Friday, February 13, 2015

returned goods sold as new were infringing, false advertising

RFA Brands, LLC v. Beauvais, No. 13–14615, 2014 WL 7780975 (E.D. Mich. Dec. 23, 2014)
Plaintiffs make various electronics and accessories, with various registered marks. They use the same warehouse to distribute their products, which is in Commerce Township, Michigan.  They found their products on sale on Amazon by “Joe Roof” (later “1 Man’s Trash”), sold as new with prices well below retail and wholesale prices.  The total variety of products offered for sale had never been available from any single distributor or retailer; only the warehouse held them all.  Plaintiffs ordered a product and alleged that inspection revealed that it was used, not new. They concluded that the product had been returned to the warehouse as damaged or defective and should never have been re-sold to the public. The purchased product had stickers on it that weren’t applied by plaintiffs, including a sticker placed by a particular retailer, ShopHQ, confirming that this was a returned item as damaged or defective.
The SKUs and quantities changed significantly over time and were frequently replenished, indicating a continuous supply.  Beauvais admitted that “products were mostly identified as being new and/or unused,” and but asserted that he misrepresents the number of products that he has available as “a marketing technique” because no one will buy a single item but the listing of multiple items gives the appearance of a retail “king,” and he can then remove the additional items once a consumer is induced to purchase the single item.  He argued that the photos of the products were provided by to storefronts.  He also admitted that he lacked knowledge whether the product he sold to plaintiffs as a new product was actually used.
Beauvais claimed that all the products he sold came from an auction of two storage units. Pictures of the contents obtained from the storage company prior to auction didn’t show the goods in question, and no one witnessed the product in the units at the time that he came into possession of the units. The prior owner of the units testified that he never kept products with plaintiffs’ marks in the units, but only household goods, and that nothing in his storage units could have been sold as new, unused, unopened items.  
Beauvais’s Facebook page showed a photo of a van parked at plaintiffs’ warehouse, allegedly in an area only visible from the warehouse property.  Plaintiffs concluded that the majority of the products had come from the returns section of the warehouse, given that the products bore various retailer stickers, and some of the goods showed indications of having been opened and improper packaging.  Beauvais offered red and blue versions of one product, but those colors were a special order for one retailer, further indicating that the products were customer returns.  Nearly all of the packaging of the inspected inventory showed signs of wear, sometimes significant. Some of the products were much older models, and many bore indications of re-sealing with non-factory stickers.
At least nine of the items weren’t available in the United States until after March 25, 2013, the date after which the prior owner of the storage unit could’ve put stuff into it. Beauvais’s records also showed that inventory that was “sold out” in October was replenished in November. And, in another sale, defendant represented that the unpackaged product for sale had been “refurbished” and “showcased display models,” a statement that would be hard to make honestly if Beauvais had found this product in the storage units.
Plaintiffs alleged a policy against the sale of returned goods as a matter of quality control.  Instead of refurbishing or reconditioning, products are returned to the manufacturing site. Plaintiffs alleged that the sale of returned goods caused a significant risk of negative internet word of mouth, harming the brands and plaintiffs’ reputation. Also, plaintiffs’ warranty does not extend to older models and products that were subject to prior returns, though they may choose to accommodate customers at its discretion on a case-by-case basis.
Amazon requires “new” to be new: “Just like it sounds. A brand-new, unused, unopened item in its original packaging, with all original packaging materials included. Original protective wrapping, if any, is intact. Original manufacturer’s warranty, if any, still applies, with warranty details included in the listing comments.”  But Beauvais testified that he opened everything that he sold to verify that it was new and working.
Trademark infringement: there was no question about likely confusion. The only question was first sale.  Importantly, “when a defendant sells a product that is materially different ... it is presumed that the undisclosed difference between the products will confuse consumers.” The threshold of materiality is low “to include even subtle differences between products.” And, the defendant bears the burden of proving lawful purchase to invoke first sale.
Plaintiffs challenged Beauvais’s story about buying storage units, and also argued that “[m]ysterious found goods of an unknown origin and unknown nature does not prove a first sale enabling [d]efendant to sell product as new[.]”  The court agreed. Even assuming that Beauvais found the products in the storage units, at best he could only speculate about their origin, and didn’t rebut plaintiffs’ evidence that the products were returned and not to be resold.  Thus, he didn’t establish that the first sales were “authorized.”  (Hmm.  Let’s say title did pass to the retailers, who subsequently returned them or passed on customer returns.  Why isn’t that first sale?  The fact that it’s retransferred to the original manufacturer doesn’t undo the initial sale, does it?  If I keep my malfunctioning electronic item rather than returning it, surely I can sell it as used?)
Plus, even if the first sale was authorized, the undisputed evidence was that the products offered for sale were materially different and inaccurately represented as new. Thus, the products weren’t genuine because they were sold as new rather than used.  And plaintiffs don’t allow distribution of returned goods; they never authorized resale.  “[R]eselling products with inferior warranties constitutes a material difference negating the first sale defense.”
The court rejected Beauvais’s argument that the products could be “deemed new” because customers were not complaining.  That didn’t change the products into “new” products; also, Beauvais sold some products as “refurbished” or as purported “show case models,” but those claims were precluded by his story that he bought the items at a storage locker auction; given his alleged chain of title he couldn’t know that.
Along with infringement, the court also found false advertising based on the sale of used and returned products as “new.” Beauvais also misrepresented a product as “refurbished” and admitted to misrepresenting the number of units available for sale. The court accepted that these actions “detract[ed] from the value of plaintiffs’ mark.”
Plaintiffs successfully asked for disgorgement of $20,000 in profits.
(So, where did those products come from?  I wonder if an internal investigation revealed any culprits.)

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