Recent Decision Gives Guidance to Brand Owners Policing Online Resales

Brand owners often struggle to maintain their “minimum advertised price” (or “MAP”) in a world of ubiquitous online resellers. A recent decision issued by the U.S. District Court for the District of Utah involving a consumer brand provides guidance to trademark owners who want to limit the unauthorized resale of their products.

Skullcandy, Inc. v. Filter USA, Inc.

Skullcandy, Inc. (“Skullcandy”) is a manufacturer of headphones and speakers that sells its products online through its website as well as through authorized resellers and dealers. According to Skullcandy’s court filings, the company has several registered trademarks for its products and requires its authorized resellers to follow specific quality controls when reselling its products. Those quality controls require authorized resellers to (1) inspect all products and remove any defective products from inventory; (2) report any defects to Skullcandy; (3) store Skullcandy products in accordance with specific guidelines; (4) disclose to Skullcandy the identity of the resellers from whom it obtained Skullcandy products; (5) assist with product recalls and other consumer safety information efforts: (6) provide ongoing customer support to consumers to ensure the quality and performance of Skullcandy products; (7) refrain from relabeling, repackaging, or altering products and their contents; and (8) comply with Skullcandy’s rules governing online sales.

Skullcandy claims that it further obligates its authorized resellers to sell its products only to authorized purchasers (which consist of consumers and authorized dealers). Skullcandy alleges that it also prohibits its authorized resellers from reselling Skullcandy products on online marketplaces, including Amazon.com.

Skullcandy provides consumers a two-year limited manufacturer’s warranty. According to Skullcandy, the warranty applies to all products sold to end users by authorized retailers. The warranty provides that if a product contains a manufacturing defect at the time of purchase, Skullcandy will repair or replace the defective item. Skullcandy says that it extends this warranty only to authorized resellers who have followed Skullcandy’s quality control requirements.

In 2018, Skullcandy identified Filter USA, Inc. (“Filter USA”) as an unauthorized reseller that was selling Skullcandy products on Amazon through a storefront called “Filter Pro.” After a series of cease and desist letters, Skullcandy filed a complaint in the U.S. District Court for the District of Utah against Filter USA, averring federal trademark infringement, federal unfair competition, trademark dilution, common law trademark infringement, deceptive practices under Utah law, unfair competition under Utah law and tortious interference with contract.

Skullcandy alleged that Filter USA did not abide by Skullcandy’s quality control provisions, did not inspect products as required, did not report defects as required, commingled both “new” and “used” inventory and did not provide ongoing customer support as required by Skullcandy’s quality control provisions.

Applying the First Sale Doctrine

Filter USA moved to dismiss Skullcandy’s complaint primarily on the basis of the “first sale doctrine.” The first sale doctrine is well established in trademark law and provides that a trademark owner generally may not use its trademarks to control the sale of its products after the first sale. In other words, when the trademark owner sells a product once, the respective purchaser may resell that same, genuine product without infringing the trademark owner’s marks. The first sale doctrine is often relied upon by unauthorized resellers to defend against the attempts of a brand owner to enforce their MAP policy and other reseller program guidelines.

Exceptions to the first sale doctrine exist, however, such as when the reseller sells trademarked products that are “materially different” from those sold by the trademark owner. In the case against Filter USA, Skullcandy argued that the products sold by Filter USA are materially different because they do not come with Skullcandy’s warranty and fail to abide by Skullcandy’s quality controls. In this regard, the court took notice of Skullcandy’s quality control procedures (as alleged in Skullcandy’s complaint and outlined above) and ruled that these allegations were sufficient and establish a “substantive and non-pretextual” reason for refusing to extend its warranty to products sold by unauthorized resellers. The court also noted that Skullcandy alleged various ways in which Filter USA was not adhering to Skullcandy’s quality controls, including allegations that the products sold by Filter USA had not been stored, handled or inspected in the way they would if sold by an authorized reseller, and would not have the benefit of customer support of the kind mandated by Skullcandy for its authorized resellers. As a result, the court concluded that Skullcandy pleaded enough facts to properly allege that the products resold by Filter USA were “materially different” from products sold by authorized resellers.

Having found that Skullcandy’s complaint sufficiently alleged exceptions to the first sale doctrine, the court concluded that Skullcandy’s complaint properly stated a claim that Filter USA’s products infringe Skullcandy’s trademarks. Accordingly, the court denied Filter USA’s motion to dismiss and allowed the case to move forward.

Practice Pointers

The court’s decision in the Skullcandy case underscores the importance to brand owners of maintaining a robust reseller program with a properly-structured warranty and quality control policy. Linking the reseller program terms to the manufacturer’s warranty and a quality control policy that imposes material and specific duties on authorized resellers provides strong support for the brand owner when it needs to demonstrate that its authorized products are materially different from those sold by an unauthorized reseller. Brand owners are well advised to invest the time and attention required to review, update and consistently enforce these policies so that they can maintain their ability to enforce their trademarks when needed.