Trademark claims survive despite Kirtsaeng first sale defense

AFL Telecommunications LLC v. SurplusEQ.com Inc., 2013 WL 2211629 (D. Ariz.)

Lots of goodies in this case, including what counts as "commercial advertising or promotion" in the digital age.

After Kirtsaeng, copyright first sale is much easier to assert than trademark first sale.  AFL sued SurplusEQ and other defendants for unfair competition, false advertising, and copyright infringement arising from Defendants' sale of fusion splicers (devices used to splice fiber optic cable) made by AFL's Japanese parent, Fujikura Ltd.  AFL is the exclusive authorized distributor of Fujikura splicers in North America.

The hardware and software on every splicer is identical, regardless of intended sale destination. The software has many available languages. During manufacturing, Fujikura “implements” a lock that changes the setting to display only the language sued to the region of intended sale. Afterwards, one must change the software settings to make another language available. In 2006, Fujikura added a “splash screen” to some of its splicers stating that the unit is licensed for a particular country or region. Each version of the software contains substantial code from the preceding version, plus new content.  Fujikura registered version 1.32b of the operating software for its FSM–60 series.  Its registration certificate’s “Limitation of copyright claim” section states: “Material excluded from this claim: Previous version.”

SurplusEQ sold several brands of fiber optic equipment over the internet.  In 2005, it began selling gray market Fujikura splicers it obtained from China and Hong Kong.  In a blog post, it referred to the splicers as “new,” purchased directly from the manufacturer, and covered by a manufacturer's warranty. On its website, SurplusEQ advertised some of its Fujikura splicers as “new and unused” and “[g]uaranteed not modified in any way.” It stopped selling gray market Fujikura splicers in late 2011.

Fujikura splicers sold in the US through authorized channels have a manufacturer’s warranty allowing buyers to get warranty service from AFL.  Gray market splicers don’t have a warranty, though SurplusEQ offered a one-year warranty.  In 2009, AFL added an additional year of warranty.

In 2009, a company called Entergy bought a Fujikura splicer from SurplusEQ. After about a year, Entergy contacted AFL for service. AFL determined that it was a gray market unit and offered Entergy a replacement in exchange.  AFL’s inspection revealed that the splicer’s serial number had been changed both on the outside of the unit and in a flash memory chip; the flash memory chip had been replaced; nearby components had been subjected to heat damage; and the splicer's protective coating had been damaged.

AFL and Fujikura developed a plan to eliminate gray market competition, including a copyright license agreement that provided AFL with the exclusive license to distribute the Fujikura software and to register such rights in AFL’s name.  The agreement also assigned AFL all existing claims for infringement.  (Query whether this suffices post-Righthaven.)  They also entered into a trademark license agreement.

AFL sought summary judgment on its trademark, false advertising, and copyright claims, and lost basically all its arguments but, because trademark doctrine is so expansive, got a chance to prove its trademark claims at trial.

For gray market goods, actionable trademark confusion stems from material differences between the allegedly infringing good and the authorized-in-the-US product.  “[C]onsumers may unwittingly purchase the goods on the basis of the domestic markholder's reputation only to be disappointed when the product does not meet their expectations.”  (One would think this would be a false advertising claim, not an infringement claim, at least when consumers aren’t confused about whether the sales are authorized; we see a bit of this in the discussion below.)  Material differences are likely to cause consumer confusion, and the threshold of materiality is always quite low—any difference that consumers would likely consider relevant creates a presumption of confusion.

AFL argued that there were material differences because of physical alterations, differences in warranty coverage, and software licensing issues.  AFL did not provide any evidence that the Entergy splicer had been altered before SurplusEQ sold it; it failed to meet its burden of proof on this. 

As for the warranty, defendants argued that they offered an identical warranty, but this clearly wasn’t true.  The Fujikura warranty allowed customers to seek repair from AFL, a Fujikura-authorized dealer; the SurplusEQ warranty required repair by SurplusEQ or someone else.  Defendants argued that they fully disclosed the differences between the products.  The court considered this an attempt to rebut the presumption of confusion, which would have to be done by showing by a preponderance of the evidence that consumers wouldn’t generally consider the differences in buying—which doesn’t make much sense; consumers could consider the warranty differences, but make the call that the lower price justified the lesser warranty, in full knowledge of the chance they were taking.  It’s the knowledge, not the lack of difference, that fixes the alleged confusion.

Defendants offered deposition testimony that they always disclosed the lack of authorization and that Fujikura wouldn’t repair splicers bought through them.  One employee stated that customers usually noted that it was a gray market unit and asked, and they’d be told that AFL wouldn’t service it.  The website also disclosed this fact, as did the invoice and stickers placed on the units.  The court found that this created a genuine issue of fact as to whether the warranty differences were material to consumers. 

As for software licensing, AFL argued that purchasers would consider their possible copyright liability for using unauthorized software to be material.  Though the court found this a close question (except that this is no longer a close question, since any attempt to sue the end users for copyright infringement should result in a fee award to the users after Kirtsaeng; the court seems to have missed this interaction), it wouldn’t support summary judgment for AFL.  Likely confusion is routinely submitted to juries, so materiality of software licensing was best left to the jury.

On false advertising, AFL alleged that SurplusEQ falsely advertised in a blog post that its splicers were“new,” the “same machine” provided by authorized sellers, purchased “direct from the manufacturer,” sold with “a full Manufacturers [sic] warranty,” and that it falsely advertised on its own website and its eBay store that it sold “new” and “guaranteed not modified in any way” Fujikura splicers.

Defendants argued that AFL failed to show that the blog post was sufficiently disseminated to constitute commercial advertising or promotion.  The court concluded that the blog post wasn’t a classic advertising campaign (!), and without any evidence establishing that the blog was disseminated to the purchasing public (! Was it password protected?  We don’t ask how many people actually saw/heard other forms of broadcast advertising), it wasn’t an ad and thus AFL’s summary judgment motion had to be denied.

However, the statements on SurplusEQ’s website and eBay webpage seemed like classic ad campaigns.  (Now I’m really confused.)  They were made for the purpose of influencing customers to buy splicers and included direct purchasing information.  But there were genuine issues of material fact about whether the splicers were in fact “new” and “not modified” when sold.

Turning to copyright, AFL argued that either it didn’t need to register the software because it was a non-US work, or its registration of a later version was sufficient because the registered version was a derivative work of earlier versions.  Whether it was a non-US work depended mostly on (place of) publication, and there was no evidence there, so that wouldn’t work on summary judgment.  The later registration also wasn’t clearly sufficient to maintain an action for infringement of earlier versions.  “Under the effective registration doctrine, the registration of a derivative work satisfies the registration requirement for an infringement action based on preexisting work not separately registered.”  But, as defendants argued, AFL failed to produce evidence of how the software was modified over time, and in any event the registration specifically excluded any “previous versions” from its claim. At the motion to dismiss stage, the court previously found that the effective registration doctrine applied because it was reasonable to infer from the complaint that each successive version incorporated preceding versions.  But given the specific disclaimer of previous versions, Streetwise (which held that registration of a derivative work protected the underlying work where the registration certificate stated that the work was derivative of previous versions) did not apply.

AFL provided no evidence that SurplusEQ sold splicers with the registered software version, and thus couldn’t get summary judgment on its claim for unauthorized distribution.

Turning to defendants’ motion for summary judgment, the court first declined to find laches, because the record didn’t demonstrate the absence of a genuine issue of material fact about when AFL learned that defendants were selling Fujikura splicers.

Defendants then argued that SurplusEQ fully disclosed the nature of what it was selling, preventing any confusion.  But they didn’t show that SurplusEQ dislcosed “differences related to software licensing and language settings.”  So they didn’t establish a lack of material differences or that all differences were disclosed.  (The language settings are not independently relevant, as far as I can tell; I can see no reason why they matter if (a) the copyright claim does not exist, as it does not, and (b) the fact that these are gray market goods intended for another region is disclosed.)

The court granted summary judgment to defendants on the false advertising claim on the blog post, for the reasons noted above.  Though the blog post discussed SurplusEQ’s products and announced the arrival of Fujikura splicers, with a hyperlink to where consumers could buy them, AFL failed to point to evidence that the blog post was “disseminated”—that anyone actually saw it, “or, more importantly, that anyone responded to it and was influenced to purchase a splicer.” Content alone was insufficient to infer dissemination.  However, matters were different with the website and eBay store, so no summary judgment there.

As for copyright infringement, first sale protected defendants’ conduct.  Kirtsaeng.  Fujikura’s authorization of initial foreign sale exhausted its exclusive rights to distribute copies.  All subsequent owners, including SurplusEQ, were entitled to sell their copies.  (Which logically means that there are no material copyright-related differences between the grey market and authorized copies.  That AFL might theoretically assert a facially legally invalid claim in order to harass buyers surely can’t qualify as a material difference—especially since the buyers wouldn’t even be violating the distribution right, and there is no cause of action against possessing an infringing copy.)

Defendants argued that AFL couldn’t seek damages for the period before Fujikura granted it an exclusive license in 2011. The court disagreed.  AFL had been Fujikura’s exclusive splicer distributor in North America since 2003.  That was a sufficient commercial interest in the mark to give AFL standing to raise a Lanham Act unfair competition claim.  This included standing to pursue damages for sales that resulted in shipments out of the US, even though that was outside the scope of AFL’s license.

The court also granted in part AFL’s motion to seal certain exhibits relating to AFL’s efforts to combat gray market sales, because disclosing AFL’s tactics could cause competitive harm to its efforts if publicly divulged.