Diversion, also known as gray market or parallel importation, is the unauthorized trade of genuine branded products through distribution channels not intended or supported by the original manufacturer. Diverted products are often imported from lower cost markets and harm brand owners by reducing revenues and potentially eroding brand value if products are expired, contaminated, or not approved for certain markets. To combat diversion, brand owners implement layered authentication technologies like RFID chips, covert barcodes, and taggants to track products and educate employees to identify signs of diversion like unusual order quantities or missing information on packaging. Multiple overt and covert techniques are recommended as diverters continuously adapt their methods.

1. PROTECTING yOUR MARGINS
©iStockphoto.com / 36clicks
unwElComE divErsions
Diversion (also known as gray market, parallel distribution or parallel
importation) 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 authorised
distributors. Ross Bulla looks at how to deal with it.
www.worldipreview.com World Intellectual Property Review November/December 2010 71

2. PROTECTING yOUR MARGINS
Diversion is generally a legal activity that is usually of distribution channels, partner contracts and Employees, sales agents, distributors and other
a civil contractual matter, and is intended to take reseller programmes; performing due diligence supply chain personnel should be educated about
advantage of available price differences. Diverted on companies and their subsidiaries seeking the consequences of diversion, and encouraged
products are often imported from markets in to become authorised resellers or distributors; and rewarded for reporting it. Often, the most
which manufacturing costs or taxes are lower, or developing policies and procedures to address actionable intelligence comes from sales staff and
reimported (a process called the ‘U-boat’, after returns and replacements, discount and warranty distributors that are losing income from reduced
the u-turn that a ship makes after departing the claims, auditing of distributors and resellers to or absent sales.
dock) to evade taxes and tariffs altogether. verify compliance with contractual programme
terms and conditions; and records management Potential indicators of diversion include:
In fact, major retail chains and warehouse clubs
for serial number verification. • A steep decline in product orders from a single
are known to buy diverted product in order
to satisfy consumer demand for lower prices, Because diverters continuously adapt techniques customer, but not from others in the same
and the industry is represented by lawyers and and technologies to counter those used by brand market or market segment. This might indicate
lobbyists. Diversion is so profitable that one owners, the use of multiple (layered), overt that it is obtaining diverted product
New York diverter earns over $2 billion in yearly and covert authentication, and track-and-trace • Distributors ordering quantities of product
revenues and won a copyright case that was heard technologies are advised. Options include: intended for a market that cannot support
by the US Supreme Court, which ruled that a • Electronic article surveillance technologies, such equivalent sales. This might indicate that they
manufacturer cannot prohibit the reimportation as embedded and inconspicuous radio-frequency are diverting product to other markets or
of its own product. identification (RFID) chips or smart labels, market segments
which can locate and track product throughout • Missing or obscured barcodes, or damaged or
the entire distribution chain and activate alarms worn packaging
when unauthorised movement is detected (RFID
• Only a foreign language appearing on product
chips can be prohibitively expensive)
“DIVERTED PRODUCTS packaging
ARE OfTEN IMPORTED • Invisible or encrypted 2D barcodes, which are
more difficult to copy, alter or obscure • Products labelled for sale through other
fROM MARKETS IN WHICH marketing channels.
• UV (invisible) ink
MANUfACTURING COSTS
OR TAXES ARE LOWER, • Taggants, which are microscopic, inert or rare
elements, dyes or fluorescent fibres embedded
OR RE-IMPORTED (A Ross Bulla is president of The Treadstone Group, Inc.
in products or packaging
PROCESS CALLED THE He can be contacted at: bulla@treadstonegroup.com
• Digital watermarking, which is ideal for print
‘U-BOAT’, AfTER THE
or online media
U-TURN THAT A SHIP
• Gas chromatography/mass spectrometry or
MAKES AfTER DEPARTING covert markers for the identification and
THE DOCK) TO EVADE quantification of organic molecules
TAXES AND TARIffS • High-security holograms that contain covert
ALTOGETHER.” authenticators, such as polarising sheets, UV
radiation or chemical reagents, or moisture-
reactive capabilities (the hologram reacts to
human breath)
Diverters use deception and fraud to acquire Many of these techniques are used to fight
Ross Bulla is president of The Treadstone
products, and diversion harms everyone in the counterfeiting (the absence of a device is an
Group, Inc., which investigates and
supply chain, from manufacturer to distributor, indicator that the product has been repackaged)
anonymously acquires trademarks and
retailer and consumer. Diversion costs brand and prevent product tampering, as well as to
domain names on behalf of many of the
owners billions of dollars in lost revenues, damages enable brand owners to trace a discovered, world’s largest brand owners and law firms.
relationships with trusted suppliers and distributors, diverted product back to a specific manufacturer Bulla has managed complex, international
and can erode brand value. Expired, contaminated or authorised distributor. Because diverted investigations in more than 42 countries,
or diluted products, or products with formulas product might not appear in the marketplace including the Middle East, and has negotiated
not approved by the presiding agencies, can cause for many months, such technology is critical to the acquisition of thousands of trademarks,
injury, illness (or be ineffective at curing illness), tracing a unique barcode or other technology to domain names and patents. Actively involved
or death. And to make matters worse, counterfeit the manufacturer or distributor with which it is in many professional organisations and
products often accompany gray market shipments. associated. Brand owners might also print a notice committees, Bulla is on the forefront of
that products are not packaged for individual or establishing industry best practices. He is
The Alliance for Gray Market and Counterfeit retail sale, that they are for export only or that an active member of INTA, for which he
Abatement recommends three ways to mitigate they are for sale by specialty stores, such as the serves on the INTA Internet Committee
diversion: corporate awareness, review of sale of hair care products only in salons. Unique and Internet Governance and Contractual
entities in the company’s distribution channels trade dress or packaging can be used to identify Relationships Subcommittee.
and effective serial number tracking. Proactive sales channels—exported products, products sold
and preventative measures include: the review in specialty stores, institutional products, etc.
72 World Intellectual Property Review November/December 2010 www.worldipreview.com