July 16, 2012When 'Retail Arbitrage' Isn't Legal
By Cliff Ennico
"I sell jewelry and related items on eBay. Many items I sell are from a specific designer who sells her jewelry in stores across North America, and I am well known on eBay for selling her unique designs.
Posted by Staff at 7:01 AM
A customer from Latin America called me last month and said she wanted to buy some items and have them shipped to a freight forwarder in the U.S., who would then forward them to her in Latin America. I contacted this freight forwarder, and they asked me to send them some MSDS's (Material Safety Data Sheets) on the products I would be sending. Some freight forwarders require this initially so they can determine that the items shipped are not flammable.
When I called the designer and asked for an MSDS form, they wanted to know which items I would be sending. I told them I wasn't exactly sure which items I would be sending, so I gave them a large list of items that I might possibly send because I wanted to have my bases covered and I didn't want to have to ask a second time for additional MSDS forms to cover items I had not mentioned.
The designer's people said it might take a couple of days to get all of these MSDS forms sent, so they would fax them to me after they got them all. Meanwhile, I left for lunch and then came back to a phone message saying they were cancelling the request for the MSDS forms since they had determined that I was reselling their products. After looking at my buying history, searching for me on the Internet, and finding that I sold on eBay, they said they would also be banning me from their website so I would no longer be able to purchase items online. They said they do not "allow" reselling of their products in the U.S. or internationally. They said they were sorry and realized it would be disappointing, but they had to protect their products.
I went into a local jewelry store that carries this designer's products and talked to the manager. While shopping in the past, I'd never come out and said that I was selling on eBay in case there was some problem with it, and it also was a way to make sure other people didn't come up with the same idea. I usually told the store cashiers that "I buy things for other people".
I told this store manager about the phone call from the designer, and she said that they all knew I wasn't buying all of these products for myself. She said her senior manager even knew I bought for resale purposes, and they didn't have a problem with it. In fact, she said they like me because I am their best customer! But even though she said I could still buy there, I don't think I can now because I'm afraid they might come after me since they know I am a reseller.
Do you think I could be sued if I were to continue purchasing products from my local stores?"
One of the hottest concepts in online retail right now is "retail arbitrage" - buying goods retail and then reselling them online for even more money. The idea is that people who cannot buy these items in their local stores will pay a premium over the retail price to buy them online.
Which is all well and good, until you bump into a manufacturer that already has an established distribution system.
Most high-end luxury goods companies (think Gucci, Louis Vuitton, Tiffany's) give their domestic and international distributors exclusive rights to sell their products within certain territories. When you engage in "retail arbitrage," you are undercutting those exclusive arrangements. If the manufacturer appears to be in cahoots with you, they could be sued by their distributors (or worse, the distributors may refuse to carry their merchandise anymore).
The law says that manufacturers can restrict their distribution channels any way they like, subject to certain very narrow restrictions (they can't discriminate against female-owned or minority-owned enterprises, for example). Sadly, they have every right to prohibit you from reselling their products if you are not an "authorized" reseller or wholesaler. If the designer complains to eBay about your activities, they are almost certain to pull your eBay Store, so I would stop doing this if I were you.
The local store manager who supplied you with inventory may be in bigger trouble. Most retail stores are prohibited from selling at wholesale, and if she "knew or had reason to know" that you were a reseller (buying 10 or more pieces of jewelry a week is a dead giveaway), she may lose her job.
"Retail arbitrage" is generally OK, but not where the merchandise is trademarked. When selling brand-name merchandise, you must be an authorized distributor. If you don't have a contract with the manufacturer saying you can sell at wholesale, then you can't.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book and 15 other books. COPYRIGHT 2012 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.