Sam’s Club exposed to disgorgement for potential warranty differences in grey goods it sold

Monahan Prods. LLC v.
Sam’s East, Inc., 2020 WL 2561255, No. 18-11561-FDS (D. Mass. May 20, 2020)
Plaintiff makes
UPPAbaby strollers. Sam’s is a chain of membership-only retail warehouse stores
and, despite not being an authorized retailer, it sold actual UPPAbaby
strollers, and it can’t get out of a trademark infringement claim because
basically anything can be a material difference.
Although UPPAbaby
characterized the strollers as “gray market” goods—intended for distribution
and sale in foreign countries—they were physically identical. But UPPAbaby
argued that there were three post-manufacture differences that would consumer
confusion and injure its brand. “First, it contends that it maintains strict
quality control in its domestic distribution chain, while Sam’s Club does not.
Second, it contends that only its authorized retailers provide appropriate
customer support, and that Sam’s Club is not such a retailer. Third, the
warranty protection provided by UPPAbaby does not apply if the product is sold
by an unauthorized retailer such as Sam’s Club.” (Amazon is an authorized
retailer, if you thought that there might actually be customized support
services involved.)
Cross-motions for
summary judgment were mostly denied. Europeans think of the US as more
freewheeling than the EU on trademark, but I really have to wonder if that’s
true for first sale given the costs of litigating issues like this when the
products are physically identical.
Despite being sold
by Amazon, one of the company’s founders testified that the UPPAbaby “brand and
[its] products have a reputation and an assumption by a consumer of certain
quality and services”—a reputation that she said could be harmed if the
strollers were sold by unauthorized retailers who lack “the same level of knowledge
and service” as authorized retailers or who sell the strollers at lower prices.
The parties disputed
whether the strollers were unpacked or re-packaged by Sam’s Club along the way,
by which UPPAbaby apparently includes the allegation that Sam’s employees may
have removed them from their original shipping pallets and put them on
different pallets; Sam’s disputes that there was any re-packaging.
Unlike authorized
retailers, Sam’s Club does not provide replacement parts or repair services for
UPPAbaby strollers. Sam’s Club employees are not specially trained on how to
sell or service the strollers. Under the terms of the warranty, strollers sold
by Sam’s were not covered, though on several occasions, UPPAbaby allowed
customers who said they had bought a stroller at Sam’s Club to register for the
warranty, and Sam’s also argued that UPPAbaby’s warranty limitation was illegal
under NY law.
Sam’s Club offered
its own warranty on the strollers—a “100% Merchandise Satisfaction Guarantee” promoiing
that “[i]f the quality and performance of member’s purchases don’t meet their
expectations, [Sam’s Club will] replace it or give them a refund in most
cases.” For some time, the Sam’s Club website represented that the strollers
were covered by a “6 month manufacturer warranty,” but Sam’s removed the
reference after the complaint was filed and replaced it with its own “100%
Merchandise Satisfaction Guarantee.”
First sale does not
bar trademark enforcement when “genuine, but unauthorized, imports” “differ
materially from authentic goods authorized for sale in the domestic market.”
Sam’s argued that
these weren’t even gray market goods, given that they came into the US with
UPPAbaby’s consent and then were dispatched to Sam’s, some allegedly by round
trip to Canada; at least some of the strollers never left the country. UPPAbaby
argued that nonetheless, they weren’t authorized to be sold in the US. The
court found that UPPAbaby’s definition—a grey-market good is one unauthorized
for sale in the United States, whether or not it was originally imported with
the consent of the trademark holder—was better supported by the case law.
So the remaining
question was whether there were material differences between the strollers sold
by Sam’s and the authorized versions. The “threshold of materiality” is “always
quite low” in gray-market goods cases and covers “any difference between the
registrant’s product and the allegedly infringing gray good that consumers
would likely consider to be relevant when purchasing a product.” If a material
difference does exist, it “creates a presumption of consumer confusion as a
matter of law.”
While the existence
of differences is a factual question, materiality may be a matter of law. Quality
control: The case law says (interestingly without any particular evidence, as
compared to what may be required in a false advertising case) that “[d]ifferences
in quality control methods, although not always obvious to the naked eye, are
nonetheless important to the consumer” and that “substantial variance in
quality control” constitutes a material difference.
Here, the
quality-control procedures at issue didn’t involve the actual manufacture of
the product. UPPAbaby argued that it ensures that the strollers “reach the
customer with as few supply chain steps as possible and maintain[s] close
quality control at all steps in its distribution.” Sam’s contends that there
was no evidence that this affected the strollers. Such evidence isn’t strictly
necessary because quality control measures “may create subtle differences in
quality,” but “‘quality control’ is not a talisman the mere utterance of which
entitles the trademark owner to judgment.” There was a factual dispute: “on one
occasion, Sam’s Club shipped a stroller to a customer that was different from
what it had advertised,” and it was possible that this was caused by different inventory
tracking procedures. [How this could affect the reputation of the manufacturer is
left as an exercise for the reader.] And “due to supply chain differences, the
strollers sold by Sam’s Club were likely to have been shipped several more
times than those sold by authorized UPPAbaby retailers,” though there was no
evidence that Sam’s shipping precautions were any different from those taken by
UPPAbaby or its authorized retailers, especially Amazon. Other than number of
shipping instances (which might not differ for Amazon), UPPAbaby didn’t show
what specific actual quality-control procedures it observed, or how they
differed from those used by Sam’s Club or its suppliers. “On this record, a
jury could reasonably conclude either that there are important differences
between UPPAbaby’s and Sam’s Club’s quality-control procedures or that there
are no (or only trivial) differences.”
Customer support: “The
question here is whether the advice and information that is available for
UPPAbaby strollers sold by Sam’s Club differs materially from what is available
for strollers sold by UPPAbaby’s authorized retailers.” It wasn’t clear that
there were any differences; Sam’s customers seemed to have the same access to
the UPPAbaby support team as anyone else, and there was evidence that those
customers called and received help from UPPAbaby’s customer-support team on
several occasions.
UPPAbaby argued that
only its authorized retailers had invested the time and money to train their
employees on how to display its strollers properly, recommend a suitable model
for each customer, and answer maintenance questions. There was some evidence that
Sam’s Club’s customer-support staff was less than fully informed about
UPPAbaby’s strollers. “On one occasion, a member of its customer-support staff
called UPPAbaby’s own support hotline to ask about a stroller.” But it wasn’t clear
that authorized retailers were substantially different, only “broad statements”
by UPPAbaby’s employees. Given that UPPAbaby sold through Amazon, the court was
dubious “whether Amazon trains its employees on how to display UPPAbaby
strollers properly and recommend suitable models to customers, or how it would
even go about doing so.” Still, this created a factual dispute. [Sometimes I
imagine false advertising claims being treated with this level of deference.
Sometimes I don’t.]
Warranty
differences: It was unclear whether a difference in warranty protection,
standing alone, could be material in the absence of functional product
differences. The court rejected Sam’s argument that UPPAbaby’s voluntary
extension of its warranty to some Sam’s purchases made this putative difference
arbitrary and immaterial. Though UPPAbaby did seem to have done this, “[i]t
would frustrate the purpose of federal trademark law to require UPPAbaby to
refuse warranty protection, risking further harm to its goodwill, in order to
preserve its trademark claims.” [How this is material to consumers if
the warranty is honored is again left as an exercise for the reader.] Anyway,
UPPAbaby doesn’t always honor the warranty for Sam’s purchases. Nor does state
law requiring warranty coverage to be extended change things. New York law, for
example, prohibits manufacturers from limiting warranty coverage “solely for
the reason that such merchandise is sold by a particular dealer or dealers.” But
there was no evidence UPPAbaby ever complied, and its violation of NY law (if
violation there be) was a different issue. [Again, how this could be material
to NY customers, at least, is not clear.]
Sam’s argued that
the difference in warranties was not material because its own “100% Merchandise
Satisfaction Guarantee” was superior. But the question was whether the products
it sold were materially different, not whether they were inferior. “Thus, even
a product covered by a more generous warranty may still be materially different
if that warranty is substantially unlike the one that applies to authorized
versions.” Again, whether the differences were material were not clear on this
record. On paper, the differences would likely to matter, since UPPAbaby’s
warranty allows for repairs and replacement parts for a broken stroller, but
not an entirely new stroller or a refund, while Sam’s is vice versa. However,
that difference might be only theoretical; UPPAbaby apparently never actually
repaired a stroller under its manufacturer’s warranty. “Its own employee
admitted that the warranty primarily serves as “marketing,” rather than to
provide real product support.” And UPPAbaby’s implementation of its warranty
also apparently does allow refunds.  
The court noted that
the fact that several Sam’s customers apparently contacted UPPAbaby to ask
whether their strollers were covered by the manufacturer’s warranty. While that
tended to show confusion about which warranty applied, it didn’t show that
there were ultimately real differences in those warranties that would have
mattered to them.
“[O]n this record
jurors could reasonably disagree as to whether any of the alleged product
differences meaningfully exist in a way that would likely be relevant to
consumers.”
Sam’s moved for
partial summary judgment on whether UPPAbaby could get money damages. Under First
Circuit rules:
(1) a plaintiff seeking damages must prove actual harm, such as the
diversion of sales to the defendant;
(2) a plaintiff seeking an accounting of defendant’s profits must show
that the products directly compete, such that defendant’s profits would have
gone to plaintiff if there was no violation;
(3) the general rule of direct competition is loosened if the defendant
acted fraudulently or palmed off inferior goods, such that actual harm is
presumed; and
(4) where defendant’s inequitable conduct warrants bypassing the usual
rule of actual harm, damages may be assessed on an unjust enrichment or
deterrence theory.
UPPAbaby sought: (1)
the costs of future corrective advertising; (2) compensation for extra
personnel expenses incurred; and (3) the disgorgement of Sam’s Club’s profits.
UPPAbaby hadn’t done
any corrective advertising; courts occasionally award prospective corrective advertising
costs, but with reservations, given the “substantial potential for inaccuracy.”
Such awards are appropriate “only if it compensates the injured party for
identifiable harm to its reputation.”
There was some evidence
of identifiable harm to UPPAbaby’s brand in the record because some Sam’s customers
called the UPPAbaby support hotline or communicated online, unsure about
whether their strollers were under warranty. Another customer called to report
that Sam’s Club had advertised a different model year stroller than what it had
for sale, possibly due to quality-control differences, and that he or she felt
“confused” and deceived. “Any harm to UPPAbaby’s brand caused by this consumer
confusion is compensable, and therefore, at least in theory, it could recover
the costs of a corrective advertising campaign that would effectively repair
that harm.” [I really don’t understand the harm story here. How is harm done to
the “brand”? Ok.]
Still, Sam’s got
summary judgment on this, because UPPAbaby’s marketing expert based his corrective
advertising cost estimate at least in part on the fact that Sam’s sold the
strollers cheaply. “But even if such harm occurred, sales at discounted prices
do not violate the Lanham Act. … [A]ny harm to UPPAbaby’s brand caused simply
by discount sales is not recoverable.” Indeed, the court noted in a footnote—something
that bears on the discussion above—“[E]ven if Sam’s Club’s versions had
unavoidable material differences—for example, because they were not covered by
the manufacturer’s warranty—Sam’s Club could still legally sell them if it
effectively disclaimed those differences.” Nor did UPPAbaby show that its
proposed remedy would actually redress harm to its brand. The expert proposed “an
unspecified message—either by mail or by digital advertising—to as many
consumers who may have seen Sam’s Club’s advertising as is possible. He did not
identify the contents or layout of that message, let alone explain how it would
remedy the consumer confusion arising from any material differences in the
strollers sold by Sam’s Club.” Without that, UPPAbaby was just seeking a free
ad campaign, which was not an ok way to measure damages.
Damages for personnel
expenses: UPPAbaby sought compensation for the time spent by its employees
investigating the sale of its strollers by Sam’s Club and addressing related
complaints by customers and retailers. Sure, “additional personnel expenses
arising from unauthorized sales in violation of the statute are recoverable as
a general matter.” But “[o]ne obvious issue is that most, if not all, of those
employees were salaried, so the company would have paid them regardless, and
therefore it has not suffered any incremental out-of-pocket losses.” Still, it
was theoretically possible to prove lost opportunity costs; had UPPAbaby provided
sufficient factual evidence to create a factual issue as to whether there was a
reasonable likelihood of actual harm to the company? Some of UPPAbaby’s
employees who worked on this issue may have been compensated on an hourly basis,
so their efforts might be compensable, and even for the salaried employees, “using
the number of hours those employees spent on remedial efforts is not an
unreasonable approximation” of lost opportunities, given that wrongdoers bear
the risk that the harm they do will be hard to quantify. So no summary judgment
on this kind of damages.
Disgorgement: Romag
doesn’t matter much here because the First Circuit already allowed disgorgement:
“(1) as a rough measure of the harm to plaintiff; (2) to avoid unjust
enrichment of the defendant; or (3) if necessary to protect the plaintiff by
deterring a willful infringer from further infringement.” To recover under (1),
a plaintiff must prove both actual harm and direct competition. But the parties
weren’t direct competitors, because Sam’s is a retailer selling directly to
consumers and UPPAbaby is manufacturer that doesn’t (also, UPPAbaby also got
paid for these strollers!). True, consumers might instead have bought from an
authorized distributor, but that wasn’t the same thing as direct competition,
and it thus wasn’t inherently plausible that “defendant’s profits may be
presumptively similar to what plaintiff would have earned on the sale.”
Fraud or willfulness
could still justify disgorgement even without direct competition. A jury could
reasonably conclude that Sam’s Club acted willfully or in bad faith. “Its
supplier informed it in writing that the UPPAbaby warranty would not apply to
the strollers if sold in the United States.” But Sam’s nonetheless allegedly
put the strollers on the website as having a manufacturer’s warning. “A jury
could reasonably conclude either that it was a mistake, or that it was done
willfully and with the intent to mislead consumers.”
However, Mass. Gen.
Laws ch. 93A claims failed because the statute expressly provides that no
action may be brought under the statute unless the complained-of conduct
occurred “primarily and substantially within the Commonwealth.” The critical
inquiry is “whether the center of gravity of the circumstances that give rise
to the claim is primarily and substantially within the Commonwealth.” It was undisputed
that the actionable conduct was not centered in Massachusetts, but was
throughout the US. It didn’t matter that UPPAbaby’s strollers are stored in its
warehouse in Massachusetts and sold by several authorized retailers in
Massachusetts, because that wasn’t the relevant conduct. A place of injury
within Massachusetts is not a sufficient basis for finding that conduct
occurred “primarily and substantially” within the Commonwealth.

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