Post-purchase confusion trumps 'first sale' doctrine

United States of America

In Au-Tomotive Gold Inc v Volkswagen of America Inc (Case 08-16005, May 6 2010), the US Court of Appeals for the Ninth Circuit has found against a company that created new products incorporating another company's genuine and lawfully purchased trademarked products, holding that the 'first sale' doctrine is not a defence if such new products create a likelihood of confusion among persons observing the products after purchase.

Au-Tomotive Gold Inc (Auto Gold) manufactured and sold various automobile accessories for specific car brands, including Volkswagen. Volkswagen automobiles bear decorative badges on the hoods or trunks, consisting of the letters 'VW' inside a circle. Among Auto Gold's products are 'marquee' licence plates, which are plain licence plates onto which Auto Gold mounted genuine 'VW' badges. Auto Gold purchased the replacement badges from an authorized Volkswagen supplier.

After receiving a cease and desist demand from Volkswagen of America Inc, Auto Gold filed suit seeking a declaratory judgment that it did not infringe or dilute the VW marks. Volkswagen counterclaimed for federal trademark infringement, counterfeiting, false designation of origin and dilution under the Lanham Act, and related state law claims. Both parties moved for summary judgment. The district court granted summary judgment to Auto Gold on all claims, finding that the VW marks were functional and not entitled to trademark protection. Volkswagen appealed.

The Ninth Circuit reversed, finding that Auto Gold's use of Volkswagen's marks was "neither aesthetic nor independent of source identification", but that consumers purchased Auto Gold's products directly because of the products' identification with the VW brand. The Ninth Circuit, in remanding the case, also determined that Auto Gold's production and sale of automobile accessories bearing the VW marks, including the marquee licence plates, created a sufficient likelihood of confusion to constitute trademark infringement.

On remand, the district court granted summary judgment to Volkswagen and awarded a permanent injunction against Auto Gold. This time, Auto Gold appealed with respect to the issue of infringement by the marquee licence plates, arguing that its sale of the licence plates was protected by the first sale doctrine.

Generally, the first sale doctrine protects the resale of trademarked products when consumers will not be confused as to the source or sponsorship of the products. The Ninth Circuit explained that the first sale doctrine comports with the principle that, in the absence of consumer confusion, "the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product". Auto Gold argued that, because it had lawfully purchased the VW badges before incorporating them into its marquee license plate products, its use of the VW marks was protected by the first sale doctrine.

The Ninth Circuit rejected this argument, explaining that it did not base its finding of a likelihood of confusion on pre-purchase confusion among purchasers of the marquee licence plates. Instead, the Ninth Circuit determined that post-purchase confusion was likely among non-purchasers who observed the marquee plates used on automobiles. The Ninth Circuit explained that post-purchase confusion creates a free-rider problem. Although Auto Gold had paid for the trademarked products, its purchase covered the trademarked badges only, not the use of the trademark. As such, the court explained, "if a producer profits from a trademark because of post-consumer confusion about the product's origin, the producer is, to that degree, a free-rider". This conclusion was supported by the fact that "customers buy marquee licence plates principally to demonstrate to the general public an association with Volkswagen".

So long as the likelihood of consumer confusion is eliminated when incorporating another's trademarked product into a new product, such as through the use of prominent disclaimers, the first sale doctrine will ordinarily protect the sales of such products. However, the present case illustrates that the first sale doctrine will not apply if the association between the trademarked product and the new product is not made clear to consumers at all stages of the purchasing process. To strengthen one's first sale defence, disclaimers and other messages to consumers should be used prominently to negate the existence of a likelihood of confusion, both pre-purchase and post-purchase, even with respect to potential confusion among persons who observe a product after another has bought it.

Rita Weeks, McDermott Will & Emery LLP, Washington DC

Unlock unlimited access to all WTR content