sunglasses reseller liable for (c) infringement, maybe TM/false advertising/tortious interference

Maui Jim, Inc. v. SmartBuy Guru Enters., No. 1:16 CV 9788,
— F.Supp.3d —-, 2020 WL 4435320 (N.D. Ill. Feb. 24, 2020)

Maui Jim alleged that the defendants sold non-genuine
Maui-Jim-branded sunglasses while using its copyrighted photographs to falsely
advertise that they are an authorized retailer. The defendants counterclaimed
that Maui Jim’s statements about their legitimacy constituted defamation or,
alternatively, unjust enrichment. The court partly granted and partly denied
cross-motions for summary judgment, because first sale is now so narrow a
defense that it is almost unavailable for non-used goods; MJ established
liability on its copyright claims outright but must go to a jury on
trademark/false advertising. Also, there are a troubling number of redactions here, including for facts that the court relies on in its holding; hard to see how this can properly inform the public of the legal basis for the decision.

Defendants sold a redacted number of non-prescription and
prescription pairs of Maui-Jim-branded sunglasses into the United States
between 2009 and 2019. The prescription sunglasses contained third-party
prescription lenses glazed into a Maui-Jim-branded frame. Maui Jim alleged that
its sunglasses incorporate patented technology to “wipe out glare and UV rays,
and boost[] color via lens treatments.” Its sunglasses have earned the Skin
Cancer Foundation’s Seal of Recommendation as an effective UV filter for the
eyes and surrounding skin. Maui Jim has registered trademarks, and registered
copyrights for the 93 professional photos at issue here, each issued within
five years of Maui Jim’s first publication. 

Maui Jim averred that it required all Maui Jim sunglasses be
sold with authentic Maui Jim lenses, frames, and parts, and not modified in any
manner. Defendants disputed this, noting that nothing in Maui Jim’s European
authorized retailer agreements stated that its warranty would be voided if an
authorized retailer sold Maui Jim sunglasses to third parties or if third-party
lenses were glazed into its frames, and claiming that Maui Jim authorized
retailers in the U.S. had glazed third-party lenses into Maui Jim’s frames
without consequence.

The parties disputed whether their warranties differed, and
whether Maui Jim’s warranty was an integral part of its product offering. Along
with some redacted information, Maui Jim’s representative indicated that
customers used Maui Jim’s repair department for, on average, three to four
non-Maui Jim prescription lenses per week between 2015 and 2018.

Defendants ship all their Maui-Jim-branded sunglasses sold
to the United States from Hong Kong, , and some number of shipments of
Maui-Jim-branded sunglasses contained a packaging slip that identified a
different party as the manufacturer, which defendants blamed on faulty computer
coding. Defendants
also admitted that they wrongly included a Maui Jim’s 2009 Drop Ball
Certification (a certification that lenses comply with certain regulatory
requirements) in a limited number of shipments to U.S. consumers. Defendants
additionally admitted to at least twenty examples of delayed shipments to its
purchasers of Maui-Jim-branded sunglasses, thirteen of which were delayed due
to FDA or customs issues.

Defendants’ webpage touts the supposed authenticity of
eyewear that it sells from “some of the world’s leading eyewear manufacturers” and
their “relationships with some of the world’s leading suppliers.” It oece
contained a diagram indicating that their supply chain is direct from the
manufacturer to the customer rather than the “traditional supply chain” that
routes from the manufacturer to an exporter to an importer to a wholesaler to a
shop and then to a customer. An accompanying sentence said: “By offering the
world’s largest range of authentic designer eyewear, sourced directly from the
world’s leading eywear [sic] suppliers, we are here to help you find what you
love.” Defendants argued that this “was accurate and consistent with
SmartBuyGlasses’ practice for the majority of its sales including
manufacturers/brands – such as [redacted] and [redacted] – from which it buys
genuine products from the manufacturer of the brands and ships it to its
consumers.”

MJ alleged that the FAQ falsely answered “Can I trust the
authenticity of the products?” with “All of our products have a 100%
Authenticity Guarantee, no exceptions. SmartBuyGlasses takes great lengths to
ensure the high quality and product authenticity that our customers have come
to expect, and all products are accompanied with official tags and manufacturer
warranties.”

Defendants’ website does say that “SmartBuyGlasses is not
affiliated with nor an official re-seller for Maui Jim ….” when consumers
select a MJ-branded frame, and it has small, grey type on the bottom of the
pages, stating that it is “a leading independent retailer of the world’s best
designer eyewear since 2006 and is not owned by or affiliated with the brands
it sells unless stated otherwise.” MJ, however, commissioned a survey that allegedly
found that 40.1% of respondents, net, took away the false impression that
SmartBuyGlasses is an authorized MJ retailer. Also, the MJ-specific language,
which goes on to say “therefore we provide our own comprehensive 24 month
warranty, as Maui Jim do not support their own 24 month warranty with us,” was
added after litigation began. The parties also disputed whether defendants’
website adequately informed consumers that they were purchasing third-party
prescription lenses rather than MJ lenses.

MJ also argued that the website falsely suggested that defendants
had an “operation centre” in New York. Although defendants don’t have physical
location or physical office in New York, they do have an “operational dropship
location in New York.”  [Query how MJ
plans to show this misrepresentation, if it is one, harmed them.]

Authenticity: There was a material dispute over the
authenticity of (some of) the MJ branded sunglasses based on MJ’s claim that it
hadn’t sold enough pairs to the third parties from whom defendants bought to
make up their supply, though MJ apparently wasn’t able to determine from test
purchases that there were any counterfeits or stolen products.  Since the burden was on defendants to show
that first sale applied, they weren’t entitled to summary judgment on that
ground alone.

Separately, there were issues about material difference,
which would prevent a first sale defense. At least twice, a MJ CSR told a
customer that Defendants’ omission from Maui Jim’s authorized retailers list didn’t
automatically mean that defendants’ Maui-Jim-branded sunglasses were
inauthentic. But MJ still argued that none of defendants’ MJ sunglasses had
been subject to an authorized first sale by Maui Jim. Its digital marketing
manager told CSRs to respond to customer inquiries about unauthorized retailers
“that these sites are not listed and therefore are selling diverted, used,
damaged or counterfeit goods and they void our 2 year warranty by purchasing on
these sites.”

The court first addressed the burden of proof for a first
sale defense: the party asserting the defense has the burden to “show ownership
through lawful acquisition.” “Defendants are best suited to know who gave them
the Maui-Jim-branded sunglasses they sell on their website.” And “blanket
self-serving testimony and testimony from third-parties” was insufficient to
grant summary judgment, at least in light of MJ’s own evidence that it hadn’t
sold (enough) pairs to the identified third party sources. But nor was MJ
entitled to summary judgment, because there was a material question of fact on
sourcing.

What about material differences?

The first sale doctrine does not
apply to products that have been materially altered from their original form.
It is incumbent upon the reseller to show that the differences are not of the
kind that consumers would likely consider in purchasing the product. An
alteration is material if it changes something about a product that is relevant
to consumers’ decision to purchase the product.

I note that the application of this rule has made first sale
defenses almost unwinnable for unused goods, despite Supreme Court precedent
recognizing that used goods are subject to first sale even though they are
basically always materially different from unused goods. For used goods, proper
disclosure of their used status is sufficient to avoid actionable consumer
deception despite material differences. Though courts occasionally gesture at disclosure
for unused goods too, they don’t take it seriously, I guess because they think
cutting off the used-goods market would be more socially detrimental than
allowing total trademark owner control of initial sales channels, which seems
like a competition policy decision that trademark law should not be making.
Even this relatively balanced opinion is willing to countenance this control.

MJ identified three alleged material differences, two of
which the court accepted as creating material factual issues. (1) Defendants’
sunglasses customers experience inordinate delays; (2) Defendants’ sales do not
qualify for Maui Jim’s warranty program; (3) Defendants “sold MAUI JIM-branded
sunglasses after removing the original lenses and mounting in the frames
prescription lenses that did not come from Maui Jim” but rather were
“manufactured using a process over which Maui Jim had no control.”

Shipping delays: Although case law holds that “a physically
identical product is nevertheless ‘materially different’ from the genuine article
if ‘the bundle of services’ that attach to that genuine article is not
available to the consumer,” shipping delays are different from other alleged
service differences because they would naturally be attributed to the seller,
not the manufacturer, and “are wholly unrelated to the product’s brand.”

Warranty: MJ argued that its warranty didn’t apply to
sunglasses purchased outside of its authorized dealers; defendants argued that
MJ’s “own communications with customers belie that contention.” The court
disagreed: Instances where MJ told customers that they would repair and replace
a customer’s sunglasses as long as they were authentic didn’t indicate that the
repair would be made pursuant to a warranty. 

So the next question was whether MJ’s warranty was
materially different from defendants’ own warranty. “[A]bsence of or a
different warranty has been held to be a material difference.”

The court relied on a prior case about Hyundai equipment,
which illustrates Jeremy Sheff’s point about the damage that post-sale
confusion reasoning has done to direct infringement doctrine. In that case, the
defendant’s customers agreed that they knew they were purchasing a product
without a warranty, but the defendant still lost on summary judgment because, “[w]hile
it may have been [his] intention to warn all of his customers … this would
not protect subsequent customers who may purchase the equipment from [his]
customers.” (How often are sunglasses resold compared to large vehicles, by the
way?)

It was undisputed that the parties have received inquiries
from both present and potential customers about their respective warranty
coverages. But whether their respective warranties were identical was disputed.
Defendants argued that their warranty was identical or better, but: (1) Maui
Jim’s warranty offers repair in addition to replacement, while SmartBuyGlasses’
does not; (2) Maui Jim’s warranty is tracked from the date the customer
receives the product, whereas SmartBuyGlasses’ tracks it from the order date,
meaning that Maui Jim’s is longer (without even accounting for alleged slower
shipping speeds); and (3) both warranties only cover manufacturer’s defects, so
MJ, as manufacturer, was “logically better suited to determine whether an issue
is a manufacturer’s defect or not.”

These differences must be material to overcome first
sale. It was defendants’ burden to show the absence of materiality. Defendants
hadn’t done so: (citation to redacted materials) and there was evidence that
the warranty did matter “as highlighted in consumer complaints and consumer
inquiries directed to both Maui Jim and SmartBuyGlasses.” And “the fact that
warranties and repair services were ranked [redacted] in consumer priorities
when choosing premium sunglasses could support a finding that Maui Jim’s
warranty is a material part of a consumer’s purchasing decision, especially
given Defendants do not offer repair services.” [Look, if the court is relying
on this for its legal conclusion, it should not be redacted—I have no idea what
the justification for this is. Any concept of trade secrets that covers this
information is appallingly overbroad.]

In addition, “a jury could find that the difference in
warranty provider alone could warrant a material difference even if the
warranties’ terms were identical. For example, we conjecture that a warranty
from an institutional manufacturer would certainly be perceived more valuable
to a consumer than the same warranty term provided by a discount retailer.”

Quality control: MJ argued that, even if the glasses were
“once authentic,” MJ’s inability to control their quality once they arrived in
defendants’ hands constituted a material difference. Of course, this rationale,
taken seriously, would make the unauthorized resale of any used product
unlawful—my Toyota has been out of Toyota’s control for over ten years!
Anything could have happened! (And admittedly, much has.) However, the court reasoned
that “[q]uality control measures may create subtle differences in quality that
are difficult to measure but important to consumers.” Thus, courts don’t require
trademark owners to show differences in actual quality. That would be
too hard! But “quality control” also isn’t a magic phrase. “Rather, the test is
whether the quality control procedures established by the trademark owner are
likely to result in differences between the products such that consumer
confusion regarding the sponsorship of the products could injure the trademark
owner’s goodwill.” MJ needed to show that “its quality control procedures
create a likelihood that their sunglasses are different from those that it does
not control,” in particular that it stops enough substandard product from
reaching a consumer “to create a material difference between the categories of
authorized and unauthorized sales.” That wasn’t clear on this record.  

Finally, MJ argued that the “sponsorship exception” to first
sale applied because defendants falsely indicated that they were authorized
resellers. “Thus, use of a plaintiff’s trademark in promotional materials such
as advertising or displays is not protected by the first sale doctrine, but use
of a plaintiff’s trademark solely to identify a product up for sale is
protected.” [This is a weird way to phrase it: advertising or displays are
often ways to identify a product for sale. If a used car dealership truthfully
advertises that it has Toyotas for sale, that can’t itself falsely imply
sponsorship.] The court rephrases: “conduct that goes beyond the mere resale of
trademarked goods and its incidental advertising may not be protected by the
first sale doctrine.”

“Maui Jim chiefly takes issue towards SmartBuyGlasses.com’s
representation that it works directly with leading eyewear manufacturers and
suppliers,” such as the diagram showing a supply chain direct from the
manufacturer. Even SmartBuyGlasses’ VP testified that this diagram was a poor
representation of SmartBuyGlasses’ procurement model. Also, MJ submitted [redacted]
instances where defendants’ customer service representatives supposedly
indicated that they were an authorized Maui Jim dealer. One example: a customer
asked “Are you an authorized Maui Jim’s dealer?” and a CSR responded: “Yes, we
are.” The court also worried about the statement “all our products are 100%
authentic[ ] [w]e source the authentic items through authorized distributors,”
even though that doesn’t say that defendants are authorized
distributors. That statement was in response to the following message: “your
section ‘Authenticity’ says you work directly with the manufacturers, in this
case Maui Jim, so why is it that they don’t know where you get your MJ
sunglasses from.” More plausibly, a customer asked how defendants can
“guarantee authenticity when [its] not an authorized dealer of Maui Jim
products?” The CSR stated that it “source[s] it from the manufacturer itself.” When
the customer responded by telling the representative that Maui Jim had told
that customer that they “aren’t supplying you guys with glasses,” the
representative changed course: “we do not source the item from Maui Jim brand,
we source it from the factory or manufacturer on where they also ordered their
items.” While defendants called these statements mere mistakes, they at least
created a factual issue.

I’m not sure why this misrepresents sponsorship as
opposed to misrepresenting the quality of the product, but defendants also at
least sometimes included “Maui Jim’s 2009 Drop Ball Certification,” which
certified that the lenses had been tested for impact resistance, which was not
true.

What about the website disclaimers? First, “SmartBuyGlasses
may have confused customers with its contradictory statements throughout its
website that it is authorized by ‘all’ brands rather than a more accurate word
like ‘most’ or ‘many’ brands.” Second, the survey showed 40% net deception,
though 60% didn’t perceive sponsorship. Too many disputed material facts!

Likely confusion: also disputed. If the goods were in fact
counterfeit, there would be a presumption of confusion. MJ’s digital marketing
manager oversaw secret test purchases and testified that some were not
manufactured by MJ. MJ’s VP of Marketing also testified that he could tell that
some of the glasses sold through SmartBuyGlasses.com were counterfeit because
they were sold “without our Maui Jim lenses.” Is that counterfeiting? Well,
there’s a question of material fact over whether defendants adquately notified
customers about the lenses.

As to the multifactor test, the analysis here is wonky
because the usual multifactor test is not suited to the question of whether
actual Maui Jim frames sold by someone else confuses people about source, which
is why first sale and nominative fair use and other defenses are important.
Interestingly, the court finds degree of care to be neutral, because “Maui Jim
sunglasses are both premium (and so relatively expensive) and widely accessible
on the internet.” MJ’s alleged instances of actual confusion, though disputed,
were admissible hearsay because they were business records of a regularly
conducted activity that were made at or near the time they transpired.

Dilution: summary judgment also denied (no discussion of
fame).

False advertising claims covered four (or maybe five) things:
(1) Defendants’ CSRs’ statements in response to customer inquiries about
authenticity, (2) the website’s authenticity guarantee, (3) the website supply chain
image, (4) the alleged statement that defendants have a U.S. location, and (5)
the non-MJ lenses inserted in MJ frames.

CSR statements: Were these “advertising or promotion”? No;
they were individual statements made in response to customer inquries,  not “promotional material disseminated to
anonymous recipients.”

Website authenticity guarantee: Defendants pointed to their
disclaimers, including “With some of the brands that we sell, the
manufacturers’ warranty will be available worldwide however for other brands
the official warranty may not be available in your country due to territorial
limitations and/or brand policies. To cover all scenarios, we offer our own
exclusive 24-month warranty against all manufacturers’ defects without
exception” and the MJ-specific disclaimer it added. There was a question of
material fact on falsity, despite the existence of the survey, given the
disclaimers and other questions discussed in the trademark section. The survey
wasn’t enough because it didn’t specifically evaluate the effects of the
disclaimers.

comparative supply chain graphic

Supply chain image: There was a factual dispute over the
misleadingness of showing a direct supply chain from manufacturer to consumer,
rather from manufacturer to an exporter to an importer to a wholesaler to a shop
and then to a customer. Defendants argued that the diagram was accurate and
consistent with their practice for the majority of sales including [redacted]
brands, and that disclaimers took care of remaining uncertainty.

Operations graphic showing NY “operation centre”

U.S. location: Also a material question over whether the
U.S. dropship location made this truthful.

one prescription lenses statement

another, including ridiculous redaction from public website

Third-party lenses: These were less than 1% of defendants’
sales. MJ argued that defendants advertised that their prescription lenses were
manufactured by MJ, but defendants used words like “our” rather than “Maui
Jim’s prescription lenses” to describe them; this question was for the jury.

Reverse passing off: At one point, defendants incorrectly
identified [redacted] as the manufacturer of MJ branded sunglasses on
commercial invoices it sent to its customers. Defendants attributed this as a
computer coding error and there was no evidence that there was any benefit to
them from doing so, but regardless it wasn’t reverse passing off as defined by Dastar
because they didn’t represent the goods as their own. Following the
“precise words” used by the Supreme Court and the Seventh Circuit, “Defendants
must have substituted its own name for the true manufacturer to be liable for
reverse passing off.” Even without binding law, the court would still reject
reverse passing off, because MJ didn’t show likely damage based on the
invoices, though the result might be different if the mislabeling had been in
ads.  

Illinois Uniform Deceptive Trade Practices Act claims
survived for the reasons discussed above.

example of MJ photo compared to image on defendants’ site

As for the copyright claim, the court easily rejected a fair
use defense: the use wasn’t transformative, the modest creativity of the photos
was enough, they were used in their entirety, and there was a licensing market
for the photos insofar as “a benefit of contracting to act as one of Maui Jim’s
authorized retailers is the right to use these copyrighted photographs in
advertisements.” And the court found infringement:

 “Although Defendants
ask us to infer that this is merely the same pairs of sunglasses shot at
standard angles against a standard white background, we hold that no reasonable
jury would find these photos are anything but identical.” Damages were a
factual issue for trial.

Tortious interference: Whether Maui Jim produced enough evidence
to establish the existence of its contracts with third parties was a disputed
issue. However, the court rejected the argument that those contracts were
unenforceable under European law: “the European Court of Justice squarely
addressed the legality of authorized retailer contracts and distribution
networks … in the context of luxury or high-end goods and ruled such contracts
are not prohibited when three conditions are met: (1) the product necessitates
a selective distribution system because it is high quality or technical; (2)
resellers must be chosen on the basis of objective criteria; (3) the criteria
defined must not go beyond what is necessary. Case C-230/16, Coty Germany GmbH
v Parfumerie Akzente GmbH, 2017 EUR-Lex CELEX LEXIS 62016CJ0230, at ¶ 24.” [I
don’t really see the court analyzing whether (2) and (3) were satisfied,
especially given the factual issue about whether there were such contracts.]

Also, there was no question of material fact that defendants
were aware that Maui Jim contracted with authorized retailers and that
authorized retailers were prohibited from selling to other retailers (like defendants).
In 2008, Maui Jim wrote to defendants: “By purchasing Maui Jim sunglasses from
any authorized Maui Jim account, you are inducing that retailer to breach its
contract with Maui Jim, which will subject you to civil liability for
interference with a contractual relationship.” Defendants acknowledged receipt.

And there was evidence that Maui Jim incurred financial harm
from the interference. So defendants’ summary judgment motion was denied.

Counterclaims for defamation: Defendants alleged that Maui
Jim’s corporate headquarters and customer service representatives “falsely
instructed potential SmartBuyGlasses’ customers that SmartBuyGlasses sells
counterfeit goods, that the Maui-Jim-branded sunglasses they sell are ‘fake’ or
‘not authentic,’ and that SmartBuyGlasses ‘is not an authentic website,’” as
well as falsely telling customs officials that Maui-Jim-branded sunglasses
shipped by SmartBuyGlasses to U.S. Consumers were “not genuine,” causing U.S.
customs to seize their authentic sunglasses. Since truth is a defense, the
court denied summary judgment here.

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