"Material Differences" Outside the Gray Market Context
, Kilaru, Naresh
Authored by Naresh Kilaru and Mark Sommers
Most often, the issue of "material differences" in trademark infringement cases arises in the context of gray market goods, when the question is whether unauthorized imports are materially different from the product sold by the authorized U.S. distributor or owner. In Beltronics USA, Inc. v. Midwest Inventory Distribution [562 F.3d 1067 (10th Cir. 2009)], the U.S. Court of Appeals for the Tenth Circuit confirmed this principle is not limited to the gray market context, but applies whenever goods are resold outside the trademark owner's intended chain of distribution (i.e., on an eBay Web site).
BackgroundPlaintiff Beltronics USA distributed its BELTRONICS radar detectors and other aftermarket vehicle electronics to authorized distributors who resold them for a specified minimum retail price. In apparent violation of their distribution agreements, two distributors resold Beltronics' radar detectors to eBay merchant Midwest who offered the products at lower prices through the Internet auction site. To prevent Beltronics from discovering their activities, the distributors replaced or removed the original Beltronics serial numbers. It was Beltronics' policy that only radar detectors bearing an original serial number were eligible for warranty service and other benefits such as software upgrades, rebates, product use information, service assistance, and recalls.
When consumers who purchased their detectors on eBay contacted Beltronics expecting warranty service, Beltronics informed them their products were ineligible. Determining that such unauthorized sales were harming its reputation and goodwill, Beltronics filed suit against Midwest for trademark infringement and moved for a preliminary injunction. The district court granted Beltronics' motion, finding that Beltronics was likely to succeed on the merits of its trademark infringement claim. Specifically, it found that Midwest's lack of comparable warranty coverage and service commitments were sufficient to make the products it resold materially different and cause a likelihood of confusion.
Midwest appealed, claiming that (1) its activities were protected as a matter of law under the first-sale doctrine because the products it resold were physically identical to Beltronics' authorized products, and (2) there was no likelihood of confusion because Midwest sufficiently disclosed the difference in warranty coverage on its eBay auction page. The Tenth Circuit affirmed.
First Sale Doctrine and the "Material Differences" ExceptionUnder the first-sale doctrine, resellers of genuine goods are not liable for trademark infringement under the theory confusion cannot exist when consumers buy a genuine product. The first-sale doctrine does not apply, however, when the resold goods are "materially different" from the genuine article. Because materially different goods can generate consumer confusion about the source or quality of the product, their unauthorized resale can constitute trademark infringement.
To establish that material differences existed between its authorized products and the ones resold by Midwest, Beltronics pointed to the fact Midwest's detectors were not eligible for warranty service or other benefits (e.g., software upgrades, rebates, service assistance, and recalls). Midwest countered that material differences should be limited to differences in physical quality (or quality control procedures designed to ensure a product's physical quality).
Under well-settled law, differences are considered "material" if consumers would consider them relevant in their purchasing decisions. As many factors influence such considerations, the Tenth Circuit noted the threshold "must be kept low to include even subtle differences" [562 F.3d at 1073 (citation omitted)]. Applying this test, the Court expressly rejected Midwest's argument that material differences are limited to physical differences between products. Consistent with other federal circuit precedent, the Court held that differences in warranty protection and service commitments could be material. Here, as Beltronics presented evidence that consumers rely on its product and service assistance and that Midwest's simple replacement warranty does not provide the same level of service expected by consumers, the Court held the district court did not err in finding that material differences existed.
As a matter of policy, Midwest argued that such a broad interpretation of material differences could allow trademark owners to improperly restrict distribution and fix prices simply by limiting warranty coverage and service commitments to "authorized" products sold through select distributors. In response, the court reiterated that the core purpose of the material differences test is to assist courts in determining whether the unauthorized product is likely to cause confusion. It held that so long as resellers of unauthorized products take the necessary steps to alleviate any resulting confusion (i.e., by sufficiently disclosing how the product differs from the genuine article), they are free to distribute those products without liability.
Sufficiency of Midwest's DisclosureMidwest also argued that it sufficiently disclosed the differences in warranty coverage on its eBay auction page to avoid any likelihood of confusion. Midwest displayed the following statement on its auction page: "We provide a 1 year defective replacement warranty. The manufacturer will not honor the warranty if purchased off eBay. Since we honor the warranty, the serial number has been removed and retained by us." The district court found this statement ineffective because some consumers still contacted Beltronics expecting warranty coverage and the statement did not disclose the other benefits that would be unavailable without an original serial number such as software upgrades, rebates, service assistance, and recalls.
As to the Midwest consumers who contacted Beltronics for warranty coverage, Midwest argued on appeal that the limited number of consumers complaints received by Beltronics simply indicated those consumers either did not read the disclosure or read the disclosure but tried to obtain warranty coverage from Beltronics anyway. The Court held that while Midwest's theory was plausible, so too was the district court's factual finding that Midwest's disclosure was ineffective. As such, the Court found no clear error justifying reversal.
ConclusionThe Tenth Circuit's decision follows the trend of U.S. cases recognizing that "material differences" are not limited to physical differences between products, but may extend to any number of intangible features, such as warranties and servicing. So long as consumers consider the difference relevant in their purchasing decisions, it may be material. The Tenth Circuit's decision also opens the door for trademark infringement suits against online merchants who resell a trademark owner's products without the same warranty and service assistance. If the merchant fails to adequately disclose those differences and a likelihood of confusion results, trademark owners may be able to enjoin such unauthorized resales.
Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.