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Grey software is not black and white

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UK resellers selling cheap Microsoft software are not necessarily flogging pirated goods.

Microsoft is currently locked in legal proceedings with two UK businesses regarding the sale of what it says are counterfeit products, and which the resellers say are products acquired legitimately on the grey market.

Matthew Rippon, a litigator specialising in intellectual property and IT at law firm Prettys, explains that a couple simple things that have to be established first: is the product genuine; and has it been marketed to the EEA (European Economic Area) with Microsoft's consent?

Once these points have been verified, then Microsoft's trademark rights are exhausted, which means it has no further control over who brings it to market and at what price. Thus, it is completely possible for resellers to be selling legitimate grey market product.

As Rippon says, the matter is about trademark law, not copyright law. (See Prettys' dissertation of the Tesco vs Levi Strauss ruling.)

So if a local trader gets its hands on software from the EEA cheaper than other resellers, it is entitled to flog it on to consumers at a reduced price without falling foul of trademark law. And it is not pirated or counterfeit.

Generally the trademark owner's rights are exhausted when its product is first marketed or put on sale. This is usually when it gets sold to its distributor. The distributor may then sell it off to anyone it chooses. Aside from possible contractual provisions and statutory regulations, the reseller can sell the product anyway it likes (and as profitably as it wants). This is known as the exhaustion of trademark rights.

Julia Phillpot, Microsoft's anti-piracy manager, says that the vast majority of grey market product advertised at cut-price rates is counterfeit, although not all of it is. She says it will be difficult for anyone to get hold of software that is vastly cheaper than what's available on the legitimate channels and warns people to exercise caution when purchasing from non-authorised channels.

Microsoft provides a free product identification service for resellers or consumers wanting to verify if the software they have purchased is legitimate.

Drew Cullen writes We think the Tesco ruling will help Microsoft squeeze grey software from the UK channel. Although MS cannot stop UK resellers buying and selling OEM software sold within Europe, UK resellers are interested in selling English-language versions only. The greatest source is the US.

In the US, Microsoft cannot legally enforce conditions of resale, and in the UK, it cannot legally enforce conditions of resale. But software originally intended for the US has not been marketed within the EEA. As trademark holder, Microsoft can, armed with the Tesco precedent, choke supply into the EU from this source. ®

Related Links

Prettys dissertation of the Tesco versus Levi Strauss ruling can be found here
US example of trademark law: Quality King Distributors versus L'anza Research International
Tesco versus Levi Strauss - FT Report

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The Tesco ruling - what does it mean for grey MS software?
German ruling loosens MS lock on reselling of Windows

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