Using Trademark Law to Fight Price Gouging: Beware the Exhaustion Doctrine
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On April 10, 2020, 3M Company, a well-known manufacturer of scientific and medical products, became one of the first companies to file a lawsuit alleging trademark infringement, likely dilution, and false advertising arising from alleged price gouging during the COVID-19 pandemic.1 This case raises a number of issues associated with the use of trademark law to combat pandemic-inspired price gouging schemes. The most significant of these is the applicability of the first-sale, or exhaustion, doctrine, which limits the ability of trademark owners to challenge the resale of their own products. This alert addresses the significance of that doctrine and strategies trademark owners can use to ameliorate the doctrine’s effects in lawsuits against price gouging associated with their own goods.
Under this doctrine . . . a markholder may no longer control branded goods after releasing them into the stream of commerce. After the first sale, the [mark]holder’s control is deemed exhausted. Down-the-line retailers are free to display and advertise the branded goods. Secondhand dealers may advertise the branded merchandise for resale in competition with the sales of the markholder (so long as they do not mis-represent them¬selves as authorized agents).5
The doctrine therefore protects resellers and licensees from being liable, for example, for selling a mark owner’s goods for what the mark owner considers too low or too high of a price. This also prevents mark owners from simply saying, “I disapprove of the defendant’s resale of my goods.” Nevertheless, mark owners may avail themselves of several recognized exceptions to this doctrine, provided they plead them carefully and are prepared to adduce the evidence and testimony necessary to establish the exceptions’ applicability at the proof stage of litigation to protect their marks.
“[Q]uality control” is not a talisman the mere utterance of which entitles the trademark owner to judgment. Rather, the test is whether the quality control procedures established by the trademark owner are likely to result in differences between the products such that consumer confusion regarding the sponsorship of the products could injure the trademark owner’s goodwill.13
Consequently, to assert trademark infringement under this theory, the mark owner must establish “(i) it has established legitimate, substantial, and nonpretextual quality control procedures, (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.”14 The procedures at issue need not be “the most stringent measures possible” to trigger this exception;15 nevertheless, their existence must be pleaded and ultimately proven.
[T]he [first sale] doctrine is not available to uses that create confusion beyond mere resale. . . . Any conduct beyond mere resale triggers liability. For example, active or purposeful deception, false suggestion, or misrepresentation on the part of a reseller, designed or likely to cause confusion about whether or not the reseller is an authorized dealer.18
Thus, “the first sale doctrine does not protect resellers who use [plaintiffs’] trademarks to give the impression that they are favored or authorized dealers for a product when in fact they are not.”19
1 3M Co. v. Performance Supply, LLC, No. 1:20-cv-02949-LAP (S.D.N.Y. Apr. 10, 2020). 3M followed its filing in the Southern District of New York with substantively identical suits in California, Florida, and Texas.
4 “[T]he general rule that a distributor who resells branded goods without change is not an ‘infringer’ and thus needs no ‘license.’” J. Thomas McCarthy, 4 McCarthy on Trademarks and Unfair Competition § 25:41 (5th ed.) (“McCarthy”). The exhaustion doctrine does not apply if the goods in question were not released into the stream of commerce under the authority of the owner of the trademark appearing on them. See, e.g., By Design PLC v. Ben Elias Indus., 49 U.S.P.Q.2d 1789, 1791-93 (S.D.N.Y. 1998) (rejecting doctrine’s applicability in case in which plaintiff had rejected goods in question, only to have them surface in defendants’ possession).
5 Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1173-74 (S.D.N.Y. 1984) (citations omitted).
6 146 F.3d 1083 (9th Cir. 1998).
7 Id. at 1085-86.
8 “Thus, the first sale rule does not apply when the goods are altered so as to be materially different.” McCarthy, supra note 4, § 25:41.
9 See, e.g., Societe des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 635 (1st Cir. 1992) (differing caloric content of resold mints).
10 See, e.g., Beltronics USA, Inc. v. Midwest Inventory Distrib. LLC, 562 F.3d 1067, 1074-76 (10th Cir. 2009) (affirming finding of liability based on failure to disclose lack of warranty protection covering altered good).
11 See Zino Davidoff SA v. CVS Corp., 571 F.3d 238, 246 (2d Cir. 2009).
12 See, e.g., id. (referring to “low” standard).
13 Iberia Foods Corp. v. Romeo, 150 F.3d 298, 306 (citations omitted).
14 Warner-Lambert Co. v. Northside Dev. Corp., 86 F.3d 3, 6 (2d Cir. 1996).
15 Mary Kay, Inc. v. Weber, 661 F. Supp. 2d 632, 643 (N.D. Tex. 2009).
16 See Metropcs Wireless, Inc. v. Virgin Mobile USA, L.P., No. 3:08-CV-1658-D, 2009 WL 3075205, at *4 (N.D. Tex. Sept. 25, 2009) (“[A]t least in the context of the sale of repaired or altered goods that still bear their original trademark, if it is deceptive to retain the trademark because the product is, after extensive repairs or alterations, essentially a new product, then the original trademark must be removed from the repaired or altered good.”).
17 See e.g., Cartier v. Aaron Faber, Inc., 396 F. Supp. 2d 356, 360 (S.D.N.Y. 2005) (reaching finding of counterfeiting based on showing that “[t]he [defendants’] alteration of the [plaintiff’s] watches is so extensive as to have significantly changed the design of the original product and to have compromised the core functions of the watch”).
18 Caterpillar Inc. v. Telescan Techs., L.L.C., No. CIV.A. 00-1111, 2002 WL 1301304, at *5 (C.D. Ill. Feb. 13, 2002); see also Enesco Corp. v. K’s Merch. Mart Inc., 56 U.S.P.Q.2d 1583, 1593 (N.D. Ill. 2000) (denying defense motion for summary judgment on ground that first-sale doctrine protects resellers from liability for infringement when use of the trademark is only “incidental to permissible resale and accompanying advertisement of trademarked products” and does not extend to uses that “create confusion beyond mere resale”).
19 Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1241 (10th Cir. 2006).
Theodore H. Davis Jr.
Jennifer Fairbairn Deal