1 December 2010PatentsRoss Bulla

Unwelcome diversions

Diversion (also known as gray market, parallel distribution or parallel importation) is generally a legal activity that is usually a civil contractual matter, and is intended to take advantage of available price differences. Diverted products are often imported from markets in which manufacturing costs or taxes are lower, or reimported (a process called the ‘U-boat’, after the u-turn that a ship makes after departing the dock) to evade taxes and tariffs altogether.

In fact, major retail chains and warehouse clubs are known to buy diverted product in order to satisfy consumer demand for lower prices, and the industry is represented by lawyers and lobbyists. Diversion is so profitable that one New York diverter earns over $2 billion in yearly revenues and won a copyright case that was heard by the US Supreme Court, which ruled that a manufacturer cannot prohibit the reimportation of its own product.

Diverters use deception and fraud to acquire products, and diversion harms everyone in the supply chain, from manufacturer to distributor, retailer and consumer.

Diversion costs brand owners billions of dollars in lost revenues, damages relationships with trusted suppliers and distributors, and can erode brand value. Expired, contaminated or diluted products, or products with formulas not approved by the presiding agencies, can cause injury, illness (or be ineffective at curing illness), or death. And to make matters worse, counterfeit products often accompany gray market shipments.

The Alliance for Gray Market and Counterfeit Abatement recommends three ways to mitigate diversion: corporate awareness, review of entities in the company’s distribution channels and effective serial number tracking.

“Diverted products are often imported from markets in which manufacturing costs or taxes are lower, or re-imported (a process called the ‘U-boat’, after the u-turn that a ship makes after departing the dock) to evade taxes and tariffs altogether.”

Proactive and preventative measures include: the review of distribution channels, partner contracts and reseller programmes; performing due diligence on companies and their subsidiaries seeking to become authorised resellers or distributors; developing policies and procedures to address returns and replacements, discount and warranty claims, auditing of distributors and resellers to verify compliance with contractual programme terms and conditions; and records management for serial number verification.

Because diverters continuously adapt techniques and technologies to counter those used by brand owners, the use of multiple (layered), overt and covert authentication, and track-and-trace technologies are advised. Options include:

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