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Controlling Online Distribution Leakage By Unauthorized Sellers

April 13, 2021

One of the biggest frustrations for brand owners is seeing their products sold through unauthorized distribution channels such as on the Amazon Marketplace. Carefully controlled brand experiences and minimum advertised pricing policies can be destroyed when unauthorized sellers offer the brand owner’s products. This can lead to disgruntled authorized sellers and price erosion. United States trademark law permits the sale of genuine products by unauthorized distributors, and Amazon does not typically take down product listings simply because they are offered by unauthorized sellers. Fortunately for brand owners, the law still provides avenues by which brand owners can limit unauthorized sales. However, if those avenues are misused, the brand owner can be placed in legal jeopardy.

The First Sale Doctrine and Distribution Agreements

In the United States, a person or entity that purchases trademarked goods from a brand owner has the right to resell those goods so long as the goods are unchanged. In other words, once the brand owner sells its goods, its trademark rights are exhausted. This is known as the first sale doctrine.

Brand owners can maintain control over how their resellers offer and promote their goods through distribution agreements which place limits on the resellers’ sale and advertised pricing of goods. For example, a distribution agreement can prohibit a reseller from selling products for the purpose of resale, ban bulk sales and proscribe certain types of sales such as online sales. If properly drafted, the brand owner can immediately terminate the distributor if any of these prohibitions are breached.

Yet, unauthorized sellers find ways to obtain branded products. Often, these goods are purchased from authorized distributors looking to make additional sales. Branded goods can also be obtained from overseas sellers as exchange rates and lower prices that brand owners charge outside the U.S. for the same goods can create a sufficient margin to make it profitable for the U.S.-based seller to import the goods and sell them in the U.S. These types of goods are known as gray market goods.  In general, the purchase and resale of goods obtained in these ways are legal.

Material Differences and Infringement

There is an exception to the first sale doctrine and gray market sales, and it is the way for brand owners to limit the unauthorized distribution of their products. If the branded goods sold by unauthorized sellers are materially different than the goods offered by the brand owner, the unauthorized sales of these goods are considered infringing.

Material differences can consist of alterations to the product or its packaging such as obliterating serial or other identification numbers and concealing warning labels, ingredient lists and expiration dates. For gray market goods, product instructions and warnings that are not in English can render a product materially different. Differences in the U.S. and overseas packaging or product, such as different ingredients for food products or different paper quality for books, can also constitute material differences.

Material Differences Arising from the Brand Owner’s Post-Sale Activities

Those are some of the more obvious material differences. Courts have held that the standard for materiality is very low. Subtle differences between authorized and unauthorized sales are sufficient so long as consumers would likely find these differences to be relevant to their purchasing decisions. These differences often fall into the category of post-sale activities provided by the brand owner which are exclusively for products purchased from authorized distributors such as warranties, telephone and online service and updates.

Yet, denying warranty coverage to genuine products purchased from unauthorized sellers can be risky. Some states, such as New York, limit brand owners’ ability to disclaim warranties for these types of purchases. Also, some courts have held that if a seller sufficiently discloses that the brand owner’s warranty does not apply, then there is no likelihood of consumer confusion as to whether or not the product is materially different and thus no infringement.

Material Differences Caused by Variations in Quality Control

The final way in which a product can be materially different is if the unauthorized seller does not follow the brand owner’s quality control procedures. Brand owners are not required to adopt the most stringent quality control standards available in order to create material differences between products offered by authorized and unauthorized sellers.

All a brand owner needs to do is established legitimate, substantial, and non-pretextual quality control procedures, abide by them and, when necessary, be able to demonstrate that non-conforming sales will diminish the value of the brand owner’s trademark. Meaningful quality control procedures can include pre-sale inspections, product expiration dates and storage standards for the brand owner’s goods such as limits on temperature and humidity.

With these standards in place, products that are expired or improperly stored can be deemed materially different and infringing. But these standards must be legitimate. Imposing expiration dates on kitchen utensils or refrigeration requirements on bicycles would almost certainly be deemed illegitimate. On the other, quality control standards will likely be upheld if the brand owner can show that its product starts to degrade after its expiration date or deteriorates if improperly stored.

Halting Unauthorized Sales

If a brand owner wants to stop distribution leakage, it must proceed carefully. Incorrect allegations of infringement submitted to a retail platform can cause significant financial harm to the seller for which the brand owner can be liable.

Unauthorized Sales on the Amazon Marketplace

When Amazon receives a notice of trademark infringement for an item sold on the Amazon Marketplace, it will often immediately take down the listing for the accused product. However, if a brand owner subsequently withdraws its complaint with Amazon, it can take a significant amount of time for the unauthorized seller’s product listing to be restored, leading to a large number of lost sales for the Amazon Marketplace seller.

In my experience representing Amazon Marketplace sellers, brand owners frequently submit trademark infringement notices to Amazon without sufficiently investigating whether or not the product is infringing. I have seen brand owners get product listings on the Amazon Marketplace taken down even though the product was dropped shipped to consumers from the brand owner’s authorized distributor. In other words, the brand owner caused the sales of a genuine product to be halted.

One time, a brand owner’s trademark complaint led to Amazon taking down a listing for a genuine product-a vinyl covered dumbbell-just a few days after the product was first offered for sale on the Amazon Marketplace. Because the seller had yet to make a single sale of the product, the brand owner could not have conducted an investigation as to whether or not the product was genuine.

In these types of situations, the brand owner can be held to have violated state laws against unfair business practices-some of which provide for treble damages and the payment of the seller’s attorney fees, defamation and tortious interference with contract. To insulate themselves from potential liability, brand owners should always conduct a reasonable investigation before filing a notice of infringement with Amazon or any other retail platform. In most cases, the investigation should include purchasing and examining the accused product.

Using Cease and Desist Letters to Discover the Source

Another method of curtailing unauthorized distribution of products is by sending a cease and desist letter to the unauthorized distributor. When dealing directly with the distributor, the brand owner’s goal should not be limited to having the seller stop selling the brand owner’s product. Just as important is discovering the unauthorized distributor’s source of the product. With that information, the brand owner can potentially staunch a much larger flow of unauthorized sales, particularly if the source is the brand owner’s authorized distributor. Without uncovering the source and plugging it, stopping unauthorized sales of branded goods can become a game of whack-a-mole.

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