Exposed: Dangers of the Gray Market

The lawsuit filed by American Data revealed an immense amount of information about where the switches came from and helped define a murky gray-market channel.

Documents filed with the court showed that Relational and Gulfcoast bought the Cisco switches from VOIP Inc. of Murrieta, Calif., and Epoch Sales of Santa Ana, Calif. Neither company is a certified Cisco partner, and both specialize in liquidation and "alternative" sources. Epoch claims to have been a Cisco partner at the time of the transaction but could not produce supporting documentation.

"Everyone looks at money," says Epoch president Dana Skaggs. "We get our products from several sources all over. With every order we ask, 'If we find cheaper refurbished equipment, will you take it?'" For this particular order, Skaggs says Relational "just asked that it be clean and new." Skaggs says this was essentially determined by packaging. The switches, for example, came in a Cisco box, with the standard shipping tape carrying the brand name.

While Skaggs didn't give specifics about where the company acquired the merchandise, a subpoenaed invoice shows the merchandise coming from two companies in Hong Kong, and naming both China and Taiwan as countries of origin. GovernmentVAR couldn't track down or reach the source companies through the contact information listed on the documents. The government prohibits the sale of products sourced or manufactured in China.

"Even though Gulfcoast/Relational may have been unwitting dupes to anything sinister regarding possible black-market product from China, they are still culpable for the scam they perpetrated with the equipment," Castro wrote in an e-mail to GovernmentVAR.

VOIP president Ricardo Delgado contends that Cisco is responsible. He says such incidents result from the growing trend by vendors to outsource manufacturing to China. The manufacturing plants inevitably create extra units for the gray and black markets.

"We get our products on liquidation, when available, and try to get discounts from the Internet and other places," Delgado says. "I check out [the products], because I know how [to spot faulty or counterfeit goods]."

Delgado says Relational placed no requirement on VOIP for the equipment to be certified as new by Cisco. He won't divulge where VOIP sourced products, saying only that he encourages all customers to examine the products upon receipt. Relational, which Delgado describes as a very good customer, would have returned any merchandise that did not meet its requirements, he says.

"Our position is clear in the legal filing," says Allan Umans, corporate attorney for Relational. "We have no comment on any other [issues regarding the court proceedings]."

NEXT: Unfinished business.