Sam's Club exposed to disgorgement for potential warranty differences in grey goods it sold

Monahan Prods. LLC v. Sam’s East, Inc., 2020 WL 2561255, No. 18-11561-FDS (D. Mass. May 20, 2020)

Plaintiff makes UPPAbaby strollers. Sam’s is a chain of membership-only retail warehouse stores and, despite not being an authorized retailer, it sold actual UPPAbaby strollers, and it can’t get out of a trademark infringement claim because basically anything can be a material difference.

Although UPPAbaby characterized the strollers as “gray market” goods—intended for distribution and sale in foreign countries—they were physically identical. But UPPAbaby argued that there were three post-manufacture differences that would consumer confusion and injure its brand. “First, it contends that it maintains strict quality control in its domestic distribution chain, while Sam’s Club does not. Second, it contends that only its authorized retailers provide appropriate customer support, and that Sam’s Club is not such a retailer. Third, the warranty protection provided by UPPAbaby does not apply if the product is sold by an unauthorized retailer such as Sam’s Club.” (Amazon is an authorized retailer, if you thought that there might actually be customized support services involved.)

Cross-motions for summary judgment were mostly denied. Europeans think of the US as more freewheeling than the EU on trademark, but I really have to wonder if that’s true for first sale given the costs of litigating issues like this when the products are physically identical.

Despite being sold by Amazon, one of the company’s founders testified that the UPPAbaby “brand and [its] products have a reputation and an assumption by a consumer of certain quality and services”—a reputation that she said could be harmed if the strollers were sold by unauthorized retailers who lack “the same level of knowledge and service” as authorized retailers or who sell the strollers at lower prices.

The parties disputed whether the strollers were unpacked or re-packaged by Sam’s Club along the way, by which UPPAbaby apparently includes the allegation that Sam’s employees may have removed them from their original shipping pallets and put them on different pallets; Sam’s disputes that there was any re-packaging.

Unlike authorized retailers, Sam’s Club does not provide replacement parts or repair services for UPPAbaby strollers. Sam’s Club employees are not specially trained on how to sell or service the strollers. Under the terms of the warranty, strollers sold by Sam’s were not covered, though on several occasions, UPPAbaby allowed customers who said they had bought a stroller at Sam’s Club to register for the warranty, and Sam’s also argued that UPPAbaby’s warranty limitation was illegal under NY law.

Sam’s Club offered its own warranty on the strollers—a “100% Merchandise Satisfaction Guarantee” promoiing that “[i]f the quality and performance of member’s purchases don’t meet their expectations, [Sam’s Club will] replace it or give them a refund in most cases.” For some time, the Sam’s Club website represented that the strollers were covered by a “6 month manufacturer warranty,” but Sam’s removed the reference after the complaint was filed and replaced it with its own “100% Merchandise Satisfaction Guarantee.”

First sale does not bar trademark enforcement when “genuine, but unauthorized, imports” “differ materially from authentic goods authorized for sale in the domestic market.”

Sam’s argued that these weren’t even gray market goods, given that they came into the US with UPPAbaby’s consent and then were dispatched to Sam’s, some allegedly by round trip to Canada; at least some of the strollers never left the country. UPPAbaby argued that nonetheless, they weren’t authorized to be sold in the US. The court found that UPPAbaby’s definition—a grey-market good is one unauthorized for sale in the United States, whether or not it was originally imported with the consent of the trademark holder—was better supported by the case law.

So the remaining question was whether there were material differences between the strollers sold by Sam’s and the authorized versions. The “threshold of materiality” is “always quite low” in gray-market goods cases and covers “any difference between the registrant’s product and the allegedly infringing gray good that consumers would likely consider to be relevant when purchasing a product.” If a material difference does exist, it “creates a presumption of consumer confusion as a matter of law.”

While the existence of differences is a factual question, materiality may be a matter of law. Quality control: The case law says (interestingly without any particular evidence, as compared to what may be required in a false advertising case) that “[d]ifferences in quality control methods, although not always obvious to the naked eye, are nonetheless important to the consumer” and that “substantial variance in quality control” constitutes a material difference.

Here, the quality-control procedures at issue didn’t involve the actual manufacture of the product. UPPAbaby argued that it ensures that the strollers “reach the customer with as few supply chain steps as possible and maintain[s] close quality control at all steps in its distribution.” Sam’s contends that there was no evidence that this affected the strollers. Such evidence isn’t strictly necessary because quality control measures “may create subtle differences in quality,” but “‘quality control’ is not a talisman the mere utterance of which entitles the trademark owner to judgment.” There was a factual dispute: “on one occasion, Sam’s Club shipped a stroller to a customer that was different from what it had advertised,” and it was possible that this was caused by different inventory tracking procedures. [How this could affect the reputation of the manufacturer is left as an exercise for the reader.] And “due to supply chain differences, the strollers sold by Sam’s Club were likely to have been shipped several more times than those sold by authorized UPPAbaby retailers,” though there was no evidence that Sam’s shipping precautions were any different from those taken by UPPAbaby or its authorized retailers, especially Amazon. Other than number of shipping instances (which might not differ for Amazon), UPPAbaby didn’t show what specific actual quality-control procedures it observed, or how they differed from those used by Sam’s Club or its suppliers. “On this record, a jury could reasonably conclude either that there are important differences between UPPAbaby’s and Sam’s Club’s quality-control procedures or that there are no (or only trivial) differences.”

Customer support: “The question here is whether the advice and information that is available for UPPAbaby strollers sold by Sam’s Club differs materially from what is available for strollers sold by UPPAbaby’s authorized retailers.” It wasn’t clear that there were any differences; Sam’s customers seemed to have the same access to the UPPAbaby support team as anyone else, and there was evidence that those customers called and received help from UPPAbaby’s customer-support team on several occasions.

UPPAbaby argued that only its authorized retailers had invested the time and money to train their employees on how to display its strollers properly, recommend a suitable model for each customer, and answer maintenance questions. There was some evidence that Sam’s Club’s customer-support staff was less than fully informed about UPPAbaby’s strollers. “On one occasion, a member of its customer-support staff called UPPAbaby’s own support hotline to ask about a stroller.” But it wasn’t clear that authorized retailers were substantially different, only “broad statements” by UPPAbaby’s employees. Given that UPPAbaby sold through Amazon, the court was dubious “whether Amazon trains its employees on how to display UPPAbaby strollers properly and recommend suitable models to customers, or how it would even go about doing so.” Still, this created a factual dispute. [Sometimes I imagine false advertising claims being treated with this level of deference. Sometimes I don’t.]

Warranty differences: It was unclear whether a difference in warranty protection, standing alone, could be material in the absence of functional product differences. The court rejected Sam’s argument that UPPAbaby’s voluntary extension of its warranty to some Sam’s purchases made this putative difference arbitrary and immaterial. Though UPPAbaby did seem to have done this, “[i]t would frustrate the purpose of federal trademark law to require UPPAbaby to refuse warranty protection, risking further harm to its goodwill, in order to preserve its trademark claims.” [How this is material to consumers if the warranty is honored is again left as an exercise for the reader.] Anyway, UPPAbaby doesn’t always honor the warranty for Sam’s purchases. Nor does state law requiring warranty coverage to be extended change things. New York law, for example, prohibits manufacturers from limiting warranty coverage “solely for the reason that such merchandise is sold by a particular dealer or dealers.” But there was no evidence UPPAbaby ever complied, and its violation of NY law (if violation there be) was a different issue. [Again, how this could be material to NY customers, at least, is not clear.]

Sam’s argued that the difference in warranties was not material because its own “100% Merchandise Satisfaction Guarantee” was superior. But the question was whether the products it sold were materially different, not whether they were inferior. “Thus, even a product covered by a more generous warranty may still be materially different if that warranty is substantially unlike the one that applies to authorized versions.” Again, whether the differences were material were not clear on this record. On paper, the differences would likely to matter, since UPPAbaby’s warranty allows for repairs and replacement parts for a broken stroller, but not an entirely new stroller or a refund, while Sam’s is vice versa. However, that difference might be only theoretical; UPPAbaby apparently never actually repaired a stroller under its manufacturer’s warranty. “Its own employee admitted that the warranty primarily serves as “marketing,” rather than to provide real product support.” And UPPAbaby’s implementation of its warranty also apparently does allow refunds.  

The court noted that the fact that several Sam’s customers apparently contacted UPPAbaby to ask whether their strollers were covered by the manufacturer’s warranty. While that tended to show confusion about which warranty applied, it didn’t show that there were ultimately real differences in those warranties that would have mattered to them.

“[O]n this record jurors could reasonably disagree as to whether any of the alleged product differences meaningfully exist in a way that would likely be relevant to consumers.”

Sam’s moved for partial summary judgment on whether UPPAbaby could get money damages. Under First Circuit rules:

(1) a plaintiff seeking damages must prove actual harm, such as the diversion of sales to the defendant;

(2) a plaintiff seeking an accounting of defendant’s profits must show that the products directly compete, such that defendant’s profits would have gone to plaintiff if there was no violation;

(3) the general rule of direct competition is loosened if the defendant acted fraudulently or palmed off inferior goods, such that actual harm is presumed; and

(4) where defendant’s inequitable conduct warrants bypassing the usual rule of actual harm, damages may be assessed on an unjust enrichment or deterrence theory.

UPPAbaby sought: (1) the costs of future corrective advertising; (2) compensation for extra personnel expenses incurred; and (3) the disgorgement of Sam’s Club’s profits.

UPPAbaby hadn’t done any corrective advertising; courts occasionally award prospective corrective advertising costs, but with reservations, given the “substantial potential for inaccuracy.” Such awards are appropriate “only if it compensates the injured party for identifiable harm to its reputation.”

There was some evidence of identifiable harm to UPPAbaby’s brand in the record because some Sam’s customers called the UPPAbaby support hotline or communicated online, unsure about whether their strollers were under warranty. Another customer called to report that Sam’s Club had advertised a different model year stroller than what it had for sale, possibly due to quality-control differences, and that he or she felt “confused” and deceived. “Any harm to UPPAbaby’s brand caused by this consumer confusion is compensable, and therefore, at least in theory, it could recover the costs of a corrective advertising campaign that would effectively repair that harm.” [I really don’t understand the harm story here. How is harm done to the “brand”? Ok.]

Still, Sam’s got summary judgment on this, because UPPAbaby’s marketing expert based his corrective advertising cost estimate at least in part on the fact that Sam’s sold the strollers cheaply. “But even if such harm occurred, sales at discounted prices do not violate the Lanham Act. … [A]ny harm to UPPAbaby’s brand caused simply by discount sales is not recoverable.” Indeed, the court noted in a footnote—something that bears on the discussion above—“[E]ven if Sam’s Club’s versions had unavoidable material differences—for example, because they were not covered by the manufacturer’s warranty—Sam’s Club could still legally sell them if it effectively disclaimed those differences.” Nor did UPPAbaby show that its proposed remedy would actually redress harm to its brand. The expert proposed “an unspecified message—either by mail or by digital advertising—to as many consumers who may have seen Sam’s Club’s advertising as is possible. He did not identify the contents or layout of that message, let alone explain how it would remedy the consumer confusion arising from any material differences in the strollers sold by Sam’s Club.” Without that, UPPAbaby was just seeking a free ad campaign, which was not an ok way to measure damages.

Damages for personnel expenses: UPPAbaby sought compensation for the time spent by its employees investigating the sale of its strollers by Sam’s Club and addressing related complaints by customers and retailers. Sure, “additional personnel expenses arising from unauthorized sales in violation of the statute are recoverable as a general matter.” But “[o]ne obvious issue is that most, if not all, of those employees were salaried, so the company would have paid them regardless, and therefore it has not suffered any incremental out-of-pocket losses.” Still, it was theoretically possible to prove lost opportunity costs; had UPPAbaby provided sufficient factual evidence to create a factual issue as to whether there was a reasonable likelihood of actual harm to the company? Some of UPPAbaby’s employees who worked on this issue may have been compensated on an hourly basis, so their efforts might be compensable, and even for the salaried employees, “using the number of hours those employees spent on remedial efforts is not an unreasonable approximation” of lost opportunities, given that wrongdoers bear the risk that the harm they do will be hard to quantify. So no summary judgment on this kind of damages.

Disgorgement: Romag doesn’t matter much here because the First Circuit already allowed disgorgement: “(1) as a rough measure of the harm to plaintiff; (2) to avoid unjust enrichment of the defendant; or (3) if necessary to protect the plaintiff by deterring a willful infringer from further infringement.” To recover under (1), a plaintiff must prove both actual harm and direct competition. But the parties weren’t direct competitors, because Sam’s is a retailer selling directly to consumers and UPPAbaby is manufacturer that doesn’t (also, UPPAbaby also got paid for these strollers!). True, consumers might instead have bought from an authorized distributor, but that wasn’t the same thing as direct competition, and it thus wasn’t inherently plausible that “defendant’s profits may be presumptively similar to what plaintiff would have earned on the sale.”

Fraud or willfulness could still justify disgorgement even without direct competition. A jury could reasonably conclude that Sam’s Club acted willfully or in bad faith. “Its supplier informed it in writing that the UPPAbaby warranty would not apply to the strollers if sold in the United States.” But Sam’s nonetheless allegedly put the strollers on the website as having a manufacturer’s warning. “A jury could reasonably conclude either that it was a mistake, or that it was done willfully and with the intent to mislead consumers.”

However, Mass. Gen. Laws ch. 93A claims failed because the statute expressly provides that no action may be brought under the statute unless the complained-of conduct occurred “primarily and substantially within the Commonwealth.” The critical inquiry is “whether the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth.” It was undisputed that the actionable conduct was not centered in Massachusetts, but was throughout the US. It didn’t matter that UPPAbaby’s strollers are stored in its warehouse in Massachusetts and sold by several authorized retailers in Massachusetts, because that wasn’t the relevant conduct. A place of injury within Massachusetts is not a sufficient basis for finding that conduct occurred “primarily and substantially” within the Commonwealth.