Investigating Product Diversion

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<ol><li> 1. PROTECTING yOUR MARGINS iStockphoto.com / 36clicks unwElComE divErsions Diversion (also known as gray market, parallel distribution or parallelimportation) is the trade of a genuinely branded product through channels of distribution that are unauthorised or unintended,and not supported by the original manufacturer or authoriseddistributors. Ross Bulla looks at how to deal with it.www.worldipreview.com World Intellectual Property Review November/December 2010 71 </li><li> 2. PROTECTING yOUR MARGINSDiversion is generally a legal activity that is usually of distribution channels, partner contracts and Employees, sales agents, distributors and othera civil contractual matter, and is intended to take reseller programmes; performing due diligence supply chain personnel should be educated aboutadvantage of available price differences. Divertedon companies and their subsidiaries seeking the consequences of diversion, and encouragedproducts are often imported from markets in to become authorised resellers or distributors; and rewarded for reporting it. Often, the mostwhich manufacturing costs or taxes are lower, ordeveloping policies and procedures to address actionable intelligence comes from sales staff andreimported (a process called the U-boat, afterreturns and replacements, discount and warranty distributors that are losing income from reducedthe u-turn that a ship makes after departing theclaims, auditing of distributors and resellers to or absent sales.dock) to evade taxes and tariffs altogether.verify compliance with contractual programmeterms and conditions; and records managementPotential indicators of diversion include:In fact, major retail chains and warehouse clubsfor serial number verification. Asteepdeclineinproductordersfromasingleare known to buy diverted product in orderto satisfy consumer demand for lower prices,Because diverters continuously adapt techniques customer, but not from others in the sameand the industry is represented by lawyers andand technologies to counter those used by brand market or market segment. This might indicatelobbyists. Diversion is so profitable that oneowners, the use of multiple (layered), overtthat it is obtaining diverted productNew York diverter earns over $2 billion in yearly and covert authentication, and track-and-traceDistributors ordering quantities of productrevenues and won a copyright case that was heardtechnologies are advised. Options include:intended for a market that cannot supportby the US Supreme Court, which ruled that a Electronicarticlesurveillancetechnologies,such equivalent sales. This might indicate that theymanufacturer cannot prohibit the reimportationas embedded and inconspicuous radio-frequency are diverting product to other markets orof its own product. identification (RFID) chips or smart labels,market segmentswhich can locate and track product throughout Missingorobscuredbarcodes,ordamagedorthe entire distribution chain and activate alarms worn packagingwhen unauthorised movement is detected (RFIDOnlyaforeignlanguageappearingonproductchips can be prohibitively expensive) DIVERTED PRODUCTS packagingARE OfTEN IMPORTEDInvisibleorencrypted2Dbarcodes,whicharemore difficult to copy, alter or obscureProducts labelled for sale through otherfROM MARKETS IN WHICH marketing channels.UV(invisible)inkMANUfACTURING COSTSOR TAXES ARE LOWER, Taggants,whicharemicroscopic,inertorrareelements, dyes or fluorescent fibres embeddedOR RE-IMPORTED (A Ross Bulla is president of The Treadstone Group, Inc.in products or packagingPROCESS CALLED THEHe can be contacted at: bulla@treadstonegroup.comDigital watermarking, which is ideal for printU-BOAT, AfTER THEor online mediaU-TURN THAT A SHIPGas chromatography/mass spectrometry orMAKES AfTER DEPARTING covert markers for the identification andTHE DOCK) TO EVADEquantification of organic moleculesTAXES AND TARIffS High-security holograms that contain covertALTOGETHER.authenticators, such as polarising sheets, UVradiation or chemical reagents, or moisture-reactive capabilities (the hologram reacts tohuman breath)Diverters use deception and fraud to acquireMany of these techniques are used to fight Ross Bulla is president of The Treadstoneproducts, and diversion harms everyone in the counterfeiting (the absence of a device is an Group, Inc., which investigates andsupply chain, from manufacturer to distributor, indicator that the product has been repackaged) anonymously acquires trademarks andretailer and consumer. Diversion costs brandand prevent product tampering, as well as to domain names on behalf of many of theowners billions of dollars in lost revenues, damagesenable brand owners to trace a discovered, worlds largest brand owners and law firms.relationships with trusted suppliers and distributors,diverted product back to a specific manufacturer Bulla has managed complex, internationaland can erode brand value. Expired, contaminatedor authorised distributor. Because divertedinvestigations in more than 42 countries,or diluted products, or products with formulasproduct might not appear in the marketplaceincluding the Middle East, and has negotiatednot approved by the presiding agencies, can cause for many months, such technology is critical tothe acquisition of thousands of trademarks,injury, illness (or be ineffective at curing illness),tracing a unique barcode or other technology todomain names and patents. Actively involvedor death. And to make matters worse, counterfeitthe manufacturer or distributor with which it is in many professional organisations andproducts often accompany gray market shipments. associated. Brand owners might also print a notice committees, Bulla is on the forefront ofthat products are not packaged for individual or establishing industry best practices. He isThe Alliance for Gray Market and Counterfeitretail sale, that they are for export only or that an active member of INTA, for which heAbatement recommends three ways to mitigate they are for sale by specialty stores, such as the serves on the INTA Internet Committeediversion: corporate awareness, review of sale of hair care products only in salons. Uniqueand Internet Governance and Contractualentities in the companys distribution channels trade dress or packaging can be used to identify Relationships Subcommittee.and effective serial number tracking. Proactive sales channelsexported products, products soldand preventative measures include: the review in specialty stores, institutional products, etc.72 World Intellectual Property Review November/December 2010www.worldipreview.com</li></ol>