Taking a swing at the first sale doctrine
Resellers raise challenge in trademark infringement case

Resellers of genuine trademarked goods generally are protected from trademark infringement claims. But, in the recent case of Beltronics USA, Inc. v. Midwest Inventory Distribution LLC, the Tenth U.S. Circuit Court of Appeals looked into whether differences in warranties, upgrades, service, rebates and similar components between trademarked goods could provide an opening for trademark holders to bring infringement claims.

Reselling under the radar

Beltronics sold its trademarked electronics equipment to authorized distributors who agreed to sell the products for a specified minimum price. Two distributors sold Beltronics radar detectors to Midwest, which resold them as “new” on eBay.

To prevent Beltronics from discovering they were supplying Midwest’s inventory, the distributors either replaced each detector’s original serial number label with a phony label or removed the original label before shipping. If a radar detector arrived with the original label affixed, Midwest removed the label before resale.

Under Beltronics policy, only customers who buy detectors with an original serial number label are eligible for certain products and services, including warranties and software upgrades. Beltronics learned its detectors were being sold without the original serial labels when Midwest’s customers contacted Beltronics with warranty requests. These customers stated that they did not receive what they believed they had purchased and that Beltronics had deceived them.

Beltronics sued Midwest for counterfeiting and for trademark infringement, among other claims, and requested a preliminary injunction. The district court granted a preliminary injunction preventing Midwest from selling or offering for sale any Beltronics products without an original serial number label. On appeal, Midwest claimed that its sale of radar detectors with the Beltronics trademark was protected by the “first sale” doctrine.

Limiting trademark rights

The Tenth Circuit explained that, under the first sale doctrine, “the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product.” According to the court, “A purchaser who does no more than stock, display and resell a producer’s product under the producer’s trademark violates no right conferred upon the producer by the Lanham Act [the federal trademark statute].”

The first sale doctrine does not apply when trademarked goods are sold that are “materially different” from those sold by the trademark owner. A materially different product is not genuine and may create consumer confusion about the source and quality of the trademarked product. In Beltronics, the Tenth Circuit joined other federal appellate courts in holding that the unauthorized resale of a materially different trademarked product can constitute trademark infringement.

The court explained that “a guiding principle” is whether the product differences confuse consumers and impinge on the trademark holder’s goodwill. If consumers would consider the differences relevant to their purchasing decision regarding a product, the differences are material.

Detecting infringement

Midwest argued that material differences are limited to differences in physical quality or in control procedures designed to ensure a trademarked product’s physical quality at resale. It claimed that, because Beltronics’ warranties and other services were “collateral” to the radar detectors’ physical quality, no material differences distinguished Beltronics’ detectors from those sold by Midwest.

In assessing this argument, the court returned to the essence of the first sale doctrine. It observed that something more than stocking, displaying and reselling radar detectors was at issue here. And, while this court had never reviewed whether differences in warranties or service commitments could constitute material differences, at least two other federal appeals courts had found they may. In fact, no federal appeals courts had held otherwise. Thus, the Tenth Circuit concluded that the district court hadn’t erred in finding that material differences may include warranties and services.

The court added that the fact that the resale of a materially different trademarked product can constitute a trademark infringement does not mean it always does. The Lanham Act does not prohibit material differences per se — it prohibits sales and offers for sales that are “likely to cause confusion, or to cause mistake, or to deceive.”

If resellers of materially different products take the necessary steps to adequately alleviate the confusion and prevent injury to the trademark holder’s goodwill, the differences are unlikely to trigger liability for trademark infringement. Such steps might include the use of a disclosure. (See “Disclosure: Another way out?”.)

Jamming unauthorized sales

The Tenth Circuit’s decision in Beltronics shows that trademark infringement claims represent an effective way to control the resale of goods that are materially different from genuine trademarked goods. The court indicated that its reasoning also applies to “gray market” goods (those authorized for exclusive production and sale in a foreign country but that are imported and sold in the United States without the trademark owner’s consent). •