If your company manufactures durable consumer goods, there is a great likelihood those products will end up in E-Commerce. In fact, recent information published by the U.S. Department of Commerce reveals that at least 8.4% of all goods sold in the United States are sold via online retailers like Amazon or eBay. Wall Street analysts estimate that Amazon alone accounts for over 40% of E-Commerce sales in the United States. Importantly, however, Amazon is the true reseller of only around 17% of the products offered for sale on its website. In other words, approximately 83% of the products sold on the site are sold by third-party sellers utilizing Amazon’s retailer platform.
The Problem of Unauthorized Sellers
Third-party sellers are not, in and of themselves, a problem. Unauthorized third-party sellers, on the other hand, are a significant problem for U.S. manufacturers. Put simply, unauthorized sellers are any online resellers who obtained a company’s products through unauthorized means and intend to resell those products for a profit. In their most sinister form, unauthorized sellers purchase products using stolen credit cards and then resell them online for a 100% profit margin. On the more innocent end of the spectrum, unauthorized sellers may have obtained products from a company’s authorized distributors and then – due to quantity discounts received from the distributor – turn a profit through online sales.
Both cases become problematic when goods are sold online by unauthorized sellers who are selling below the manufacturer’s Minimum Advertised Pricing (“MAP”). Most durable goods manufacturers have MAP policies dictating the lowest price at which authorized sellers can sell their products. These policies are typically aimed at preserving brand value and consumer confidence and are taken very seriously by manufacturers. In fact, well-written distribution agreements allow a manufacturer to terminate its contractual relationships with authorized sellers if they discover those sellers are pricing products below MAP.
The illicit sales of products below MAP are a huge problem for manufacturers. First, lower prices have the potential of harming brand perception in the eyes of consumers. Additionally, sub-MAP pricing frustrates authorized sellers who are forced to follow MAP or lose distribution rights. At the same time, authorized sellers are competing at every turn with unauthorized sellers who – at least through traditional legal channels – cannot be restrained by the manufacturer.
The First Sale Doctrine
For many years, unauthorized sellers were nearly impossible to stop because the laws favored downstream sellers. Specifically, the “First Sale Doctrine” mandates that a manufacturer yield all control over a product to the first purchaser of that product. The doctrine was first recognized in a 1908 United States Supreme Court decision regarding copyright infringement. Nearly 70 years later, Congress codified the doctrine in the Copyright Act of 1976.
Later cases and statutes applied the doctrine in the trademark realm as well. In the context of trademark infringement cases, the First Sale Doctrine states that a trademark owner’s act of placing a product into the stream of commerce extinguishes that owner’s right to control who later buys, sells or uses that product.
The First Sale Doctrine quickly became the primary weapon in the unauthorized sellers’ arsenal. Without further analysis, it seems to be the perfect defense. So long as the manufacturer originally sold the product to someone, rogue sellers (as the current owners) are not subject to price controls or any other restrictions the manufacturer may want to impose on them. Luckily for manufacturers, the law is rarely that black and white.
The Material Difference Exception
To prevail in a trademark infringement action, the trademark owner must basically prove two things: (1) that it is, in fact, the owner of a valid trademark; and (2) that the unauthorized seller’s use of the trademarked product is likely to create confusion concerning the origin of the goods.
In cases involving unauthorized sellers – where the seller’s “product” is identical to that of the manufacturer – courts have held that consumers are likely to be confused when the products are “materially different.” This “material difference” standard is key to the development of an effective E-Enforcement strategy.
Differences are found to be “material” when they are likely to damage the goodwill or reputation of the brand developed by the trademark owner. Although it may seem counter-intuitive, the more attenuated the differences, the more likely consumers are to be confused.
For example, in the E-Commerce realm, courts have found material differences in things such as: (1) differing warranties or a lack of money-back guarantees offered by the alleged infringer; (2) a lesser standard of customer service than the trademark owner would provide; (3) differing quality control standards such as how the product is packed, shipped or stored; or (4) practices that would affect the safety of the product, such as expiration dates.
Well-Crafted Policies Can Preserve the Material Difference Argument
Manufacturers are encouraged to collaborate with their in-house or outside attorneys to craft policies and agreements aimed at enhancing the material difference argument. For example, discuss with counsel whether your company’s website should include an “authorized seller” page reciting some of the conditions of your company’s agreements with authorized distributors. Helpful conditions might include requirements that authorized sellers honor and maintain the manufacturer’s warranties and guarantees, adhere to standards for packing, shipping, selling or storing goods, and so forth.
Ironically, it is the policies a company enacts with authorized sellers that may make the difference in a trademark infringement case against unauthorized sellers. Again, it is important to carefully consult with attorneys in setting these policies and procedures.
Once you have the right policies in place, you may want to consider working with an E-Enforcement team that specializes in identifying and stopping E-Commerce abuse by unauthorized sellers, and traffic diverters. They have the ability to identify the unauthorized sellers, vial private seller databases they have developed combined with high-tech monitoring systems that can see a sellers every move. When combined with an graduated enforcement system, unauthorized sellers will find a company too difficult to deal with and eventually, they will move on to exploit another company’s products.
For more information, contact the E-Enforcement team at firstname.lastname@example.org, or call us at (800) 892-0450. You can follow us at e-enforceCIS@twitter.com, Ecommerce Enforcement Group On Linkedin and E-Enforce.com.