To succeed in a competitive marketplace, electrical contractors must build lasting partnerships with their customers by supplying quality, dependable electrical products that they can stand behind. Using “gray-market” products places contractors in a risky legal position that could leave them solely responsible for any defects or problems with those products.

The gray market is defined as the unauthorized sale of new, branded products that have been diverted from authorized distribution channels or imported into a country for sale without the consent or knowledge of the original trademark-holding manufacturer.

“Generally, the gray market refers to products manufactured by the trademark owner [or authorized to be manufactured by the trademark owner], but that have been diverted from intended and authorized channels of distribution to another … unauthorized and frequently undesired channel of distribution,” said Curtis Krechevsky, partner and chair of the trademark and copyright department of Cantor Colburn, LLP, Bloomfield, Conn.

These diversions can be referred to as leaks out of the authorized chain and can occur at any point from the authorized manufacturer to the freight forwarder, exporter, shipping company, importer, wholesaler or, ultimately, the retailer. However, according to Krechevsky, if the authorized manufacturer that has purchase orders from the trademark owner runs a number of units over the stated quantities and sells them, those products technically are considered counterfeit because they are not authorized.

“These products are commonly known as overrun products and are treated differently by the law, as they were never authorized to be placed into commerce by the trademark owner,” Krechevsky said.

Excess inventory or dated goods can be another source of gray-market products, according to Clark Silcox, counsel for the National Electrical Manufacturers Association (NEMA), Rosslyn, Va.

“It is also useful to understand that gray-market products can move through multiple tiers of distribution before it reaches the contractor. Products that move through authorized channels, however, offer less of an opportunity for damage to the product, product tampering, or repackaging or relabeling of the product,” he said.

The reasons the gray market exists in the first place, according to Krechevsky, are pricing advantages, currency fluctuations, supply and demand fluctuations, market gluts, and careless control of manufacturing and distribution processes. The gray market also is facilitated by the reduction of trade barriers, free trade agreements, and the ease and relative cheapness of shipping goods.

“It’s just a fact that gray-market prices can be significantly lower than the prices charged by authorized distributors or retailers,” Krechevsky said.

“Liability from the use of gray-market products can arise when something goes wrong that leads to a claim for personal injury, property damage or breach of warranty,” Silcox said.

With some manufacturers, unauthorized distribution voids the manufacturer’s warranty and leaves the consumer disappointed and the reputation of the supply channel, including the electrical contractor, damaged.

“If a gray-market product has been tampered with or relabeled along the way, the manufacturer may avoid liability completely, leaving the contractor, and perhaps others in the distribution channel, answering for the product liability claim,” he said.

In addition to not being able to make a claim under a manufacturer’s warranty for a defective gray-market product, the contractor might not be able to get products serviced, maintained or repaired.

“If the warranty is not honored by the manufacturer because the product came from the gray market, the customer will still demand that the electrical contractor fix the problem and won’t care how they have to do it,” Krechevsky said. And, if the contractor does not or cannot honor that request for redress, it certainly will lose future business from that customer and very possibly damage its reputation.

A real concern for electrical contractors using gray-market products is that they may not be purchasing what they think they are. Gray-market products may be promoted as excess inventory that needs to be liquidated at extraordinarily low prices but are, in fact, counterfeit.

“It is documented,” Silcox said, “that the gray-market channel opens the doors for the infiltration of counterfeit and substandard products.” Since the trademark-owning manufacturer is not liable for the defective or substandard counterfeit product that causes harm or fails, the contractor and others in the distribution channel will have to answer for any product liability claim.

“If the failure of defective product produces property damage or personal injury, the contractor may not only be faced with a huge potential financial liability, but with fines or penalties imposed by governmental regulatory agencies for using products from unreliable sources,” Krechevsky said.

In fact, the entire supply chain can face product liability claims for negligence in supporting gray-market diversions involving counterfeit products.

“The argument here is that the supply channel fails to exercise reasonable care when it knows that defective counterfeit goods are entering the supply channel and purchasers mistakenly buy the counterfeit product in the belief that it is genuine,” Silcox said.

Recognizing and avoiding gray-market products

There are a number of ways a contractor can recognize gray-market products, including physical signs of mistreatment, mishandling or repackaging; previous use; recycling or refurbishment; and wear and tear.

“Gray-market products can also be avoided if the contractor ensures that the product complies with standard marking and labeling requirements,” Krechevsky said.

“Performing due diligence is required to avoid gray-market products and the liabilities that arise when someone not previously known to be an authorized distributor claims they have access to genuine product from an authorized source. This ruse has been used to sell counterfeit products as well,” Silcox said.

There always is the possibility, regardless of how careful the contractor might be, that a gray-market, or even counterfeit, product is purchased and used in a project and for which the contractor would be liable if it was defective or failed. In that case, the contractor could possibly mitigate its legal exposure in several ways.

“If a product is identified as having come from the gray market, the contractor can return to the supplier to seek replacement with a clearly authorized product,” Krechevsky said. Or, if the contractor has the capability, it can test another component from the same lot and satisfy itself that the product will perform as specified. “If it turns out that there is a quality issue, the contractor is better off voluntarily replacing the product with a legitimate, authorized product and then attempt to seek redress from the supplier,” he said.

It’s important to note that counterfeiters often will pass off products as gray-market goods, and the penalties for possessing and dealing with counterfeit products are more severe, including criminal charges.

Partnering with others

To avoid issues with gray-market products, it is recommended to communicate with the owner of the brand when any suspicious products appear from the contractor’s supply chain.

“It is advised that the contractor get written confirmation from its immediate supplier that the product did originate with the brand owner and that it comes with the full warranty and service commitment,” Krechevsky said. And, according to Silcox, a key problem for electrical contractors with gray-market products is that they do not know the distribution history of the product, nor can they verify the answers they receive if they ask.

“When one does not really know the distribution history of a gray-market product, one cannot confirm that it is genuine, that it has not been tampered with, repackaged or relabeled, or whether it has been stored and handled in a manner consistent with the original manufacturer’s quality control processes. But when dealing only with the authorized distribution channel, those problems no longer exist,” Krechevsky said.

In confronting this issue, each individual manufacturer has to address how it deals with the unauthorized distribution of its product. This may involve enforcing its contract rights or even re-evaluating its contract terms or channel partners. For the contractor, the resolution is simply to buy genuine goods from known, authorized sources.

“To become involved in addressing these issues, contractors can take advantage of the educational opportunities offered by industry associations concerning gray-market and counterfeit products, and join trade association programs that monitor government regulations and that lobby for laws against gray-market distribution,” Krechevsky said. EC

BREMER, a freelance writer based in Solomons, Md., contributes frequently to ELECTRICAL CONTRACTOR. She can be reached at 410.394.6966 or darbremer@comcast.net.