July 23, 2012More on 'Retail Arbitrage'
By Cliff Ennico
Last week's column on "When Retail Arbitrage Isn't Legal" generated lots of fan mail, mostly from readers who have been doing this for some time and were shocked - shocked! - to find out that there might be some laws that pertain to this new and (as yet) untested field of e-commerce. "Retail arbitrage" is buying something at retail and then reselling it (usually on eBay or Amazon) for an even higher price.
Posted by Staff at 7:01 AM
To save time, I grouped the e-mail responses from last week's column into categories.
Category No. 1: "Wait a minute! I can't be an 'unauthorized wholesaler' because I pay the full retail price whenever I buy something. That can't be illegal. Because the only people who pay more than retail are people who can't get the merchandise any other way. The manufacturer shouldn't complain because I'm generating sales it wouldn't get otherwise."
This is a sound and logical argument. The problem is that most retail contracts prohibit resales to wholesalers, and a "wholesaler" is usually defined as anyone who buys with the intention to resell, regardless of the price they paid. So technically you are a "wholesaler," and your local retail outlet or online merchant should not be selling to you if they suspect you are putting them in breach of their contract to the manufacturer.
The other (possible) problem is most people who buy from "retail arbitrageurs" are people who are locked out of the manufacturer's distribution system - for example, residents of a certain country where the manufacturer does not want to do business, cannot legally do business, or already has an exclusive distributor. Circumventing that distribution system may cause legal problems for the manufacturer. Also, you may be selling in violation of U.S. export laws or the laws of the host country.
Category No. 2: "Wait a minute! The 'first sale doctrine' says a manufacturer loses its copyright and trademark protection when its product is sold. Once I buy at retail, I can do anything I want with the merchandise."
Under the "first sale doctrine," when a trademarked or copyrighted item is sold, the manufacturer loses its "distribution right" - the right to sue a reseller for infringement - to that physical product at the moment of sale. The manufacturer does, however, retain its "reproduction right" - the right to sue for infringement if you are selling illegal "knockoff" products or "bootleg" reproductions of CDs and DVDs.
If a manufacturer wants to shut you down because you are reselling its products in a manner it doesn't like, it is unlikely to sue for trademark or copyright infringement because of the "first sale doctrine." It has plenty of other ammunition, however - keep reading.
Category No. 3: "Wait a minute! A manufacturer can't prevent resales of its merchandise beyond the initial sale because I'm told that violates the antitrust laws."
Believe it or not, it doesn't. The antitrust laws are fairly flexible in allowing manufacturers to deal with whomever they wish as long as (1) they don't try to fix the resale price (for example, by imposing minimum or maximum prices for resellers) and (2) they don't discriminate unlawfully in choosing distributors (for example, by refusing to sell to distributors of a certain race, religion or national origin).
Many manufacturers of luxury goods want to create the impression (or, if you're cynical, the illusion) that their goods are "exclusive," very rare and hard to obtain. Those manufacturers generally do not want their merchandise available at Walmart, or on eBay, because they fear it will confuse the marketplace (lawyers refer to this as "trademark dilution"). Prohibiting resales in those marketplaces probably would not violate the federal antitrust laws (although doing so may violate the "unfair trade practice" laws of some states, which might be worth looking into if you are thinking of challenging such a practice).
Category No. 4: "Wait a minute! You're telling me I have to advertise my products as 'used' or 'secondhand' even though they are still in the original packaging and shrink-wrap? No way! This stuff is still new."
I hate to be the bearer of bad news, but once something sells at retail, it is considered "used" or "secondhand." You can no longer advertise it as "new" or "like new." Sorry.
Category No. 5: "Wait a minute! If I buy from a retail store that is prohibited by contract from selling a manufacturer's stuff at wholesale, it is the store's problem, not mine, if I resell the merchandise online. The manufacturer can't come after me, right?"
Yes, it can. If it really wants to shut you down, it will sue you for "inducing" the retailer's breach of contract - what lawyers call "tortious interference with contract." If you did it knowing of the restriction in the retailer's contract, it can even seek punitive damages. Big oopsie.
For more information on the legal issues involved in retail arbitrage, see Chris Green's book Retail Arbitrage, or my own The eBay Seller's Tax and Legal Answer Book.
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.