Renting legitimate goods isn't actionable, at least with disclaimer

Proactive Environmental Products Int’l, LLC v. Pine Environmental Servs., LLC, No. 8:21-cv-250-CEH-CPT, 2021 WL 3025481 (M.D. Fla. May 20, 2021) (R&R)

Proactive alleged that Pine infringed registered trademarks associated with Proactive’s groundwater sampling pumps and their components and engaged in counterfeiting. “Until recently, Pine served as one of Proactive’s licensed distributors for the pumps. The principal issue in this lawsuit is whether Pine can continue to rent Proactive’s pumps to its customers despite the termination of that license, particularly where Pine has made or will make repairs to the rented pumps.”

In a functioning system, this would be an easy question, but TM’s definition of confusion has expanded so far that it takes the judge work to conclude that Proactive probably shouldn’t get an injunction.

In prior litigation, Pine stipulated in a settlement that it would not rent or sell pumps containing parts not purchased from Proactive, including, but not limited to, “electrical contacts, contact blocks, and DC Electric Motors.” Pine continued to purchase pumps from Proactive, many of which it subsequently rented to end-users. The parties dispute how much Proactive approved of Pine’s repairs; it did complain about allegedly poor repair at least twice, but executed a new distributor agreement with Pine nonetheless.

Pine denied wrongdoing, but removed Proactive’s name from its website and sales catalog, stopped selling Proactive pumps, and “affixed to the Proactive pumps it rents a laminated tag, which notifies customers of the pumps’ used condition and disclaims any association between Pine and Proactive.”  Its rental inventory included over two hundred Proactive pumps, fifty-five of which it purchased after entering into the final distributor agreement.

The judge first found that Proactive wasn’t likely to succeed on its argument that Pine violated their earlier settlement agreement, so Pine was entitled to the benefit of that agreement’s covenant not to sue.

Proactive, which licensed the trademarks from the other plaintiff, did not have standing under §32 (which presumably also affects the counterfeiting claims), but did have standing under §43(a), applying Lexmark. A licensee of a trademark need not be expressly afforded a right to enforce the marks in order to bring a claim under § 43. Here, Proactive had an exclusive, oral license to use the Proactive trademarks and the licensor joined Proactive in filing this action. Thus, it had a valid right under §43.

First sale: Even tiny differences can defeat a first sale defense, including variations in quality control, and also first sale can’t protect against claims that consumers think the defendant is an authorized dealer, at least when there is a network of authorized dealers. The judge recommended that the court find that Proactive failed to meet its burden of showing that the doctrine didn’t apply at this stage.

As to material differences, rental mattered: “[C]ustomers who rent a pump (or any product for that matter) are likely to assume that it has been used before and therefore is not in pristine condition.” Pine disclosed the condition of its pumps and disclaimed any association with Proactive; Pine also provided evidence that differences between a rental pump and an unmodified Proactive pump “do not affect the pump’s operation, amount to normal wear and tear expected for a used rental pump, and/or were not caused by Pine.” As for Proactive’s quality control, the agreement between the parties didn’t address the degree to which Pine was authorized to make repairs, which was an open question. [And if quality control can defeat the fact that everyone knows the product is used, then there will be no more used goods market.]

Proactive argued that Pine couldn’t meet its quality control standards because it can no longer purchase replacement parts from Proactive. But Proactive failed to provide evidence about the current condition of the pumps in Pine’s inventory, or other evidence that Pine was presently renting pumps which do not meet Proactive’s standards, or evidence about the comparative condition of the pumps rented by Proactive’s authorized distributors. Without that, the judge couldn’t find harm to the trademarks.

Nor was the judge persuaded that consumers would think Pine was an authorized distributor, given the changes it made to its site and to the products.

Anyway, does renting cause likely confusion? Also not shown. Pine’s rentals were not equivalent to selling counterfeit goods or continuing to operate a franchise after the agreement expired. Pine operates under its own name and sells/rents other products, some of which directly complete with Proactive. And it bought most of the pumps it rents before the last distributor agreement, and discloses that they’re used. This didn’t create a “certainty of confusion” that would allow a court to skip over a multifactor analysis. Three key factors—actual confusion, similarity of the products, and similarity of the parties’ trade channels and customers—didn’t support an injunction.

Proactive failed to submit any evidence of actual confusion, which was “particularly noteworthy” given Pine’s anti-confusion steps. Product similarity didn’t support Proactive because of the differences between new and refurbished goods, which were analogous to rental goods (citing Champion Spark Plug). As Champion said: 

[I]nferiority is expected in most second-hand articles.... Inferiority is immaterial so long as the article is clearly and distinctively sold as repaired or reconditioned rather than as new. The result is, of course, that the second-hand dealer gets some advantage from the trade mark. But ... that is wholly permissible so long as the manufacturer is not identified with the inferior qualities of the product resulting from wear and tear or the reconditioning by the dealer. Full disclosure gives the manufacturer all the protection to which he is entitled.

The Nitro Leisure golf ball case likewise rejected the argument that material differences alone sufficed to defeat a first sale defense if the used and refurbished nature of the goods was disclosed. With the “re-sale[ ] of new goods,” material differences are vital and “any variation of the product from a new condition ... may signal imitation, counterfeiting, falsity or some other irregularity affecting a customer’s decision whether to purchase the product.” [Material differences can be disclosed for new goods too; courts often skip straight to presuming confusion regardless.]

By contrast, for “used or refurbished goods,” “ ‘material differences’ do not necessarily measure consumer confusion.” As Nitro Leisure noted, “consumers are not likely to be confused by—and indeed expect—differences in the goods compared to new, unused goods.” Thus, “the question of likelihood of confusion in the context of used goods is whether [they] are so different from the original that it would be a misnomer for them to be designated by the original trademark.”

Proactive attempted to distinguish these cases by arguing that “Pine’s replacement of genuine Proactive parts on Proactive’s pumps with unauthorized components ... will eventually [cause the pumps to] contain few of the characteristics of the original device.” Proactive’s Ship of Theseus argument was “both speculative and insufficiently supported at this stage.” Proactive didn’t show that the differences in pumps actually rented by Pine were anything more than would be expected for used pumps.

Proactive also attempted to use its network of authorized distributors to distinguish the cases, but there was no evidence showing consumer confusion about authorization or, indeed, about the condition of authorized dealers’ pumps.

Though similarity of trade channels/customers weighed “marginally” in Proactive’s favor, that wasn’t enough here.