Unauthorized E-commerce Dealers of Authentic Goods

Unauthorized online sellers of genuine goods present a huge legal obstacle to companies of big and small brands. While there is also the problem of counterfeit goods, this problem has been around for some time and there are established methods to combat counterfeit goods. On the other hand, unauthorized dealers of genuine products are a newer dilemma. In certain circumstances, the sales may be legal and not infringe intellectual property rights, falling under the First Sale Doctrine, while other circumstances may constitute trademark infringement. Some of the unauthorized dealers may obtain the goods in a legal manner and purchase the products via a legitimate sale; conversely sometimes the goods are stolen from the normal distribution channels.

Under the First Sale Doctrine, a trademark owner cannot control the goods once they have been sold in commerce. Second hand dealers and unauthorized dealers can display and advertise the branded goods in competition with the mark holder. A court will have to decide whether the trademark owner authorized the first sale of goods; and second whether the goods were genuine. See Dan-Foam A/S v. Brand Name Beds, LLC, 500 F.Supp. 2d 296, 318 (S.D.N.Y. 2007). The sale must cause consumer confusion or dilution to constitute trademark infringement. The Second Circuit Court of Appeals has held that the First Sale Doctrine only applies if the trademark owner authorizes the first sale of goods. If so, subsequent sales of authentic goods are not considered trademark infringement. See Liz Claibourne, Inc. v. Mademoiselle Knitwear, Inc., 979 F. Supp. 224, (S.D.N.Y. 1997).

However, there are two exceptions to the First Sale Doctrine, one known as the material difference exception and the other, the quality control exception. The material difference exception includes a difference in the products or in the warranties. A material difference can be virtually any difference that exists between the authorized goods and the unauthorized goods. Courts have acknowledged some subtle differences that rise to the level of causing confusion and trademark infringement. Some differences include, physical differences (for example differences in battery life), alteration to packages (for example removing reference numbers, SKUs, bar codes, etc.), differences in package shape and labels, lack of warnings or differences in warning labels, and differences in warranty protection applicable.

The other exception is the quality control exception that is acknowledged in the Second Circuit Court of Appeals. The premise of this exception is that one of the most important tenets of trademark law is that the owner has the right to control the quality of the goods manufactured and sold under the brand. See El Greco Leather Prods. Co. v. Shoe World, Inc., 806 F.2d 392, 395 (2nd Cir. 1986). Differences in quality control standards can create a likelihood of confusion. If the standards of the trademark owner are not met, it is likely to devalue the trademark and erode the goodwill associated therewith. Goods that do not conform to the mark holder's quality control standards are not authentic. In a pleading, the plaintiff must demonstrate that legitimate quality control procedures existed and sales of products not conforming to those quality control procedures will diminish the trademark value.

Recently, a case falling under this subject matter in the Southern District was filed (on September 7, 2018), and should be monitored. See Olaplex LLC et al. v. Verbena Products, LLC et al., where claims were made that the products contained material differences, and that the unauthorized dealer's conduct constituted trademark infringement, among other violations. Plaintiff in that case claimed that the packaging was mutilated and certain codes that plaintiff typically maintains on its products were removed.

One of the reasons why it is so difficult to combat unauthorized sellers when there is a true infringement is that Amazon makes a significant profit from unauthorized dealers, and does not have an incentive to prohibit such dealers. Brand owners can consult with attorneys in these types of situations or consult with specialized companies that focus on protecting brand owners' rights who sell on Amazon employing strategies to combat unauthorized dealers. Of course, there are considerable fees to engage these companies that may make it cost prohibitive for smaller companies. However, brand owners must keep the pressure on Amazon in cases of infringement. If you have questions pertaining to this topic, please contact the firm for a courtesy consultation.