Thanks to an August 2018 ruling by Nathanael Cousins, a federal judge for the US District Court of Northern California, third-party sellers will now have less of a legal leg to stand on when using the first sale doctrine to protect themselves against a brand’s claims of trademark infringement. In fact, this ruling could represent the death knell for unauthorized sellers’ first sale doctrine defense.
Here’s a brief overview of the case and a discussion of why it’s good news for brand owners.
The Case: ADG Concerns, Inc. v. Tsalevich, LLC
California-based ADG Concerns, which does business as Health Concerns, sells herbal dietary supplements both directly and through a network of authorized resellers, which the company vets and monitors. Health Concerns places specific demands on its resellers in terms of quality controls that include “procedures on inspection, storage, product recalls, product recommendations, and customer service,” according to court records.
Health Concerns sued Tsalevich, LLC when it discovered the company was acquiring and reselling its products on Amazon without permission and in ways that violated these quality controls. In other words, Health Concerns claimed that Tsalevich violated its trademarks by selling products that were “materially different” from the inventory that the company’s authorized retailers were selling.
Here are a few excerpts from the court’s ruling, explaining how the judge analyzed the case and applied the law in his decision.
(Note: We’re removing the case law he references, to make it easier to read.)
“Typically, the ‘first sale doctrine’ prevents trademark infringement and unfair competition liability for the ‘mere resale’ of a trademarked product. The idea is that a trademark holder’s right to control the sales of its goods extends only to the initial sale. After that first sale, however, the trademark holder may establish infringement only if he demonstrates that the goods are materially different.
“One way resold goods may be materially different—and therefore an exception to the first sale doctrine—is when they do not meet the trademark holder’s quality control standards. The quality control exception recognizes that one of the most valuable and important protections afforded by the Lanham Act is the right to control the quality of the goods manufactured and sold under the holder’s trademark, and that distribution of a product that does not meet the trademark holder’s quality control standards may result in the devaluation of the mark by tarnishing its image.
“Here, the complaint alleges that Tsalevich is selling non-genuine, materially different products that are not subject to Health Concerns’ quality controls and are in fact of a degraded quality. For example, the complaint includes screenshots of customer complaints claiming that products purchased from Tsalevich with the Health Concerns mark ‘arrived with the expiration date scratched out,’ had a ‘dark substance inside the plastic wrap by the cap,’ and had a ‘different’ consistency from the same item purchased two years earlier.
These allegations, taken as true, establish that Tsalevich did not comply with Health Concerns’ quality controls and sold materially different goods likely to cause consumer confusion. Consequently, Health Concerns has established its trademark infringement and unfair competition claims.”
At the conclusion of his ruling, Judge Cousins makes this statement, which could help shift the balance for future cases against unauthorized resellers’ ability to hide behind the first sale doctrine.
“Finally, the public interest weighs distinctly in favor of enjoining Tsalevich’s unlawful acts. Upholding the law is inherently in the public interest, and an injunction further enhances this interest here by protecting consumers from degraded products that are confusing at best and harmful at worst.”
It’s worth pointing out that the Health Concerns lawsuit actually alleged several violations against Tsalevich other than trademark infringement. The judge dismissed some of these additional claims, such as false advertising, while upholding others, including unfair competition.
So even though the court awarded monetary damages to Health Concerns and ordered Tsalevich never again to resell the company’s products, the lawsuit did not represent a total victory for Health Concerns. But it could represent a big win for other manufacturers.
Why This Case Is Good News for Your Brand Protection Efforts
The reason this ruling could become significant, and why it might represent a major victory for other manufacturers and brand owners, is that the judge underscored the fact that when unauthorized sellers make any material changes to a product—including failing to follow the trademark holder’s quality control procedures—they are in fact violating the law.
With this 2018 court ruling now a permanent part of the federal case law surrounding trademark infringement, you might find unauthorized sellers a little less likely to try their dirty tricks to acquire and resell your products. And if they do, this ruling might give your company a much stronger case in court.