Tuesday, February 19, 2013

Liebesman & Wilson: The Perils of the Online Secondary Sales Market

Have trademark holders succeeded in obtaining control of product distribution, past the first sale? In their article, The Mark of a Resold Good, authors Yvette Joy Liebesman (Professor at Saint Louis University School of Law), together with Benjamin Wilson (Law Clerk for the Honorable William D. Stiehl of the U.S. District Court for the Southern District of Illinois), warn that this is a real possibility.

The authors offer several real-world examples to support their position that the use of trademark in resale markets should be protected. For instance, if a consumer goes online to buy a Waterford vase, he will likely type "Waterford" into a search engine. This trademark—Waterford—is etched into Waterford vases and will never be disassociated from the item. The authors describe many problems that will occur if trademark owners convince courts to limit resellers' ability to use accurate descriptive terms, like Waterford. Limiting this ability obviously impacts the reseller's legitimate interest in reselling the item in question. But, it also causes problems for the consumer who then doesn't know if he is looking at an advertisement for a genuine Waterford vase, or an item that is merely descriptively similar to a Waterford vase.

Market Disruption, Mark Owners' Response, and Blurring Confusion
According to the authors, increased use of Internet sales channels—like Craigslist and eBay—by genuine and no-so-genuine resellers has caused market disruption that mark owners have sought to curtail. In particular, mark owners have claimed that resellers promote initial interest confusion in the consumer market. As discussed by the authors, the two types of possible confusion are either confusion as to the source of the goods, or confusion as to the distribution of genuine goods. For example, according to mark owners, it is often unclear whether a seller on an Internet sales channel is an authorized sales agent, a group selling counterfeit goods, or a legitimate reseller of goods in the secondary sales market.

The enforcement mechanisms being used by these mark owners range from cease and desist letters to more costly claims in court against not only the resellers themselves, but also the hosting websites. The authors believe that when mark owners bring these claims in court, that the courts are improperly broadening their interpretation of what constitutes actionable confusion. This misapplication blurs the lines between the two forms of possible confusion and ultimately fails to recognize the validity of the affirmative defense of the first sale doctrine by legitimate resellers of genuine goods.

Affirmative Defenses under the Lanham Act
The authors focus on two affirmative defenses available to accused trademark infringers under the Lanham Act. The first sale doctrine is an affirmative defense that applies to all areas of intellectual property: trademark, copyright and patent law. With respect to trademark law, the first sale doctrine is based on the idea that a reseller should be allowed to use a trademark as a reference point when the reseller has a legitimate intention of reselling a genuine good covered by the trademark.

The affirmative defense of nominative fair use is similarly intended to restrict manufacturers' control over sales markets. It is based on the idea that the use of a trademark should not, by itself, show that there was any intent to deceive the public into believing that the trademark holder endorsed the reseller.

Given the viability of these defenses when accurately assessed, the authors believe there are many frivolous lawsuits that mark owners file against legitimate resellers. Furthermore, according to the authors, neither first sale nor nominative fair use are evaluated uniformly across the circuits. Moreover, these lawsuits are prohibitively expensive for resellers to defend against, often leading resellers to abandon online ventures, or in some cases, bleeding resellers dry of financial resources.

How to Move Forward
The authors argue that restricting competition in the resale market has many negative repercussions. For example, according to the authors, the restriction on competition harms consumers and does little to protect them from deceptive sales. Furthermore, this disincentivizes competition in the original market, and in a less competitive environment there is less motivation for manufacturers to innovate.

The authors propose both legislative and judicial remedies. First, the authors propose adding language to the Lanham Act that will (1) codify trademark first sale and nominative fair use as defenses under Section 33(b); (2) eliminate the controversial claim of initial interest confusion regarding the sale of genuine goods; and (3) specify a requirement of deceptive intent regarding distribution affiliation confusion for this type of claim to be actionable. Second, with regard to judicial intervention, the authors suggest that, to protect consumer interest, courts need to strengthen their stance on nominative fair use and first sale, while simultaneously restricting the definition of confusion. The authors also argue that the courts should discount the doctrine of initial interest confusion because it is fundamentally at odds with the basic tenant of trademark law that consumers should have the freedom to advertise the resale of genuine goods that they legitimately own.

Final Thoughts
The authors clearly describe a developing problem in trademark law that seems to stem from the courts. Restrictions they have imposed on legitimate resellers using trademarks in product descriptions severely handicap the flow of information within the consumer market. Imagine that in the future you attempt something as simple as trying to sell your car in the classified ads. You list your car with the following information: "2006 Toyota Camry, 4-wheel drive, black with beige leather interior, excellent condition, asking price $6000." A buyer looking at this listing probably assumes that you're selling your own car, and so long as your car is being sold at a reasonable price for that particular make and model, the buyer might contact you. But, imagine that you are not able to include the make and model of the car in your advertisement. A listing for a "2006 sedan, 4-wheel drive, black with beige leather interior, excellent condition, asking price $6000," would not likely elicit a potential buyer's response.

As the authors state in their article, there are 30 million new ads on Craiglist each month and 6 million ads placed on eBay, each day. The high traffic on these websites indicates that there is a strong demand for resold goods. To protect legitimate uses of these secondary sales markets, the courts must provide clarity regarding the proper application of the principles of confusion. The authors' two-pronged proposal should be studied to determine whether it will help limit frivolous claims that impede the flow of accurate information in the resale consumer market.

Drafted by Charu Shori (cnarula@smu.edu), research assistant to Professor Sarah Tran (Southern Methodist University). While Professor Tran is on leave, Professor David Taylor (Southern Methodist University) is supervising her research assistants.

Charu is a third year evening student at the SMU Dedman School of Law. She acquired her BA in Chemistry from the University of Kansas and her MBA in Finance from the SMU Cox School of Business. Currently, Charu works for The Milby Firm in Dallas, TX. She is also an officer the SMU chapter of APALSA and is a team member representing SMU for the 2013 Philip C. Jessup International Law Moot Court Competition.

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