Alleging that unauthorized reseller sells old product defeats first sale defense

Unite Eurotherapy, Inc. v. Walgreen Co., Case No.:
16-cv-01706, 2017 WL 513008 (S.D. Cal. Feb. 7, 2017)
Unite sells boutique hair care products through authorized
resellers and its own website. Unite alleged distribution agreements with all
of its resellers, allowing those resellers to make sales only through limited
channels and prohibiting those resellers from selling its products through
online or internet channels. Since about August 2010, its distribution
agreements contained an Anti-Diversion Agreement prohibiting resellers from
selling “Product to persons or entities purchasing Product in bulk” or to “any
diverter or redistributors of products or to any other person or entity
reasonably believed to be purchasing Product for subsequent sale,” as well as
related provisions. 
Unite sent defendants C&D letters informing them of
these agreements and that its online sales of Unite were unauthorized.
Defendants continued to sell the products on, allegedly resulting
in the loss of two accounts and numerous other existing clients threatening to
drop the brand.

The court found that intentional interference with contractual relations was
properly alleged, even though Unite didn’t identify the specific third parties
who’d been induced to violate their agreements, because it sufficiently alleged
that all its distributors were bound and that Walgreen knew that because Unite
told it.
Unfair competition/trademark infringement: Defendants
pointed out that the first sale doctrine exists.  But there’s a quality control exception: “Where
the distribution of a product that does not meet the trademark holder’s quality
control standards results in the devaluation of the mark by tarnishing its
image,” the non-conforming product is deemed not genuine and infringing. The
question is “whether the public is likely to be confused as a result of the
lack of quality control,” because of a hard-to-detect defect in the product.
Unite’s first theory, that consumers would likely be
confused into believing that the sales were authorized by Unite, was barred by
the first sale doctrine.  But Unite also
alleged likely deception about the quality of the product, “because the
unauthorized sales are dumping old product of degraded quality into the
marketplace.” Thus, the quality control exception applied.  Comment: How can this be sensible?  Unless Unite reclaims old, unsold product—which
allegations the court didn’t mention—then authorized products can be just as
old. The allegations the court mentioned were that Unite engages in extensive
product testing (pre-sale), and that it carefully chooses salon sellers to keep
the products off of others’ online sites, because online retail sites tend to “
‘dump’ products that have been sitting on shelves or in warehouses for too long
and therefore of lesser quality.”  But
all products age; I don’t see how these allegations survive the
first sale doctrine.

from Blogger

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