January 19, 2016

Anti-Diversion Efforts vs. New York Warranty Law


Trademark law is one of the key tools for stopping unauthorized sellers. When an unauthorized seller offers products that are materially different than genuine products, it may infringe the company’s trademark. Many businesses have a warranty or guarantee that only apply to products bought through authorized channels. A product bought from an unauthorized seller does not include the guarantee. Thus, it is materially different.

Having a warranty or money-back guarantee helps promote customer satisfaction. A money-back guarantee, in particular, allows customers to buy products with confidence; unsatisfied customers can get a refund. This promotes a business’s good will and helps increase customer satisfaction in many ways.

For example, a company might learn about problems with a product if there are a lot of returns. Having a guarantee that only applies to authorized products is also a valuable tool in fighting product diversion.

However, there is a potential legal problem with having a warranty that only applies to authorized sales. This is evidenced by NY Gen. Bus. Law § 369-b, a New York statute that limits warranty disclaimers:

A warranty or guarantee of merchandise may not be limited by a manufacturer doing business in this state solely for the reason that such merchandise is sold by a particular dealer or dealers, or that the dealer who sold the merchandise at retail has, since the date of sale, either gone out of business or no longer sells such merchandise. Any attempt to limit the manufacturer's warranty or guarantee for the aforesaid reason is void.

There is not much case law interpreting this statute. But at least one court has held that the statute prohibits manufacturers from disclaiming warranties because the purchaser bought the product from an unauthorized seller. See, e.g., Bel Canto Design, Ltd. v. MSS HiFi, Inc., 837 F. Supp. 2d 208 (S.D.N.Y. 2011).

Another court disagreed with this interpretation, questioning whether § 369-b prohibited warranty exclusions from unauthorized sellers generally because the statute only “voids warranty disclaimers for products ‘sold by a particular dealer or dealers’” not unauthorized dealers in general. Worldhomecenter.com, Inc. v. KWC Am., Inc., No. 10 Civ. 7781 (NRB), 2011 U.S. Dist. LEXIS 104496, at *23 (S.D.N.Y. Sept. 15, 2011) (quoting N.Y. Gen. Bus. Law § 369-b).

Assuming the Bel Canto court is correct, a problem might arise with respect to a manufacturer’s sales to New York residents or its New York dealers’ sales to others. If the statute voids warranty disclaimers, then this could eliminate a key “material difference” from the genuine goods and undermine efforts to stop New York- based unauthorized sellers. Further, a company that does not honor the guarantee for New York sales by an unauthorized seller might be in violation of the statute.

The good news for brands is that consumers cannot sue for a violation of § 369-b. There is no private right of action. See Worldhomecenter.com, Inc. v. KWC Am., Inc., No. 10 Civ. 7781 (NRB), 2011 U.S. Dist. LEXIS 104496 (S.D.N.Y. Sept. 15, 2011) (confirming that there is no private right of action under § 369-b). Still, the New York Attorney General has the power to enforce the statute against violators.

A manufacturer that sells products in New York or has authorized sellers operating in New York should be aware of NY Gen. Bus. Law § 369-b. But the statute should not be a significant impediment to the overall enforcement of a business’s warranty policy. Rather, a manufacturer should work with its counsel to ensure that its policies and activities in New York comply with the law.