Alleging that unauthorized reseller sells old product defeats first sale defense

Unite Eurotherapy, Inc. v. Walgreen Co., Case No.: 16-cv-01706, 2017 WL 513008 (S.D. Cal. Feb. 7, 2017)

Unite sells boutique hair care products through authorized resellers and its own website. Unite alleged distribution agreements with all of its resellers, allowing those resellers to make sales only through limited channels and prohibiting those resellers from selling its products through online or internet channels. Since about August 2010, its distribution agreements contained an Anti-Diversion Agreement prohibiting resellers from selling “Product to persons or entities purchasing Product in bulk” or to “any diverter or redistributors of products or to any other person or entity reasonably believed to be purchasing Product for subsequent sale,” as well as related provisions. 

Unite sent defendants C&D letters informing them of these agreements and that its online sales of Unite were unauthorized. Defendants continued to sell the products on walgreens.com, allegedly resulting in the loss of two accounts and numerous other existing clients threatening to drop the brand.

The court found that intentional interference with contractual relations was properly alleged, even though Unite didn’t identify the specific third parties who’d been induced to violate their agreements, because it sufficiently alleged that all its distributors were bound and that Walgreen knew that because Unite told it.

Unfair competition/trademark infringement: Defendants pointed out that the first sale doctrine exists.  But there’s a quality control exception: “Where the distribution of a product that does not meet the trademark holder’s quality control standards results in the devaluation of the mark by tarnishing its image,” the non-conforming product is deemed not genuine and infringing. The question is “whether the public is likely to be confused as a result of the lack of quality control,” because of a hard-to-detect defect in the product.

Unite’s first theory, that consumers would likely be confused into believing that the sales were authorized by Unite, was barred by the first sale doctrine.  But Unite also alleged likely deception about the quality of the product, “because the unauthorized sales are dumping old product of degraded quality into the marketplace.” Thus, the quality control exception applied.  Comment: How can this be sensible?  Unless Unite reclaims old, unsold product—which allegations the court didn’t mention—then authorized products can be just as old. The allegations the court mentioned were that Unite engages in extensive product testing (pre-sale), and that it carefully chooses salon sellers to keep the products off of others’ online sites, because online retail sites tend to “ ‘dump’ products that have been sitting on shelves or in warehouses for too long and therefore of lesser quality.”  But all products age; I don’t see how these allegations survive the first sale doctrine.