First Sale Doctrine – Is the Argument Now a MYTH?

8 Minutes read

Written by David Howell

Here at Howell & Associates, we deal with many manufacturers that have authorized and unauthorized selling of our client’s products. This causes a lot of confusion thanks to the first sale doctrine and the many laws surrounding it. Today, we want to take a deep dive into this doctrine, exploring what it is, and addressing one of the big myths surrounding it.

What is the First Sale Doctrine?

To begin, we should have a brief discussion on what the first sale doctrine actually is, and what it entails. Essentially, it’s a legal idea that revolves around copyright infringement. The aim is to limit the rights that the owner of a registered trademark has.

Generally speaking, if you own the rights to something, you can take action when people use your work without consent. In a broad sense, imagine a business that has a copyrighted logo that gets used by another company, or is printed on a t-shirt and sold to consumers. In this scenario, the business can step in and sue for copyright infringement because they’ve not given consent to their logo being used in this way.

However, the first sale doctrine prevents businesses from having complete and utter control over their copyrighted property. For example, a business that owns the rights to a certain product can’t stop other people from selling that product. This is where things get interesting from our perspective, as we’re very much dealing with this idea of third-party sales and 3P sellers. The law is that, as long as the copyright owner’s exclusive rights aren’t infringed upon, then someone can legally purchase their product, and sell it on.

We see this type of thing all the time on online marketplaces like Amazon or eBay. Third-party sellers can purchase goods from manufacturers and sell them on to make a profit. It’s a pretty basic element of the business world, and the first sale doctrine is responsible for allowing this to happen.

Why does this present a potential problem for manufacturers?

While the first sale doctrine is designed to help encourage third-party selling and prevent manufacturers from having a stranglehold on their products, it does create possible problems. Most manufacturers like to enter an online resellers agreement with third-party individuals/companies. This agreement details everything from what products they’re allowed to re-sell, to the MAP (minimum advertised price) and even potential sales targets set by the manufacturer. These agreements are sought out to create a contract that basically makes someone an authorized seller. They’ve been fully-authorized by the manufacturer to sell their goods and can be held accountable if they breach the rules of the agreement.

This is beneficial as it allows manufacturers to have some control over their products. However, there are still unauthorized sellers on the market that don’t have these agreements yet can still sell the manufacturers products. They’re allowed to do so thanks to the first sale doctrines, which means they can sell the goods as long as they don’t breach the exclusive rights.

So, in theory, someone can buy a product online and sell it to someone else without being an authorized seller of that specific product.

The First Sale Doctrine Myth

This brings us to the primary focus of this article; the first sale doctrine. Now, many people assume that this doctrine allows them to sell products without needing to enter a contractual agreement with the manufacturer. They get their hands on the products somehow and sell them on, often advertised as ‘new’. You see this all the time, particularly from third-party sellers on Amazon. Just take a look at the Marketplace Items Condition Guidelines they have for sellers to describe their items:

Amazon’s Marketplace, for instance, states: “New: Just like it sounds. A brand-new, unused, unopened item in its original packaging, with all original packaging materials, included. Original protective wrapping, if any, is intact. Original manufacturer’s warranty, if any, still applies, with warranty details included in the listing comments.”

If you were a consumer, and you saw this description, it could persuade you to buy a product with the assumption that you’re buying a genuine item. You even have the warranty attached, so you’re covered in case anything goes wrong.

However, this is where there’s a big myth surrounding the first sale doctrine, called the Material Difference.

What is the Material Difference?

The Material Difference is essentially an exception to the first sale doctrine rule. In simple terms, it means that trademark goods that are materially different than those sold by the trademark holder are not covered. In essence, the reseller can come under fire for selling things like this and be under trademark liability.

There is some confusion as to what a material difference actually is, but it can cover a whole range of things. Legally speaking, it’s defined as a difference in the product that can sway a consumer’s decision to purchase that product. One massive example of this and the thing we’re going to focus on is the warranty. Most consumers will be more inclined to purchase a product if they know it’s covered by a warranty, or they’ve got a guarantee on the product that allows them to return it if issues occur. It helps them make a purchase with more confidence and is considered a way for companies to try and influence purchasing decisions.

When you apply this to the idea of unauthorized sellers, there are plenty of people/companies out there that sell products with warranties advertised. Go back to the Amazon example earlier, and you can see that it clearly states a manufacturer’s warranty is included. Many third-party sellers believe they can include this if they purchase a product from the manufacturer or from an authorized reseller. However, this is a total myth as many manufacturers have rules in place that make warranties void when they’re sold by unauthorized sources.

This is where a company comes into play, as many companies have a very specific warranty policy. For example, a warranty exclusively covers products that are sold by authorized retailers through authorized sales channels. As a result, if customers purchase a product from unauthorized retailers – or via an unofficial sales channel – they do not receive the warranties and benefits associated with genuine products. Consequently, thanks to the material difference exception, in the first sales doctrine, it is no longer considered a genuine product. Therefore, it’s not even covered by the first sales doctrine at all.

The Material Difference in Action

There are plenty of examples of cases where resellers have ended up in a lot of trouble because they sold products that were no longer covered by the first sale doctrine as they were considered materially different. A good example of this is Beltronics USA, Inc. vs. Midwest Inventory Distrib. LLC. This was a case that happened in 2009, and the basic premise is that Midwest was an unauthorized seller of Beltronics equipment. Beltronics had agreements in place with authorized distributors to sell their products at an agreed minimum price. However, these distributors sold the products to Midwest, who then sold them on eBay as ‘new products’ that received a full Beltronics warranty. The issue was that the products they sold on eBay had their serial numbers either altered or removed by the distributors/Midwest. This is where the material difference argument comes into play as it’s Beltronic’s policy that only products with original serial number labels qualify for the warranties and other benefits like software upgrades, etc. I understand that removing the serial numbers is literally a physical material difference, however, it is also a nonphysical difference because of the warranty removal.

As a result, Beltronics received numerous calls from customers that complained about defects and wanted replacements under their warranty, and so on. Beltronics asked for serial numbers and had to inform the customers that the products they purchased weren’t genuine and so they weren’t covered. This led to a lot of disgruntled customers, who ultimately took their annoyance out on Beltronics as it was their product.

The consequence of this was Beltronics filing an action against Midwest. The defense from Midwest was that they haven’t done anything wrong as they’re allowed to re-sell goods under the first sale doctrine. However, the court ruled in favor of Beltronics, citing that the first sale doctrine was void “when an alleged infringer sells trademarked goods that are materially different than those sold by the trademark holder.” It was considered trademark infringement, and Midwest lost the court case.”

There are countless other cases to explore as well that shows the material difference in action. What this proves is that it’s not entirely accurate that any unauthorized seller can re-sell goods via online marketplaces under the first sale doctrine. If the original manufacturer has a policy in place that voids things like the warranty or guarantee, then it means all unauthorized sales aren’t genuine.

Unauthorized Use of a Registered Trademark Is Actionable

It’s critical that you’re aware of the consequences that come when you’re not authorized to use a registered trademark. According to Section 35 of the Lanham Act (15 U.S.C. ss 1117) any violation of our rights regarding registered trademarks can lead to the following:

Potential recovery of all profits made via the selling of trademark goods – in essence, we could claim all the profits you made if you’re not authorized to sell our goods. Potential recovery of any damages we’ve sustained – if your unauthorized selling of goods that are materially different to the original items has led to damages for our company, we resolve the right to recover them from you. Potential recovery of any legal costs one sustains when pursuing legal action against you – essentially, you will have to pay all the legal fees for us.

Not only that, but if you sell unauthorized goods that are materially different from the original versions, and you do so willingly, a manufacturer can possibly claim three times the profits/damages along with attorney’s fees.

Why am I telling you this? To show you what happens when you don’t abide by the proper laws. Remember, goods are only genuine when they’re sold via authorized sellers and sales channels when you put these rules in place. Any other sales are not considered genuine as the warranty doesn’t cover them. By law, it’s considered that a change in warranty is a material difference, which means a product isn’t covered by the first sale doctrine.

There are countless examples of court cases where similar things have happened to other resellers in the past. They sell things that are materially different, and the courts have no choice but to rule in favor of the original manufacturer. To save yourself a lot of worry and money, make sure you fully understand everything surrounding the first sale doctrine and material difference.

Warranty Is Just One Example of a Material Difference

We’ve used the example of a warranty here as it applies to products. However, there are many other examples of a material difference, not just this. In fact, there are somewhere around 75 non-physical examples of material difference claims out there right now.

If a manufacturer states that they have a specific return policy for authorized goods only, then this doesn’t apply to an unauthorized item, meaning it’s not genuine. The same applies to if free repairs are offered only on authorized items, or certain post-sale services are included. All it takes is one material difference to trigger a trademark infringement.

In Summary

We know that there’s been a lot of information disclosed in this article, and it can be a lot to take in. So, we’ll do our best to summarize the main points you should take with you after reading this:

  • The First Sale Doctrine limits a manufacturers control over their trademarked products and can allow unauthorized sellers to resell their products.
  • However, there’s a big myth that all unauthorized sellers are protected by this law.
  • If an unauthorized seller sells something that’s ‘materially different’ from the original product, then it’s no longer covered by the first sale doctrine and a trademark infringement has occurred.
  • There are many examples of material differences, with the warranty being a big one.
  • A warranty only covers products sold by authorized retailers through authorized sales channels. Any other products are considered ‘materially different’ and we can pursue legal action.
  • Unauthorized use of a trademark is actionable and can cost your business a lot of money.

We hope this helps condense everything down into more manageable chunks. If you’re a third-party seller, please be aware of the material difference exception to the first sale doctrine, and don’t assume you’re automatically covered. If you are a manufacturer, call me to make sure these things are put in place for your brand protection.