Legal Briefs #6 - First Sale Doctrine

Transcript:

Ron: Welcome to Legal Briefs. As always, we've got Jeremy Richardson on the line. Jeremy is a partner in the New York Office of the law firm Freeborn and Peters. Jeremy, are you there?

Jeremy: I sure am. good morning. Ron: Good morning. Today we'd like to talk about something that a lot of brands need more clarity about, and that's the First Sale Doctrine. You did mention it in one of our earlier podcasts, but let's go a little more in depth. The basics are “I own it so I can do whatever I want with it, and you can't stop me.” If that's the case, Jeremy, how can a brand get rid of undesired sellers who have purchased their products?

Jeremy: Hey, this is actually a topic that I really like talking about and learning more about. So, the First Sale Doctrine, at its heart, is that if you as a trademark owner, sell a product with your trademark on it, once you sell it you lose control of the purchaser’s right to resell. So as long as a retailer buying from your supplier has purchased legitimate genuine goods, it can resell them in whatever way it wants to. That's the First Sale Doctrine, again in its essence.

But there are some limitations on the resellers ability not to infringe the owner's trademark, and it's really two different categories that we talked about. One is the material difference standard and two is quality control. I'm going to talk about both of these together because they really wrap together very well.

Essentially, you as the trademark owner, can still control the resale of your trademark products through, again, the material difference quality control standards. If there is a material difference between what the retailer’s selling and the genuine goods, there is the ability of the trademark owner to enforce this trademark and prevent the retailer from selling non-genuine or materially different goods, under trademark infringement theories.

And a couple of different types of material differences could be post-sale customer support, guarantees, warranties, the ability to return product, those types of issues that a consumer would find material to the product they’re purchasing. So, it doesn't even have to be a physical difference between products. We're not necessarily talking about adulterated products. But we're talking about various things that really go with a product.

And a trademark owner has an opportunity to say to a retailer, you have to do all of these things to be an authorized reseller of our product. And if you were not handling this in the right way, if you were selling a product and it really is materially different from the genuine article, the brand owner can bring in trademark infringement action and essentially stop sales.

Ron: So, can you give me an example of materially different? You know, you mentioned warranties, how does, how would that play out?

Jeremy: Sure. So, if you are a brand owner and you have a group of Authorized resellers and those authorized resellers are really the ones that you want selling your product, and when you purchase through this authorized reseller, a consumer has the opportunity to register its product to obtain an extended warranty by registering the product, to be able to get, as we talked about post sale, customer support. Maybe to get notices of accessories or other items that go well with your product, and if a retailer who is not an authorized reseller is not able to provide those additional services that go with your product, that is enough to make a material difference. Something again that the consumer would expect or find important when making its purchasing decision.

So, if there's an authorized reseller and not authorized reseller, both have the trademarked product, both sell it on E-com, both have the same price, but one has those additional benefits and the other doesn't, one would think that a consumer would want to purchase from the retailer where there's additional benefits are available. So that's what we talked about is material difference, and that's what gives rise to a trademark infringement suit or really the opportunity of the brand owner trademark owner to prevent an unauthorized reseller from selling non-genuine products.

Ron: So, we're not saying that the product is actually materially different, but the relationship between the brand and the seller is materially different.

Jeremy: I would put those together. I would say that the product and the additional services are merged together as one. So, the material difference really is not a physical difference or physical attribute that distinguishes the product, but it's really those related services that could go with the product.

Ron: Is there anything to certification of authenticity to be able to say to an unauthorized seller, and does this fall under the purview of the first sale doctor that since you're not authorized to purchase our products, we don't know where you got it. Therefore, we can't even vouch for the authenticity of that product. Would that be something that you could bring in?

Jeremy: Yeah, I think that's a really good point. When you have unauthorized resellers and the brand owner doesn't know the source of its supply, it could be gray market, it could have been intended for a different region, and in those cases, you can have significant differences. For example, in Product Safety standards, because we don't have international harmonization, a product that complies with one country's safety standards may not comply with another.

So, those are really important differences. The product, by and large, may be the same, but there may be something that is different and I'll throw out an example. In Canada, at least in some regions of Canada, there's a requirement of dual language French/English information on the packaging. So, if you have a product that's sold in the US that only has English language, it's really not authorized for sale in, say, Quebec, where they have the dual language requirement. The product itself inside the bag could be the exact same, but there's a violation of a standard there, and that certainly, in my mind, would be a material difference and subject reseller to trademark infringement case by the trademark owners.

Ron: Just to be a little more specific as to maybe a product type. So, we work with a lot of nutrition brands. What would a material difference be potentially with, you know, with that type of a product that's going to be a consumable? Or maybe even an on the skin type of product.

Jeremy: Well, again there may be a host of post-sale services that are available to a consumer. To be able to go to the brand manufacturer, register their product to be able to get additional information, get notices about, I don't know, sales of, you know, discounts of the supplemental product, to be able to learn about related products that go with the consumable that you've purchased. If you're buying one type of vitamin C and you want to learn about vitamin D or zinc or something else that's made by the same company and you register to get that information. If that's available only through authorized resellers and not through an unauthorized reseller, that, I think is a great example of the material difference.

Ron: Is there a place in a terms and conditions or a reseller agreement where a brand should lay the groundwork for this type of defense?

Jeremy: I think the better place for that is maybe getting into the quality standards, which is the second exception to the First Sale Doctrine. If you have product, let's say that has an expiration date, and you want to make sure that your resellers don't sell the product after the expiration, or the Best Buy date, that might be material term in your terms and conditions of sale.

It may give rise to requirement that the brand manufacturer take back expired product if the retailers unable to sell it, but that's sort of a different avenue. We can talk about but quality standards are really important and I would certainly list those are in a reseller agreement. It may be that the brand owner wants to have a member of its team go visit the retailer to meet fairly regularly to give the sales staff, the retailer sales staff, training about the product.

If we're talking about pet industry, I imagine there are some types of pet food that go really well with one breed and maybe not so well with another breed, or with the size of dog, or with an age of dog and you want to be able to have your team be able to give training to the sales staff at that retailer’s establishment. So, there's a quality standard where you want to have well-educated sales folks in the retail stores to provide the best information about your range of products, and an unauthorized reseller isn't going to get that hands on training from the brand owner.

So, there are quality standards there that make a significant difference to the brand owner because they want their brand represented in a particular way. And those quality standards are a real avenue to prevent unauthorized resellers who don't meet those quality standards from selling your product.

Ron: So, I've heard that there have been some successful lawsuits that have used material differences to take down sellers who were who were unauthorized sellers. Are you familiar with that? Can you speak to that is, is this a way to potentially sue someone to stop selling your products?

Jeremy: Well, it absolutely is. Because again, the First Sale Doctrine at its essence is, the reseller who buys genuine product can sell it however he, she, they want to sell the product without any restrictions. So, you if you were to bring a trademark infringement action against a reseller of genuine products, they would hold up the First Sale Doctrine as an absolute defense and you would get nowhere.

But with these two exceptions, with the material differences exception and the quality standards exception, you could go in and bring a Trademark infringement lawsuit and have the ability to stop the retailer from selling these products as non-genuine, as infringing your trademark. So yes, there are a number of lawsuits and a number of opportunities there to stop an unauthorized reseller.

To be honest, I haven't seen a whole lot of these acts. I think it's because most brand owners are not familiar with these two exceptions to the First Sale Doctrine, and it doesn't get enough attention and it is a real opportunity. It's a great, as I like to say, arrow in the quiver to protect your brand and to prevent resellers who are not selling your product in a way that represents your brand standards.

Ron: I think this is great. Quality standards and material differences are a way to combat the First Sale Doctrine. Let's maybe we'll get an article up on the website about this. I think that'd be terrific.

Jeremy: Sounds like fun.

Ron: Well, that's it I think unless you have anything you want to say in summation, Jeremy, I think that this has been a great podcast and I think a lot of good information.

Jeremy: This is a topic that I find really exciting. And again, it's an underutilized tool that brand owners have and I'd love to see proper enforcement of trademark rights, especially in this area. Thanks, Ron.

Ron: Excellent. Thank you. Have a great day.

Ron: If you'd like to submit a question or topic for a Legal Brief podcast then send an email to legalbriefs@mapptrap.com. For more information about how MAPP Trap can help you with your online brand protection needs, visit www.mapptrap.com.