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Online Product Diversion Strategies

By Chris Anderson, Ph.D.

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Dr. Anderson works with companies and legal counsel to help implement graduated, online seller enforcement programs.  In addition to being a co-founder of Cyber Investigation Services (CIS), he is also co-founder of an international coalition of enforcement professionals in the Online Protection Coalition (www.onlineprotectioncoalition.org)

Online Product Diversion Strategies—Mitigation, Investigation and Enforcement

A significant number of product companies are discovering that their products are being sold by unknown third-parties on Internet websites—without proper authorization. These products are often sold through popular online storefronts such as Amazon and eBay, and also on independent third-party websites operated by anonymous retailers. When consumers search for products online, they frequently see items being sold in a variety of stores. It’s often the case that a number of unauthorized sellers are offering products well below the intended retail price. Some of this product is outdated and can be downright dangerous.

Typically, unauthorized online retailers and diverters are profiting from product companies that they perceive will offer little resistance and no enforcement.

 

There is, in fact, an entire industry of online retailers that specialize in obtaining products in large volumes by fraudulent means and for the lowest cost possible. They resell those products online. These diverters typically make bulk purchases from legitimate distributors and offer to pay more than the distributor cost, but at a price that is still well below retail. Such unauthorized online resellers arrange a deal that allows the distributor to profit and removes the sales burden for a large number of items, and thereby they negotiate a price that is significantly below retail value. These illegal online sellers will then market the products on impressive online storefronts websites that appear entirely legitimate to virtually any type of consumers. By selling products well below retail prices, such online retailers will often sell large quantities quickly and make a handsome profit.

Another type of diversion can be significant as it accumulates over time: individuals that consistently making unauthorized sales of one-off items or small batches. Of course, it’s common to find that employees, friends, and family have taken free samples and sell them online. Consumers can resell products online that they no longer want and employees may steal products from the retail stores or a distributor warehouse. Distributors that are unhappy with a dispute may cancel their distributor agreements and sell remaining inventory online.

Everywhere, all the time, such unauthorized sales have a seriously negative impact on the product companies financial performance. The worst effect, perhaps, is that these illegitimate sales are damaging the ability to attract legitimate distributors and retailers and maintain existing relationships. Reputable sellers do not want to compete in an environment that tolerates unauthorized sales channels that offer the same items for significantly less. This is a toxic environment for legitimate retailers, since many customers will simply return the legitimate products with the complaint that they saw the same items elsewhere online.

Product companies that kick back and avoid combating unauthorized sales of their products are losing revenue unnecessarily. If you are no longer content to remain passive, continue reading to learn how you can mitigate your exposure to unauthorized resellers and product diverters.

Our company works with some of the top brands, attorneys, and enforcement groups in the world to combat these problems. We can share a few observations based upon what we have learned along the way.

First Tactic: Declare and Inform

All legitimate and authorized product companies should adopt and publicize their anti-diversion programs. It’s important to present both summary and detail of the enforcement actions that await any product diverters and unauthorized online retailers. To be effective, you must communicate that unauthorized product diversion is illegal and will be vigorously punished: and then you must actually do that in the market place.

Illegitimate retailers who sell unauthorized products online typically earn their money by selling products from a wide variety of businesses that are unlikely to take any detrimental action against them. Anti-diversion experts have found that most unauthorized sellers will avoid diverting products if they expect the product company or authorized resellers to aggressively pursue enforcement. They will simply look elsewhere.

Publish Deterrent Policies on the Product Company Website

The easiest and lowest-cost method is to publish a high-visibility webpage that details your anti-diversion program. Some of the top attorneys (we are not attorneys) recommend:

  • Clearly specify the authorized distribution channel(s).
  • Declare in no uncertain terms that the product company does not authorize product sales through any other channel—which includes no online retailing through Amazon or eBay.
  • Make it plain that product warranties are invalid for products sold outside the legitimate chain of distribution.
  • Outline enforcement actions that will have been taken against diverters and unauthorized sellers (more on this in another article).
  • Inform readers that the product company maintains systems that track each product unit, which helps to identify diversion operations. If tracking devices are removed, the company will prosecute diverters for trademark infringement.

Attorneys also recommend that you also declare the following:

  • Notify readers that there is no guarantee of compliance with quality control standards for maintenance, transportation, and delivery.
  • To attract informants and offer an additional disincentive, list a toll-free number to report unauthorized resales.
  • If applicable, specify that the product company construes unauthorized resale as an intellectual property rights violation.

Remember, this information should not only discourage diverters and unauthorized sellers but also clearly outline the negative consequences of unapproved resale operations.

Legal Setup & Contracts

One of the keys learned along the way is that skilled attorneys can setup legal claims that are truly effective and give your teeth in the enforcement process. These contracts can explicitly prohibit distributors and retailers from providing products to resellers. Make the contract very specific, stipulating strong disincentives such as liquidated damages provisions—clauses that specify the damages that are payable in the event of contract breach.

Unfortunately, what we see is that many product companies will try to “cheap out” this step because they believe that their internal notices, or their local attorney can accomplish the same impact.   These companies almost always experience poor enforcement results while those that will spend a couple of dollars up front can achieve significant impacts. We have seen some legal setup costs as low as $1,500 so it is a small investment that pays huge dividends.

Monitoring, Sorting, And Pricing For Illegal Products

The next step in a successful enforcement program is to actively monitor for Unauthorized Sellers on Amazon, ebay, and other locations across the web.   What we have found for most companies is the monitoring a couple of times in a month is sufficient to allow you to target the most egregious online sellers.

What many companies attempt to do, but yet do not achieve successfully, is to monitor these products by hand internally.   Done right, even for small companies with just a few sellers, this is really a poor use of internal labor. Further, someone searching by hand has to do the following:

  1. Check all of Amazon and search all the products;
  2. Check all of Ebay and search all the products;
  3. Check all of Google shopping and search all the products;
  4. Check Google search results for top products;
  5. Calculate number of products offered for each seller to determine severity;
  6. Determine best way to electronically contact the seller for sending legal notice; and
  7. Determine typical pricing of the seller’s offering relative to retail or MAP policies.

Depending upon the company and size, CIS can provide these functions for as low as $450/month which is impossible to achieve with manual, internal labor.

Put The Sellers On e-Notice

In any type of enforcement action, there is always a delicate balance between costs and effectiveness.   What we have found most effective is a graduate enforcement program that takes cost effective steps at the beginning and then simply escalates as needed.

One you identify the sellers via monitoring and have electronic contacts (but not yet ID), then it is prudent often to send electronic cease & desist letters. We have seen good efficiencies of this step when the company 1) has done its up front legal work, 2) when the notices are from real law firms known as being experienced in enforcement, and 3) when the company is serious about creating a zero tolerance atmosphere by caring action further if they do not get compliance at this stage.

A good example of enforcement actions in another area in Disney who has become known as deadly serious about enforcement of stolen digital materials.   Because of this, once Disney notices an infringer, then they have a high success rate in getting removals with simple legal steps.

Investigation and Pursuit

A certain percentage of sellers will ignore your e-notices.   What you do next will now determine your long term success in your enforcement program.

The next level of enforcement involves a physical cease & desist letter being sent by attorneys to the illegal seller.   To accomplish this, however, requires knowing where to send the letter which, in turn, means that the seller must be identified.

This is a function that CIS assists in world-wide.   Typically, we perform under cover product purchases in country and then use information gained in that process, along with sophisticated databases, along with special purpose analysis of open source information on the web to perform identification.
This information is then turned over to your legal counsel to send cease and desist notifications to those who are managing these storefronts or websites. Usually, the items are removed, but the offenders may refuse. Your legal counsel can then pursue trademark infringement claims in court to force removal.

Is Your Company Ready?

Companies deal with product diversion and unauthorized sales issues at their own pace.   When you want to explore real world, affordable solutions for implementing enforcement programs, then CIS welcomes your call at (800) 892-0450.