Supply Chain Counterfeit Enforcement

Target the Source: While marketplace enforcement addresses individual sellers, wholesale and distribution enforcement targets the supply chain - the importers, distributors, and wholesalers who supply counterfeit goods to retailers. Stopping one distributor can eliminate hundreds of retail-level counterfeit sales.

Types of Distribution Channel Violations

Violation Type Description Legal Theory
Counterfeit Distribution Distributing fake products bearing your trademark Trademark infringement (Lanham Act Section 32)
Gray Market / Parallel Import Genuine foreign goods imported without authorization Material differences doctrine, Lanham Act Section 42
Diverted Goods Authorized goods sold outside approved channels Breach of contract, quality control impairment
Altered/Repackaged Goods Genuine goods modified without authorization First sale doctrine exception, quality control
Commingled Inventory Genuine and counterfeit goods mixed together Quality control, consumer confusion

Counterfeit vs. Gray Market Goods

Counterfeit Goods

  • Not manufactured by or for brand owner
  • Unauthorized use of trademark
  • Always trademark infringement
  • Subject to seizure and destruction
  • Criminal penalties may apply
  • Statutory damages available

Gray Market Goods

  • Genuinely manufactured products
  • Trademark lawfully applied at source
  • Infringement depends on "material differences"
  • May be blocked at customs if recorded
  • No criminal liability
  • Actual damages only (no statutory)

First Sale Doctrine and Its Limits

First Sale Does Not Protect Counterfeits: The first sale doctrine (trademark exhaustion) only protects resale of GENUINE goods purchased through authorized channels. It provides no defense for counterfeit goods, materially different goods, or goods that have been altered or repackaged.

When First Sale Doctrine Does NOT Apply

Exception Legal Standard Examples
Counterfeit Goods No legitimate first sale ever occurred Fake products, knockoffs, replicas
Material Differences Goods differ materially from authorized U.S. products Different formulation, warranty, labeling, ingredients
Quality Control Impairment Brand owner's quality control has been defeated Improper storage, expired products, broken cold chain
Unauthorized Alterations Goods have been modified after initial sale Repackaging, relabeling, tampering
Contractual Restrictions Reseller breached distribution agreement Sale outside territory, unauthorized discounting

Material Differences Test (Gray Market)

Under Lever Brothers v. United States and subsequent cases, gray market goods can be blocked if they differ "materially" from the authorized U.S. version. Courts have found material differences based on:

Low Threshold: Courts have held that even small differences can be "material" if they could affect consumer purchasing decisions. A different shade of color, slightly different scent, or foreign language instructions have been found material.

Distribution Agreement Enforcement

Key Provisions to Enforce

Provision Purpose Enforcement
Exclusive Territory Prevent sales outside assigned geographic area Breach of contract, injunction, termination
Approved Customer List Restrict sales to authorized resellers only Contract damages, loss of distributor status
Anti-Diversion Clause Prohibit sales to unauthorized channels Liquidated damages, supply cutoff
Quality Control Requirements Maintain product integrity and storage conditions Trademark claims if quality impaired
Audit Rights Verify compliance with agreement terms Information requests, facility inspections
Minimum Advertised Price (MAP) Prevent price erosion and brand damage Warning, supply reduction, termination

Sample Wholesale Demand Letters

Sample 1: Demand to Wholesale Distributor of Counterfeits
[COMPANY LETTERHEAD] [Date] VIA CERTIFIED MAIL AND EMAIL [Distributor Company Name] [Address] Attn: [Owner/CEO Name] Re: Distribution of Counterfeit [BRAND NAME] Products - Demand for Immediate Cessation Dear [Recipient]: This firm represents [Brand Owner], the owner of U.S. Trademark Registration No. [X,XXX,XXX] for the [BRAND NAME] mark. [Brand Owner] is the exclusive manufacturer and authorized source of genuine [BRAND NAME] products in the United States. INVESTIGATION FINDINGS Through our investigation, we have confirmed that [Distributor] is engaged in the wholesale distribution of counterfeit [BRAND NAME] products. Specifically: 1. On [Date], our investigator purchased [Quantity] units of "[Product Name]" from [Distributor] at your facility located at [Address], Invoice #[XXXX]. 2. Our quality assurance laboratory has examined these products and confirmed they are COUNTERFEIT based on: - [Indicator 1 - e.g., Incorrect UPC codes not in our system] - [Indicator 2 - e.g., Substandard packaging materials] - [Indicator 3 - e.g., Missing authentication features] - [Indicator 4 - e.g., Incorrect product formulation] 3. The wholesale price you charged ($[XX] per unit) is significantly below our authorized distributor cost ($[XX] per unit), indicating these cannot be legitimate products. 4. [Distributor] is not and has never been an authorized distributor of [BRAND NAME] products. SUPPLY CHAIN CONCERN Your distribution of counterfeit [BRAND NAME] products has introduced dangerous fake goods into the U.S. market. These products: - Have not undergone [Brand Owner]'s quality testing and safety verification; - May contain harmful ingredients or components not approved for sale; - Expose consumers to health and safety risks; - Have been reported to your downstream customers, including [if known: major retailers]. LEGAL LIABILITY Your wholesale distribution of counterfeit [BRAND NAME] products constitutes: 1. TRADEMARK INFRINGEMENT under 15 U.S.C. Section 1114 - unauthorized use of the [BRAND NAME] mark in commerce; 2. TRAFFICKING IN COUNTERFEIT GOODS under 18 U.S.C. Section 2320 - a federal felony carrying up to 10 years imprisonment and $2,000,000 in fines; 3. UNFAIR COMPETITION under 15 U.S.C. Section 1125(a) - false designation of origin causing consumer deception. As a wholesale distributor, you bear heightened responsibility for the authenticity of products in your supply chain. Your failure to source from authorized channels makes you strictly liable for all counterfeit products you have distributed. DEMAND We demand that [Distributor]: 1. IMMEDIATELY CEASE all purchase, warehousing, distribution, and sale of any [BRAND NAME] products; 2. Within seven (7) days, provide COMPLETE RECORDS of: - Source(s) from which you purchased [BRAND NAME] products (names, addresses, contacts) - All customers to whom you sold [BRAND NAME] products (names, quantities, dates) - Total quantities purchased and sold - Current inventory of [BRAND NAME] products 3. SURRENDER all [BRAND NAME] products in your possession for inspection and destruction; 4. ISSUE RECALL NOTICES to all customers who purchased [BRAND NAME] products from you; 5. PAY [Brand Owner]'s damages including investigation costs, lost profits, and brand remediation expenses. CONSEQUENCES If you fail to comply within seven (7) days, [Brand Owner] will: - File a federal trademark infringement lawsuit seeking injunctive relief, statutory damages up to $2,000,000 per mark per product type, treble damages for willful infringement, and attorney fees; - Refer this matter to the FBI and Department of Justice for criminal prosecution; - Notify all identifiable downstream customers of the counterfeit nature of products purchased from you; - Pursue all suppliers and customers in your distribution chain. Your distribution records will be subpoenaed in litigation. Destruction of evidence will result in adverse inference and potential criminal obstruction charges. Contact the undersigned immediately to discuss resolution. Sincerely, [Attorney Name] [Law Firm] Counsel for [Brand Owner] cc: [Brand Owner] Enclosures: Authentication Report, Test Purchase Documentation
Sample 2: Gray Market / Parallel Import Demand
[COMPANY LETTERHEAD] [Date] VIA CERTIFIED MAIL [Importer/Distributor Name] [Address] Re: Unauthorized Importation of [BRAND NAME] Products - Material Differences Violation Dear [Recipient]: This firm represents [Brand Owner], the owner of U.S. Trademark Registration No. [X,XXX,XXX] for the [BRAND NAME] mark, which is recorded with U.S. Customs and Border Protection. GRAY MARKET IMPORTATION We have determined that [Importer] is importing and distributing [BRAND NAME] products intended for foreign markets into the United States without authorization. Specifically: - On [Date], we purchased [Product] from [Retailer/Source] that was supplied by your company; - The product packaging shows [foreign language labeling / foreign regulatory marks / foreign batch codes]; - The product was manufactured for [Country] market distribution, not the United States; - [Importer] is not an authorized importer or distributor of [BRAND NAME] products in the United States. MATERIAL DIFFERENCES The [BRAND NAME] products you are importing MATERIALLY DIFFER from the authorized U.S. versions: 1. FORMULATION: The [Country] version contains [ingredient differences], while the U.S. version is formulated with [U.S. ingredients/specifications]; 2. WARRANTY: Your imported products carry no U.S. warranty. Authorized U.S. [BRAND NAME] products include [warranty coverage]; 3. LABELING: The imported products lack required U.S. labeling including [FTC disclosures / FDA drug facts / CPSC warnings / ingredient lists in English]; 4. REGULATORY COMPLIANCE: The imported version has not been registered with [FDA/EPA/relevant agency] for U.S. sale and does not comply with [specific U.S. regulation]; 5. QUALITY CONTROL: [Brand Owner] exercises no quality control over the distribution chain you utilize, defeating consumer expectations of product integrity. Under Lever Brothers Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993), and its progeny, the importation and sale of materially different gray market goods constitutes trademark infringement because it creates consumer confusion about the nature and quality of the goods. TRADEMARK INFRINGEMENT Your importation and distribution of materially different [BRAND NAME] products constitutes: 1. TRADEMARK INFRINGEMENT under 15 U.S.C. Section 1114; 2. Violation of the Tariff Act, 19 U.S.C. Section 1526 (importation of goods bearing marks owned by U.S. citizen); 3. UNFAIR COMPETITION under 15 U.S.C. Section 1125(a). DEMAND We demand that you: 1. IMMEDIATELY CEASE all importation, distribution, and sale of [BRAND NAME] products not authorized for U.S. distribution; 2. Within fourteen (14) days, provide: - Source of your [BRAND NAME] product supply - Quantities imported and dates of importation - Customer list and quantities sold - Current inventory 3. DESTROY or EXPORT all non-U.S. [BRAND NAME] products currently in your possession; 4. Compensate [Brand Owner] for damages and enforcement costs. [Brand Owner] has recorded its trademark with CBP. Future shipments of unauthorized [BRAND NAME] products will be detained at the border and subject to seizure. Contact the undersigned within ten (10) days to discuss resolution. Sincerely, [Attorney Name] Counsel for [Brand Owner]
Sample 3: Distribution Agreement Violation Demand
[COMPANY LETTERHEAD] [Date] VIA CERTIFIED MAIL AND EMAIL [Authorized Distributor Name] [Address] Attn: [Contact Name] Re: Breach of Distribution Agreement - Unauthorized Diversion Agreement dated [Date] Dear [Recipient]: This firm represents [Brand Owner] regarding [Distributor]'s violations of the Authorized Distributor Agreement dated [Date] (the "Agreement"). DIVERSION VIOLATIONS [Brand Owner]'s investigation has confirmed that [Distributor] has diverted [BRAND NAME] products to unauthorized channels in violation of the Agreement: 1. SALES TO UNAUTHORIZED RESELLERS: Sections [X.X] of the Agreement restricts sales to the Approved Customer List (Exhibit [X]). [Distributor] has sold [BRAND NAME] products to: - [Unauthorized Customer 1] - [Quantity] units on [Date] - [Unauthorized Customer 2] - [Quantity] units on [Date] - [Online marketplace sellers] - [Quantity] units traced through [method] 2. TERRITORIAL VIOLATIONS: Section [X.X] limits [Distributor]'s sales to [Assigned Territory]. [Distributor] has made sales to customers in [Unauthorized Territory], including: - [Customer/Location details] 3. ONLINE SALES PROHIBITION: Section [X.X] prohibits sales through online marketplaces without written approval. [BRAND NAME] products supplied by [Distributor] have appeared on Amazon (ASIN [XXXXXXXXXX]) and eBay through sellers traced to your distribution. 4. MINIMUM ADVERTISED PRICE VIOLATIONS: Section [X.X] requires compliance with MAP Policy (Exhibit [X]). Your customers have advertised [BRAND NAME] products at $[XX], which is [XX]% below MAP of $[XX]. DOCUMENTATION Our investigation includes: - Purchase records from [Distributor] to unauthorized accounts - Product authentication tracing units to [Distributor]'s allocated inventory - Photographs of products with [Distributor]'s lot codes at unauthorized retailers - Declarations from [Unauthorized Purchaser] confirming [Distributor] as source AGREEMENT REMEDIES Under Section [X.X] of the Agreement, [Brand Owner] is entitled to: 1. LIQUIDATED DAMAGES of $[Amount] per unit sold to unauthorized channels (estimated [XXX] units = $[Total]); 2. IMMEDIATE TERMINATION of [Distributor]'s authorized status; 3. FORFEITURE of all rebates, incentives, and payments otherwise due; 4. INJUNCTIVE RELIEF to prevent further diversions; 5. INDEMNIFICATION for [Brand Owner]'s costs in addressing downstream confusion and unauthorized sales. Additionally, [Distributor]'s diversion of products outside authorized channels IMPAIRS [Brand Owner]'s quality control, potentially supporting trademark infringement claims beyond contract remedies. CURE PERIOD AND DEMAND Pursuant to Section [X.X], [Distributor] has [XX] days to cure the following violations: 1. Provide complete records of all sales outside the Approved Customer List; 2. Identify the source of all unauthorized sales and online marketplace diversions; 3. Implement enhanced anti-diversion measures acceptable to [Brand Owner]; 4. Pay liquidated damages for documented violations. If [Distributor] fails to cure within the cure period, [Brand Owner] will terminate the Agreement effective immediately and pursue all available legal remedies including breach of contract damages and trademark infringement claims. Contact the undersigned immediately to discuss cure and remediation. Sincerely, [Attorney Name] Counsel for [Brand Owner] cc: [Brand Owner] VP Sales [Brand Owner] Legal Department

Frequently Asked Questions

Yes. Trademark infringement is a strict liability offense - intent is not required. A distributor is liable for selling counterfeit goods even if they genuinely believed the products were authentic. However, innocent intent affects remedies: willful infringers face enhanced statutory damages (up to $2M vs. $200K), mandatory attorney fees, and potential criminal liability. Innocent distributors may only face actual damages and injunction. Courts expect distributors to verify authenticity by purchasing from authorized sources.
Several methods: (1) Lot codes and serial numbers - if you track products by lot, you can trace units to specific distributors; (2) Test purchases - buy directly from the suspected distributor with documented chain of custody; (3) Invoice subpoenas - compel retailers to produce invoices showing their supplier; (4) Packaging analysis - distributor-specific labels, price stickers, or stamps; (5) Witness declarations - retailers willing to identify their source; (6) Investigator testimony - private investigators who made purchases and can testify to chain of custody.
Product diversion occurs when authorized products are sold outside approved distribution channels - e.g., products meant for professional salons appearing at discount retailers. Diversion matters because: (1) diverted products often get mixed with counterfeits, making authentication difficult; (2) it undermines legitimate distribution and pricing; (3) quality control is lost when products leave authorized channels; (4) it creates entry points for counterfeiters who exploit the confusion. Many counterfeiters sell their fakes alongside diverted genuine products.
Key steps: (1) Document violations - use investigators to make test purchases tracking products to the distributor; (2) Send breach notice per agreement terms - most agreements require notice and cure period; (3) Exercise contract remedies - liquidated damages, supply cutoff, termination; (4) Consider trademark claims - if diversion impairs quality control, you may have trademark infringement claims beyond contract; (5) Notify downstream customers - inform unauthorized recipients that future purchases may result in legal action. Strong agreements with audit rights, anti-diversion clauses, and meaningful liquidated damages are essential.
Counterfeits are fake - they're not manufactured by or for the brand owner. Gray market goods are genuine products manufactured by or for the brand owner but imported without U.S. authorization. Legal differences: (1) Counterfeits are always infringement; gray market requires proving "material differences"; (2) Statutory damages and criminal penalties apply only to counterfeits; (3) First sale defense may apply to gray market but never to counterfeits; (4) CBP can seize counterfeits automatically if recorded; gray market seizures require showing material differences. Both can be stopped, but counterfeits are easier cases.
It depends on the legal theory: (1) Trademark counterfeiting - attorney fees are mandatory unless court finds extenuating circumstances; (2) Regular trademark infringement - fees available in "exceptional cases" (willfulness, bad faith); (3) Breach of contract - only if the distribution agreement includes an attorney fee provision (include one!); (4) Gray market - treated like regular infringement, fees only in exceptional cases. For wholesale enforcement against clear counterfeiters, you should expect to recover fees. Include strong attorney fee provisions in all distribution agreements.