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Attorneys

When Product Resales are not Protected under the First Sale Doctrine

December 11, 2009

Earlier this year, the Tenth Circuit court upheld a preliminary injunction granted in favor of an electronics equipment manufacturer against a reseller of its goods in a trademark infringement action. In Beltronics v. Midwest Inventory Distribution, the reseller (Midwest) argued that it was able to resell the manufacturer’s goods based on the first sale doctrine. The court, however, disagreed with this assessment and ruled that the resellers violated the manufacturer’s trademark rights because Midwest’s sales caused consumer confusion.

Beltronics, a manufacturer of electronics equipment, sells its equipment under its trademark. Beltronics has used authorized distributors to sell its products at a specified minimum price. At one point in time, these distributors violated their agreements by selling radar detectors to a reseller. The reseller, Midwest, then resold the radar detectors on eBay. Prior to reselling the goods on eBay, Midwest removed the serial number label from the radar detector to prevent Beltronics from discovering that Midwest resold their goods. Beltronics learned of the sales when it was contacted by several customers seeking warranties on the products purchased on eBay. Beltronics’ warranty policy, however, only covers products that were purchased with a valid serial number on the product. Because Beltronics would not warranty products purchased on eBay, these consumers became upset with Beltronics. These customers expressed their belief that Beltronics had deceived them. Obviously, these complaints harmed Beltronics’ reputation and goodwill.

Learning of the possible damages to its goodwill, Beltronics filed a suit against Midwest for trademark infringement and sought preliminary injunction to stop further sales. The district court granted the injunction and Midwest filed an appeal. The issue that the court examined on appeal was whether or not Midwest violated Beltronics trademark rights.

The guiding principle in trademark law is that trademarks are granted in order to protect consumers. Trademarks protect consumers by identifying the source of goods. If a product sold in the marketplace causes confusion to the source of goods, then the sale may constitute trademark infringement. The more likely the confusion, the more likely infringement has occurred.

Beltronics argued that the manner in which Midwest sold radar detectors caused confusion in the minds of consumers. Midwest, however, relied on a specific defense to trademark infringement known as the first sale doctrine. The first sale doctrine states that those who resell genuine trademarked products are generally not liable for trademark infringement. The rationale behind this defense is as stated above. Trademark law is designed to prevent sellers from confusing consumers about the source of products. If a genuine article is being resold, this confusion does not exist. If a purchaser of a product does no more than “stock, display and resell a producer’s product under the producer’s trademark” no trademark violation has occurred.

The first sale doctrine, however, does not apply when the reseller sells trademarked goods that are materially different than those sold by the trademark owner. Since a materially different product is not genuine, consumers may be confused as to the source of the products. In order to determine if Midwest could rely on the first sale doctrine, the court determined whether the changes that Midwest made to the product as sold on eBay constituted a materially different product. Midwest argued that its changes were not materially different because the changes revolved solely around the product’s warranty. Midwest claimed that it removed the serial number, so consumers would know that the purchaser would not be covered under Beltronics’ warranty. In addition, on its eBay sales page, Midwest disclosed to potential purchasers that the product was covered by Midwest’s own warranty and not any other. Based on these facts, Midwest argued that the changes to the product were immaterial and that it was protected from any liability under the first sale doctrine.

The court, however, was not persuaded by these arguments. The court held that even though there may have been no physical change in the products, there was a material difference in the nonphysical characteristics associated with the product. Since Midwest did not offer the same warranty as Beltronics did, the court held that this constituted a material difference. The court stated that such characteristics as warranties and customer service must be considered when examining the product as a whole. Since the resale of a trademarked product that is materially different constitutes trademark infringement, the court upheld the preliminary injunction.

On the other hand, the court may have ruled differently if Midwest’s disclosures were more effective. Because several consumers who purchased the radar detectors through eBay eventually came to Beltronics seeking warranty coverage shows that consumer confusion actually did exist. Consumers thought they were purchasing a radar detector that was covered by Beltronics’ warranty and service commitments. What they actually were purchasing was the same physical product but without the nonphysical services associated with the trademark. This led the court to conclude that Midwest infringed on Beltronics’ trademark rights. If Midwest disclosures were effective and consumers were not actually confused, the court may have ruled in favor of Midwest.