a system should use technology to identify unauthorized product sales and sellers; target certain sellers (typically the largest offenders) through cease-and-desist letters; and pursue the remaining sellers, who do not comply with the cease-and-desist letters, through legal strategies (up to and including filing lawsuits against them).
This process is most effective when it is run on a monthly cycle, with the enforcement team providing monthly reports to clients detailing the efforts made and the results achieved. For example, a monthly report can provide a list of the number of sellers who complied with the cease-and-desist letters, the identities of any unauthorized sellers that have been obtained and recommended legal tactics to stop any remaining sellers. A monthly report can also identify the unauthorized sellers who have not yet been targeted, further recommending a number of sellers that the enforcement team can pursue in the upcoming month.
This entire process best serves companies when run as a “flat fee” program, only going to an hourly rate if and when escalated legal tactics are needed to pursue non-compliant sellers. A graduated enforcement system can be tailored to fit the needs of any company, and it is aimed at significantly reducing the number of unauthorized sellers (and products being sold without authorization) online in an efficient manner and at a reasonable cost. Aside from the direct benefit of eliminating existing unauthorized sellers, it also serves as a deterrent for other bad sellers and helps demonstrate to existing authorized distributors that the company is doing everything it can to stop the unauthorized sales.
To learn more about unauthorized seller enforcement, read this article from Momentum Factor’s Travis Wilson.
And to find out how Momentum Factor can help protect your company against unauthorized sellers, contact our team today.
