Gray marketing, the selling of trademarked products through channels of distribution not authorized by the trademark holder, can involve distribution of goods either within a market region or across market boundaries. Gray marketing within a market region (“channel flow diversion”) occurs when manufacturer-authorized distributors sell trademarked goods to unauthorized distributors who then sell the goods to consumers within the same region. For example, quantity discounts from manufacturers may motivate authorized dealers to enter the gray market because they can purchase larger quantities of a product than they themselves intend to stock if they can sell the extra units through gray marketing channels.
When gray marketing occurs across market boundaries, it is typically in an international setting and may be called “parallel importing.” Manufacturers often produce and sell products in more than one country and establish a network of authorized dealers in each country. Parallel importing occurs when trademarked goods intended for one country are diverted from proper channels (channel flow diversion) and then exported to unauthorized distributors in another country.
Trademark owners justifiably argue against gray marketing practices since such practices clearly jeopardize the goodwill established by trademark owners: consumers who purchase trademarked goods in the gray market do not get the same “extended product,” which typically includes pre- and postsale service. Equally important, authorized distributors may cease to promote the product if it becomes available for much lower prices through unauthorized channels.
Current debate over regulation of gray marketing focuses on three disparate theories in trademark law that have been variously and confusingly applied to parallel importation cases: universality, exhaustion, and territoriality. The theory of universality holds that a trademark is only an indication of the source or origin of the product. This theory does not recognize the goodwill functions of a trademark. When the courts apply this theory, gray marketing practices are allowed to continue because the origin of the product remains the same regardless of the specific route of the product through the channel of distribution. The exhaustion theory holds that a trademark owner relinquishes all rights once a product has been sold. When this theory is applied, gray marketing practices are allowed to continue because the trademark owners’ rights cease as soon as their products are sold to a distributor. The theory of territoriality holds that a trademark is effective in the country in which it is registered. Under the theory of territoriality, trademark owners can stop gray marketing practices in the registering countries on products bearing their trademarks. Since only the territoriality theory affords trademark owners any real legal protection against gray marketing practices, I believe it is inevitable as well as desirable that it will come to be consistently applied in gray marketing cases.
7. Which one of the following best expresses the main point of the passage?
(A) Gray marketing is unfair to trademark owners and should be legally controlled.
(B) Gray marketing is practiced in many different forms and places, and legislators should recognize the futility of trying to regulate it.
(C) The mechanisms used to control gray marketing across markets are different from those most effective in controlling gray marketing within markets.
(D) The three trademark law theories that have been applied in gray marketing cases lead to different case outcomes.
(E) Current theories used to interpret trademark laws have resulted in increased gray marketing activity.
8. The function of the passage as a whole is to
(A) criticize the motives and methods of those who practice gray marketing
(B) evaluate the effects of both channel flow diversion and parallel importation
(C) discuss the methods that have been used to regulate gray marketing and evaluate such methods’ degrees of success
(D) describe a controversial marketing practice and evaluate several legal views regarding it
(E) discuss situations in which certain marketing practices are common and analyze the economic factors responsible for their development
9. Which one of the following does the author offer as an argument against gray marketing?
(A) Manufacturers find it difficult to monitor the effectiveness of promotional efforts made on behalf of products that are gray marketed.
(B) Gray marketing can discourage product promotion by authorized distributors.
(C) Gray marketing forces manufacturers to accept the low profit margins that result from quantity discounting.
(D) Gray marketing discourages competition among unauthorized dealers.
(E) Quality standards in the manufacture of products likely to be gray marketed may decline.
10. The information in the passage suggests that proponents of the theory of territoriality would probably differ from proponents of the theory of exhaustion on which one of the following issues?
(A) the right of trademark owners to enforce, in countries in which the trademarks are registered, distribution agreements intended to restrict distribution to authorized channels
(B) the right of trademark owners to sell trademarked goods only to those distributors who agree to abide by distribution agreements
(C) the legality of channel flow diversion that occurs in a country other than the one in which a trademark is registered
(D) the significance consumers attach to a trademark
(E) the usefulness of trademarks as marketing tools
11. The author discusses the impact of gray marketing on goodwill in order to
(A) fault trademark owners for their unwillingness to offer a solution to a major consumer complaint against gray marketing
(B) indicate a way in which manufacturers sustain damage against which they ought to be protected
(C) highlight one way in which gray marketing across markets is more problematic than gray marketing within a market
(D) demonstrate that gray marketing does not always benefit the interests of unauthorized distributors
(E) argue that consumers are unwilling to accept a reduction in price in exchange for elimination of service
12. The author’s attitude toward the possibility that the courts will come to exercise consistent control over gray marketing practices can best be characterized as one of
(A) resigned tolerance
(B) utter dismay
(C) reasoned optimism
(D) unbridled fervor
(E) cynical indifference
13. It can be inferred from the passage that some channel flow diversion might be eliminated if
(A) profit margins on authorized distribution of goods were less than those on goods marketed through parallel importing
(B) manufacturers relieved authorized channels of all responsibility for product promotion
(C) manufacturers charged all authorized distributors the same unit price for products regardless of quantity purchased
(D) the postsale service policies of authorized channels were controlled by manufacturers
(E) manufacturers refused to provide the “extended product” to consumers who purchase goods in the gray market