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UNAUTHORIZED, ONLINE DEALERS Robert W. Payne ©2009 LaRiviere, Grubman & Payne, LLP 1.

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Presentation on theme: "UNAUTHORIZED, ONLINE DEALERS Robert W. Payne ©2009 LaRiviere, Grubman & Payne, LLP 1."— Presentation transcript:

1 UNAUTHORIZED, ONLINE DEALERS Robert W. Payne ©2009 LaRiviere, Grubman & Payne, LLP 1

2 Introduction 2 Recent developments re unauthorized dealers Rise of online dealers of genuine, new goods US Supreme Court decision 2007 striking down per se vertical pricing restraints with dealers Focus today on sales of allegedly new, genuine goods by unauthorized dealers & unauthorized sales by authorized dealers Not on: Counterfeit Infringing – from another source Used product resale

3 The Problem 3 Online sales by e-tailers – free riding and minimal overhead: no investment in customer service & promotion required of dealers but benefit from ads Undercutting authorized dealers on sales, who cant compete well Undermining mfr-dealer relationships Affects mfr preferences and strategy for initial sale and treatment of products/channels of trade Increased commoditization of branded goods, competing only on basis of price

4 The Problem – Authorized Dealer Investment Manufacturer/producer (Dell computers, Nunn Bush shoes) may want dealers to make substantial investment to meet consumer demand and grow in areas of: Installation Servicing Product demonstrations Show rooms Sales personnel & staffing Training Retailer advertising 4

5 New vs. Used Products – The Terrain 5 Used and the 1 st Sale Doctrine New – genuine products & unauthorized dealer How the unauthorized dealer gets new product Resale – out the front door Liquidated, discontinued, seconds, returned Out the back door (off-shore authd mfr, etc.) Gray market Stolen in quantity

6 The Terrain – the Dealer-Distribution Agmt 6 In addition to issues with downstream seller Contract provisions with dealer transshipments channels of trade (internet sales?) liquidation vs. return for credit to producer training, promotion assistance product familiarization Contract provisions with ex-dealer less concerned with being cut off left with inventory – sell-off provisions?

7 Nothing is Per Se Improper About Being an Unauthorized Dealer 7 Genuine goods, bearing true mark No IP basis to block Usually no contract privity Need something more

8 Trademark Infringement Theory: First Sale Doctrine 8 Obstacle to infringement when sale of genuine goods with actual brand: first sale doctrine Doctrine: Rights of trademark owner extend only to first sale, not the resale of genuine goods in unchanged state Rationale: Implied license that buyer of branded goods can resell. TM owner got value from first sale.

9 Trademark Infringement Theory: Exception to First Sale Doctrine 9 Gray market goods analogy (imported w/o consent) First sale doctrine does not apply when goods materially altered/different from authorized goods creates confusion over source & loss of good will are not considered genuine because are confusingly different 2 nd Cir: also differences in quality control stds

10 Trademark Infringement Theory: Material Difference Standard as Exception 10 Defined broadly – any that consumer would likely consider relevant Physical differences – tangible product quality, e.g. battery life variety, presentation & composition of chocolates formulation, content of cigarettes packaging (batch codes, container shape, labeling)

11 Trademark Infringement Theory: Material Difference Standard as Exception, p.2 11 Non-Physical Differences – intangible qualities, e.g. warning and safety labels, operator manuals, service plans warranty protection (no warranty or invalidated by online sale) differences in available services (Cabbage Patch Dolls speaking Spanish, w/out birthday card) Low threshold for materiality (subtle differences)

12 Trademark Infringement Theory: New 12 Implications when selling new product says is new implies is new If unauthorized re-seller tells full truth about product (e.g., not covered by warranty, imported and differently bottled/labeled) – eliminate possible confusion as to origin/sponsorship/quality?

13 Fair Use by Unauthorized Dealer 13 Trademark infringement defense Irrespective of first sale doctrine defense Right to truthfully inform (but not confuse re quality/affiliation) as to dealership specializing in these products E.g., Independent VW Service; We sell used HP products. Problems with prominence of use – affiliation?

14 Copyright Infringement Theory: Types 14 Unauthorized sellers will use: images of products taken by manufacturer blocks of original text written by manufacturer logos of manufacturer (cf. trademark infringement too) Ease in circumvention, after take down

15 Copyright Infringement Theory: Advantages 15 Useful tool when can assert this theory – weapons In addition to injunctive relief, remedies include: DMCA take down notice – off the website Actual damages and profits of infringer Possibly statutory damages ($750-$30,000) for each Work, without proof of causation Statutory: $150,000/Work max if willful infringement (How many Works?) Potentially costs and attorneys fees

16 Copyright Infringement Theory: Registration 16 Potential problem – Work already registered? 17 USC Sec. 411 – No action until registration Consider registering important works now, before infringement Registration, or application to register enough? Some courts (10 th, 11 th Cir., ND Cal, CD Cal) – registration is a prerequisite 5 th Cir (Texas) & SDNY –application OK

17 Copyright Infringement Theory: Misc. 17 Expedited registration – costly but can be done Copying vs. hyperlinking – latter is usually not infringement (no copying, directed to legitimate owner) First sale doctrine and copyright – similar to trademark material alteration defeats defense gray market wrinkle: goods originally made & sold in US (defense if made in US, exported & re-imported)

18 Non-IP Legal Theories 18 Unfair competition (federal and state) Interference with contractual relations Breach of contract Violation of Warranty Statutes Antitrust & minimum pricing Franchising laws

19 California Unfair Business Practices (B&P Section 17200 et seq.) 19 A form of unfair competition Includes unlawful business practices, unfair business practices, fraudulent business practices Also includes misleading advertising, e.g. stating: covered by manufacturers warranty is an authorized dealer goods are new Must suffer injury in fact

20 False Advertising Under Lanham Act – Section 43(a)(2) 20 Another form of unfair competition E.g., calling/implying product is new if material alteration 43(a)(2) – misrepresentation/misleading re nature or qualities of goods, or nature of affiliation or sponsorship of seller

21 Interference with Contractual Relations 21 Not party to contract between producer/mfr and distributor Interference with prospective business advantage; interference with contract Key– wrongful conduct by defendant (e.g., proscribed by statute, common law) in interfering Unauthorized seller selling below minimum authorized price set by contract with dealers? Interferes with sales, causes discounts.

22 Breach of Contract 22 Between manufacturer/producer and (former?) authorized dealer Breach of dealership agreement Termination rights if current dealer + other remedies Specific obligations not otherwise mandated in law

23 Breach of Contract – Special Issues 23 Injunctive relief? Enjoining a breach – CC 3423(e) Attorneys fees if contract provides – harder with Lanham Act Clear provision breached or implied in fact/course of dealing/industry custom terms? Contract formation: statute of frauds if oral contract; parol evidence (CCP 1856) – varying terms or supplementing

24 Statutory Violation of Warranty Laws 24 California Civil Code sec 1797.8 & 1797.81 (enforce through B&P sec 17200) Definition of gray market – express warranty; imported other than through authd distributor without valid US warranty Duties – must post at POP and affix to product/ packaging conspicuous tag & in advertising if not: covered by mfr express warranty valid in US compatible with current/frequencies/other stds replacement parts/accessories not avail in US no English instructions not eligible for rebate

25 Avenues of Attack Against Unauthorized Dealers 25 Federal court (diversity, federal question) – copyright & venue? Quality control issue needed? State court (concurrent trademark; no copyright) Customs – blocking at the border if gray market (or counterfeit or infringing). Need registered mark, copyright. UDRP takedown of domain name if trademark issue (e.g., ITC complaint if IP infringement -- exclude imports DMCA self help take down

26 ITC Proceedings – IP Infringement & Imports Initiate detailed complaint with ITC with numerous exhibits – 30 days for Commission to decide to launch Investigation Proceeds much like federal litigation, ending in Initial Determination by administrative law judge, which can become final in 45-60 days Shorter time frame to trial Remedies: cease and desist order, exclusion order, consent order No damages 26

27 DMCA Take Downs 27 Copyright issues (only) Written notice to ISP per Sec. 512, swearing in good faith that infringement, identifying materials ISP immunity if complies; notifies posting party Posting party may file Counter Notice that not infringing If no suit by Owner within 14 days, ISP restores Abuse – right to sue for Sec 512(f) violations – damages and atty fees for bad faith take downs Beware of using unauthorized seller or for trademark infringement

28 eBay – VeRO Take Downs 28 Like DMCA but expanded to trademark & patent infringement as well Give reason code Unlike DMCA, reinstates if Counter Notice and copyright infringement was alleged/denied but not if trademark/patent infringement alleged – needs Owner permission/court order. Counter Notice – venue & jurisdiction conceded Black marks from numerous complaints – can be delisted by eBay (& also DMCA) Other self help measures with ISPs -- contractual

29 Special Issue – Unlawful Franchising Defense 29 Case: Defendant claimed dealer agreement was an unlawful franchise, when attacked as unauthorized dealer Franchise agreement – TM owner controls not just use of mark but also instills marketing system re methods and mode of sale Minimum pricing can be a factor

30 Special Issue – Unlawful Franchising Defense 30 Indicia of a franchise, control by TM owner over: claim successful marketing plan uniform marketing terms/sales pitches terms of payment collateral services sources of supply employee uniforms hours of operation appearance of business premises/décor approval of locations & signage

31 Special Issue – Antitrust & Minimum Pricing 31 Complaint against unauthorized dealers – interfering with pricing with authorized dealers Defense – minimum pricing standards in dealer agreement violates antitrust laws Minimum pricing re challenges of intrabrand competition among authorized dealers Ensures profit margins for authorized dealers Enhances producer profits – dealers have sufficient revenue to invest in servicing, show rooms etc.

32 Minimum Pricing – Rule of Reason 32 Leegin case (2007) – vertical price restraints no longer per se illegal. Look to Rule of Reason re reduction of interbrand competition May stimulate interbrand competition by reducing intrabrand competition Reduction of intrabrand price competition encourages dealers to invest in tangible/ intangible services and promotion, aiding manufacturers competition with rivals Gives consumers more options – discount or value-added brands Facilitates new mkt entries – dealer investment

33 Minimum Pricing – Anticompetitive Effects 33 Cartels at retailer level to force manufacturer to help with resale price maintenance – preventing efficient charging of lower prices, by agreement Horizontal cartels – mfr or retailer level – decreasing output or competition to increase prices – per se unlawful still Forestall innovation in distribution that increases costs

34 Minimum Pricing – Unilateral Pricing 34 Unilateral pricing policy of manufacturer – Colgate S Ct case 1919 says where no agreement manufacturer can refuse to deal with dealer not accepting pricing policy

35 Thank You Robert W. Payne LaRiviere, Grubman & Payne, LLP

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