90 USPQ2d 1228 (10th Cir. Apr. 9, 2009)
The Tenth Circuit Court of Appeals held that the first–sale doctrine is not an available defense for a reseller against an infringement claim where (1) the goods offered by the reseller differ materially from those sold by the trademark owner by nature of their warranty, and (2) these differences are not sufficiently disclosed. The reseller’s explicit online statement that the manufacturer will not honor the warranty for products sold on eBay was considered insufficient to alleviate consumer confusion.
Plaintiff-Appellee Beltronics USA Inc. (“Beltronics”) is a provider of aftermarket vehicle electronics, including radar detectors. Beltronics offers and provides certain products and services for its radar detectors, including software upgrades, rebates, service assistance, warranties, and recalls, to purchasers whose products bear an original Beltronics serial number. Beltronics sells its radar detectors to a limited number of authorized distributors who, in turn, agree to sell them for a set minimum price.
In violation of their agreements with Beltronics, two distributors sold Beltronics radar detectors to the Defendant-Appellant Midwest Inventory Distribution LLC (“Midwest”), who, in turn, resold them as “new” on eBay. To conceal their source, Midwest and/or the distributors obliterated or “replaced” the Beltronics serial numbers on each item. In its eBay listings, Midwest included an explicit statement that the manufacturer would not honor its warranty for items offered on eBay. Because the items did not bear original Beltronics serial numbers, Beltronics denied warranty services to owners of radar detectors purchased from Midwest on eBay.
Following complaints from numerous Midwest purchasers, Beltronics filed suit claiming federal and state trademark infringement and other violations of federal and state law. The District Court of Kansas granted a preliminary injunction in Beltronics’s favor enjoining Midwest’s sales of any Beltronics products not bearing an original serial number. Midwest appealed the order to the Tenth Circuit.
In its appeal, Midwest challenged the district court’s finding that Beltronics had a substantial likelihood of success on the merits of its trademark–infringement claim on two grounds. First, Midwest claimed that its sale of the Beltronics products was protected by the first–sale doctrine because it was selling genuine Beltronics merchandise. While acknowledging that the first–sale doctrine is not applicable when the trademarked goods sold are materially different from those sold by the trademark owner, Midwest argued that material differences are limited to differences in physical quality or control procedures and that mere differences in warranties and other services collateral to a product’s physical quality could not, by law, be “material.” Midwest also challenged the district court’s holding that Midwest’s disclosure to its customers was insufficient to alleviate confusion.
The Tenth Circuit first turned its attention to the issue of “materiality.” The appeals court expressly rejected Midwest’s attempt to restrict the evaluation of materiality solely to differences in physical quality or control procedures, noting that product differences are material “if consumers consider them relevant to their decision whether to buy the product.” The court noted with approval decisions from the Federal Circuit and First Circuit holding that differences in nonphysical characteristics such as warranties or service commitments may be material because they can mislead the consumer and damage the owner’s goodwill. In the absence of any contradicting decisions on this point, the appeals court found no error in the district court’s finding of materiality.
The appeals court also rejected Midwest’s claim that the district court had improperly shifted the burden of proof to Midwest to demonstrate the effectiveness of its disclosure rather than placing the burden on Beltronics to demonstrate the ineffectiveness of the disclosure. The appeals court found that the district court properly assigned the parties’ respective burdens in its evaluation of the evidence.
In its response to Beltronics’s evidence of alleged actual confusion, Midwest argued that the consumers that contacted Beltronics could have either failed to read its warranty disclosure or, alternatively, tried to game the system by obtaining warranty coverage despite knowing it was disallowed. Accordingly, Midwest argued that the fact that a few customers contacted Beltronics was insufficient to support the conclusion that its disclaimers were inadequate as a matter of law. The appeals court disagreed, finding that the warranty inquiries received by Beltronics were sufficient to call into question whether Midwest’s disclaimer was adequate to ameliorate any confusion. The appellate court also rejected Midwest’s contention that the instances of actual confusion proffered by Beltronic were de minimus and inadequate to sustain Beltronics’s burden of establishing a likelihood of confusion. The court pointed to the relevant case law holding that a showing of more than isolated instances of actual confusion is only required if either the products are not physically similar or not used for similar purposes, or, alternatively, the defendant has presented substantial evidence demonstrating no significant actual confusion. Given the identity of the products and the absence of any evidence that consumers were not confused, the appeals court found Midwest’s argument unpersuasive.
This decision confirms that differences in warranties, product and service assistance, product–use information, and software upgrades, rebates, and recalls can be considered “material” so as to preclude application of the first–sale doctrine.