HP Launches Suit Alleging Gray-Market Sales

Hewlett-Packard Co. announced Thursday that it has filed suit in a Tennessee federal court to recover more than $8.6 million in pricing discounts for computer equipment it says was purchased under false pretenses by Capital City Micro Inc. of Murfreesboro, Tenn., for resale to Hopkinsville, Ky.-based P&E Distributing Co.

In this gray-market case, Hewlett-Packard‘s complaint sets forth claims for damages that include civil conspiracy, common-law fraud and breach of contract against both companies.

In its complaint, HP is alleging that Capital City Micro and its president, Martin Meeks, told HP that Capital City Micro had opportunities to sell HP and Compaq Computer Corp. products to beverage wholesaler P&E Distributing that required significant discounts from HP to win the business.

But HP alleges that Capital City Micro did not resell the products to P&E Distributing, but instead sold to companies and/or people to whom it had no authorization to sell. P&E Distributing and its president, David Welker, are also named as defendants in the complaint for their role in the transactions.

Capital City Micro had been an authorized reseller of HP and Compaq products at the time the sales took place in 2001 and 2002. In 2001, HP discovered the abuse of special discounts as alleged in the complaint and terminated the relationship with Capital City Micro.

After the termination, Capital City Micro obtained a reseller authorization with Compaq, again claiming P&E was the purchaser of the Compaq products. Soon after the merger of HP and Compaq in May 2002, HP stopped all dealings with Capital City Micro and terminated the relationship.

HP is still working out the kinks of its Compaq merger. Click here to read more.

In attempts to reach Capital City Micro, The Channel Insider was unable to find a working phone number for the company. P&E referred calls about the matter to its attorney, who had not returned calls at press time.

“HP is committed to supporting our authorized business partners and our customers and addressing cases of fraud and breach of contract,” said Scott Anderson, HP’s acting general manager of the Solution Partners Organization in the Americas. “HP is dedicated to monitoring, investigating and taking appropriate steps to prevent HP products entering the market through unauthorized channels.”

One recent industry study by KPMG and the AGMA (Alliance for Gray Market and Counterfeit Abatement) reported that $40 billion worth of IT products are resold on the worldwide gray market annually.

AGMA is a consortium of hardware IT vendors, including Cisco Systems Inc., HP and Nortel Networks Ltd., that works against the gray market.

It defines the “gray market” as the sale of goods and products outside authorized distribution channels. It believes the gray market threatens to undermine the integrity of legitimate sales channels and disrupts agreements manufacturers make with their distribution partners.

Check out eWEEK.com’s Enterprise Applications Center at http://enterpriseapps.eweek.com for the latest news, reviews and analysis about productivity and business solutions.

Be sure to add our eWEEK.com enterprise applications news feed to your RSS newsreader or My Yahoo page