Unauthorized sellers in online marketplaces are the scourge of popular brands today. No matter how tightly a brand controls its supply chain, products still seem to make their way to retailers the brand never vetted or sanctioned. Unfortunately, those sellers frequently end up doing all sorts of damage to that brand – from price erosion to reputational harm. And as time passes, the problems only seem to get worse.
This situation has been exacerbated through the unyielding popularity of online marketplaces. Many of them are household names across the globe – Amazon.com, Walmart.com, jet.com, and eBay.com among them.
These sites have several significant commonalities: (1) they are immensely popular with and trusted by the public; (2) they are known for fierce price competition; (3) a great portion of their sales come from third party retailers (“TPRs”); and (4) many of those TPRs are unauthorized sellers.
In order to sell products through one of these mega-retailers, a TPR typically fills out a short online application, agrees to pay transaction fees for each product they sell through the site, and is otherwise free to do whatever he or she wants – including making unauthorized sales or selling black or grey market goods. All of this happens with very little policing from the online marketplace itself.
Importantly, these are not small venues. In the United States alone, Amazon currently generates over 2 billion website visits every month.i Through the first six months of this year, it signed up over 500,000 new TPRs.ii Walmart, while currently hosting a much smaller TPR pool, is making significant strides to boost this part of its business. It still has under 20,000 TPRs, yet nearly 2,000 of them have signed up this year – and almost 300 of those signed up in the past month.iii
In his 2017 letter to shareholders, Amazon CEO Jeff Bezos celebrated the company’s TPR program. “In 2017, for the first time in our history,” Bezos explained, “more than half of the units sold on Amazon worldwide were from our third-party sellers.”iv Notably, the letter said nothing about the company’s rampant unauthorized seller problem. And why would he mention such a thing? In 2017, revenue from TPRs jumped by 44%, accounting for nearly $10 billion in sales.v
As nearly every popular brand in the United States knows, however, unauthorized sellers are a major problem. They do need to be policed. They do need to be stopped. There is only one question remaining for brands: Is there an effective method of policing and stopping unauthorized TPRs?
This paper explores that question in depth. Part I provides a broad overview of the unauthorized seller problem – answering some of the key questions brands ask every day. Who are these sellers? What problems do they cause? What enforcement methods have been tried?
Part II homes in on professional TPRs – those who are making hundreds of thousands, if not millions of dollars per year peddling products in online marketplaces. There is no question that many of them are unauthorized. The more significant question is where and how are they getting all those products?
Finally, Part III answers the penultimate question surrounding professional unauthorized sellers – how can they be stopped? To answer this question, Part III presents the new frontier in E-Commerce enforcement. A proprietary, multi-discipline process for detecting unauthorized TPRs, analyzing the damage potential each presents to the underlying brand, and then prioritizing take-downs using one-of-a-kind technology and cutting-edge tactics. The method has proven to be so effective that its creators have been coined “the DEA of E-commerce enforcement.”
PART I: UNDERSTANDING THE UNAUTHORIZED SELLER PROBLEM
Long before the days of E-commerce, many large brands created authorized seller networks to control sales channels. Using these networks, a brand would grant certain retailers the exclusive or semi-exclusive right to sell the brand’s products. A handbag manufacturer, for example, might grant retail rights only to stores such as Nordstrom or Bloomingdales. In large part, these relationships with chosen retailers were designed to preserve or augment a brand’s reputation among consumers.
In exchange for that exclusivity, those authorized retailers would agree to meet specific criteria set forth by the brand. For example, they would typically agree not to advertise the brand’s products below a minimum advertised price (“MAP”). They might also agree to ship and store under certain conditions or to honor the brand’s money-back guarantees. Unauthorized retailers rarely appeared outside of back alleys or flea markets – in large part due to the great barriers to entry in opening a brick and mortar location.
The system worked well – until E-commerce happened.
How E-commerce soils sales channels
Since the advent of online marketplaces, unauthorized sellers have been running amok. A TPR can hitch itself to one or more of the world’s most popular online retail marketplaces with little to no upfront investment. So long as he can obtain product, he can make sales to consumers all over the world. In doing so, however, he can begin to destroy those built-in protections previously afforded to manufacturers via authorized sales networks.
MAP is among the most significant of those protections. MAP is important to manufacturers for several reasons. For example, products may be priced at a certain level to preserve a desired brand image. If products are too far below MAP, consumers may believe the products are cheaply made and, therefore, undesirable.vi
MAP also levels the playing field among retailers, allowing multiple players to compete fairly via different retail channels. As a result, the brand sells more products and everyone in the sales channel can realize a healthy margin – so long as all the players in that sales channel honor MAP.
In the E-Commerce era, however, MAP is becoming very difficult for brands to control. Any time an unauthorized seller finds a cheap lot of products (more on how they might get those products later), they can sell them online far below MAP and still realize an impressive profit. If they are discovered and confronted by the underlying brand, they can simply close one storefront and start another under a new name within days. Frighteningly, industry insiders report that TPR accounts can be set up “using totally fictitious information.”vii
This practice has a domino effect. It is particularly troublesome for authorized brick and mortar retailers that offer price-matching services within their stores. While price matching is a good hook to keep consumers purchasing, stores may now have to violate a brand’s MAP policies to earn those sales. In order to preserve their margins, they may then put pressure on brands or distributors to lower wholesale pricing.
Meanwhile, unauthorized TPRs (who have a pattern and practice of obtaining products far below wholesale) simply keep lowering prices. This conduct is not surprising. In a recent study, 46% of TPRs reported believing that none of their sales were subject to MAP.viii The same study revealed that TPRs are generally hesitant to expand their inventory to include any product they believe is subject to MAP. While the study did not report on whether those TPRs were authorized or unauthorized, there can be no doubt that this pervasive reluctance toward MAP exacerbates the ongoing pricing war known as “the race to the bottom.”
Unfortunately, manufacturers and their authorized retailers rarely come out ahead in this race. Instead, they suffer the consequences of price erosion, brand dilution, and fractured contractual relationships with legitimate players in the sales channel. As one industry insider put it, “once even a few unauthorized retailers appear on an Amazon product listing, price competition will ensue, eroding the brand’s margin and pricing structure offline.”ix
Who are these unauthorized sellers?
Over time, unauthorized TPRs have separated themselves into two distinct categories. While all can be problematic for brands, enforcement techniques – as this paper will discuss – vary wildly for each group.
The first category is aptly referred to as “Mom & Pop” sellers. These individuals typically engage in simplistic forms of retail arbitrage as a hobby or a means of secondary income. Many are coupon fanatics. They obtain buy-one-get-one-free products at local stores, then turn them for a profit in online marketplaces. Others are brick & mortar employees who use in-store discounts combined with employee benefits to take advantage of the same turn-and-burn tactics.
Mom & Pop sellers generally don’t know that what they’re doing is wrong. They’ve never heard of the First Sale Doctrine or Material Differences, have likely never been in trouble in their lives, and are scared out of their wits when they receive a cease & desist letter. In other words, they tend to go away quickly. Nonetheless, new Mom & Pop sellers crop up all the time and must be continually monitored as part of any enforcement program.
The second category of TPRs – and the one this paper will focus on – is professional sellers. Professional sellers engage in high-volume, high-profit sales. They may have thousands of product listings in each online venue. They are experts at obfuscating their true identities. They utilize sophisticated tools such as software programs that endlessly allow them to offer the lowest price across all sales channels. They also know that what they’re doing is wrong. Consequently, they put as much effort into hiding as they do into making sales.
Regrettably, these professional TPRs seem to be increasing in number. According to one industry study, small TPRs on Amazon (i.e., those with one to five employees) dropped 10% between 2017 and 2018.x Meanwhile, TPRs with 50 or more employees increased by 5%.xi Additionally, Amazon TPRs with annual revenue greater than $250,000 increased to 40% over the past year. TPRs gaining over $1 million in sales experienced 9% growth over the past 12 months and increased their presence on Amazon from 1% to 3%. While this may seem like a small percentage, experts have determined that there are over 20,000 of these $1 million-plus TPRs operating on Amazon today.xii All of this reveals that “high-volume businesses are rapidly expanding.”xiii
Traditional enforcement methods don’t work against many sellers
Not surprisingly, while online marketplaces grew in popularity, so too did the number of unauthorized retailers. Perhaps predictably, an entire industry grew around them – various professionals whose sole purpose was to try to eradicate unauthorized TPRs from the marketplace. They came from all walks of life. Some were attorneys, some former employees of Amazon or Walmart, and others were rank-and-file private investigators.
What they all knew, however, was that Amazon and other TPR sites were not terribly interested in policing the growing problems in their marketplaces. Why would they be? As noted, Amazon’s TPR sales now account for over half of total sales and Walmart’s TPR sales have jumped from 17% to 25% seemingly overnight.xiv
As the problem continued to grow, many brands initially turned to law enforcement. The response they received was as uniform as it was disappointing: law enforcement might assist in fighting E-commerce crimes (i.e., counterfeiting). When it came to unauthorized sellers, on the other hand, they saw the problem as a civil business dispute and refused to involve their agencies. Meanwhile, brands across every product category grew increasingly frustrated.
Entrepreneurial types saw the need for some sort of private policing service. Many tried to develop systems and strategies for combatting this ever-growing problem. The majority of them came up with the same solution: monitoring + electronic cease and desist letters.
Every E-enforcement investigator has their own monitoring system. Most serve the same useful function – they scan the internet for indicia of unauthorized sales. Whether they’re looking for sub-MAP sale prices, negative reviews, or something else, the end result is the same. The investigators end up with a list of seller names that they suspect of making unauthorized sales.
Generally speaking, those seller names are good for one thing and one thing only – sending an electronic cease and desist notice (the “EC&D Notice”) via communication portals the online marketplaces have created for sellers to communicate with buyers. Aside from those portals, sites like Amazon, Walmart, and eBay have no interest in putting brands in touch with their lucrative seller population.
The problem is, these EC&D Notices tend to deter only one form of unauthorized TPRs – Mom & Pop sellers. Not knowing they were doing anything wrong in the first place, they will often close up shop or remove offending items from their listings upon receiving the first communication from a brand. None of them are interested in a prolonged legal battle with the Nikes or Proctor & Gambles of the world.
In the rare instances that Mom & Pop sellers persist, most brands will hire an attorney to send the next EC&D Notice. As one brand owner notes, however, every time she employed this tactic, it costs her $2,000.xv Given that many brands face dozens of unauthorized sellers across dozens of SKUs at any one time, this method quickly becomes cost-prohibitive.
Don’t get us wrong – these tactics continue to have their place in E-commerce enforcement. In fact, at E-Enforce™ we have automated these processes for ultimate efficiency. Unfortunately, these tactics rarely (if ever) work against professional sellers. Part II explores this dilemma further.
PART II: PROFESSIONAL UNAUTHORIZED SELLERS
Professional unauthorized sellers are not deterred by EC&D Notices. The reason for this is simple. They know that all they have to do upon receipt of one of these notices is close their current seller account, open up a new account under a new fictitious name, and continue selling the offending products. Alternatively, they can switch to a different online marketplace for a while. In either case, they continue generating tremendous profits while brands grow ever more exasperated.
Undoubtedly, each new seller identity will be flagged as a potential unauthorized seller, a new EC&D Notice will go out, and the process will start all over again. Many brands describe this process as an endless game of whack-a-mole. Professional sellers have three distinct advantages in this game: (1) the online marketplaces allow them to operate using purely fictitious identities; (2) seller accounts can be opened and closed with ease; and (3) the online marketplaces have no incentive to offer up the sellers’ true identities to brands (in fact, in many cases, the marketplace may not even have that information).
Until recently, many brands have had little to no success in shutting down professional unauthorized sellers. Before we turn to effective enforcement measures against these sellers, however, let’s first examine how they end up with so many unauthorized products to begin with, as product sourcing will become a significant part of the overall enforcement scheme.
Professional sellers are not getting products with coupons. To the contrary, they are clever business people (sometimes associated with organized crime) who operate sophisticated entities. Perhaps the best example of this type of seller is company out of Queens, New York, known as Pharmapacks.
Pharmapacks generates $160 million in annual revenue by purchasing products cheaply for resale online.xvi For the most part, Pharmapacks obtains products from a distributor called Quality King, which happens to be known as the “largest and most successful [product] diverter in the world.”xvii Product diversion is just another name for distributor leakage. And in the case of Quality King, the company seems to pride itself on its questionable product sourcing.
To give some scale to the enormity of this problem (and to give perspective to the professional seller dilemma) Quality King is reported to have raked in over $2 billion a year since at least 2009.xviii By 2014, they were #147 on Forbes’ “Largest Private Companies in America” list and were generating over $3.2 billion in annual revenue.xix These figures leave many brands scratching their heads. How is it possible for distributor leakage to generate this kind of revenue? And how does distributor leakage even happen? Here are some of the most common schemes:
Cargo theft: Cargo theft is a surprisingly common crime in the United States. In fact, the FBI estimates that cargo theft costs U.S. shippers and trucking companies over $30 billion per year. Not surprisingly, cargo theft can occur at the distributor level.
One of the most common heists is known as the “fictitious pickup.” In this scheme, thieves masquerade as legitimate carriers, pull up to the distributor warehouse, and drive off with a shipment intended for another company.xx By the time the original carrier arrives at the warehouse, the products are long gone. These are not inconsequential events. The average loss resulting from a fictitious pickup is more than $140,000 per occurrence.xxi
U-Boats: In this scheme, the distributor orders large quantities of product from a manufacturer under the guise that the products will be sold strictly in foreign markets (products for foreign markets often wholesale for quite a bit less than their domestic counterparts). In a seemingly normal business transaction, the distributor picks up the products and places them onto a ship .xxii
That ship, however, will never reach a foreign port. Rather, it will quickly return to the United States, where the products will then be sold far below the market rate in domestic outlets.xxiii Distributors that operate at this level have also come up with documentation scams which help them get the products back through customs without a hitch.xxiv
Employee Theft: One of the most obvious ways products escape from traditional sales channels is through employee theft. At retail, for example, employee theft is responsible for nearly half of all business losses.xxv According to some reports, it has become a bigger problem for employers than shoplifting or organized crime.xxvi
Distributorships are particularly susceptible to employee theft. The opportunities are vast: sales staff can convert product samples for their own use, truck drivers can pilfer products on their way to and from the warehouse, and managers can often appropriate products for resale without much oversight.
In one well-publicized case, the manager of a wine distributorship in Connecticut made off with nearly $250,000 worth of wine over the course of a year.xxvii He then sold that wine to retailers outside of the distributor’s exclusive network.
Sales to unauthorized channels: Distributors are in business to make money and are extremely hesitant to pass up any sale. TPRs know this and will sometimes approach authorized distributors directly asking to purchase a product that the distributor isn’t supposed to sell to them. These inquires frequently include incredibly favorable terms, such as prepayment and high-volume orders.xviii
For the distributor, this is almost too good to be true – immediate revenue and the opportunity to order product that is guaranteed to sell. Again, the risk of getting caught by the manufacturer pales in comparison to the lure of instant profit.
Unsold products: From time to time, distributors order more products than end up being able to sell. Often, this is a result of the distributor negotiating with the manufacturer for lower prices in exchange for high-volume orders.
This process can backfire, however. Once the distributor realizes it is not going to sell all of the products, it will do whatever it takes to get them out of the warehouse. Sometimes, that means selling that extra inventory to unauthorized channels – even if that is a direct breach of their contract with the manufacturer.xxix
No retailer enjoys having products languish on store shelves. This is true even of brands that sell direct through Amazon, as well as for legitimate TPRs. At some point, the cost of warehousing unsold products exceeds the products’ value.
Unfortunately, legitimate sellers often have trouble selling products in online marketplaces. Because they can’t compete on price with unauthorized TPRs, even popular products may sit in Amazon’s fulfillment warehouses for months and months on end. Once the cost of storing those products ceases to make business sense, Amazon gives its sellers the option of participating in a program called “Amazon Destroy.”
The name certainly suggests that such products end up being broken down and sent to landfills. That is not the case at all. Instead, Amazon sells entire lots of these products to liquidators such as 888Lots.com, Bulq.com, and others. Keep in mind, these are brand new products. Amazon sells them to liquidators with detailed manifests that include ASINs, SKUs, MSRPs, and sometimes even links to the original manufacturer’s product descriptions and photos.
The liquidator sells these products for pennies on the dollar. Shockingly, “the sellers who buy these lots are able to resell these products on Amazon.com at rock bottom prices.”xxx This is one of the fastest and most devastating paths to price erosion. Despite the patent unfairness of the situation, legitimate sellers report ongoing frustrations with this practice.xxxi
PART III: STOPPING PROFESSIONAL UNAUTHORIZED SELLERS
By this point, it should be clear that dealing with professional unauthorized sellers requires enhanced expertise and discipline on the enforcement side. At E-Enforce™ we’ve assembled key personnel and proprietary processes that allow us to bring down professional sellers that traditional monitoring services can’t seem to handle. Here’s how we do it.
Assemble a world-class team
Along with its parent company, Cyber Investigation Services™, E-Enforce™ has been stopping unauthorized sellers and counterfeiters since 2010. From the get-go, we set out to build a multi-disciplined team that could handle the many facets of E-commerce enforcement.
Today, our team consists of computer programmers and engineers, former law enforcement investigators, and licensed in-house cyber investigators. Day in and day out, they remain laser-focused on tackling even the most sophisticated unauthorized TPRs and counterfeiters.
Our programming and engineering staff, for example, are dedicated to developing and updating state-of-the-art enforcement and identification tools. Through the years, they have built a database of nearly 100,000 TPRs known to repeatedly engage in illicit sales and sophisticated hiding techniques. They have created an automated (i.e., cost-effective) method of getting rid of Mom & Pop sellers, and they’ve built more complex systems to track sellers across multiple name and venue changes.
On the law enforcement side, our team consists of prior federal agents who know the ins and outs of high-stakes investigations. They know the criminal mindset and the games offenders like to play. As current private-industry members of the FBI InfraGard and Secret Service Financial Crimes Task Force, they are not only in regular contact with the world’s best investigation forces but are often called upon to train law enforcement personnel in cyber investigation tactics.
State-of-the-art monitoring & analyses
As noted above, every E-Enforcement investigation begins with some level of monitoring. Indeed, it is a necessary step to assess the extent of a brand’s unauthorized TPR problems. Our team uses proprietary software and pricing algorithms to root out these sellers wherever they may operate. Among other things, these programs locate products sold far below MAP, flag bogus reviews, and search for other proprietary indicators of illicit sales.
Throughout our monitoring process, E-Enforce™ also looks for defined SKUs/ASINs. We compare any identifying information about the sellers to our in-house database of nearly 100,000 known offenders. This provides us with a real-time snapshot of how each product is being sold online and gives us an idea of the sophistication of the sellers at hand. Unfortunately, initial reports often reveal dozens of unauthorized TPRs ranging from the smallest of Mom & Pop sellers to the largest of professional sellers.
This is where the enforcement analysis kicks in. It starts with a report on the overall unauthorized seller landscape. For example, while a brand may have 35 unauthorized TPRs selling 43 different products, there may be three or four sellers doing the greatest level of damage to our clients.
In those scenarios (which are very common), our clients typically choose to have our automated systems attempt to scare off the Mom & Pop sellers, while more focused enforcement efforts are levied against professionals.
Perhaps more than anything else, seller identification capabilities set E-Enforce™ apart from other professionals in the industry. Simply put, it doesn’t matter to us one bit that online sellers operate using fictitious names. Nor does it bother us that they might shut down one online storefront just to pop up somewhere else later. We have automated systems in place to track all that.
More importantly, however, we have developed the ability to identify the real people behind those online sales. In fact, within a relatively short period of time, we can access their true names, addresses, email addresses, phone numbers, and social security numbers. From there, all enforcement efforts are deployed against the individuals – and they can’t hide nearly as effectively as their fictitious identities can.
With real identifying information in hand, E-Enforce™ quickly escalates its enforcement efforts. For example, we arrange to have physical cease and desist demands send directly to sellers in the physical location of their homes and businesses. Within these demands, sellers are notified that they have a very short window within which to cease making sales.
This is a critical point in the enforcement process. In professional selling rings, the people making online sales are typically just foot soldiers in a much larger operation. Once we have identified them and contacted them, however, we can give them a choice. They can face ongoing enforcement efforts personally, or they can reveal who the players are higher up the food chain. Sometimes, they may even be able to identify the precise source of distributor leakage. It’s amazing how offenders open up to the idea of talking when faced with a lawsuit from a major brand. (This tactic, by the way, is what prompted a former Amazon employee to refer to E-Enforce™ as “the DEA of E-commerce Enforcement.”)
Absent cooperation, these individuals are notified that they will be sued for, among other things, trademark infringement. Working with our vast network of attorneys, the individuals are sent a final cease and desist letter that attaches a draft federal court complaint. Once again, sellers are given a short window for compliance.
Even among professional sellers, there are very few individuals who have the resources or the desire to battle a popular brand in court. While the most dogged sellers will call a brand’s bluff up until the point of receiving the complaint, that draft complaint typically signals the end to their operations.
Importantly, these hardball tactics tend to have a snow-ball effect. Once a brand earns the reputation for seeking out real people behind illicit operations (and threatening to sue them), other retailers are less likely to attempt future unauthorized sales. Even for sophisticated operations, the hassle simply becomes greater than the reward.
Over time, unauthorized sellers simply move on to other brands. That is always our goal.
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. They have also enjoyed exponential growth in that time. In February 2017, we made our proprietary E-Enforcement system available commercially.
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:
• Direct sales
• Paper products
• Home repair
• Women’s accessories
• Food supplements
• Pet products
• Sunglasses & accessories
• Consumer electronics
• Vacuum cleaners
• Purses and bags
• Radar detectors
• Skin care
• Health products
• Hair products
If you have questions about stopping unauthorized sellers or would like additional information, contact the E-Enforce™ team at email@example.com, or call us at (800) 892-0450.
viii See, The State of the Amazon Marketplace 2018, A report based on a survey of 1,200 Amazon Sellers, published by Feedvisor (2018).
x See, The State of the Amazon Marketplace 2018, A report based on a survey of 1,200 Amazon Sellers, published by Feedvisor (2018).
xiii See, The State of the Amazon Marketplace 2018, A report based on a survey of 1,200 Amazon Sellers, published by Feedvisor (2018).