gray market material differences must come from products/warranties, not supply chain alone

Toyota Motor Sales, U.S.A., Inc. v. Allen Interchange LLC, 2025 WL 465815, No. 22-cv-1681 (KMM/JFD) (D. Minn. Feb. 11, 2025)

This discovery dispute says some interesting things about gray market goods. “This lawsuit involves claims and counterclaims between competitors selling Toyota parts to Toyota dealers in the United States.” Toyota objected to Allen’s importation and sale of Toyota parts in the United States. “Most parts in Toyota vehicles do not have aftermarket substitutes from independent third parties.… Toyota allegedly sells parts in the U.S. at significantly higher prices than the prices charged by other Toyota entities elsewhere in the world.” Arbitrage thus occurs.

Allen maintained that the parts it sold bore the same part numbers and were identical in design, function, and quality as Toyota parts that are intended for sale in the U.S. market. Toyota claimed that the parts have material differences from the “genuine” parts it sells, such as the absence of a manufacturer-backed warranty, the shipping of the parts, and the handling of “outdated” parts.

Toyota sought evidence about Allen’s supply chain and argued that this was relevant to showing material differences in the parts. “[A] material difference is a difference that a consumer would find relevant in deciding to purchase one item over the other, and courts have established this to be a low threshold.” The main alleged material differences were differences in warranty coverage and differences in “supply chain and/or quality control measures.”

The court accepted Allen’s argument that material differences have to relate to the products themselves (which could include warranty coverage). Toyota argued that if “Allen plans to argue that the Toyota Branded Parts it sells are covered by some type of ‘Manufacturer Warranty’ as advertised to the consuming public, Toyota is entitled to know what warranties, if any, are offered by Allen’s suppliers.” “But the Court does not see how Allen’s suppliers would have any documents relevant to whether Allen provides a warranty to its customers.” The potential warranty sources were Allen, its customers, or Toyota itself. “Suppliers merely divert the parts from an authorized Toyota supply chain to Allen, and whether the warranty that Toyota provides with its parts is valid is entirely up to Toyota and how the language of its warranty addresses parts acquired through the gray market.” Thus, the information Toyota sought about supplier warranties was irrelevant.

In addition, the court concluded, “supply chain differences or differences in quality control measures in and of themselves” can’t be a material difference:

Certainly, supply chain or quality control differences could cause material differences between parts, but material differences in the products must be observed in the products themselves. The Court does not recognize the validity of a claim of material difference that is premised solely upon differences in the processes by which parts are made, supplied, checked for quality, etc., but without a resultant detectable difference in the product itself. For the purposes of false advertising claims, the issue that the parties must address is whether there are material differences between the products, not why any such differences may exist. Any material differences that result from differences in these processes can be discovered by inspecting and testing the parts themselves.

In addition, the court declined to require Allen to produce documents seeking “All communications to or from [Allen] mentioning, involving, relating to, or otherwise concerning counterfeit automotive parts since January 1, 2016, to the present,” and “All documents Defendants reference or rely on in determining whether or not the TOYOTA BRANDED PARTS sold by Defendants are or are not counterfeit.” Toyota argued that these documents are relevant to Allen’s counterclaim challenging the veracity of Toyota’s statements to dealers that counterfeit parts are often intermingled with gray market parts. And it argued that a 2018 email to a Toyota employee stating that counterfeit headlamps were delivered to Allen from a company in Dubai provided further support for its position.

Allen argued that counterfeiting wasn’t at issue in this case (filed in 2022, after Toyota received the email). The court agreed. “The logical chain from an email alleging that Allen once received a delivery of counterfeit headlamps to relevance to this case about gray market parts is a long one, in which Toyota’s argument skips multiple important links… That Allen questions the veracity of Toyota’s intermingling statements does not create sufficient relevance to open discovery in this case to counterfeit parts. All Toyota has shown the Court is that Allen probably, once, took delivery of counterfeit headlamps.”