Introduction

E-Commerce enforcement (or “E-Enforcement”) is an industry born of necessity. As online marketplaces proliferated over the last twenty years, so too did an E-Commerce underworld. Just like thieves that operate in the physical world, these cyber-thieves are constantly scheming up new ways to rip off manufacturers and inventors that have poured their blood, sweat and tears into building popular brands.

As brands grew ever more exasperated in their efforts to thwart these cybercrimes, they found that traditional law enforcement agencies were ill-prepared to fight any form of online corruption. Rather, agencies quickly branded all forms of E-Commerce misconduct as “civil disputes” and washed their hands of the issue.

Thus, nearly ten years ago, private E-Commerce enforcement firms began to emerge. E-Enforce™ (and its parent company, Cyber Investigation Services) was among the first players in this space. Our sole mission was to develop effective enforcement strategies against those who were exploiting the E-Commerce universe for ill-gotten gains.

From the outset, we assembled a team of professionals from an array of disciplines to stop these online offenders – from former federal law enforcement officials, to computer engineers, to data analysts. Since 2010, we’ve been laser-focused on developing a proprietary process for putting a stop to the single largest category of offenders in the E-Commerce space – unauthorized sellers. (However, our process is also very effective against counterfeiters and gray market sellers as well.)

Nearly a decade later, we’ve got an unparalleled track record of stopping these illicit operations. Nonetheless, many manufactures and brands still don’t completely understand what effective E-Enforcement is and how it can be deployed to save brands from having their profits siphoned away via the Internet.

This paper explores the E-Enforcement process in depth. Our aim is to illustrate how companies that subscribe to a consistent E-Enforcement process are successfully halting their existing unauthorized sellers on third party marketplaces. Perhaps more importantly, however, we also examine how a solid E-Enforcement strategy builds a company’s “street credibility” – thus dissuading cyberthieves from targeting our clients’ brands in the future.

In Part I, we’ll explain the unauthorized seller phenomenon – who they are, where they operate, and why they’ve become so successful over the past several years. We’ll also explain how their favored venue, Amazon.com, has fostered a lucrative environment for illegitimate sales that have a devastating impact on brands.

Part II discusses the integral nature of the first sale doctrine to an effective E-Enforcement strategy. We’ll explore how brands that have made successful inroads against unauthorized sellers have embraced all the nuances of this legal strategy.

Part III explores the characteristics of companies that have had great triumphs with their E-Enforcement efforts. We’ll discuss their management styles, take-down strategies, and overall buy-in to the important process of tracking and stopping unauthorized sellers. Additionally, Part III looks at the outcomes for companies who have already built the street credibility needed to ward off future E-Commerce attacks.

Part I: The unauthorized seller phenomenon

If you’re reading this paper, chances are your brand has been impacted by unauthorized sellers. The very term – “unauthorized sellers” – remains foreign to most consumers in the United States. In fact, even though many companies know their businesses are being attacked by these brand-killers, many still lack a full understanding of how they operate.

Any discussion of unauthorized sellers must begin with a thorough consideration of Amazon.com and the vast sales landscape it has provided for millions of third-party sellers. Unfortunately, Amazon’s great success with its third-party seller program has spawned similar programs within other mega online retailers – Walmart.com and Jet.com among them. While each program operates in a slightly different manner, they all have one thing in common – unauthorized sellers thrive there.

Since Amazon created the blueprint for all the other third-party venues that came after it, this part will begin with a focused look inside the largest third-party seller program in the world.

Amazon’s undeniable popularity

In just over two decades, Amazon has built an empire based off three main goals: (1) offer the most products for sale in one place; (2) offer those products at lower prices than anyone else; and (3) deliver them quicker than everyone else. No one can deny that Amazon has met its first goal. The company presently offers nearly 600 million different products on its website, ranging from beauty products to truck parts.i Amazon’s world-wide popularity is also undeniable. Amazon.com currently generates over 2 billion website visits each month.ii

In light of this, one might think all manufacturers – small and large alike – would make Amazon part of their overall sales strategy. Who wouldn’t want exposure to 2 billion consumers month after month? The fact of the matter is, however, many brands are desperately seeking ways to get products off of Amazon.

Growth through third-party sales

The reason brands are clamoring to get their products off Amazon lies in the company’s third-party seller program. Presently, between 50 to 75% of the products sold on its website are not sold by Amazon. Rather, they are sold by an unbelievable number of third-party retailers (TPRs) who use the Amazon platform as a means of setting up online storefronts.iii

Notwithstanding the fact that few consumers have heard of the TPR program, it is shockingly large. Presently, over 2 million TPRs sell products on Amazon.com.iv Industry insiders report that nearly three thousand new TPRs join the program every single day.v And, perhaps most impressively, TPRs generated over $10 billion in sales for the mega-retailer in 2017 alone.vi

The question remains: if Amazon’s TPRs are so successful, why don’t brands simply encourage TPRs to sell their products on the site? The answer to that question begins with the second of the three Amazon goals outlined above – specifically, the company’s quest to sell products at lower prices than anyone else. That singular goal has spawned an unauthorized seller program that is doing more harm to brands than perhaps any other market force.

Authorized vs. unauthorized retailers

If pressed, most consumers probably could not describe the difference between authorized and unauthorized retailers. Those in manufacturing, however, know that these terms did not originate with E-Commerce. In fact, way before products were being sold on the internet, many brands were using authorized seller networks.

At their core, authorized networks function like this:(1) a brand grants chosen retailers the exclusive or semi-exclusive right to sell the brand’s products; and (2) in exchange for those rights, retailers agree to adhere to certain rules and conditions imposed by the brand. Perhaps the most important promise an authorized retailer can make is not to advertise the brand’s products below a minimum advertised price (“MAP”). Other promises might include things like storing products at a certain temperature or handling customer returns in a specified manner.

Before product sales online became so popular, these arrangements worked well. Unauthorized retailers almost never cropped up, mostly because of the overhead involved in creating a brick and mortar retail store. And, although counterfeiters certainly existed in those days, they mainly operated in flea markets and on popular street corners in big cities. If you bought a $10 Gucci purse from these guys, you probably knew that what you were buying was stolen or fake.

That’s not the case anymore. With giant online retailers like Amazon offering sellers exposure to billions of consumers with a very low barrier to entry, unauthorized sellers are running rampant. Indeed, virtually anyone with $40 and products to sell can become an Amazon TPR in a matter of hours.

To make matters worse, these wrongdoers get to hide behind the dark cloak of internet anonymity. Sellers are not ever required to reveal their true identities to consumers, brands, or E-Enforcement officials. Rather, they get to use fictitious business names designed to obfuscate their personal information.

This still doesn’t end the analysis. We next have to examine the harm that Amazon’s unauthorized retailers are causing to brands.

How unauthorized TPRs destroy brands

Through the years, we’ve seen unauthorized TPRs harm brands in three consistent ways: price erosion, brand dilution, and harmed relationships with authorized retailers. Unfortunately, these forces rarely occur in isolation. To the contrary, all three tend to hit at once, with devastating effects on brands.

Each of these forces is a result of the same unforgiving reality – unauthorized sellers are obtaining products through illicit sales channels and reselling them on Amazon at prices far below MAP. In some cases, the method for obtaining products is relatively innocent – such as the store employee who uses an employee discount with in-store coupons to get products at rock bottom prices. In other cases, such as with cargo theft, the scheme for obtaining products is downright criminal.

Let’s take a look at how unauthorized TPRs cause each type of harm noted above.

Price erosion

At any given time, dozens or even hundreds of TPRs may be offering the same product for sale on Amazon. To add insult to injury, Amazon itself might also be selling that same product. Amazon knows, however, that consumers would never wade through hundreds of product listings on a single item. Accordingly, Amazon has set up a sales incentive program that rewards TPRs for offering the lowest prices and other consumer conveniences.

The ultimate prize within Amazon’s sales incentive program is known as “winning the Buy Box.” Anyone who has ever purchased an item on Amazon is familiar with the Buy Box. It is the “Add to Cart” button that appears in the upper right-hand corner of every product page. Though most consumers don’t know it, when they click the“Add to Cart”button, they are directly linked to a unique seller. It might be Amazon or it might be a TPR. That depends on a whole host of variables, including offering the lowest price or having the highest customer satisfaction reviews. Though there are many variables at play, having the lowest price is believed to be the greatest determinant of who wins the Buy Box on any given day.

The Buy Box is incredibly valuable to TPRs.Only ONE retailer can win the Buy Box at any given moment, regardless of how many them are offering that product for sale. Studies reveal that up to 90% of all purchases made on Amazon are initiated via the Buy Box.

Given the importance of offering the lowest price, TPRs (and an entire industry of professionals who cater to them) have developed sophisticated computer programs that detect any time a competitor offers a lower price on any given product. The program responds by lowering its TPR’s pricing by a nominal amount (usually two cents or less). When a consumer visits Amazon to purchase that particular product, the seller with the lowest price is most likely to win the sale.

Problematically, these programs are used by thousands of TPRs, as well as Amazon itself. As more and more retailers lower prices in an effort to win the Buy Box, product pricing is driven further and further downward. This leads to exponential price erosion that has come to be known as “the race to the bottom.”

Brand dilution

Aside from the obvious financial implications of this practice, price erosion can have ancillary negative effects on brands. As consumers notice prices dropping on popular items, they may come to believe those items are no longer popular or desirable. They may also associate low prices with a lack of quality or trustworthiness, and choose to purchase other items.

Worse yet, unauthorized TPRs are known for spoiling other indicia of a brand’s quality. For example, they may not offer the same money-back guarantees as authorized retailers. In other instances, they may completely ignore customer service requests. Since most consumers who purchase products through TPRs on Amazon believe they are buying products directly from the brand (or from Amazon, who they believe purchased directly from the brand), they blame poor purchase experiences on the underlying brand, rather than the unauthorized seller who created the problem in the first place.

Harmed relationships with authorized retailers

The nightmare doesn’t end there. Price erosion and brand dilution have a domino effect on brands. In particular, if a brand still has brick and mortar retailers in their authorized sales network, those trusted retailers could also suffer ill effects.

For example, since many of them still have price matching policies in place, they may be forced to lower their prices in order to compete with Amazon and its vast army of TPRs. The next thing they know, they are forced to violate MAP, which puts their authorized status at risk. For many, it is a risk they have to take if they want to make sales and/or move a seasonal or time-sensitive product.

Of course, this practice quickly erodes an authorized retailer’s price margin. Consequently, that retailer will request a wholesale discount from the manufacturer. This practice may work for one or two rounds. Eventually, however, both the manufacturer and the retailer will see their profits evaporate.

Ultimately, many trusted, long-standing authorized sellers come to see the brand as a burden that forces them out of contention for coveted consumer dollars. Eventually, the pervasive and fierce competitive pressure from Amazon can completely eradicate a brand’s authorized retailer network.

Going head-to-head with Amazon

It is also important to note a separate but related problem that occurs in the Amazon marketplace. In some cases, our clients have made a concerted and successful effort to control TPRs in that venue. These brands have either converted all TPRs on the site to authorized sellers or are acting as the sole third party retailer on Amazon themselves. It would seem these brands would be free from all of the headaches that come with unauthorized sellers, right?

Not so fast. Even after eradicating unauthorized sellers, these brands still may be competing with Amazon itself. This results in a bizarre situation where Amazon can be both a savior and a nemesis to brands. On the one hand, Amazon may be selling tons of products – which is great. At the same time, however, they are typically doing so by violating the brand’s MAP, thereby undercutting that brand’s own third-party sales, thus the challenge with a hybrid 1p & 3P approach.

Part II: The first sale doctrine

The purpose of this paper is to help manufacturers and brands understand how effective E-Enforcement strategies can put their unauthorized seller problems behind them. We can’t adequately explain those operations, however, without first discussing the impact the first sale doctrine has on overall enforcement strategy.

If your company has tried to handle unauthorized sellers in-house, it probably looked something like this: (1) you sent a cease and desist demand to a TPR, informing them that their unauthorized sales on Amazon constitutes trademark infringement; and (2) the TPR’s response asserted that the first sale doctrine gives them the right to sell your products in any way they see fit.

Unfortunately, if overcoming the first sale doctrine hasn’t been part of your preventative E-Enforcement strategy, the seller may be right. Let’s break the issue down a little further.

The first sale doctrine in a nutshell

The first sale doctrine is a defense to trademark infringement claims. The basic principle is that once a manufacturer places a product into the stream of commerce (in other words, makes the “first sale”), the manufacturer no longer has a right to control where or how that product is resold.

In the abstract, that assertion is accurate. Once a manufacturer sells a product to a retailer or a distributor, the manufacturer has lost future control over that product. That subsequent seller’s rights are not without limits, however. Specifically, downstream sellers do not have an unencumbered right to sell the trademarked product in a manner that is likely to confuse the public.

 

The importance of material differences

Trademark owners can defeat the first sale doctrine defense if they can prove their products were offered by a subsequent seller in a way that was likely to confuse consumers. In legal terms, the trademark owner has to prove that the product sold downstream was materially different than the product they intended to be sold to the public. So, let’s examine what “materially different” really means.

In the most obvious cases, material differences are physical differences that make the source of the product confusing. In some cases, for example, unauthorized retailers sell products as single units that were originally packaged and intended to be sold in pairs. Courts might construe those single units as a material difference sufficient to overcome the first sale doctrine. Other physical differences include packaging changes, logo/trademark alterations, and incorrect UPC codes.

In some of the most important cases in this area, courts have held that material differences do not have to be physical differences. To the contrary, they have held that things like product warranties, money-back guarantees, and specified levels of customer service are essential to a product’s identity. Consequently, the failure to offer these things as the manufacturer intended can render the product materially different from the original.

Material differences as a preventative strategy

Early in our days as E-Enforcement professionals, we began to see that using the material differences analysis as a preventative strategy could help our clients stop unauthorized sellers down the road. Thus, along with our attorney partners, we began to advise our clients to attach as many non-physical distinguishing characteristics to their products as they possibly could. These included things like:

  • Money back guarantees
  • Product warranties
  • Defined customer service standards
  • Shipping, storing, and handling parameters, if applicable (These included things such as required storage temperatures or specific packing and shipping requirements.)

We also advised our clients to widely publish these non-physical attributes in their product manuals and websites. We made sure clients trained their authorized retailers on the intricacies of these standards. We also requested that our clients clearly communicate to authorized retailers that these standards were non-negotiable. To remain in the authorized network, retailers had to comply. Our goal was to create as many integral, non-physical traits as we could so we could distinguish authorized products from those sold by unauthorized TPRs.

In a sense, the plan was foolproof. Because unauthorized retailers would be wholly untrained on providing these key product attributes, they couldn’t possibly sell our clients’ products in the manner intended. In short, they couldn’t sell them without doing so in a materially different way that a court would deem “likely to cause confusion.”

The strategy has proven highly effective. When combined with other mission-critical tactics, many companies are winning the battle against unauthorized TPRs. We’ll discuss those tactics in Part III.

Part III: How can your company become a successful E-Enforcer

When most new clients reach out to us, they have very little idea how an E-Commerce enforcement operation works. In many cases, the company has noticed a recent deluge of unauthorized sales and they are desperately trying to stop the bleeding. Indeed, at that point, many clients don’t even care how we do what we do, they just want us to do it – and fast!

While we are very effective at doing that, our most successful operations come from clients who contact us before they have a rampant unauthorized sales problem. While those clients may be experiencing illicit sales here and there, they seem to innately understand that in order to avoid an unauthorized sales avalanche, they need to deploy equal parts of prevention and enforcement.

Through the years, we’ve noticed that the companies in the latter category have many common organizational traits. Here are the shared characteristics of our most successful E-Enforcement clients:

#1: Their E-Enforcement philosophy is aligned across the company

We receive calls from new clients every single day. Many times, the principal contact from those organizations falls into one of three distinct categories: (1) a lower-level employee who has been tasked with just making the unauthorized sales issue “go away”; (2) an in-house attorney who is annoyed that cease and desist letters didn’t dissuade unauthorized TPRs from making ongoing illicit sales; or (3) a high-level executive who wants the problem stopped but isn’t sure why he’s throwing money at a process he doesn’t understand.

We are happy to work with any of those individuals. We’ve noticed, however, that there is a fourth type of caller who stands out from the others. These are calls from companies that are completely aligned on the issue of E-Commerce enforcement.

Often these companies will arrange initial conference calls that include employees in sales & distribution alongside corporate executives and attorneys. Many times, individuals from the IT or marketing departments will also be involved. Regardless of who is on the call, everyone involved is committed to shutting down unauthorized sellers.

We know from the outset that these companies will be successful at E-Enforcement. Why? Because it takes effort and alignment from all levels of an organization to launch a successful enforcement strategy. For example, the sales and distribution people may act as “boots on the ground” when it comes to issues of distributor leakage. The in-house attorney may assist us by drafting authorized retailer contracts and other programs designed to defeat the first sale doctrine. And, of course, the company executives have to lead all of the initiatives that will support the operations.

When we get that cross-company level of buy-in, enforcement efforts tend to be monumentally fruitful.

#2: They understand the importance of the first sale doctrine

This point is critical. Our most successful E-Commerce enforcement clients completely understand that it takes a dual course strategy to stop unauthorized sellers. The first strategy, of course, is shutting down those sellers who are currently operating in online venues like Amazon. The second is setting up policies, practices, and procedures that will prevent future unauthorized sellers from exploiting the brand.

This process can seem expensive and time-consuming for larger companies who have hundreds or thousands of authorized retailers and distributors. How can those companies possibly train all of those downstream sellers on material differences? Our answer is, “they don’t have to.” Since the unauthorized seller problem occurs almost exclusively on the internet, we advise our clients to select a very small number of sellers who are authorized to sell products in online channels.

Ideally, we have them enter an “Authorized Online Seller Agreement” with one retailer who is sanctioned to sell products only in defined marketplaces. Using its website, packaging, and other marketing collateral, the brand then notifies consumers and other sellers that: (a) any of the brand’s products purchased online must be purchased from the sole “Authorized Online Seller”; and (b) products purchased online from any other source will not come with the same warranties, money-back guarantees, and customer service as they would if purchased from the Authorized Online Seller.

As discussed above, establishing built-in material differences to overcome the first sale doctrine is the lynchpin of prevention. Taking the time to build those material differences today can only serve to make enforcement efforts faster and more efficient in the future. Unfortunately, an unauthorized seller problem is not a one-time problem.

So long as a brand retains a modicum of popularity on sites like Amazon, unauthorized TPRs will continue to make illicit sales of that brand’s products. In light of this, why not put preventative practices in place that will make it harder for them to do so in the future?

#3: They understand that “street credibility” is also a strong preventative strategy

Successful E-Commerce enforcement clients also know that unauthorized sellers, like others out to make a quick buck, prefer the path of least resistance. If you make it hard for TPRs to make unauthorized sales of your products, they are less likely to make unauthorized sales of your products. It’s simple math.

One critical preventative strategy, therefore, is building a reputation as a brand that aggressively pursues unauthorized sellers. To do this, a brand must vigilantly attack the highest-volume TPRs who are driving down prices and damaging the brand’s reputation. Our job is to coordinate this attack.

Perhaps our single greatest differentiator, as compared with others in the E-Commerce enforcement space, is our ability to identify the real people behind fictitious online seller names. Over the years, we have built a proprietary database of over 100,000 serial online offenders. We also have proprietary processes that allow us to quickly identify the name, address, phone number, social security number, and email addresses of every principal behind a fictitious storefront.

Accordingly, when we start taking enforcement steps like sending cease and desist demands or a draft federal court trademark infringement complaint, we aren’t sending them to some random Amazon seller name. Rather, we deliver directly to the individuals behind the online storefronts.

Additionally, since we know the personal identity of these illicit sellers, we can track them if they do things like: (a) shut one seller account only to open up under another name a day later; or (b) shut their seller account in one online venue (e.g. Amazon) only to open up a seller account in a different venue (e.g. Walmart.com). In other words, we can continually escalate enforcement efforts against these individuals no matter how they try to hide.

This has a distinct way of earning our clients the label of “aggressive enforcers.” In other words, it gives them street credibility.

#4: They study and understand history

Companies that are successful with E-Commerce enforcement have another important commonality – they watch the marketplace and emulate the strategies of other popular brands that have overcome massive unauthorized seller dilemmas.

Two prominent examples include Apple and GoPro. Both companies are immensely popular and, as such, suffered widespread unauthorized sales in venues like Amazon.com. What those companies also have in common, however, is that they took highly aggressive stances against unauthorized sellers.  Consequently, both companies are enjoying record profits and enhanced reputations with very little current interference from unauthorized sellers.

#5: They have built an enforcement shield around their brand

Finally, our most successful E-Commerce enforcement clients are making a dedicated, consistent effort to shield their brands from present and future attacks. They understand that enforcement efforts are not a one-time operation. To the contrary, they are a combination of immediate triage and ongoing preventative strategies.

They also understand that unauthorized sellers are not going away. They are as much a part of the current and future online sales landscape as shoplifters are to brick and mortar retailers. Accordingly, our most successful clients are adopting E-Enforcement as one of their core corporate philosophies.

If your brand is starting to notice unauthorized online sales, the time to begin enforcement efforts is today. Our job is to be aggressive, efficient, and to deliver longstanding results. Our goal is to give your brand the street credibility it needs to make unauthorized TPRs run far and fast.

About E-Enforce™

E-Enforce is a division of an internationally recognized investigation firm, Cyber Investigation Services, LLC. We have been providing litigation support and investigations for high profile cases and leading intellectual property law firms since 2010.

In 2012, we began combatting unauthorized sellers at the request of our client, Zo Skin Health. When we began that process, the company was overwhelmed with unauthorized retailers in online marketplaces. Today, they have virtually zero. Instead, they have the street credibility for aggressive E-Enforcement that keeps unauthorized sellers at bay. Unlike many companies that have suffered problems with unauthorized sellers, they have also enjoyed exponential growth in that time.

From 2010 to 2017, E-Enforce managed numerous corporate accounts. In fact, we were the exclusive E-Enforcement provider for a national IP law firm and several of its fortune 500 clients. In February 2017, we made our proprietary E-Enforcement system commercially available. It combines legal strategy, technology, and cyber investigation capabilities.

Today, E-Enforce™ employs a dedicated team of engineers, software developers, data analysts, product purchasing specialists, licensed cyber investigators, and seasoned former law enforcement officers. We dedicate our time and attention to helping our clients deal with this rapidly evolving problem of  unauthorized sellers, counterfeiters, and grey market sellers.  In addition to our in-house team, we regularly partner with legal professionals around the world who are specialized in the many aspects of fighting cyber-crime.

E-Enforce™ is committed to assisting clients with unauthorized sellers who are determined to erode our clients’ hard-earned margins and brand reputation.

We currently work with over 50 brands, including global companies, mid-sized operations, and small-but-growing manufacturers to thwart unauthorized sellers and counterfeiters alike. Our clients represent the following industries:

  • Cosmetics& Hair Products                                                                                                
  • Direct sales
  • Paper products
  • Home repair
  • Clothing
  • Women’s accessories
  • Vitamins &Food supplements
  • Pet products
  • Sunglasses & accessories
  • Consumer electronics
  • Vacuum cleaners
  • Purses and bags
  • Radar detectors
  • Cutlery
  • Skin care
  • Health products

 

If you have questions about stopping unauthorized sellers or would like additional information, contact the E-Enforce™ team at sales@e-enforce.com, or call us at (800) 892-0450. 

ENDNOTES

https://www.scrapehero.com/many-products-amazon-sell-january-2018/

ii https://www.marketplacepulse.com/articles/amazon-is-the-new-canal-street

iii https://www.sec.gov/Archives/edgar/data/1018724/000119312518121161/d456916dex991.htm

iv https://www.sellerlabs.com/blog/walmart-marketplace-differs-amazon/

https://www.feedbackexpress.com/amazon-1029528-new-sellers-year-plus-stats/

vi https://www.cnbc.com/2018/04/26/amazon-25-percent-of-third-party-sales-came-from-global-sellers.html

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