Third-party infringers are finding new ways to sell unauthorized products and profit from doing so. As one example, the third-party seller buys products in bulk from the product owner, receiving a cheaper rate due to bulk sales or taking advantage of coupons offered to first-time buyers. In another example, when a business runs a sale, like a Black Friday sale, the third-party seller buys one or a few products at a time using different names, until they amass enough products to sell from their own “store.” They then sell these at full price, pocketing the difference.
Business owners often want to sue these resellers (after all, these third parties are selling products using the business’s intellectual property) but fear they will lose under the first sale doctrine. Generally, the first sale doctrine allows the resale of items bearing intellectual property. The doctrine allows legitimate purchasers of a product to do whatever they want with it—use it, dispose of it, or sell it. As described, “’the right of a producer to control the distribution of its trademarked product does not extend beyond the first sale of the product.’” Bluetooth SIG Inc. v. FCA US LLC, 30 F.4th 870, 872 (9th Cir. 2022) (quoting Sebastian Int’l, Inc. v. Longs Drug Stores Corp., 53 F.3d 1073, 1074 (9th Cir. 1995)). While the doctrine exists for various forms of IP, this article discusses it under trademark law.
Why does this doctrine exist? As it relates to trademark law, the doctrine is solely court-created; it has not been codified into statute. There are two main reasons why courts have done so, which are consistent with the purposes of trademark law: to protect the trademark owner and to prevent consumers from being confused in the marketplace. The first sale doctrine allows the resale of products if both of these goals are accomplished. First, the IP owner has already gotten that “first sale,” so the owner presumably should not be harmed by a second sale. “Trademark rights are ‘exhausted’ as to a given item upon the first authorized sale of that item.” Bluetooth, 30 F.4th at 871. Second, “confusion ordinarily does not exist when a genuine article bearing a true mark is sold.” NEC Elecs. v. CAL Circuit Abco, 810 F.2d 1506, 1509 (9th Cir. 1987).
However, this is not always the case, and the “second sale” can often cause harm to the IP owner, either through loss of sales or by causing confusion to potential customers. Accordingly, courts have developed numerous exceptions to the first sale doctrine. Generally, courts ask, is the reseller’s use of the mark done in a way that is likely to confuse the public? If yes, then they are likely not protected by the doctrine. See, e.g., Stormor, a Div. of Fuqua Indus., Inc. v. Johnson, 587 F. Supp. 275, 279 (W.D. Mich. 1984).
Limitations of the First Sale Doctrine
The first sale doctrine is limited and may be difficult to prove.
1. The First Sale Must Be Authorized
The first sale doctrine protects only the resale of “genuine goods bearing a true mark.” Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 61 (2d Cir. 1992). Distribution of a non-genuine product bearing a mark still constitutes trademark infringement. El Greco Leather Prods. Co. v. Shoe World, 806 F.2d 392, 397 (2d Cir.1986). “Goods are not genuine goods until their sale is authorized by the trademark owner.” FURminator, Inc. v. Kirk Weaver Enters., Inc., 545 F. Supp. 2d 685, 690 (N.D. Ohio 2008). This means that the reseller must establish that the first sale (i.e. the sale to the reseller) was authorized and genuine. In sum, “[i]t does not matter that the owner of the trademark objects to the use of its mark, as long as one approved sale has already occurred.” McDonald’s Corp. v. Shop At Home, Inc., 82 F. Supp. 2d 801, 807 (M.D. Tenn. 2000).
In one case, for example, the plaintiff discovered that the defendant was selling the plaintiff’s products on Amazon and sued for trademark infringement. RFA Brands, LLC v. Beauvais, No. 13-14615, 2014 WL 7780975, at *3 (E.D. Mich. Dec. 23, 2014). In defense, the defendant claimed that he obtained the goods through a purchase of auctioned storage units, and he believed the first sale defense applied to protect his later sales on Amazon. The burden was on the defendant to first prove that the goods were genuine. Id. In many circuits, including the one applicable in this case, “[i]f the trademark owner did not approve the original sale, the goods cannot be considered genuine as a matter of law and infringement is established.” Id.; FURminator, 545 F. Supp. 2d at 690. Because the defendant could not prove the origin of the products and could not refute the possibility that the goods were returned products not authorized for resale, the “defendant ha[d] not established that the first sales of the products at issue were ‘authorized.’” The court granted summary judgment for the plaintiff.
However, if the reseller can prove that its purchase of the goods in the first place was a legitimate sale from the IP owner, one court has held that it does not matter if the reseller lied to get the goods. In Hidalgo Corp. v. J. Kugel Designs, Inc., No. 05-20476-CIV, 2006 WL 8433271, at *4 (S.D. Fla. Nov. 6, 2006), the court rejected the plaintiff’s argument that to qualify, the “first sale” cannot be “tainted by any fraud, deception or misrepresentation.” The fact that the defendant purchaser was a strawman, and not a legitimate operation, was immaterial. This fact did not create a risk that consumers would be deceived as to the quality of the goods purchased. Id. According to the court, “[a]ny disputes relating to the ‘legitimacy’ of first sales are likely left to other areas of law for resolution, and not trademark law.” Id.
2. The Mark Cannot Be Used for Anything Beyond Marking the Good/Service
The reseller can sell the product under the trademark but may not use the mark for other purposes. In Sebastian Int’l, Inc. v. Longs Drug Stores Corp., 53 F.3d 1073 (9th Cir.1995), the Ninth Circuit held that “[w]hen a purchaser resells a trademarked article under the producer’s trademark, and nothing more, there is no actionable misrepresentation under the statute.” Id. at 1076 (emphasis added). Using the trademark to stock and resell genuine products is permitted. Using the mark on promotional material, advertising, displays, or at trade shows, in connection with that sale, is not. Id.; D 56, Inc. v. Berry’s Inc., 955 F. Supp. 908, 920 (N.D. Ill. 1997); Stormor, a Div. of Fuqua Indus., Inc. v. Johnson, 587 F. Supp. 275, 279 (W.D. Mich. 1984).
Exceptions to the First Sale Doctrine
There are also numerous exceptions to the doctrine.
1. Inadequate Repackaging
As noted above, the product must be genuine, and one way for the trademark owner to show the product is not genuine is by showing it has been inadequately repackaged. See Brilliance Audio, Inc. v. Haights Cross Commc’ns, Inc., 474 F.3d 365, 369 (6th Cir. 2007).
A defendant can sell repackaged genuine products as long as there is both a notice of repackaging and a disclaimer that the defendant is unaffiliated with the trademark holder. Ford Motor Co. v. Heritage Mgmt. Grp., Inc., 911 F. Supp. 2d 616, 627 (E.D. Tenn. 2012). As explained: “When the public has adequate notice that the purchaser has repackaged the trademarked item, then the dangers of consumer confusion and trademark dilution are minimized. Absent this notice, the trademark holder risks being associated with a product that is not of the same quality as the original trademarked item.” Id.
2. False Impressions
The first sale doctrine does not protect resellers who use trademarks in a way that falsely implies they are authorized or favored dealers, or a franchise, of the IP owner. Resellers cannot use the trademark in promotional materials or advertising, or even on the product, in a way that suggests an affiliation with the trademark owner. Maui Jim, Inc. v. SmartBuy Guru Enters., 459 F.Supp.3d 1058 (N.D. Ill. 2020); Bandag, Inc. v. Al Bolser’s Tire Stores, 750 F.2d 903, 916 (Fed. Cir. 1984) (no protection where seller used producer’s trademark in a telephone directory advertisement in a way to suggest reseller was a franchisee of the producer); Enters. v. Michael Joaillier, Inc., 207 F. Supp. 3d 799 (S.D. Ohio 2016) (no protection when the reseller used false certificates of authenticity).
3. Material Differences
The first sale doctrine does not apply when the resold goods are materially different from those sold by the trademark owner. See, e.g., Rockwell Automation, Inc. v. Radwell Int’l, Inc., No. CV 15-05246 (RBK/JS), 2019 WL 7288946, at *3 (D.N.J. Dec. 30, 2019). An alteration is material if it changes something about a product that is relevant to a consumer’s decision to purchase the product. Hyundai Const. Equip. U.S.A., Inc. v. Chris Johnson Equip., Inc., No. 06-cv-3236, 2008 WL 4210785 (N.D. Ill. Sept. 10, 2008).
This makes sense, as material differences can cause consumer confusion about the source and quality of the goods, which is a key concern of trademark law as noted above. Moreover, some courts hold that “goods are not genuine if they . . . differ materially from the product authorized by the trademark holder for sale.” Zino Davidoff SA v. CVS Corp., 571 F.3d 238 (2d Cir. 2009).
Many changes can constitute “material differences,” including:
- The altering of serial numbers, which voids the product warranty under the IP owner’s policy. Beltronics USA, Inc. v. Midwest Inventory Distrib. LLC, 522 F. Supp. 2d 1318, 1327 (D. Kan. 2007), aff’d 562 F.3d 1067, 1071 (10th Cir. 2009). Similarly, “absence of or a different warranty has been held to be a material difference.” Hyundai v. Johnson, No. 06-3238, 2008 WL 4210785 at *2 (N.D. Ill. 2008).
- Damage to the physical appearance of the packaging via the removal of production codes. Coty Inc. v. Cosmopolitan Cosms. Inc., 432 F. Supp. 3d 345, 351 (S.D.N.Y. 2020).
- Under certain circumstances, the fact that the resale is of expired products. Warner-Lambert Co. v. Northside Development Corp., 86 F.3d 3, 6 (2nd Cir. 1996). One court found that this is a material difference if the IP owner proves that it made “legitimate efforts to keep expired products out of the stream of commerce, and that the [resellers] are hindering that effort to such an extent that they are devaluing the … mark.” Mary Kay, Inc. v. Weber, 601 F.Supp.2d 839 (N.D. Tex. 2009).
Other things may not constitute a material difference. For one, the fact that the reseller’s shipping speeds are slower than that of the IP owner has been found to not be material. Maui Jim, 459 F.Supp.3d 1058.
Also worth mentioning is quality control. Courts consider whether the resold good conforms with the quality control procedures implemented by the IP holder. Some courts have created a separate “quality control exception,” which some courts evaluate within the material differences exception. “[T]o establish that a product is not genuine because it does not meet the trademark holder’s quality control standards, a ‘trademark holder must demonstrate only that: (i) it has established legitimate, substantial, and nonpretextual quality control procedures, (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.’” Warner-Lambert, 86 F.3d at 6. An IP owner who conducts only limited inspections of its products may not be able to establish that its quality control mechanism created a material difference between the products offered by the trademark owner and the reseller. Iberia Foods Corp. v. Romeo, 150 F.3d 298, 304 (3d Cir. 1998). Courts have also held that even if there are differences in quality control procedures between the trademark owner and the reseller, these differences are not material if they do not result in an observable difference between the products. Coty Inc., 432 F. Supp. 3d at 351.
Key Takeaways
Trademark owners who are facing situations where someone is selling legitimate products under their trademarks may have recourse where the first sale doctrine does not apply, depending on the following:
- How did the reseller get the product in the first place? Was that first sale authorized?
- How is the reseller using the IP? Is it listed only on the goods, or is it also being used on any type of advertising?
- Is the seller stating or implying they are an authorized retailer, or in any way affiliated with the trademark or brand?
- Are the resold products different from the non-diverted products in any way?
- Is the packaging different?
- What is the brand’s quality control procedure? Does the reseller’s procedure differ?
If the first sale doctrine does not apply for any reason, factual allegations supporting the exceptions to the doctrine should be pled in the complaint, in anticipation of the inevitable argument that the resales are protected by the first sale doctrine. The party asserting the first sale doctrine as an affirmative defense bears the initial burden of satisfying its requirements. Adobe Sys. Inc. v. Christenson, 809 F.3d 1071, 1079 (9th Cir. 2015).
The Gordon Rees Scully Mansukhani Intellectual Property practice handles trademark pre-litigation and litigation matters. Contact our IP team to explore how we can assist with your intellectual property needs.