Thursday, September 10, 2020

sunglasses reseller liable for (c) infringement, maybe TM/false advertising/tortious interference

Maui Jim, Inc. v. SmartBuy Guru Enters., No. 1:16 CV 9788, --- F.Supp.3d ----, 2020 WL 4435320 (N.D. Ill. Feb. 24, 2020)

Maui Jim alleged that the defendants sold non-genuine Maui-Jim-branded sunglasses while using its copyrighted photographs to falsely advertise that they are an authorized retailer. The defendants counterclaimed that Maui Jim’s statements about their legitimacy constituted defamation or, alternatively, unjust enrichment. The court partly granted and partly denied cross-motions for summary judgment, because first sale is now so narrow a defense that it is almost unavailable for non-used goods; MJ established liability on its copyright claims outright but must go to a jury on trademark/false advertising. Also, there are a troubling number of redactions here, including for facts that the court relies on in its holding; hard to see how this can properly inform the public of the legal basis for the decision.

Defendants sold a redacted number of non-prescription and prescription pairs of Maui-Jim-branded sunglasses into the United States between 2009 and 2019. The prescription sunglasses contained third-party prescription lenses glazed into a Maui-Jim-branded frame. Maui Jim alleged that its sunglasses incorporate patented technology to “wipe out glare and UV rays, and boost[] color via lens treatments.” Its sunglasses have earned the Skin Cancer Foundation’s Seal of Recommendation as an effective UV filter for the eyes and surrounding skin. Maui Jim has registered trademarks, and registered copyrights for the 93 professional photos at issue here, each issued within five years of Maui Jim’s first publication. 

Maui Jim averred that it required all Maui Jim sunglasses be sold with authentic Maui Jim lenses, frames, and parts, and not modified in any manner. Defendants disputed this, noting that nothing in Maui Jim’s European authorized retailer agreements stated that its warranty would be voided if an authorized retailer sold Maui Jim sunglasses to third parties or if third-party lenses were glazed into its frames, and claiming that Maui Jim authorized retailers in the U.S. had glazed third-party lenses into Maui Jim’s frames without consequence.

The parties disputed whether their warranties differed, and whether Maui Jim’s warranty was an integral part of its product offering. Along with some redacted information, Maui Jim’s representative indicated that customers used Maui Jim’s repair department for, on average, three to four non-Maui Jim prescription lenses per week between 2015 and 2018.

Defendants ship all their Maui-Jim-branded sunglasses sold to the United States from Hong Kong, , and some number of shipments of Maui-Jim-branded sunglasses contained a packaging slip that identified a different party as the manufacturer, which defendants blamed on faulty computer coding. Defendants also admitted that they wrongly included a Maui Jim’s 2009 Drop Ball Certification (a certification that lenses comply with certain regulatory requirements) in a limited number of shipments to U.S. consumers. Defendants additionally admitted to at least twenty examples of delayed shipments to its purchasers of Maui-Jim-branded sunglasses, thirteen of which were delayed due to FDA or customs issues.

Defendants’ webpage touts the supposed authenticity of eyewear that it sells from “some of the world’s leading eyewear manufacturers” and their “relationships with some of the world’s leading suppliers.” It oece contained a diagram indicating that their supply chain is direct from the manufacturer to the customer rather than the “traditional supply chain” that routes from the manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. An accompanying sentence said: “By offering the world’s largest range of authentic designer eyewear, sourced directly from the world’s leading eywear [sic] suppliers, we are here to help you find what you love.” Defendants argued that this “was accurate and consistent with SmartBuyGlasses’ practice for the majority of its sales including manufacturers/brands – such as [redacted] and [redacted] – from which it buys genuine products from the manufacturer of the brands and ships it to its consumers.”

MJ alleged that the FAQ falsely answered “Can I trust the authenticity of the products?” with “All of our products have a 100% Authenticity Guarantee, no exceptions. SmartBuyGlasses takes great lengths to ensure the high quality and product authenticity that our customers have come to expect, and all products are accompanied with official tags and manufacturer warranties.”

Defendants’ website does say that “SmartBuyGlasses is not affiliated with nor an official re-seller for Maui Jim ....” when consumers select a MJ-branded frame, and it has small, grey type on the bottom of the pages, stating that it is “a leading independent retailer of the world’s best designer eyewear since 2006 and is not owned by or affiliated with the brands it sells unless stated otherwise.” MJ, however, commissioned a survey that allegedly found that 40.1% of respondents, net, took away the false impression that SmartBuyGlasses is an authorized MJ retailer. Also, the MJ-specific language, which goes on to say “therefore we provide our own comprehensive 24 month warranty, as Maui Jim do not support their own 24 month warranty with us,” was added after litigation began. The parties also disputed whether defendants’ website adequately informed consumers that they were purchasing third-party prescription lenses rather than MJ lenses.

MJ also argued that the website falsely suggested that defendants had an “operation centre” in New York. Although defendants don’t have physical location or physical office in New York, they do have an “operational dropship location in New York.”  [Query how MJ plans to show this misrepresentation, if it is one, harmed them.]

Authenticity: There was a material dispute over the authenticity of (some of) the MJ branded sunglasses based on MJ’s claim that it hadn’t sold enough pairs to the third parties from whom defendants bought to make up their supply, though MJ apparently wasn’t able to determine from test purchases that there were any counterfeits or stolen products.  Since the burden was on defendants to show that first sale applied, they weren’t entitled to summary judgment on that ground alone.

Separately, there were issues about material difference, which would prevent a first sale defense. At least twice, a MJ CSR told a customer that Defendants’ omission from Maui Jim’s authorized retailers list didn’t automatically mean that defendants’ Maui-Jim-branded sunglasses were inauthentic. But MJ still argued that none of defendants’ MJ sunglasses had been subject to an authorized first sale by Maui Jim. Its digital marketing manager told CSRs to respond to customer inquiries about unauthorized retailers “that these sites are not listed and therefore are selling diverted, used, damaged or counterfeit goods and they void our 2 year warranty by purchasing on these sites.”

The court first addressed the burden of proof for a first sale defense: the party asserting the defense has the burden to “show ownership through lawful acquisition.” “Defendants are best suited to know who gave them the Maui-Jim-branded sunglasses they sell on their website.” And “blanket self-serving testimony and testimony from third-parties” was insufficient to grant summary judgment, at least in light of MJ’s own evidence that it hadn’t sold (enough) pairs to the identified third party sources. But nor was MJ entitled to summary judgment, because there was a material question of fact on sourcing.

What about material differences?

The first sale doctrine does not apply to products that have been materially altered from their original form. It is incumbent upon the reseller to show that the differences are not of the kind that consumers would likely consider in purchasing the product. An alteration is material if it changes something about a product that is relevant to consumers’ decision to purchase the product.

I note that the application of this rule has made first sale defenses almost unwinnable for unused goods, despite Supreme Court precedent recognizing that used goods are subject to first sale even though they are basically always materially different from unused goods. For used goods, proper disclosure of their used status is sufficient to avoid actionable consumer deception despite material differences. Though courts occasionally gesture at disclosure for unused goods too, they don’t take it seriously, I guess because they think cutting off the used-goods market would be more socially detrimental than allowing total trademark owner control of initial sales channels, which seems like a competition policy decision that trademark law should not be making. Even this relatively balanced opinion is willing to countenance this control.

MJ identified three alleged material differences, two of which the court accepted as creating material factual issues. (1) Defendants’ sunglasses customers experience inordinate delays; (2) Defendants’ sales do not qualify for Maui Jim’s warranty program; (3) Defendants “sold MAUI JIM-branded sunglasses after removing the original lenses and mounting in the frames prescription lenses that did not come from Maui Jim” but rather were “manufactured using a process over which Maui Jim had no control.”

Shipping delays: Although case law holds that “a physically identical product is nevertheless ‘materially different’ from the genuine article if ‘the bundle of services’ that attach to that genuine article is not available to the consumer,” shipping delays are different from other alleged service differences because they would naturally be attributed to the seller, not the manufacturer, and “are wholly unrelated to the product’s brand.”

Warranty: MJ argued that its warranty didn’t apply to sunglasses purchased outside of its authorized dealers; defendants argued that MJ’s “own communications with customers belie that contention.” The court disagreed: Instances where MJ told customers that they would repair and replace a customer’s sunglasses as long as they were authentic didn’t indicate that the repair would be made pursuant to a warranty. 

So the next question was whether MJ’s warranty was materially different from defendants’ own warranty. “[A]bsence of or a different warranty has been held to be a material difference.”

The court relied on a prior case about Hyundai equipment, which illustrates Jeremy Sheff’s point about the damage that post-sale confusion reasoning has done to direct infringement doctrine. In that case, the defendant’s customers agreed that they knew they were purchasing a product without a warranty, but the defendant still lost on summary judgment because, “[w]hile it may have been [his] intention to warn all of his customers ... this would not protect subsequent customers who may purchase the equipment from [his] customers.” (How often are sunglasses resold compared to large vehicles, by the way?)

It was undisputed that the parties have received inquiries from both present and potential customers about their respective warranty coverages. But whether their respective warranties were identical was disputed. Defendants argued that their warranty was identical or better, but: (1) Maui Jim’s warranty offers repair in addition to replacement, while SmartBuyGlasses’ does not; (2) Maui Jim’s warranty is tracked from the date the customer receives the product, whereas SmartBuyGlasses’ tracks it from the order date, meaning that Maui Jim’s is longer (without even accounting for alleged slower shipping speeds); and (3) both warranties only cover manufacturer’s defects, so MJ, as manufacturer, was “logically better suited to determine whether an issue is a manufacturer’s defect or not.”

These differences must be material to overcome first sale. It was defendants’ burden to show the absence of materiality. Defendants hadn’t done so: (citation to redacted materials) and there was evidence that the warranty did matter “as highlighted in consumer complaints and consumer inquiries directed to both Maui Jim and SmartBuyGlasses.” And “the fact that warranties and repair services were ranked [redacted] in consumer priorities when choosing premium sunglasses could support a finding that Maui Jim’s warranty is a material part of a consumer’s purchasing decision, especially given Defendants do not offer repair services.” [Look, if the court is relying on this for its legal conclusion, it should not be redacted—I have no idea what the justification for this is. Any concept of trade secrets that covers this information is appallingly overbroad.]

In addition, “a jury could find that the difference in warranty provider alone could warrant a material difference even if the warranties’ terms were identical. For example, we conjecture that a warranty from an institutional manufacturer would certainly be perceived more valuable to a consumer than the same warranty term provided by a discount retailer.”

Quality control: MJ argued that, even if the glasses were “once authentic,” MJ’s inability to control their quality once they arrived in defendants’ hands constituted a material difference. Of course, this rationale, taken seriously, would make the unauthorized resale of any used product unlawful—my Toyota has been out of Toyota’s control for over ten years! Anything could have happened! (And admittedly, much has.) However, the court reasoned that “[q]uality control measures may create subtle differences in quality that are difficult to measure but important to consumers.” Thus, courts don’t require trademark owners to show differences in actual quality. That would be too hard! But “quality control” also isn’t a magic phrase. “Rather, the test is whether the quality control procedures established by the trademark owner are likely to result in differences between the products such that consumer confusion regarding the sponsorship of the products could injure the trademark owner’s goodwill.” MJ needed to show that “its quality control procedures create a likelihood that their sunglasses are different from those that it does not control,” in particular that it stops enough substandard product from reaching a consumer “to create a material difference between the categories of authorized and unauthorized sales.” That wasn’t clear on this record.  

Finally, MJ argued that the “sponsorship exception” to first sale applied because defendants falsely indicated that they were authorized resellers. “Thus, use of a plaintiff’s trademark in promotional materials such as advertising or displays is not protected by the first sale doctrine, but use of a plaintiff’s trademark solely to identify a product up for sale is protected.” [This is a weird way to phrase it: advertising or displays are often ways to identify a product for sale. If a used car dealership truthfully advertises that it has Toyotas for sale, that can’t itself falsely imply sponsorship.] The court rephrases: “conduct that goes beyond the mere resale of trademarked goods and its incidental advertising may not be protected by the first sale doctrine.”

“Maui Jim chiefly takes issue towards’s representation that it works directly with leading eyewear manufacturers and suppliers,” such as the diagram showing a supply chain direct from the manufacturer. Even SmartBuyGlasses’ VP testified that this diagram was a poor representation of SmartBuyGlasses’ procurement model. Also, MJ submitted [redacted] instances where defendants’ customer service representatives supposedly indicated that they were an authorized Maui Jim dealer. One example: a customer asked “Are you an authorized Maui Jim’s dealer?” and a CSR responded: “Yes, we are.” The court also worried about the statement “all our products are 100% authentic[ ] [w]e source the authentic items through authorized distributors,” even though that doesn’t say that defendants are authorized distributors. That statement was in response to the following message: “your section ‘Authenticity’ says you work directly with the manufacturers, in this case Maui Jim, so why is it that they don’t know where you get your MJ sunglasses from.” More plausibly, a customer asked how defendants can “guarantee authenticity when [its] not an authorized dealer of Maui Jim products?” The CSR stated that it “source[s] it from the manufacturer itself.” When the customer responded by telling the representative that Maui Jim had told that customer that they “aren’t supplying you guys with glasses,” the representative changed course: “we do not source the item from Maui Jim brand, we source it from the factory or manufacturer on where they also ordered their items.” While defendants called these statements mere mistakes, they at least created a factual issue.

I’m not sure why this misrepresents sponsorship as opposed to misrepresenting the quality of the product, but defendants also at least sometimes included “Maui Jim’s 2009 Drop Ball Certification,” which certified that the lenses had been tested for impact resistance, which was not true.

What about the website disclaimers? First, “SmartBuyGlasses may have confused customers with its contradictory statements throughout its website that it is authorized by ‘all’ brands rather than a more accurate word like ‘most’ or ‘many’ brands.” Second, the survey showed 40% net deception, though 60% didn’t perceive sponsorship. Too many disputed material facts!

Likely confusion: also disputed. If the goods were in fact counterfeit, there would be a presumption of confusion. MJ’s digital marketing manager oversaw secret test purchases and testified that some were not manufactured by MJ. MJ’s VP of Marketing also testified that he could tell that some of the glasses sold through were counterfeit because they were sold “without our Maui Jim lenses.” Is that counterfeiting? Well, there’s a question of material fact over whether defendants adquately notified customers about the lenses.

As to the multifactor test, the analysis here is wonky because the usual multifactor test is not suited to the question of whether actual Maui Jim frames sold by someone else confuses people about source, which is why first sale and nominative fair use and other defenses are important. Interestingly, the court finds degree of care to be neutral, because “Maui Jim sunglasses are both premium (and so relatively expensive) and widely accessible on the internet.” MJ’s alleged instances of actual confusion, though disputed, were admissible hearsay because they were business records of a regularly conducted activity that were made at or near the time they transpired.

Dilution: summary judgment also denied (no discussion of fame).

False advertising claims covered four (or maybe five) things: (1) Defendants’ CSRs’ statements in response to customer inquiries about authenticity, (2) the website’s authenticity guarantee, (3) the website supply chain image, (4) the alleged statement that defendants have a U.S. location, and (5) the non-MJ lenses inserted in MJ frames.

CSR statements: Were these “advertising or promotion”? No; they were individual statements made in response to customer inquries,  not “promotional material disseminated to anonymous recipients.”

Website authenticity guarantee: Defendants pointed to their disclaimers, including “With some of the brands that we sell, the manufacturers’ warranty will be available worldwide however for other brands the official warranty may not be available in your country due to territorial limitations and/or brand policies. To cover all scenarios, we offer our own exclusive 24-month warranty against all manufacturers’ defects without exception” and the MJ-specific disclaimer it added. There was a question of material fact on falsity, despite the existence of the survey, given the disclaimers and other questions discussed in the trademark section. The survey wasn’t enough because it didn’t specifically evaluate the effects of the disclaimers.

comparative supply chain graphic

Supply chain image: There was a factual dispute over the misleadingness of showing a direct supply chain from manufacturer to consumer, rather from manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. Defendants argued that the diagram was accurate and consistent with their practice for the majority of sales including [redacted] brands, and that disclaimers took care of remaining uncertainty.

Operations graphic showing NY "operation centre"

U.S. location: Also a material question over whether the U.S. dropship location made this truthful.

one prescription lenses statement

another, including ridiculous redaction from public website

Third-party lenses: These were less than 1% of defendants’ sales. MJ argued that defendants advertised that their prescription lenses were manufactured by MJ, but defendants used words like “our” rather than “Maui Jim’s prescription lenses” to describe them; this question was for the jury.

Reverse passing off: At one point, defendants incorrectly identified [redacted] as the manufacturer of MJ branded sunglasses on commercial invoices it sent to its customers. Defendants attributed this as a computer coding error and there was no evidence that there was any benefit to them from doing so, but regardless it wasn’t reverse passing off as defined by Dastar because they didn’t represent the goods as their own. Following the “precise words” used by the Supreme Court and the Seventh Circuit, “Defendants must have substituted its own name for the true manufacturer to be liable for reverse passing off.” Even without binding law, the court would still reject reverse passing off, because MJ didn’t show likely damage based on the invoices, though the result might be different if the mislabeling had been in ads.  

Illinois Uniform Deceptive Trade Practices Act claims survived for the reasons discussed above.

example of MJ photo compared to image on defendants' site

As for the copyright claim, the court easily rejected a fair use defense: the use wasn’t transformative, the modest creativity of the photos was enough, they were used in their entirety, and there was a licensing market for the photos insofar as “a benefit of contracting to act as one of Maui Jim’s authorized retailers is the right to use these copyrighted photographs in advertisements.” And the court found infringement:

 “Although Defendants ask us to infer that this is merely the same pairs of sunglasses shot at standard angles against a standard white background, we hold that no reasonable jury would find these photos are anything but identical.” Damages were a factual issue for trial.

Tortious interference: Whether Maui Jim produced enough evidence to establish the existence of its contracts with third parties was a disputed issue. However, the court rejected the argument that those contracts were unenforceable under European law: “the European Court of Justice squarely addressed the legality of authorized retailer contracts and distribution networks … in the context of luxury or high-end goods and ruled such contracts are not prohibited when three conditions are met: (1) the product necessitates a selective distribution system because it is high quality or technical; (2) resellers must be chosen on the basis of objective criteria; (3) the criteria defined must not go beyond what is necessary. Case C-230/16, Coty Germany GmbH v Parfumerie Akzente GmbH, 2017 EUR-Lex CELEX LEXIS 62016CJ0230, at ¶ 24.” [I don’t really see the court analyzing whether (2) and (3) were satisfied, especially given the factual issue about whether there were such contracts.]

Also, there was no question of material fact that defendants were aware that Maui Jim contracted with authorized retailers and that authorized retailers were prohibited from selling to other retailers (like defendants). In 2008, Maui Jim wrote to defendants: “By purchasing Maui Jim sunglasses from any authorized Maui Jim account, you are inducing that retailer to breach its contract with Maui Jim, which will subject you to civil liability for interference with a contractual relationship.” Defendants acknowledged receipt.

And there was evidence that Maui Jim incurred financial harm from the interference. So defendants’ summary judgment motion was denied.

Counterclaims for defamation: Defendants alleged that Maui Jim’s corporate headquarters and customer service representatives “falsely instructed potential SmartBuyGlasses’ customers that SmartBuyGlasses sells counterfeit goods, that the Maui-Jim-branded sunglasses they sell are ‘fake’ or ‘not authentic,’ and that SmartBuyGlasses ‘is not an authentic website,’” as well as falsely telling customs officials that Maui-Jim-branded sunglasses shipped by SmartBuyGlasses to U.S. Consumers were “not genuine,” causing U.S. customs to seize their authentic sunglasses. Since truth is a defense, the court denied summary judgment here.

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