Costco is defending a trademark infringement lawsuit over its sale of Anne Cole swimwear, an iconic line of women’s swimwear that has been sold in the US for over 30 years. The suit will likely turn on the scope of the “first sale” doctrine—which shields resellers of genuine trademarked products from liability for trademark infringement—and whether the manner in which Costco displays the products is likely to mislead consumers as to their source.

In the complaint, filed in federal court in New Jersey, Plaintiff In Mocean, LLC alleges that Costco has purchased Anne Cole-branded bathing suits from an unknown source and is selling them without authorization at Costco stores in a “sloppy” and “degrading” manner, in violation of Plaintiff’s rights in its federally registered ANNE COLE trademarks. Plaintiff has asserted claims against Costco for trademark infringement and unfair competition under federal and state law and is seeking damages and injunctive relief, including a list of Costco’s suppliers of ANNE COLE products, which Costco has refused to disclose.

Costco is seeking dismissal of the suit on the ground that Plaintiff’s claims are barred by the first sale doctrine. Costco asserts that mere resale of genuine goods does not give rise to an actionable claim for trademark infringement and that Plaintiff has not disputed that the products at issue are genuine. Costco argues that the manner and environment in which the ANNE COLE products are sold does not materially alter their quality or appearance, and thus, consumers are unlikely to be misled as to the products’ source. Costco further argues that Plaintiff’s subjective characterization of the products’ display as “sloppy” and “degrading” is belied by the Plaintiff’s own exhibits, which show the ANNE COLE bathing suits organized neatly by color and size. Furthermore, Costco argues, allowing trademark holders to impose onerous requirements on downstream sellers’ display of branded goods would circumvent the first sale doctrine and effectively prevent some retailers, such as online retailers, from selling genuine downmarket goods altogether.

Notably, Plaintiff here has not alleged that it has a licensing structure in place restricting resale of ANNE COLE goods, and that Costco was on notice of such restrictions at the time it purchased the goods from its suppliers. These types of allegations have exposed Costco to tortious interference claims in other, similar cases. Had such facts been alleged here, this may have been a more complicated case.

Key to the court’s resolution of Costco’s motion is whether the manner and environment of the goods’ display so materially alters their quality as to be misleading. How courts interpret the scope of first sale doctrine has significant implications for trademark holders seeking to protect their brand from unauthorized resale by downstream sellers. In addition, this case highlights the critical importance of brand owners having in place a global strategy for dealing with gray market goods.