Dealing with Unauthorized Online Dealers: Sales of Genuine Products

The growth of the Internet as an online marketplace has created not only many new opportunities for companies to sell their goods or services, but also poses many new challenges to companies seeking to protect their intellectual property rights. As many companies know far too well, online sellers (some authorized by the manufacturer; many more not authorized) now have low-cost, direct access to consumers through their own websites and through online market places such as alibaba.com, eBay, and amazon.com. This has led to a tsunami of online dealers infringing intellectual property rights.

While many products sold by unauthorized online retailers are counterfeits, some sell products actually manufactured by and for the trademark owner. The sale by unauthorized dealers of “genuine” goods poses the greatest legal challenge to makers of well-known brands. It may or may not be a bigger business challenge, but counterfeits do not pose serious legal issues; “genuine” goods, on the other hand, are another matter. Further, the unauthorized sale of “genuine” goods is exploding on the Internet. Just look at a typical page on Amazon and hit the link to other offerings of “new” versions of the product on the Amazon Marketplace.

Unauthorized dealers obtain the products they sell as “new” and “genuine” in a variety of ways. The dealers may purchase their goods from overseas markets where prices are lower than in the United States, then import them into the United States as “gray market” goods. They may buy the products cheaply in clearance sales or returns from authorized dealers in the United States. The goods may also have been transshipped by an authorized dealer to another for resale, in contravention of the distribution contract. The goods may simply have been stolen from the brand owner’s normal distribution channels.

Such unauthorized dealers compete unfairly in a sense. They are essentially “free riders.” They have minimal overhead and do not invest significantly in customer service, showrooms, quality, or advertising. Nevertheless, unauthorized dealers reap the benefits of such efforts. They trade off the brand owner’s hard-earned reputation for quality and customer service. Not having the same overhead, they can undercut authorized dealers on price, driving prices down with their unfair advantage and making it difficult for authorized dealers (and ultimately the brand owner itself) to make a profit. Additionally, the product may differ in some way, such as lacking warranty protection. It is this differential in service and quality of promotion and quality inherent in a system of authorized dealerships which needs to be protected.

Brand owners are not without legal recourse against unauthorized dealers, however. First, some simple, self-help measures need to be considered.

Self-Help: Warranty Policy and the Unauthorized Dealer Page

As will be discussed in depth below, warranties are a key element to your armor against unauthorized dealers. Company warranties should expressly warn consumers that purchases from unauthorized dealers, even of otherwise “new” products from the company, void warranty protection. Aside from giving a benefit to customers who buy from preferred dealers, it provides an important trademark/copyright infringement weapon noted below.

So, adopt a firm warranty policy. Next, publish it on the company website, listing authorized dealers for self-verification purposes. Examples are common with any company struggling with unauthorized dealers (see, e.g., www.monsterproducts.com/warranty/; www.klipsch.com/unauthorized; http://hoover.com/authorized-dealer/). Other steps to mark genuine products may be considered, such as covert or overt markers on the products for tracking them through the distribution chain.

Self-Help: Take Downs of Unauthorized Dealer Offerings

eBay and similar online auction sites have takedown procedures which may be useful against unauthorized dealers. The key word here is “may.” Inspired by federal legislation called the Digital Millenium Copyright Act (DMCA), eBay has adopted an even broader means to take down postings offering infringing products beyond those infringing the owner’s copyright.

Called the Verified Rights Owner (VeRO) program, eBay permits intellectual property owners to request the removal of listings it claims in good faith are infringing the owner’s patent, copyright, or trademark rights, through the filing of a simple form called a Notice of Claimed Infringement (see http://pages.ebay.com/help/tp/vero-rights-owner.html). Similar to procedures set up in the DMCA, the listing party is notified and has a limited time to file a counter notice to reinstate the listing. If it does so, the owner may have to file suit to enforce its rights in order to keep the listing off, but the listing party will have consented to jurisdiction in the federal court sitting in the Northern District of California.

Outside eBay and websites with similar protections, all auction/sales online sites are subject to the DMCA, which provide similar protections for claims of copyright infringement only.

While simple, the takedown procedures have a glaring weakness. Sophisticated, unscrupulous, unauthorized dealers simply repost the listing using a different name. Hence, the DMCA and VeRO programs are sometimes referred to as a “whack a mole” game, having little real effect.

Going to Court: Legal Weapons

If self-help measures are not adequate, using the courts may be necessary. Assuming you can identify the offender and it is subject to jurisdiction in the United States, the following approaches give you weapons to assert against unauthorized, online dealers.

Trademark Infringement

Trademark infringement is the principal weapon brand owners have in combating unauthorized dealers. Without more, however, there is nothing improper about selling genuine product by an unauthorized dealer, insofar as trademark or other law is concerned. The first sale doctrine in both trademark and copyright law bars the brand owner from controlling the downstream sales. But trademark infringement can still arise regardless of the first sale doctrine.

The first sale doctrine provides that one who purchases a branded item generally has a right to resell that item in an unchanged state. The trademark rights of a brand owner are “exhausted” once the particular item has been sold in the market. But there is an exception to that which often applies in the context of unauthorized online dealers: the “material difference” exception.

The first sale doctrine does not protect alleged infringers who sell trademarked goods that are “materially different” from those sold by the trademark owner or its authorized dealers. A material difference from authorized goods creates confusion over the source of the product and results in loss of the trademark owner’s good will. In other words, materially different goods sold by an unauthorized seller are not considered “genuine,” because they are confusingly different.

Courts define “material difference” broadly: it is virtually any difference that exists between the authorized goods and unauthorized goods that a consumer would likely consider relevant when purchasing the product. Even subtle differences apply. As one court put it, “it is by subtle differences that consumers are most easily confused.”

Material differences may include differences in battery life between authorized and unauthorized batteries; differences in the variety, presentation, and composition of product; differences in the formulation, content, and blends of product; alterations to packages such as removal, grinding off, or cutting away reference numbers, SKUs, bar codes, and batch codes; differences in package shape and labels and lack of required warning labels.

Of a non-physical nature, material differences include changes in operator manuals and service plans, and differences in available services for authorized versus unauthorized goods. Perhaps most commonly, differences in warranty protection coverage between authorized and unauthorized sales often lead to trademark infringement.

In some jurisdictions, notably in Second Circuit law, a difference in quality control measures also constitutes trademark infringement of otherwise “genuine” goods under the owner’s mark.

Copyright Infringement

Copyright infringement is the unauthorized copying of a work protected by a copyright registration. In the digital age, it is now simple for unauthorized dealers to blatantly copy images of products taken by the manufacturer or large blocks of text (product descriptions, specification, etc.) written by the manufacturer. Look for unauthorized copying by the dealer on their website or eBay/Amazon listing of images, block text, and logo use. Logos of the manufacturer used in a manner which falsely implies authorization may be copyright infringement and not fair use.

Recently, the Supreme Court made a major pronouncement that mere unauthorized resale of a particular copyrighted item that is imported into the United States is not infringement. In Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1357 (2013), the Court held that the first sale doctrine applies to copies of a copyrighted work (like textbooks) which were lawfully made abroad, sold there, and then imported into the United States for resale as a “new” book. This second sale was held to be beyond the scope of copyright protection. This was a major victory for Costco, eBay, and Walmart, which regularly import gray market goods for resale in the United States. However, that does not bar copyright protection against unauthorized dealers in other respects. The unauthorized copying of images and text does not involve the question of selling the product itself; it instead involves using the copyrighted works on the product.

Recent cases reflect that these principles play out with subtle standards of the quantity of proof required by the manufacturer to trigger copyright and trademark infringement or other liability, even when material differences may exist. See, e.g., L’Oreal USA, Inc. v. Trend Beauty, 2013 U.S. Dist. Lexis 115795 (SD NY 2013) (pretextual vs. non-pretextual standards). Even a slight difference may suffice to establish infringement, the court noted. The effect of removing the seal vector and coding that would be visible to a consumer was open to factual interpretation, however, causing denial of summary judgment.

As is obvious, expertise is needed to appreciate the scope of unauthorized dealership law. Not all jurisdictions have the same standards. Further, as noted below, the issue reaches across a variety of bodies of law and can take place in a forum quite different from federal court.

Other Theories, Other Arenas for Combat

Customs and ITC Proceedings. Combating unauthorized dealers is possible beyond simply DMCA takedowns and federal court actions. If the offender is overseas and exports products into the United States, options exist against U.S.-based distributors. Further, working with the Customs Service and bringing an action before the International Trade Commission (ITC) are also options. Samples of the valid trademark to compare against a trademark infringer can stop goods at the border, where the difference is readily discernible. However, Customs will generally have a hard time barring “genuine,” validly marked goods that originated from the trademark owner. As for the ITC, Section 337 of the Tariff Act declares “unlawful” the importation, sale for importation, or sale after importation of any article that infringes a valid patent or registered copyright or registered trademark. For the above restrictions to apply, an industry relating to the protected articles must exist within the United States or be in the process of being established.

Unfair Competition, False Advertising, and Other Theories. Many unauthorized online dealers use false and/or misleading statements in their online advertisements. For example, some online dealers falsely represent that they are “authorized dealers” or that they are “authorized by leading manufacturers.” Many dealers also represent that the products they sell are covered by the manufacturers’ warranty, while the truth is that many warranties are void when products are sold by unauthorized dealers. These subject the dealer to liability under both the federal Lanham Act and various state “unfair competition” statutes.

Additionally, under certain facts one may allege the common law tort of interference with prospective business advantage or inducement to breach contract. Also, state statutes (as in New York and California) may specifically deal with gray market goods, although those two statutes are markedly different in their purpose.

Service providers, such as eBay, may be liable for contributory infringement with proof that the provider had sufficient notice of the infringing conduct by the direct infringer. Cases brought by Louis Vuitton and Tiffany point out the need for proving clear appreciation on the service provider’s part of the specific activity in question. Generalized notice is not sufficient.

Yet another avenue of attack is to go against one’s own authorized dealers. They may be breaching the terms of their contract with the trademark owner, in selling new product out the back door to unauthorized dealers. This is somewhat cannibalistic, but it can effectively cut off an illicit channel and keep other dealers in line.

Conclusion

The sale by unauthorized dealers of “genuine” goods poses the greatest legal challenge to makers of well-known brands. Manufacturers should implement self-help measures such as instituting an effective warranty policy, or covert tracking measures. Take-down measures through the DMCA and programs like eBay’s VeRO can remove a particular unauthorized sale listed online, at least in its present form.

There is nothing per se illegal about an “unauthorized” sale of “genuine” goods. The first sale doctrine under both trademark and copyright law prohibits brand owners from controlling downstream sales in the first instance. However, such sales can constitute trademark or copyright infringement if material differences exist in the product. One of the more common avenues is to attack such sellers on the grounds that their “genuine” products are not covered by the manufacturer’s warranty, and thus are materially different from authorized goods. Additional remedies can be available under business tort theories such as interference with contractual relations. Further, outside the courts one can approach the Customs Service or seek administrative relief through the International Trade Commission if imported goods are involved.