Klipsch vs Resellers

If you're a retailer harboring visions of including Klipsch Audio Technologies' products among the offerings in a deep-discount website, forget it. Likewise, reconsider if you've been tempted to buy Klipsch products at unbelievable prices from such a site. And if you're a Klipsch dealer with some overstock, don't take the bait if someone with a website offers you cash for a bulk deal, don't even think about it—because Klipsch is one company that takes the gray market seriously.

On April 1, the Indianapolis-based audio giant announced the successful conclusion of litigation begun the first week of January against five online resellers—Crazyeddie.com, 50TopSellers.com, AuthorizedElectronics.com, TheBestPriceStore.com, and HomeTheaterPhiles.com—that had offered Klipsch products last year at attractive prices. The websites' operators reportedly had obtained the products from authorized dealers—a common phenomenon known as "trans-shipping," or selling outside their contractual territories—and, in many cases, had removed factory-installed Klipsch serial numbers and replaced them with bogus ones.

Unauthorized resellers became a big problem for Klipsch in 2003, with more than two dozen websites offering the company's products at discount, plus about 125 auctions of Klipsch products on eBay and Yahoo. Twenty of the commercial websites removed Klipsch gear from their listings at the company's request; the others needed legal action to get them motivated.

Klipsch launched its courtroom salvo January 5 in the US District Court for the Southern District of Indiana, accusing the defendants of "interfering with the contractual relationships between Klipsch and its authorized dealers, infringing on Klipsch trademarks, illegally using Klipsch's copyrighted materials, and otherwise competing unfairly with Klipsch."

Crazyeddie.com went out of business within two weeks. The others deleted Klipsch from their lists. Terms of the settlement announced April 1 include an agreement by websites 50TopSellers.com, AuthorizedElectronics.com, and TheBestPriceStore.com not to sell Klipsch products or "otherwise use Klipsch trademarks and copyrights in connection with their businesses." Klipsch obtained a consent decree from Syris Holding Corporation, parent company of HomeTheaterPhiles.com, which "enjoins the company, its owners, and any associated parties from now or in the future engaging in any of the activities identified in the original complaint."

In addition, Syris "must disclose the name and contacts of the dealer or dealers that supplied them with Klipsch products." Klipsch also won a default judgment against Crazyeddie.com including "the same general provisions as the other settlements." All the defendants have been banned for life from selling Klipsch products.

Moving products "sideways" is tempting for dealers who need to jump-start their cash flow, but it's a tactic that has backfired on at least 18 Klipsch dealers since January. All have been terminated by the company in an ongoing crackdown against the online gray market.

Almost every manufacturer has an official policy against trans-shipping. Some are willing to tolerate it as long as it doesn't get out of control. Others, like Klipsch, stand firmly on principle even if it costs them a lot of money. In a press release posted on the Klipsch website, the company estimates the loss of business as a result of the terminations at six million dollars. CEO Mike Klipsch said the company is willing to "give up millions more in revenue if that is what it takes to stop the trans-shipping and prevent the unscrupulous procurement, promotion, and sale of Klipsch-branded loudspeakers by unauthorized resellers." In pursuing its adversaries, Klipsch used the services of brand protection company NetEnforcers.com. Mike Klipsch said that the company would continue to use the service as long as the problem persists.

For background on the audio industry's gray market, see "Invaded by the Grays" from June 1996.