Gray market goods presumptively cause irreparable harm

AFL Telecommunications LLC v. Fiberoptic Hardware, LLC, 2011 WL 4374262 (D. Ariz.)

I’m ignoring the personal jurisdiction part of this case. AFL is the exclusive licensee for distribution of Fujikura-brand fusion splicers in North America. Defendant FOH resells fiber optic equipment. AFL alleged that FOH buys Fujikura splicers intended for use overseas, modifies the products, and resells the "gray market" units in the United States. AFL sued for copyright infringement, unfair competition, and violation of the Lanham Act.

The court found that the complaint failed to plead sufficient facts about copyright ownership to state a plausible claim for relief. It alleged that certain fusion splicers are operated in part by Fujikura’s copyrighted software, and that on “information and belief,” Fujikura owned the copyright in the software “as a work made for hire or otherwise.” The court found these “bare allegations” insufficient.

The Lanham Act claims did better. In the Ninth Circuit, a preliminary injunction is assessed on a sliding scale: if a plaintiff shows that the balance of hardships tips sharply in its favor, it need only show serious questions on the merits rather than make a strong showing of likely success. You might think that Winter changed the Ninth Circuit sliding-scale approach, but no: Winter only requires a plaintiff to show that irreparable harm is likely. It does not add on a requirement of showing a strong likelihood of success on the merits.

Since the public interest disfavors confusion, that helped AFL, nor did FOH dispute that the balance of equities tipped strongly in AFL’s favor. All AFL needed to show was that it raised serious Lanham Act questions and that it would likely suffer irreparable harm without a preliminary injunction.

For the §43(a)(1)(A) claim, AFL needed to show that FOH’s use of the Fujikura mark was likely to cause confusion. For gray market goods, that happens if there are material differences between the allegedly infringing good and the authorized product. Sale of materially different goods is actionable because consumers may buy on the basis of the domestic supplier’s reputation and be disappointed.

AFL identified a confused and disappointed consumer: the Minnesota Air National Guard (ANG). FOH sold four Fujikura-brand fusion splicers to a reseller, who had FOH ship them to the ANG. Fujikura had initially shipped the splicers to China and licensed them for use only in that country. Less than a month after receiving one of the splicers, “the ANG had concerns about an error message on the unit's startup screen stating that the unit is ‘licensed for use only in Europe.’ Although pressing an ‘agree’ button would make the message disappear, the ANG worried that the unit ‘may not be configured properly for U.S. use.’” (Note the possibility that the seller is bootstrapping a nonsubstantive difference into a substantive one with this warning. This seems potentially anticompetitive to me; also what’s up with the European warning for a Chinese splicer?) Anyway, the ANG “also had concerns about a label FOH had placed on the unit warning the operator not to update the unit's software using Fujikura's website, but instead to return the unit to FOH. Because National Guard personnel would need to be able to update the software in the field, the ANG rightly wondered, ‘Why would connecting the unit to Fujikura's website damage it?’” ANG wasn’t satisfied with the splicers and ultimately shipped them to AFL.

The threshold for a material difference is quite low: any difference that consumers would likely consider relevant creates a presumption of confusion. (This is another example of TM owners being favored over competitors in the TM/false advertising divide: compare the materiality standard used in, say, Pizza Hut with the statement the court quoted that, “because many factors influence a consumer's decision to purchase a product, the materiality standard must be kept low to include even subtle differences between products,” Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067, 1073 (10th Cir. 2009) (citation omitted).)

Given the alterations and the ANG’s dissatisfaction, there were serious questions as to the existence of material differences.

AFL also raised serious questions on its false advertising claim that FOH falsely offered “new” fusion splicers for sale on eBay. eBay defines “new” as a "brand-new, unused, unopened, undamaged item in its original packaging," but AFL presented evidence suggesting that FOH makes material alterations to the Fujikura splicers before reselling them. FOH admitted that the splicers it advertises as being "new" are in fact used first by FOH for "quality control" purposes.

FOH argued that it carefully and explicitly informs consumers that FOH, not AFL or Fujikura, services and warranties the splicers FOH sells. But the court found serious questions as to the sufficiency of this disclosure.

FOH also argued that its disclosures averted irreparable harm. Damage to goodwill is irreparable harm. “Given the ANG's dissatisfaction with the Fujikura brand splicers resold by FOH,” AFL was likely to suffer irreparable injury—even though the dissatisfaction was related to the gray market status of the goods.