Companies seeking to stop and prevent product diversion among authorized distributors should strongly consider implementing zero tolerance policies. In essence, a zero tolerance policy amounts to using actual consequences to mold distributors’ behaviors.
In our experience, the goal as far as enforcement of an anti-diversion policy is convincing distributors that there are serious consequences if they divert the company’s products and sell them outside the authorized distribution channels.
If an authorized distributor knows that a company will simply give them a warning—a slap on the wrist, essentially—this will not strike any fear in the distributor and cause them to stop diverting the products. In fact, an authorized distributor who is diverting products will have leverage if they know that the company will be too scared of the financial impact of losing their business and not terminate the authorized distributor’s account in spite of his or her action.
Unauthorized sellers are typically aware of the First Sale Doctrine (which permits people to re-sell others’ genuine trademarked goods), will hear about and see others selling online with minimal consequences, and thus will assume that there will not be consequences for them either if caught. This is analogous to the Federal Trade Commission catching bad actors for misleading or deceptive advertising, but then doing nothing more than a public reprimand. There is not much of a deterrence effect.
In short, not enforcing an anti-diversion policy creates a situation where a company can put a lot of time, effort and money into monitoring for violators, tracking diverted products, and taking some enforcement-type actions (including sending cease and desist letters), yet for practically nothing if there are no actual consequences.
Therefore, a company that is serious about ending the unauthorized reselling of its products should enact a zero tolerance policy and take legitimate action to prevent future product diversion.
We recommend having a graduated enforcement system in place, combining technology, investigation, and legal tactics to go after unauthorized sellers. By utilizing such a system, a company can send out strongly-worded cease and desist letters to authorized distributors explaining their enforcement system and then actually back up their words with action if any product diverters do not change their behavior.