A two-year legal battle that Hyundai Construction Equipment USA Inc. lodged against an independent Michigan dealer has resulted in a legal precedent that could deter machinery importers from bypassing original-equipment manufacturers and their networks of authorized dealers to make an extra profit from selling “gray-market” goods.

Photos Courtesy of Hyundai

Foreign decals (above) and scratched-out serial plates (below) made the imported machines illegal for sale by an unauthorized dealer.

In a memorandum dated Oct. 21 and signed early this year, U.S. District Court Judge Harry D. Leinenweber orders Macomb Township, Mich.-based Chris Johnson to relinquish about $1 million in profits from the sale of about two-dozen imported machines. The court also enjoins the dealer from importing and selling future gray Hyundai machinery and to pay the original-equipment manufacturer’s roughly $6,700 in court fees.

Last fall, the court granted summary judgment to Hyundai. In the follow-up injunction order, it categorizes gray iron as “new, brand new, unused, zero hours, or slightly used.” Slightly-used machines are further defined as “a unit of heavy construction equipment that has not been operated in the field and/or operated less than 100 hours.”

The OEM’s parent company, based in Korea, produces and exports machines for international markets. The case arose in June 2006 when Chris Johnson and his eponymous company imported and sold 23 unauthorized units, which included excavators and wheel loaders. Dealers of Elk Grove Village, Ill.-based Hyundai Inc. became suspicious when owners started calling in orders for parts and service on the machines, whose serial numbers had been scratched out and altered. In some cases, the numbers matched other units already on Hyundai’s books. Machines also had Korean-specific decals and engines that did not meet U.S. emissions standards.

Hyundai sued Johnson in Illinois under the federal Lanham Act, which protects trademark owners from actions that could damage a company’s brand or goodwill. Strangely, Hyundai had not registered its brand in the U.S. even though it has worked here since 1991. But that does not bar the owner of a well-known mark from seeking relief under the law, explains Frederic Mendelsohn, a Chicago-based attorney representing Hyundai. The company has since registered the mark.

Hyundai argued that Johnson undermined the brand by offering new or near-new machines with no warranty, bad serial plates and questionable safety features. Johnson, however, told buyers that the machines were gray and did not come with a warranty, according to court records. Johnson, who has not returned ENR’s phone calls, sold them for a total $4.48 million.

“Basically, what we said out of the gates is that we are going to shut this operation down and get our money back, and that’s what we did,” Mendelsohn says. The landmark ruling is the first of its kind, he adds.

Richard Briggs, an in-house attorney for Torrance, Calif.-based Kubota Tractor Corp., another OEM that has been fighting gray iron, says the ruling does not necessarily prevent other gray importers from doing what Johnson did, “but it nevertheless is very significant.”