Nestle is Next to Battle the First Sale Doctrine

Nestle USA, Inc. filed a lawsuit against Market Centre, Inc. for selling in the United States genuine product purchased in Mexico from Nestle Mexico, S.A. de C.V. The goods sold in the U.S. is considered a grey market good. Société des Produits Nestlé S.A. is the owner of the NESTLE and other trademarks in the United States and Mexico. Société des Produits Nestlé S.A. exclusively licenses its U.S. trademarks to Nestle USA and exclusively licenses its Mexican trademarks to Nestle Mexico, which are its operating subsidiaries in these two countries.

Nestle USA alleged, similar to PopSockets, that it has a robust quality control program in the U.S. and provides after-sale benefits to consumers such as receiving and addressing complaints and addressing spoilage issues. Not surprising, no allegations are made with respect to the quality control program administered by Nestle Mexico or the after sale benefits to consumers provided by Nestle Mexico. However, chances are the programs are very similar if not the same.

Similar to the PopSockets case where reselling a domestic product is not per se illegal, importing a genuine good from a foreign country to the United States is not per se illegal because in the United States under the first sale doctrine a trademark owner that releases its goods into commerce cannot prevent the subsequent resale of those goods by others. Whether “material differences” between imported goods and domestic goods exist will determine whether the sale of the grey market good is illegal.

The “difference” does not need to be enormous. Slight variations in labeling, packaging, or quality control measures can be sufficient if they are likely to influence consumers’ purchasing decisions. Some U.S. courts have held that when the U.S. distributor is a wholly-owned subsidiary of a foreign manufacturer, the existence of material differences does not give rise to trademark infringement because the goodwill associated with the trademark still remains under the control of the foreign manufacturer.

This is an argument that Nestle USA will undoubtedly have to face. Despite Nestle USA and Nestle Mexico being operating entities, the goodwill associated with the marks from these countries remains under the control of the trademark owner Société des Produits Nestlé S.A. And the trademark owner has an interest in maintaining consistent quality in its products and ensuring a positive consumer experience regardless of what geographic location in which its goods are sold.

However, whether consumers are likely to be confused trumps all including the first sale doctrine. If the court believes that consumers are likely to be confused by the differences between the goods imported from Mexico and the goods authorized for sale in the U.S., the Court is likely to side to Nestle USA in this case.

Service Mark Strength Can’t Be Established By A Strong Trademark

Trademark strength for likelihood of confusion purposes is often misunderstood for fame in the context of dilution. The two concepts are different with fame for dilution being difficult to achieve. The common mistake service mark owners make is to assume that because their rights are strong for particular goods or services that this strength transfers to other goods or services. Trademark strength in the likelihood of confusion context does not transfer this way, which is a lesson Sunkist Growers, Inc. learned too late.

Sunkissed Families sought to register the service mark SUNKISSED FAMILIES (in standard characters with FAMILIES disclaimed) for “information in the field of parenting concerning the health of children” in International Class 44. The Trademark Office approved the mark for publication and Sunkist Growers, Inc. opposed.

Sunkist Growers plead numerous registrations for marks containing SUNKIST in connection with a wide variety of goods and services. However, because Sunkist Growers did not plead a family of SUNKIST marks, the Board focused on the registration with the most relevant description; namely, SUNKIST KIDS (Stylized) for “education and entertainment services, namely, providing a website featuring games, quizzes, experiments, educational lesson plans for teachers and educators, and related multimedia materials all in the field of food, health, and diet for the benefit of children” in Class 41. All trademark searchers should note that the Board looked for related services descriptions not overlapping International Class numbers.

Sunkist Growers argued that its mark was commercially strong entitling it to a broad scope of rights. The Board found that while Sunkist Growers provided evidence of its strength in the fruit field it provided no evidence of the strength of the SUNKIST KIDS mark in the education and entertainment services field. Therefore, the Board held that the SUNKIST KIDS mark was entitled to a normal scope of protection afforded to inherently distinctive marks. Sunkissed Families was only able to must 9 instances of third-party use of the SUNKIST mark, which was less than the 10 third-party registrations or use needed to establish conceptual weakness.

New Consideration For A Trademark Licensee

The United States Supreme Court recently decided an issue involving trademark licenses in bankruptcy that for years had split the lower courts. Prior to this decision, when a trademark licensor entered bankruptcy it had a choice to either continue with any existing trademark license agreements or terminate the agreements. The effect was trademark licensors would terminate trademark license agreements it deemed in its business judgment were unfavorable leaving the trademark licensee in a difficult spot.

In an 8-1 decision, the U.S. Supreme Court decided that trademark licensors will no longer have this choice. Instead, a trademark licensor that rejects a trademark license while in a bankruptcy proceeding is breaching not terminating the trademark license. Jay L. Westbrook, a professor at the University of Texas School of Law, in an article for Bloomberg Law said the decision “establishes the basic principle that once you transfer a property right, it won’t vaporize if the transferor files bankruptcy.” Professor Westbrook is right that this decision prevents the trademark licensee’s right from vaporizing overnight. But that does not mean the right will not eventually vaporize.

A trademark owners obligation to engage in quality control is a legal not contractual obligation. The purpose of a trademark is to indicate a single source of goods or services, and this is accomplished by the trademark licensor’s exercise of control of the quality of the goods and services offered under the licensed trademark. The legal consequence of not exercising quality control is an abandonment of all trademark rights.

Generally, trademark licensees want to be left alone from the trademark licensor. And trademark licensors are happy to oblige, which is why the trademark licensor’s exercise of actual quality control in couched in terms that leave it to the discretion of the trademark licensor. However, with this recent Supreme Court decision, trademark licensees may need to change their position on this even if it means more oversight from trademark licensors.

The practical effect of the U.S. Supreme Court’s decision will likely be that trademark licensors in bankruptcy will not reject trademark licenses because they do not want to be in breach of contract. They will simply stop exercising any quality control. Nothing in the U.S. Supreme Court decision forces trademark licensors to engage in quality control. Trademark licensees will still need to implement a Plan B, just later than they otherwise would have under the old law.

To guard against this possibility and to provide the trademark licensee with some recourse, trademark licensees may need to negotiate an affirmative contractual obligation on trademark licensors to engage in quality control.

Abusive Trademark Applications Muddy the USPTO Database

Andrei lancu – the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office – recently testified before a Congressional oversight committee that he could use help tackling the problem of abusive trademark applications. From 2013 to 2018, the USPTO reported an 1100% increase in trademark applications from China. The problem, however, with foreign applications is not just with China.

The problem with foreign applications stems from the fact that trademark applications in a foreign applicant’s native country are filed differently than in the U.S. Most countries do not require proof of use before issuing a registration, and some countries will let the applicant apply for every good or service in a particular International Class even if the applied-for mark will not be used with the vast majority of those goods or services.

Given the foreign applicant’s experience in their native country, the problem in the U.S. becomes obvious. Foreign applicant’s file U.S. trademark applications like they file trademark applications in their native country. The USPTO does not currently require a U.S. licensed attorney to file the applications for the foreign applicant. Accordingly, U.S. trademark applications filed by foreign applicants contain broad descriptions of goods that will never be used with the mark.

These foreign applications can cause all sorts of havoc for trademark searchers because of the Trademark Office’s presumptions. When goods or services descriptions are unrestricted the Trademark Office assumes the description covers all goods of a similar nature, travel in all channels of trade, and appeal to all classes of consumers. When a trademark searcher encounters a broad description with a similar mark, you have to assume it could be cited against the registration of your proposed mark. Then you are left with deciding how to respond to the issue. In the case of a foreign applicant, the likely response is a petition to cancel either on the ground of fraud or void ab initio.

Trademark owners should not have to incur this expense. Foreign applicant’s should ensure their applications comply with U.S. filing requirements. Director lancu testified that the agency has ramped up training for trademark examiners to them help spot troublesome applications, escalated a process to cancel fraudulent marks, and started piloting software that can help detect images in applications that have been tampered with on Photoshop. The agency is also considering requiring all foreign applicants to be represented by a licensed U.S. attorney.

The Board Throws Another Curveball on the Strength Factor

The strength factor in the likelihood of confusion analysis is very important, and it’s not easy to establish either way. The strength analysis becomes even more difficult when the Trademark Trial and Appeal Board throws curveballs.

Friedman and Wieder Enterprises Inc. applied to register the mark HULA DELIGHTS (in standard characters) for “gift baskets featuring processed nuts.” The Trademark Office refused registration of the HULA DELIGHTS mark based on a prior registered mark HULA PRINCESS for “shelled nuts and roasted nuts.”

Friedman and Wieder Enterprises attempted to make the weakness argument with respect to the term HULA. In support of its weakness argument, Friedman and Wieder Enterprises submitted 26 third-party registrations for marks containing the HULA word and identifying some type of food product. The applicant was on the right track exceeding the minimum number of third-party registrations generally required to make the weakness argument.

However, Friedman and Wieder Enterprises made the mistake of assuming all food is related. Of the 26 third-party registrations offered, none identified nuts or even gift baskets with nuts. And Friedman and Wieder Enterprises did not offer any evidence or legal precedent to demonstrate that any of the food identified by the third-party registrations was related to nuts. Therefore, despite offering 26 third-party registrations, Friedman and Wieder Enterprises effectively had 0 third-party registrations supporting its weakness argument.

Nevertheless, the Board concluded that even though HULA is arbitrary when applied to shelled and roasted nuts, and there is no evidence of third-party use, there is evidence of third-party registrations for similar marks in connection with a variety of food products. Therefore, the HULA PRINCESS mark was entitled to a narrower scope of protection than what inherently distinctive marks normally enjoy.

Huh? The Board just finished concluding that the 26 third-party registrations were given little probative value. The moral of this story is that any similar mark for a good or service in the same broad category is enough to establish the weakness of a term or mark.

To try and make sense of this case you could chalk it up to simply a bad decision. The problem is that the Board does not reverse itself. So this is a decision that future Examining Attorneys will cite when the situation suits them, and attorneys in inter partes proceedings will cite when the situation suits them. What this case highlights is the importance of starting any legal research with the United States Court of Appeals for the Federal Circuit, and then working your way to the TTAB precedent if necessary.

Brand Name for Hemp Products May Be Protected

The United States Patent and Trademark Office recently announced that it will accept trademark applications for hemp-based products. This is a departure from last year when we discussed strategies for brand name owners to secure some trademark protection for any cannabis-based product. Last year, all products containing any part of the cannabis plant were illegal under federal because marijuana was on the federal list of controlled substances.

The 2018 Farm Bill changed the definition of marijuana to exclude hemp. Many people may not know that hemp and marijuana are different. While both plants contain cannabinoids, hemp contains a very low concentration of THC (0.3% or less) whereas marijuana contains concentrations of THC ranging from 15% – 40%. THC is the cannabinoid that induces psychoactive effects and gives the sensation of the user getting “high.”

But before every hemp producer gets too excited about this recent development and rushes to the Trademark Office to register all their brand names, a word to the wise. Make sure you can substantiate that your product satisfies the definition of hemp. In other words, your products contain no more than 0.3% of THC.

With marijuana still on the federal list of controlled substances, it is highly likely that that the Trademark Office will want to ensure that the marks being registered are used with hemp, not marijuana-based products. The Trademark Office will pursue this inquiry by issuing a Request for Information.

The examining attorney may ask questions designed to obtain specific information that is factual in nature from the applicant. The examining attorney may also request literature, exhibits, affidavits or declarations, and general information concerning circumstances surrounding the mark, as well as, if applicable, its use or intended use.  Requests for information that is not public knowledge, but is within the knowledge of the applicant or available to the applicant, are particularly appropriate.  

A trademark applicant has a duty to participate in the examination process by responding directly and completely to each request for information. Failing to respond or to properly respond can result in the abandonment of the application to register the brand name.

PopSockets Tries to Convert Bona Fide Sellers Into Counterfeiters

In an interview for Vox, David Barnett – the founder of PopSockets – said that he saw the first counterfeit product in about 2016. In 2017 and 2018 he claims to have been Amazon’s best takedown customer because his company was taking down 1,000 – 2,000 listings every day from marketplaces around the world. PopSockets claims to have 40 lawyers around the world and has spent over $7 million in 2018 fighting alleged counterfeits.

We say “alleged” counterfeits because not all PopSocket targets are counterfeiters selling or offering for sale a counterfeit PopSocket. Some of the listings on Amazon and other marketplaces are selling authentic PopSockets. However, PopSocket attempts to transform these bona fide sales into counterfeits through the quality control program it established.

Under the first sale doctrine, also known as the exhaustion doctrine, a branded product may be bought and resold without change, assuming that there is no deception present in the resale process. Therefore, once the trademark owner authorizes the initial sale of the product under the trademark, the trademark owner cannot ordinarily prevent or control subsequent sales of goods bearing the mark. For example, down-the-line retailers can display and advertise the branded goods, and secondhand dealers can advertise the branded merchandise for resale in competition with the sales of the trademark owner, provided they do not misrepresent themselves as authorized agents.

However, the first sale doctrine does not apply if the goods differ materially from the authorized goods. One way a brand owner can differentiate authorized goods from unauthorized goods is to adopt a quality control procedure because this program gives consumers ongoing benefits after the point of sale that is not available from the unauthorized product. However, superficial differences between the quality controls of the authorized product and the unauthorized product do not allow the trademark owner of defeat the first sale defense.

The PopSocket is not a complicated product. It is a circular disk that attaches to the back of a cell phone and extends when pulled making it easier for the cell phone user to hold the phone in certain situations. To suggest that a rigorous quality control program conveys a meaningful benefit to consumers beyond the point of sale is a stretch especially when the PopSockets being resold were from authorized retailers, to begin with.

But PopSockets is not distinguishing these legitimate resellers from the true counterfeiters. This is the case in a recent lawsuit filed by PopSockets against Lora Suzanne Wilcox. PopSockets were purchased from authorized retailers and then resold on Amazon. This act is squarely within the defendant’s rights, yet PopSockets’ is attempting to argue that its rights were not exhausted when it sold a PopSocket to the first authorized reseller because of its quality control program.

PopSockets will likely lose this case because it is likely the case that no quality issues exist with the PopSockets being resold on Amazon by Ms. Wilcox. She is not one of the counterfeiters PopSockets should pursue. What PopSockets should be more concerned about is potentially losing its trademark rights altogether.

Trademarks should never be used as nouns. They should always be used adjectives. If consumers start using a trademark as a noun, congratulations you have just lost your trademark rights because the trademark is now a generic term. PopSockets appears to be heading in this direction.

At the beginning of the Vox article, the journalist states “[e]very time some asks me, ‘What’s that?” there’s about a 70 percent chance I know exactly what they are referring to. It’s my PopSocket.” Throughout the article PopSockets is used as a noun:

  • I love PopSockets
  • Without a PopSocket
  • PopSockets were originally invented . . .
  • PopSockets sell really well

With the Federal Circuit’s decision in Coke Zero finding that a generic term can exist for sub-categories of the generic term like “no sugar soda pop,” PopSocket should be concerned that it may meet the same fate.

Counterfeiting is bad and counterfeiters should be aggressively pursued by brand owners. But any enforcement campaign must be thoughtfully designed to pursue the actual wrongdoers. Not individuals that are legally reselling branded goods. Otherwise, the label of a trademark bully is fitting.