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HP Files 'Gray Market' Suit

HP filed a lawsuit in a Tennessee federal court this week against a former authorized reseller, accusing its former partner of selling on the so-called "gray market."

The Palo Alto, Calif.-based company said it is seeking to recover more than $8.6 million for the discounted computer equipment scheduled to be sold to beverage wholesaler P & E Distributing of Kentucky. In addition to recuperating its financial losses, HP is accusing Capital City Micro and its president, Martin Meeks, of civil conspiracy, common-law fraud and breach of contract. P & E Distributing Company and its president, David Welker, are also named as defendants in the complaint for their role in the transactions.

Representatives of Capital City Micro and P & E Distributing were not immediately available for comment.

According to HP, Capital City Micro agreed to sell HP and Compaq products to P & E Distributing, but said it needed larger than normal discounts from HP to win the business. When the merchandise didn't turn up, HP got suspicious. The company accuses Capital City Micro of selling the merchandise to outside parties that it had no authorization to sell to.

But Capital City Micro was an authorized reseller of HP and Compaq products at the time the alleged sales took place in 2001 and 2002. In 2001, HP said it discovered the abuse of special discounts as alleged in the complaint and terminated the relationship with Capital City Micro.

After the termination, Capital City Micro obtained a reseller authorization with Compaq Computer, again claiming P & E was the purchaser of the Compaq products. Soon after the merger of HP and Compaq in May 2002, HP stopped all dealings with Capital City Micro and terminated the relationship.

"HP is committed to supporting our authorized business partners and our customers and addressing cases of fraud and breach of contract," Scott Anderson, an HP general manager with the company's Solution Partners Organization, said in a statement. "HP is dedicated to monitoring, investigating and taking appropriate steps to prevent HP products entering the market through unauthorized channels."

HP is no stranger to the practice, having recently landed a summary judgment of $1.8 million in a case involving fraudulently obtained equipment. The computer and printer maker along with Cisco Systems and 3Com helped start the Alliance for Gray Market and Counterfeit Abatement (AGMA).

The problem of gray marketing is nothing new. As more consumers are purchasing bargain-priced merchandise in greater numbers, much of that merchandise is being sold by unauthorized resellers or authorized business partners in violation of original distribution agreements. While these items are not necessarily "illegal," often times those products are outdated, faulty, and come with expired warranties, or warranties that are not valid in the United States.

Gray markets are also expensive for PC makers and other hardware manufacturers in other ways. Industry research released in February 2003 from consulting firm KPMG and the AGMA shows that gray market sales of IT products account for over $40 billion in revenue each year, collectively costing IT manufacturers up to $5 billion annually in lost profits.

Information Technology Solution Providers Alliance (ITSPA) research also states that SMBs that buy gray market equipment are not getting any bargains either. The majority pay equally for products whether they originate in the gray market or legitimately.

Launched in May with the help of a grant from HP, the ITSPA is a nonprofit organization dedicated to helping SMBs adopt technology and grow by using local solution providers to solve business problems.

ITSPA recommends a list of tips for SMBs to avoid gray market products:

  • Ask whether the product's seller has manufacturer authorization.
  • Determine if the seller's product has warranty support.
  • Check the product serial number with its manufacturer to confirm it isn't stolen.
  • Have the product inspected by a solution provider.
  • Be wary of product advertisements that state "Unused," "New Current Vintage," "Refurbished," "Refurbished to Look New," and "New In the Box."
  • Beware of "bait and switch" product deals.