Brands on A Mission

A federal court in California just made it a little harder for your goods to be sold by unauthorized resellers on online marketplaces, giving brands the advantage when it comes to protecting brand quality and safety.

In ADG Concerns Inc. d/b/a Health Concerns (a health supplement company), vs. Tsalevich, LLC, the court entered judgment against Tsalevich for trademark infringement and unfair competition resulting from Tsalevich’s unauthorized sale of Health Concerns products on online marketplaces.

Grey market resales are a widespread problem for manufacturers. Often online resellers are anonymous, negatively affecting a marketer’s ability to control the safety and quality of its products. Such deception also causes confusion among consumers and may even cause health risks, as in this case where the product was actually ingested. Further, on many of the marketplaces, consumers can’t distinguish between an authorized and an unauthorized seller. When there’s a product that is damaged, broken, defective, or  has other quality issues  – it’s the brand itself and not the reseller who suffers from negative reviews or worse, legal action.

As the court writes, “the “first sale doctrine” prevents trademark infringement and unfair competition liability for the “mere resale” of a trademarked product. The idea is that a trademark holder’s right to control the sales of its goods extends only to the initial sale. After that first sale, however, the trademark holder may establish infringement only if he demonstrates that the goods are materially different.”

In fact, the complaint alleges that Tsalevich sold products with the expiration date scratched out, had a substantially different consistency than other Health Concerns products, and had a “dark substance” inside the wrapping around the cap. The products resold by defendant were deemed materially different because they did not meet Health Concerns’ quality control standards, processes, and requirements, which were well documented and applied to all authorized resellers.

This ruling is important for several reasons: 1) that these practices of unauthorized resellers are unlawful; 2) that the unauthorized resellers can no longer rely on the defense of “first sale doctrine”, which they have traditionally relied upon.
The court issued a permanent injunction against Tsalevich preventing it from advertising or selling Health Concerns products on online marketplaces. Defendant’s site has since been shut down. Health Concerns was also awarded damages and attorneys’ fees.

The court made loud and clear that brands with good quality controls for their authorized goods can bring legal claims against unauthorized resellers distributing their products outside of those quality controls. Best practices include having processes and guidelines in in place regarding storage, shipping, packaging, inspection, returns, damaged goods, inventory, and other quality control and safety concerns.   In addition to setting up good internal controls, ensure that you have strong contracts in place with your authorized resellers so help maintain the integrity and safety of your brand.