The First Sale Doctrine – Prevent Rogue Retailers From Damaging Your Brand

Those rogue sellers who somehow manage to acquire your company’s products and then resell them online – usually undercutting your authorized retail partners in the process – are often legally allowed to do so thanks to a rule in trademark law known as the First Sale Doctrine.

That’s the bad news. Keep reading, though, and we’ll give you some good news you can use to counter these unauthorized sellers, protect your legitimate sales partners, and prevent rogue retailers from damaging your brand.

But before we get to those tips, let’s discuss what the First Sale Doctrine is, why it was put into place, and how a rogue retailer can benefit from it – until you take the steps we’ll recommend below.

What Is The First Sale Doctrine?

Under US federal trademark law, the First Sale Doctrine states that a person who buys a product has the legal right to resell it without violating the rights of the trademark owner (in other words, the manufacturer or brand owner).

This is where the First Sale Doctrine gets its name: It refers to the fact that the trademark or copyright holder of a product has legal control over any specific copy or unit of that product only until it is sold for the first time.

That’s why it is perfectly legal for people (or even bookstores) to sell copies of used books on Amazon. Intellectual property law obviously prevents people from making copies of published books they’ve bought and then reselling those copies. But as the owner of a specific copy of a book, the law allows us to dispose of that copy any way we choose – by giving it away, renting it out, or selling it.

How The First Sale Doctrine Can Hurt Manufacturers And Brand Owners

You probably already see the problem this doctrine can create for a manufacturer or brand owner selling its products online, particularly if the company sells through retail partners.

Let’s say a retailer manages to acquire the inventory of a brand it has no relationship with and whose products it is not authorized to resell. (These rogue retailers have plenty of unethical methods to do this.) As the “first sale” recipient of the brand’s inventory, this retailer can then resell those products in any way it chooses – even knowingly violating the manufacturer’s Minimum Advertised Price (MAP) policy – and in many cases be legally within its rights.

But we said “in many cases” – not in all cases. Fortunately, there are exceptions to the First Sale Doctrine. Let’s discuss these exceptions, and how you can use them to protect your brand against rogue 3rd party resellers.

How To Use The Exceptions To The First Sale Doctrine

The Material Difference Exception

One principle working in favor of manufacturers and brand owners when it comes to unauthorized sellers is that the First Sale Doctrine applies only if a product being resold is not “materially different” from the original product.

Although the law does not give a precise definition of what constitutes a “material difference” in a product, courts have interpreted this concept broadly. A material difference could be a physical change made to the product, such as if the seller removes barcodes or other tracking information from the original packaging to conceal its sale from the manufacturer. Or the difference could include nonphysical characteristics, such as the lack of a service that is part of the authentic product sold through legitimate retailers. The most common example is a warranty or customer support that is available only for products purchased through authorized dealers.

How to use this exception:

The material difference exception can help make a legal case that a rogue retailer is selling your products in violation of trademark law – and that retailer won’t have the legal protection of the First Sale Doctrine.

Knowing this, you should build into your product physical and/or service-related elements that would by definition mean anyone selling your goods without your permission was in violation of trademark law. A great place to start: Include a warranty and/or offer customer service to customers who can verify they’ve bought your product through an authorized dealer.

The Quality Control Exception

In some jurisdictions, brand owners can also leverage the “quality control exception” to the First Sale Doctrine, to demonstrate that a rogue reseller is using quality-assurance standards that are lower than the brand owner itself as well as the standard it demands of its authorized resellers.

In one real-world example of this exception, a retailer was found selling expired cosmetic products, in violation of the manufacturer’s quality-control standards for its authorized sales partners.

How to use this exception:

As part of your reseller policy, you should include written language stating your minimum standards for quality controls in the way these companies handle and maintain your products. This way, if you catch a rogue retailer selling your inventory, you can pierce the First Sale Doctrine shield by demonstrating that they are not abiding by your written policies for quality controls.

Another Great Protection Strategy: An Authorized Dealer Program

Finally, a manufacturer should establish an Authorized Dealer Program, an opt-in partner program that allows the manufacturer to limit which retailers its distributors (and its own in-house sales teams) are allowed to sell to.

There are many business advantages to setting up an Authorized Dealer Program, and one of them is that it can serve as a legal barrier preventing rogue retailers from using the First Sale Doctrine as a shield to sell your products without your company’s permission.

In some cases (although courts’ interpretations are not entirely predictable), if you have an Authorized Dealer Program in place, and you catch an unauthorized dealer retailing your products, you can bring a legal case of tortious interference – because that rogue seller is in fact interfering with the legal contracts you’ve stuck with your authorized dealers.

Need More Guidance Preventing Rogue Retailers?

For more help stopping rotten retailers from harming your brand, here are several resources:

Read our free online guide: How to Stop Unauthorized Amazon Resellers.

Watch our video series: 13 Dirty Tricks Rogue Resellers Use to Devastate Your Brand’s Value.

And let us show you how an automated online brand protection program can help.

Make us your (not so) secret weapon

We help PROTECT + GROW the best brands in the world. We combine world-class technology with world-class people to be your world-class partner. We look forward to showing you why we’re the best.

Copyright © 2020 TrackStreet, Inc.