Monday, August 26, 2019

first sale doesn't cover hardware w/embedded licensed software, but maybe Cisco misrepresented whether a license existed

Cisco Systems, Inc. v. Beccela’s Etc., LLC, 2019 WL 3944986, No. 18-cv-00477-BLF (N.D. Cal. Aug. 21, 2019)

Cisco offers various supports for its networking products, including a warranty program (from 90 days to lifetime) and a “more comprehensive suite of service and support offered to customers for a fee” called SMARTnet Service. It relies on independent “Authorized Channel Partners” or “Authorized Resellers” to distribute and sell its products. Authorized Resellers agree to purchase Cisco products only from Cisco or authorized distributors and to sell those products only to end users (not to other resellers).

BecTech sells Cisco products but is not a Cisco Authorized Reseller. BecTech allegedly sells Cisco’s products without, among other things, a manufacturer’s warranty or customer support, which would be material to a customer’s purchasing decision. BecTech allegedly sold 37 Cisco products advertised as “Brand New Factory Sealed” that were not in fact factory sealed, as well as reselling stolen Cisco products. Likewise, Arbitech allegedly had a history of selling counterfeit Cisco products. They allegedly sold a SMARTnet contract to an end user without authorization, and thus must have induced a Cisco Authorized Reseller to sell them the SMARTnet contract in violation of the Reseller’s contract with Cisco.

Cisco sued for copyright infringement, trademark infringement and counterfeiting, unfair competition under California law, and other state law claims.

Defendants counterclaimed that they sell genuine Cisco products on a lawful “secondary market” of resellers relying on first sale, and that Cisco unfairly and anticompetitively attempts to control the secondary market by attempting to shut down these lawful sales of its goods. Cisco allegedly embeds its hardware with software that it licenses to consumers through its EULA, so customers can’t actually use the hardware without complying with the software EULA, which requires end users to purchase the software from an “Approved Source” (i.e., not on the secondary market). Cisco allegedly “does not require end users to acknowledge, read, or accept a license agreement before using Cisco goods sold by [Defendants],” and that Cisco does not inform customers of this limitation until “after their purchases.”

Cisco allegedly misrepresents to consumers that they cannot use the software without a license, even though they have purchased the hardware.  It also allegedly engages in various other attempts to squash the secondary market, including by “selectively classif[ing] genuine, lawfully obtained Cisco products as ‘used,’ ‘stolen,’ ‘counterfeit’ or ‘scrapped,’ simply because these products were traded on the secondary market.” It allegedly tells customers that products sold on the secondary market are used, which it defines as “previously owned equipment that is now owned by a party other than the original customer,” including both “opened and unopened equipment,” misleading consumers into thinking that all products sold on the secondary market have previously been opened and deterring them from buying. It allegedly wrongfully denies warranty coverage for products sold on the secondary market on grounds of deterring counterfeiting, knowing that most of these products are genuine. Defendants sought a declaratory judgment that they weren’t violating the Lanham Act; alleged false advertising under the Lanham Act and violation of NY GBL § 369-b and California’s UCL; and alleged that Cisco’s terms were unenforceable in New York.

NY GBL § 369-b states that “A warranty or guarantee of merchandise may not be limited by a manufacturer doing business in this state solely for the reason that such merchandise is sold by a particular dealer or dealers....Any attempt to limit the manufacturer’s warranty or guarantee for the aforesaid reason is void.” But it doesn’t create a private right of action, so there was no declaratory judgment claim available.

As for the Lanham Act claim, it was “certainly not unreasonable as a matter of law” that a consumer would believe the term “used” doesn’t apply to unopened goods, and thus consumers could be misled by Cisco’s private definition of the term.  As for the alleged misrepresentation of the binding effect of the EULA, the court first held that a copy of the software could just be licensed and thus not subject to first sale even if it was embedded in hardware that was sold, which is not a great rule.  However, there were questions of fact regarding whether consumers of Cisco’s goods sufficiently agreed to the software license, such that it would bind them.  [And it’s not super clear whether the court thought there were also factual issues about whether these copies had been sold or merely licensed, though one would think that the fact that consumers don’t have to agree to the “license” to buy the hardware with the software embedded would also bear on whether there was really a license.] Though silence can be consent, an offeree’s silence does not constitute acceptance “when the offeree reasonably did not know that an offer had been made.” There was a question of fact whether consumers reasonably knew of the EULA such that they could accept it (or return the product if they did not accept). Defendants alleged that Cisco didn’t inform consumers until “after their purchases” that they will have to license the embedded software and that Cisco “does not require end users to acknowledge, read, or accept a license agreement before using the Cisco goods sold by [Defendants].” Thus, first sale might apply, and Cisco might therefore have misled consumers about it.

Defendants also sufficiently alleged deceptiveness/materiality in that the misrepresentations “successfully deter consumers from purchasing Cisco goods on the secondary market” and that defendants “on information and belief...lost sales of products that would have been made but for Cisco’s false representations to consumers.”  For the same reasons, they pled proximate cause [which is often easier to do in cases of disparagement].

This also allowed UCL unlawfulness/fraudulent counterclaims to continue, and also unfairness because Cisco’s conduct allegedly “unfairly stifles competition by forcing consumers to purchase products from it and not from resellers on the secondary market,” at least requiring further facts to resolve.

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