Articles / Trademark Owners Often Can Refute the First-Sale Doctrine by Donald M. Gindy

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Alteration Issue
Trademark Owners Often Can Refute the First-Sale Doctrine
By Donald M. Gindy
Originally published in the Los Angeles Daily Journal, Thursday, January 31, 2002.
Trademark owners strive to retain customer loyalty by producing dependable, well-made products. Consumers who purchase an item containing a familiar mark expect that the goods will be of uniform and of consistent quality. The owner can bring a civil action against a competing product that deceives or confuses the public about the trademarked goods. But deception and confusion is not limited to competitors. It may also occur when the goods are re-sold.
Generally, a purchaser may resell items without fear of an action for infringement. This is called the "exhaustion" or "first sale" doctrine. It was first announced in Bobbs- Merrill v. Straus, 210 U.S. 339 (1908). There, the court recognized that once the sale has taken place, there is no need for the copyright holder to direct it any longer. The owner has been fairly compensated and should not be able to impede further commerce in his work. The purchaser should be able to enjoy the fruits of his purchase.
Eventually, this principle was enacted into law at 17 U.S.C. Section 109(a).
The same principle has found a home in trademark law. NEC Electronics v. CAL Circuit Abco, 810 F .2d 1506 (9th Cir. 1987). There is little likelihood that the first purchaser of the goods will be deceived as he engages in an authorized sale of the goods from the trademark owner.
Nonetheless, if in the act of reselling the goods, the reseller alters or modifies the product to such an extent that a "material difference" exists, then the trademark owner may refute the first-sale doctrine and bring an action to protect his mark. In such a case, he would rely upon 15 U.S.C. Section 1114.
What is a "material difference"? The courts generally have interpreted it to mean "one that consumers consider relevant to a decision about whether to purchase a product." Nestle S.A. v. Casa Helvetia Inc., 982 F .2d 633 (1st Cir. 1992).
Intuitively, we know that nearly everything is relevant to the purchasing decision. The type and color of packaging, the price, the place and time that the product is offered for sale or the way product works for the typical consumer are just some of the decisions that come into play. Iberia Foods Gorp. v. Romeo, 150 F .3d 298 (3rd Cir. 1998). Thus, the threshold for material differences is kept quite low in order to encompass all kinds of consumer decisions. Nestle. Because it is so low, virtually anything can negate the first-sale doctrine.
In Martin's Herend Imports Inc. v. Diamond & Gem Trading USA Go., 112 F.3d 1296 (5th Cir.1997), the unauthorized sale of porcelain figures was found to be a material difference when the defendant's transactions affected the sales plan of the trademark holder and the value that he was attempting to create in conjunction with his exclusive distributor.
In Nestle, the court concluded that Italian chocolates trumped Venezuelan chocolates, although both contained a genuine trademark from Perugina. Differences in composition, packaging, price and the conditions under which the chocolates were transported and stored were held to be material differences.
The 11 th U.S. Circuit Court of Appeals in Davidoff & Cie S.A. v. PLD International Gorp., 00-14368 (11th Cir. Aug. 28, 2001), concluded that the maker of fragrance products called "Cool Water", for which it had a registered trademark, had a right to bring an action for infringement when PLD obliterated a batch code on the bottle with an etching tool.
A batch code is used in the printing of information such as "sell by" dates, serial numbers and other codes on products. The content of the bottle, the fragrance, was untouched by the process. Nonetheless, the court held that PLD's conduct of reselling genuine "Cool Water" with the code removed might cause a consumer to reasonably conclude that the bottle had been "harmed or tampered with."
Until this case, the 11th Circuit had not confronted the issue of a material difference as an exception to the first- sale doctrine. Numerous other federal courts had already heard and disposed of like cases. Original Appalachian Artworks v. Granada Electronics Inc., 816 F.2d 68 (2nd Cir. 1987); Nestle; Warner-Lambert Co. v. Northside Dev't Co., 86 F .3d 3 (2nd Cir. 1996); Shell Oil Co. v. Commercial Petroleum Inc., 928 F .2d 104 (4th Cir. 1991 ); Martin's Herend Imports.
In Enesco Corp. v. Price/Costco Inc., 146 F.3d 1083 (9th Cir. 1998), the court determined that the repackaging by Costco of the plaintiffs fragile porcelain figurines called "Precious Moments", which name was protected by a registered trademark, would cause a likelihood of confusion. The failure of the defendants to give as much care to the items as the manufacturer had harmed the good will that Enesco had painfully developed.
Enesco had gone to great lengths to sell only to selected merchants, who would provide a special space for the figurines, and Price!Costco was not among the selected. Thus, when the porcelain was purchased in a damaged state, it was only natural that consumers blame Enesco. The court was faced with deciding whether the repackaged, but less secure, wrapping constituted a "material difference" effecting quality control. The tribunal struck a compromise. The court held that adequately informing the public of repackaging negated any suggestion that Enesco was responsible. Thus, Enesco's reputation for quality porcelain figures and good will would remain intact. In this way, the public would not be not misled, and there would be no likelihood of confusion.
The court held that Costco could continue to sell the items with these additional responsibilities. This practical, middle-ground resolution was the result of the Coty exception to the "quality control" concept, which derives from Prestonettes Inc. v. Coty, 264 U.S. 359 (1924).
What remains of the first-sale doctrine? Once sold, the holder of the mark can no longer restrict further transfers of the goods or of commerce generally. But when circumstances dictate that protection of the good will developed by the mark is in jeopardy, the owner may choose to intervene. The test for "material difference" is exceedingly low. Nearly any act by a reseller may invite litigation.
A recent decision of the Central District of California again sheds light on the extent to which courts are willing to go to protect goods from material differences. Judge Dean Pregerson concluded, in an application for a preliminary injunction, that the "unbundling" of a suite of software might constitute an act that effected the good will of Adobe Systems.
In Softman Products Go. v. Adobe Systems Inc., 00- 04161 (C.D. Cal. act. 22, 2001), Adobe sought to prevent its opponent from the unauthorized sale of its products. Softman was purchasing goods and breaking apart Adobe "Collections," which included such well-known names as Photoshop, Illustrator, Pagemaker and Acrobat. Softman then re-shrinkwrapped and resold the software individually.
Adobe asserted that in unbundling the collections of software, Softman was trading upon Adobe's trademark in "a manner calculated to mislead and to deceive consumers concerning the affiliation, connection, or association of Softman with the true owner of the Adobe trademarks."
Adobe alleged that the absence of a registration card for the software was crucial. When unbundling took place, the card would be omitted. If purchasers were in need of customer service or technical assistance, their ability to gain such help was imperiled. Consumers would be confused, because it is customary in the industry to provide such help. The fallout from a lack of help would focus on Adobe.
Pregerson examined the issue of a material difference affecting the good will of the Adobe trademark. At this stage of the proceedings, when a party is seeking injunctive relief, it is not necessary to show actual confusion in order to establish a likelihood of confusion. He pointed out that a product that has been rendered materially different should not be considered "genuine." Such a designation is tantamount to infringement. "In such a case, when the altered products bear Adobe's name and are in fact actual Adobe-manufactured software, the Court concludes that these end-products, re-shrinkwrapped by Softman, could create customer confusion and could infringe Adobe's trademarks."
It seems fair to conclude that the first-sale doctrine, as applied to trademark infringement, is in tatters. Courts across the country have lowered the bar to such an extent than nearly anything will re-introduce the trademark owner into the stream of commerce. Since the owner "has spent time, energy and money in presenting a product to the public and building a reputation for that product" (Mishawaka Rubber v. SS Kresge Go., 316 U.S. 203 (1942)), it seems only logical that the holder of the mark should be able to prevent its ruin.
Donald M. Gindy, PLC • 10350 Santa Monica Blvd, Suite 120 • Los Angeles, California • 90025
© Copyright 2002 Donald M. Gindy, PLC

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