Unauthorized Sales: The ‘Material Difference’ Exception
One who purchases a trademarked good may ordinarily resell that product without infringing the trademark owner’s mark. This is what is referred to as the "First Sale Doctrine."
This principle--a common defense to trademark infringement claims--only applies to the resale of “genuine” goods. In other words, the First Sale Doctrine does not apply when a reseller sells a product that is materially different from the trademark owner authentic goods.
In other words, an unauthorized sale of a good can, in fact, give rise to liability for trademark infringement.
The Material Difference Exception
The First Sale Doctrine does not protect resellers who offer "trademarked goods that are materially different than those sold by the trademark holder" (emphasis added). Beltronics USA, Inc. v. Midwest Inventory Distrib., LLC, 562 F.3d 1067, 1072 (10th Cir. 2009) (quoting Davidoff & CIE, S.A. v. PLD Int'l Corp., 263 F.3d 1297, 1302 (11th Cir. 2001)). This is known as the "material difference exception".
There is no exact definition for material difference in this context, but for purposes of establishing potential trademark liability under the Lanham Act, courts have held that “any” difference between an authorized and unauthorized good that a consumer would consider to be relevant when purchasing the product can be material. Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc. 982 F.2d 633, 641 (1st Cir.1992).
The Fourth Circuit noted in the above case that a material difference can be “subtle” and “not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations.” Id. In other words, the threshold of materiality is low.
Further, a material difference does not even have to be physical. In other words, non-physical differences can constitute trademark infringement. For example, courts have found that differences in warranty protection, a money-back guarantee, warnings or safety labels, or certain post-sale services offered to consumers can distinguish unauthorized sales from authorized sales.
Of course, a physical material difference is more commonly seen and enforced. Common examples include differences in packaging or package shape, as well as alterations to packaging such as the scraping of UPC codes and batch codes. A more specific example is the difference in battery life between genuine and unauthorized batteries.
Utilizing material differences to combat product diversion, unauthorized sales
As stated above, a person that sells materially different (non-genuine) versions of another’s product likely has committed trademark infringement. Therefore, it is important that businesses establish certain policies, procedures and quality controls in order to withstand the risks and threats that resellers pose.
In other words, businesses should try to position themselves such that they have valid trademark claims against third parties. Businesses able to overcome the First Sale Doctrine can efficiently and effectively reduce existing and future product diversion and unauthorized online sales.
Some courts have held that products sold online are materially different if their warranties or service agreements do not extend to online sales. Thus, if businesses include warranties with their products that do not apply to products sold within authorized distribution channels (or if they use quality controls that cannot be replicated by unauthorized sellers, such as certain packaging or temperature controls, as described in a subsequent blog post), it will be difficult for someone to resell the products without committing trademark infringement.
Product diversion occurs in a number of forums, most commonly on third-party websites or marketplaces. Businesses can take various steps to get their products removed from these forums and take action against unauthorized sellers after the fact.
However, it helps if businesses take preventative measures upfront to help combat unauthorized sales and product diversion, which also helps on the back end in enforcing their policies and pursuing the resellers.
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