The murky world of gray-market parts

WASHINGTON — On Feb. 29, 2016, U.S. Customs officers at the Port of Jacksonville in Florida detained a container arriving from the Middle East on suspicion that the more than 10,000 Nissan auto parts inside were counterfeit. The shipment belonged to AMG Trade & Distribution, a mom-and-pop importer in Pompano Beach, Fla.

The 15-month ordeal that followed nearly put AMG out of business and led to stress-related health problems for co-owners Anthony Bachan and Michael Pockhai.

Now the company is taking Nissan North America to court for telling U.S. Customs and Border Protection that the goods were fake.

"I went through hell," Bachan said. With no inventory to sell, AMG lost customers and incurred big legal bills.

The case sheds light on the murky world of gray-market goods — items that are technically legal but considered unfair by a manufacturer — and automakers' efforts to stop their dealerships from straying outside official distribution channels for cheaper parts.

The transactions at issue typically involve genuine, brand-name products from a reseller overseas instead of directly from the manufacturer. Merchandise often can be obtained at a substantial discount from a company's authorized distribution channel.

Sometimes, the goods are genuine but pirated, meaning a contract manufacturer produces more than its customer ordered and funnels the excess through back channels.

In this case, AMG bought the parts for $193,375 from the export arm of Suhail Bahwan Automobiles, Nissan's licensed distributor in Oman, according to invoices and court documents.

AMG's core customers are U.S. dealerships, which Nissan has regularly warned not to use parts unless they come through its official North American pipeline. Bachan, who runs the business, and his attorneys say Nissan is trying to interfere with a competitor's legitimate business so it can charge higher prices for parts.

"They tied up our money," he said. "We're a very small company. We depend on one container load to get us through. We sell that and purchase another one. So there was a lot of pain and suffering."

AMG recently filed a lawsuit accusing Nissan of making false statements to federal officials to prevent the imported parts from being sold. The suit faults Nissan for never contacting the Omani distributor to verify that its export subsidiary is a related party. Bachan said his company is seeking more than $1 million in damages.

Meanwhile, AMG is battling Customs over another shipment of Nissan parts from the same reseller in Oman, some of which have been held by the agency for months in Miami because the automaker claims they are counterfeit. The company had a similar situation involving Honda parts, but it was quickly resolved when American Honda confirmed to Customs that the contents were legitimate, Bachan said.

"This continues a pattern of Customs going out of its way to satisfy the automotive manufacturers under the guise of trademark enforcement," said Peter Quinter, a partner at law firm GrayRobinson, who handled the Customs petition for AMG. "Customs is supposed to enforce trademark laws, but in this case Customs failed to do its own due diligence and merely accepted the allegations from Nissan that the parts were counterfeit. That's the real problem here."

Nissan never sought an exclusion order against products that infringe on its U.S. trademarks. It could have sued to stop the merchandise from being sold if it really believed it was counterfeit, he said.

"It's all about the manufacturers trying to control the supply chain, and therefore, the prices they charge consumers," Quinter said.

A Nissan spokesman, Steve Yaeger, declined to comment on the AMG case. "We cooperate with U.S. Customs when we are contacted for support, but do not direct their operations or policy decisions," Yaeger wrote in an email.

Trade attorneys say gray-market goods often get caught in enforcement nets when Customs has justifiable reasons to be suspicious about a shipment. The cases can take a long time to resolve, in part because Customs is understaffed. Legitimate importers suffer in the process.

"There are companies that recognize the gray market is legal and something they have to live with. Others want to stamp it out and are comfortable encouraging Customs to be more aggressive," said Gilbert Lee Sandler, a founding member of Miami law firm Sandler, Travis & Rosenberg, which represents importers and exporters. "So you need safeguards there to make sure you're not disrupting legitimate trade."

AMG is not alone in supplying dealerships, independent repair centers, auto parts retailers and body shops with gray-market goods. Several companies operate in the market, including Pinnacle Group of Coral Springs, Fla., which promotes itself as providing "fast moving parts to our customers at a discounted price." The business, with warehouses in Texas, California and Florida, carries parts for Nissan, Infiniti, Toyota, Lexus, Honda, Acura, Mazda, General Motors, Kia, Subaru and Volkswagen vehicles, according to its website.

Pinnacle, which did not respond to several messages from Automotive News, was the target of a lawsuit by Hyundai Motor America. The case was settled two years ago.

Bachan said some distributors import five to 10 containers of auto parts each month and gross tens of millions of dollars but don't get challenged by automakers because they have the resources to fight back.

Nissan pressures dealers to follow its requirements and polices their compliance. It prohibits the use of parts imported via non-Nissan sources because they "may not meet the strict design and performance standards for our North American vehicles," Yaeger said.

"In the interest of customer satisfaction and to ensure maximum performance of Nissan and Infiniti vehicles," he said, "Nissan North America regularly provides education, training and information to dealers on the value and benefit of using genuine Nissan or Infiniti parts and accessories that are distributed by NNA."

Bachan said a new inventory-management system dealers must use enables Nissan's corporate office to track all parts bought and sold, which has scared some dealerships from gray-market goods. The system will detect, for example, if a dealer sells more brake pads than it bought from Nissan's domestic distributor over a certain period.

In a July 2015 letter obtained by Automotive News, Nissan reminded U.S. dealerships that their franchise agreement authorizes only genuine parts and accessories for warranty and recall repairs.

"Parts acquired from sources other than NNA may say they are 'genuine,' but the use of such parts is not permitted for Nissan-paid repairs, and they carry no NNA warranty," it said, adding that stores must disclose when nongenuine Nissan parts are used.

"Additionally, Nissan suppliers are prohibited from selling excess inventory outside the Nissan supply chain," the letter said. "Anyone other than NNA promoting parts as Genuine Nissan Parts may be intentionally misleading you. It is your responsibility to ensure such parts are never used for any NNA-reimbursable repair."

A lawyer in the automotive sector, who asked not to be identified so as not to jeopardize client relationships, said dealerships can open themselves up to suits from consumers or state attorneys general if they violate consumer-protection requirements by not disclosing the use of nongenuine parts.

Parts managers at several dealerships contacted by Automotive News said Nissan regularly sends notices about the requirements and that they adhere to them.

"Nissan has very good programs," said John Marrero, parts manager at Lynnes Nissan East in Bloomfield, N.J. "They are trying to go after the aftermarket and lowering prices to keep dealers from wandering."

A manager at a Florida dealership who handles parts for multiple brands said, on condition of anonymity, that he's regularly contacted by people trying to sell nonfactory parts. He declines their overtures.

"Factories frown on it," he said.