Everybody knows that it’s perfectly legal to resell an item that you have purchased, including cars, furniture, clothing, knick-knacks, and so on. But, there have been controversies when it comes to media. For instance, Disney filed a lawsuit against Redbox regarding the resale of downloadable movie codes. But under the first sale doctrine, the courts have long recognized the rights of the general public to resell even used video and music media that are covered by certain licensing restrictions. Once the rightsholder has made that ‘first sale’ to the consumer, its control over the physical item ends, and the consumer can do as one wishes (as long as they don’t make copies).
But as shown by the Redbox example, the legality of resale becomes murkier when someone resells products as a business. We live in an age where anyone can set up a web store through Amazon or eBay, or even create their own e-commerce website. Unsurprisingly, it has become increasingly common for entrepreneurs to scrounge brick-and-mortar retailers for products on sale or clearance, and flip them online through an online shop. This is a practice known as ‘retail arbitrage’—buying low and selling high.
At a high level, when dealing with physical goods, the process of simply stocking goods for resale has been totally legal for many years. Where things get complicated is where you start doing more than simply stocking goods, and that is where contacting a lawyer is a good idea. To learn how we can help, contact us by calling (916) 760-8265, or by sending us a message using our contact form.
Authorized resellers routinely engage in retail arbitrage, but secure licensing agreements which allow them to advertise using manufacturer trademarks.
There are many businesses that are authorized resellers of products. In these cases, the businesses contract with the rightsholders to sell ‘genuine’ goods. The biggest feature of having a licensing agreement is that it allows a reseller to use the rightsholder’s trademarks to advertise the goods.
For instance, a discount store might contract with Nike to buy surplus and discontinued shoes at a steep discount and sell them in their stores. As an authorized retailer, the seller can advertise in print and online using Nike’s many trademarks, such as the ‘swoosh’ logo, ‘Jumpman’ silhouette of Michael Jordan, and catchphrase “Just Do It.”
Utilizing these trademarks in the imagery of advertising conveys a sense of legitimacy, and thus it’s understandable why a rightsholder has the right to control when and how a reseller can use them.
Because unauthorized resellers do not have a license to use a manufacturer’s trademarks, it’s very easy for them to sued for infringement.
Yes, you have the right to resell just about anything that you buy. But if you’re operating as a business, you’re obviously going to need to market the items you sell. Even if you’re running a strictly online business, your website may use logos and other borrowed imagery to create a more upscale experience and help customers quickly identify the brands of products they wish to buy.
But an unauthorized reseller—or an authorized seller who cancels or breaches the license—uses protected trademarks, they are in fact infringing on the manufacturer’s intellectual property. You can refer to trademarked names while titling and describing your products—you don’t have to omit every reference to ‘Nike’ or ‘Air Force 1.’ But when you start using trademarked names and logos as elements of your storefront design and marketing efforts, you’re crossing the line into trademark infringement. If you’re a small-time operation, you may fly under the radar. But the more successful you are, the more likely you’ll be caught.
Another thing to keep in mind is that if you are buying discounted brand name products online, especially if you’re importing them from overseas, you may inadvertently purchase counterfeit products. As a consequence, you can end up fighting a multi-front battle in which you are being sued for both counterfeiting and using protected trademarks to sell the counterfeit products.
Unauthorized reselling also introduces complexities when it comes to warranties—original warranties may no longer apply, introducing material differences that can result in charges of trademark infringement.
Another one of the desirable features of being an authorized reseller is that a product’s full warranty is preserved when it is transferred from manufacturer to reseller. A customer who buys that product from the reseller has the same warranty protections one would enjoy if one bought it straight from the manufacturer.
This is not the case for unauthorized resellers. In reselling a product without a license from the manufacturer, you may invalidate a manufacturer’s original warranty which covers the original consumer who buys it, but not subsequent buyers. In other cases, this warranty is modified, restricted, or replaced in some manner.
As a reseller, you maximize the value of your product by marketing it as new and identical to the same products sold by major retailers. If you sell a product as new, but it has a different warranty than the same product purchased directly from the manufacturer, it could be considered as selling a product that is different than the original.
This falls under the Lanham Act, which prohibits the unauthorized sale of products bearing a registered trademark when they are ‘materially different.’ That is, if a consumer would consider the difference between the original and resold product to be significant, then the unauthorized sale of the inferior product degrades the esteem in which the trademark holder’s products are sold. Thus, even though resold products are genuine, a reseller may be guilty of trademark infringement, because they have failed to secure the licensing necessary to pass the product’s original full warranty on to a consumer.
Back in the 1990s, guitar manufacturer Fender sued Unlimited Music Center for importing and selling Fender guitars made for the Japanese market. The guitars looked almost identical to corresponding American models, but had some structural differences, and had different warranty and service contracts. Because Universal Music did not clearly distinguish these differences, they were found guilty of infringement, and barred from importing the Japanese guitars.
Even extremely minor variations between a retail and resold product can warrant legal action by a manufacturer.
In 1998, Enesco, the manufacturers of the “Precious Moments” line of ceramic figurines won a lawsuit against wholesale seller Costco. Enesco took great pains to control the distribution and sale of their figurines for purposes of quality control and marketing. But in the late ‘90s, Costco began purchasing figurines, removing them from their bulky protective cardboard packaging, and repackaged them in clear blister-pack cartons.
Enesco sued Costco, alleging that the new packaging was inadequate and could result in damage to both products and Enesco’s reputation. They bolstered their argument by pointing out that Costco violated the Lanham Act because they did not disclose to consumers that the figurines were not sold in their original packaging. Costco won the original suit, but lost in the Ninth Circuit Court of Appeals. Subsequently, they had to include labeling on their packaging indicating that the figurines were not sold in the original manufacturer’s packaging.
The fact that Costco merely had to adjust their packaging may seem minor, but the case was immensely costly—far more than any typical reseller could bear.
Resellers often make a variety of other mistakes that get them into serious trouble. For instance, they fail to collect sales tax in all required instances, or don’t even begin to research who they should be collecting sales tax from. And in light of South Dakota v. Wayfair, which will significantly increase the obligation that online sellers have to collect and remit sales tax, it’s all-too-easy to end up owing back taxes and immense penalties.
This is why we strongly advise that anyone operating as an online reseller, especially those with a significant volume of sales, should obtain the services of a trademark lawyer, such as ourselves. We can help you determine whether it’s a wise to obtain a license as authorized seller, avoid potential trademark infringement as an unauthorized reseller, identify any necessary disclosures you should make about your products, and even assist you with obtaining intellectual property insurance if there’s a strong chance that a manufacturer will come after you. To learn how we can help, contact us by calling (916) 760-8265, or by sending us a message using our contact form.