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When the New Jersey Parking Authority purchased $70,000 worth of Motorola two-way radios, officials thought they were getting a bargain -- until the brand-new radios began acting strangely. Some picked up conversations between New York Police Dept. officers in Brooklyn. Others simply quit working altogether. So the agency contacted Motorola -- and learned the grim truth: This deal was indeed too good to be true.
What NJPA officials discovered was that the radios were intended for sale in overseas markets and had never been certified by the Federal Communications Commission for use in the U.S. "We trusted what we got because the name Motorola was involved," says NJPA Executive Director Carmine Venezia.
SHADES OF UNCERTAINTY. To keep the agency happy, Motorola replaced the 70 radios in question free of charge. But on Nov. 6, the telecommunications giant filed suit in federal court, alleging that Data Communications Network of New York (DCN) improperly imported the ProSeries 5150 radios, which were manufactured by Motorola in Asia for use in Asia, Europe, and Latin America. One of several suits Motorola has filed this year, it alleges that DCN marketed the devices in the U.S. over the Internet. DCN declined to respond to several requests for comment for this article.
Motorola's case against DCN crosses into a murky area of trademark law relating to so-called gray market goods that unauthorized distributors bring into the country because the products cost less abroad or because demand in the U.S. is higher than supply, says Seth Lipner, author of The Legal and Economic Aspects of Gray Market Goods. Attracted by the strong U.S. dollar, gray marketers have expanded their trade of late. The exact figure is impossible to discern because of the often murky nature of the dealings, but the U.S. market for gray goods is now somewhere between $10 billion and $20 billion a year, Lipner estimates.
Some economists argue that legal gray-market trading does nothing worse than promote price competition. And while some companies may not like seeing their own products on the gray market, for the most part they have little legal recourse. Gray-market imports of consumer goods have been upheld by the U.S. Supreme Court, which has ruled that the wares can be sold inside the U.S. as long as they are genuine products.
LOST MARKET SHARE. There is, however, one exception: A 1993 case involving imported Lever Brothers' products established that companies may ask the U.S. Customs Service to stop imports at the port of entry if there are drastic differences between the goods sold here and abroad. In Motorola's case, the company complains it hasn't received any help from the Customs Service -- even though it believes the NJPA incident and others fall under this rubric.
From a business standpoint, such unauthorized imports can be a nightmare. Motorola argues that it loses market share for U.S.-certified products to wares intended for sale overseas -- and it further insists its reputation is on the line. As alleged in the DCN case, Motorola says customers who get bargain-price goods on the gray-market end up with products that lack U.S. warranties and for which service might not be available here. Says Motorola attorney Kip Schwartz: "I cannot believe that this type of problem is unique to Motorola."
The DCN case is Motorola's third recent litigation involving two-way radios: In May, the company settled a suit against Florida's International Cellular Telephone. And in July, it filed a lawsuit against five individuals in which it alleges Motorola radio-service software was sold illegally via Web auction site eBay. Motorola claims copyright and trademark violations in all of these cases, and two of the lawsuits are still pending. "We've been waging an all-out campaign," says Schwartz.
WHO'S NEXT? Reports of illegal Internet trading first came to Motorola's attention two years ago. Sales are often transacted over the Web, which "certainly makes it more difficult for us to enforce our trademark and copyright rights," admits Schwartz, who adds: "These transactions come and go with lightning speed. We can't be everywhere at once." As a matter of course, company lawyers send out "cease and desist" letters immediately upon learning of gray-market goods for sale on the Web.
When that doesn't work, the company goes to court -- if it's able to track the importers down, that is. Alas for the telecom giant, many importers are located beyond U.S. borders, making civil litigation difficult. But with the U.S. dollar staying strong, the future may well see Motorola being joined by other companies disputing gray-market sales.
By Olga Kharif in New York Edited by Alex Salkever
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Copyright 2000, Bloomberg L.P.
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