UNAUTHORIZED, ONLINE DEALERS

S c o t t J. Al l enLaRivie r e , Gr ubman & Payne , LLP

s al l en@l g pat l aw.c o m

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Introduction

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• Focus today on sales of allegedly new, genuine goods by unauthorized dealers & unauthorized sales by authorized dealers

• Not on:• Counterfeit• Used product resale

The Problem

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• Online sales by e-tailers – free riding and minimal overhead: no investment in customer service & promotion required of dealers but benefit from ads • Undercutting authorized dealers on sales, who can’t compete well

• Undermining mfr-dealer relationships • Affects mfr preferences and strategy for initial sale and treatment of products/channels of trade

• Increased commoditization of branded goods, competing only on basis of price

The Problem – Authorized Deale r Inve stment

• / Manufacturer producer may want dealers to make s ubs tantial inves tment to meet cons umer demand

:for

• Ins t al l at io n• Cus to mer S er vic e• Pr o duc t demo ns t r at io ns

• Manufacturers als o expect dealers to fo llow Quality :As s urance guide lines regarding

• Pac kag ing• S to r ag e t ime , S t o r ag e c o ndit io ns (ext r eme

t emper atur e)• Shipping metho ds

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New vs. Used Products – The Te rrain

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How the unauthorized dealer gets “new” product

• Resale – out the front door• Liquidated, discontinued, seconds, returns• Out the back door (off-shore “auth’d” mfr, etc.)• Gray market (auth’d products made and sold for overseas market)• Stolen

Nothing is Pe r Se Imprope r About Be ing an Unauthorized Deale r

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• Genuine goods, bearing true mark

• No IP basis to block

• Usually no privity of contract

• Need “something more” than the mere fact that the dealer is unauthorized

Trademark Infringement Theory: First Sale Doctrine

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• Obstacle to infringement when sale of genuine goods with actual brand: first sale doctrine

• Doctrine: Rights of trademark owner extend only to first sale, not the resale of genuine goods in unchanged state. A.K.A. – “Exhaustion”

• Rationale: Implied license that buyer of branded goods can resell. TM owner got value from first sale.

Trademark Infringement Theory: Exception to First Sale Doctrine

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Two Exceptions To First Sale Doctrine:

• Material Difference Exception: the goods sold by unauthorized dealer are materially different in some respect from authorized goods

• creates confusion over source & loss of good will• are not considered “genuine” because are “confusingly different”

• Quality Control Exception: unauthorized goods not subject to same quality control standards as those sold by authorized dealers

Mate rial Diffe rence de fined

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• Defined broadly – any that consumer would likely consider relevant in assessing the goods

• Physical differences – tangible product quality:• battery life • variety, presentation & composition of chocolates• formulation, content of cigarettes• packaging (container shape, labeling)

Mate rial Diffe rence de fined, p.2

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• Non-Physical Differences – intangible qualities• warning and safety labels, operator manuals, service plans• warranty protection (no warranty or invalidated by online sale)• differences in available services (Cabbage Patch Dolls with Spanish language birth certificates, no first birthday card)

• Low threshold for materiality (subtle differences are often most likely to cause confusion with consumers)

Quality Control Exception

• : Rationale

– One o f the mo s t impo r t ant r ig ht s af f o r ded t o a t r ademar k o wner is t he r ig ht t o c o nt r o l t he q ual it y o f t he g o o ds s o l d under that mar k.

– The s al e o f g o o ds that do no t c o nf o r m t o a br and o wner ’ s q ual it y c o nt r o l s t andar ds is l ike l y t o deval ue the t r ademar k and er o de c us t o mer g o o dwil l .

Quality Control Exception, p. 2

• : , Three Part Tes t to trigger this exception the :trademark owner will generally be required to s how

– It has l eg it imat e , s ubs t ant ia l and no n-pr et extual q ual it y c o nt r o l pr o c edur es in pl ac e ;

– It abides by tho s e pr o c edur es ; and– S al e o f pr o duc t s that do no t c o nf o r m to

tho s e pr o c edur es may diminis h t he val ue o f t he t r ademar k (t he pr o duc t c o nt ains , o r po t ent ia l l y c o ntains , a l at ent de f ec t as a r e s ul t o f f a il ur e t o f o l l o w q ual it y c o nt r o l pr o c edur es )

Quality Control Exception, p. 3

• Courts recognize that quality contro l meas ures may create “s ubtle differences ” in quality that are difficult

.to meas ure

– Thus , ther e is no r eq uir ement that a br and o wner s ho w that f inal q ual it y o f autho r ized g o o ds is meas ur abl y hig her than that o f unautho r ized g o o ds

Quality Control Exception, p. 4

• :Examples

– S al e o f po t ent ia l l y s t al e c o ug h dr o ps af t e r expir at io n dat e ;

– S al e o f c o s met ic s w ith beyo nd s he l f l if e ;– S al e o f beer t hat has no t been s t o r ed in

c o nf o r manc e w ith br and o wner ’ s s pec if ic at io ns ;

– S al e o f mat t r e s s es that wer e pac kag ed and s hipped in manner that did no t c o nf o r m to manuf ac tur er ’ s s pec if ic at io ns .

The “ Truth” Or “ Full Disclosure ” De fense

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In General: If an unauthorized re-seller tells full truth about product (e.g., not covered by warranty, imported and differently bottled/labeled) – the potential for confusion disappears.

Caveat – this defense may not apply if the product has been altered or repaired extensively, such that the altered/repaired product varies from the original so drastically that it is considered a misnomer to sell the product under the brand owner’s mark.

Fair Use by Unauthorized Deale r

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• Trademark infringement defense

• Irrespective of first sale doctrine defense

• Right to truthfully inform (but not confuse re quality/affiliation) as to dealership specializing in these products

• E.g., “Independent VW Service”; “We sell used HP products.”

• Problems with prominence of use – affiliation?

Copyright Infringement Theory: Type s

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• Unauthorized sellers will use:

• images of products taken by manufacturer

• blocks of original text written by manufacturer

• logos of manufacturer (cf. trademark infringement too)

Copyright Infringement Theory: Advantage s

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• Useful tool if unable to establish trademark infringement

• In addition to injunctive relief, remedies include:• DMCA take down notice to ISP – off the website• Actual damages and profits of infringer• Possibly statutory damages ($750-$30,000) for each Work, without proof of causation• Statutory: $150,000/Work max if willful infringement• Potentially costs and attorneys’ fees

Is Copyright Registration Required?

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17 USC Sec. 411 – No suit until registration

• Consider registering important works now.• Benefit: eligibility for statutory damages

• Long-Standing Split of Authority• Some courts (10th, 11th Cirs.) – registration is a prerequisite to filing suit• 5th, 7th and 9th Cirs. – Mere application OK

• Supreme Court (Reed Elseviere case) – Sec. 411 NOT Jurisdictional; Failed to resolve circuit split.

Copyright Infringement Theory: Misc.

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• Expedited registration – costly but can be done

• Copying vs. hyperlinking – latter is usually not infringement (no copying, directed to legitimate owner)

• First sale doctrine and copyright – similar to trademark

• material alteration defeats defense• Costco v. Omega case – Supreme Court to decide whether first sale doctrine applies to goods manufactured and first sold in foreign country, then re-sold into the United States.

Unfair Compe tition/False or Misle ading Adve rtis ing

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• Many Unauthorized Dealers Falsely Represent That:

• They are “authorized dealers” or “authorized by leading manufacturers”

• The products are covered by the “manufacturer’s warranty” (the truth – many warranties void when not sold by authorized dealer)

Unfair Compe tition/False Adve rtis ing Unde r Lanham Act – Se ction 43(a)(2)

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• 43(a)(2), 15 U.S.C. § 1125(a)(2) – misrepresentation/misleading re

• nature or qualities of goods, or• nature of affiliation or sponsorship of seller

• State Unfair Competition Laws (e.g., California Business & Professions Code § 17200 – civil remedy for “unfair competition” which is defined as any “unfair, deceptive, untrue or misleading advertising”).

Breach of Contract

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• Between manufacturer/producer and (former?) authorized dealer

• Breach of dealership agreement

• Termination rights if current dealer + other remedies

• Specific obligations not otherwise mandated in law

Avenue s of Attack Against Unauthorized Deale rs

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• Federal court (diversity, federal question) – copyright & venue? Quality control issue needed?• State court (concurrent trademark; no copyright)• Customs – blocking at the border if gray market (or counterfeit or infringing). Need registered mark, copyright.• UDRP takedown of domain name if trademark issue (e.g., dellgoods.com)• ITC complaint if IP infringement -- exclude imports• DMCA “self help” take down

ITC Proce edings – IP Infringement & Imports

• Initiate detailed complaint with ITC with numerous – 30 exhibits days for Commis s ion to dec ide to

launch “Inves tigation”

• , Proceeds much like federal litigation ending in , Initial Determination by adminis trative law judge 45-60 which can become final in days

• Shorter time frame to trial

• : , Remedies ceas e and des is t order exc lus ion order( ), limited or general cons ent order

• No damages

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DMCA Take Downs

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• Copyright issues (only)• Written notice to ISP per Sec. 512, swearing good faith belief of infringement, identifying materials• ISP immunity if complies; notifies posting party• Posting party may file Counter Notice that not infringing• If no suit by Owner within 14 days, ISP restores• Abuse – right to sue for Sec. 512(f) violations – damages and atty fees for “bad faith” take downs • Beware of using “unauthorized” seller or for trademark infringement

Se condary (Contributory) Liability

• :Targets

– ISPs– On-l ine mar ket pl ac es (e -Bay, a l ibaba)– Cr edit c ar d c o mpanies

• Contributory Trademark or Copyright Infringement

– Pr er eq uis it e : (1 ) Ret ent io n o f s ig nif ic ant c o nt r o l by al l eg ed s ec o ndar y inf r ing er ; and (2 ) c o nt inuing t o s uppl y s e r vic e s t o o ne who the s ec o ndar y inf r ing er kno ws o r has r eas o n t o kno w is eng ag ing in inf r ing ing c o nduc t .

Se condary Liability, p. 2

• Tiffany v. eBay (2nd . 1, 2010)Cir April

– Spec if ic no t ic e r eq uir ed t o pl ac e s ec o ndar y in f r ing e r o n no t ic e .

– “ Gener al ized ” no t ic e is no t s uf f ic ient .

• / :Fals e Mis leading Advertis ing Claim

– eBay he l d po t ent ial l y l iabl e f o r f a l s e/ mis l eading adver t is ing f o r pl ac ing adver t is ement s dis pl aying Tif f any’ s t r ademar ks o n thir d par ty s it e s (Go o g l e , Yaho o , e t c .).

– Rat io nal e : by us ing Tif f any’ s mar ks , eBay is r epr e s ent ing t o c o ns umer s that al l g o o ds s o l d under tho s e mar ks o n it s s it e ar e g enuine . That r epr e s entat io n is f a l s e o r mis l eading g iven eBay’ s kno wl edg e that a s izeabl e number o f s uc h g o o ds ar e no t g enuine .

– Wo ul d this r at io nal e wo r k in an unautho r ized deal e r s ituat io n?

Thank You

S c o t t J. Al l enLaRivie r e , Gr ubman & Payne , LLP

s al l en@l g pat l aw.c o m