The coronavirus pandemic has resulted in myriad reports of price gouging related to personal protective equipment (PPE) and sanitation supplies used by health care workers, “essential” workers and—increasingly—non-essential workers grappling with how to return to work safely. While state attorneys general and federal prosecutors are leading the charge against such predatory practices, N95 mask manufacturer 3M took matters into its own hands earlier this month, filing a series of trademark infringement lawsuits in New York, Utah, California and Florida against companies alleged to be reselling millions of N95 masks at dramatically increased prices.
Price gouging, however, is not an enumerated cause of action under the Lanham (Trademark) Act. Thus, 3M’s approach of deploying trademark law to go after price gougers was rather novel. 3M claimed that the defendants in these cases used confusing tactics to mislead buyers into believing that the defendants, and their “unconscionably high prices,” were authorized by 3M when they were not. The issue at hand was not that the defendants were producing fake N95 masks and holding them out as the real thing, i.e., counterfeiting (although the sale of counterfeit PPE and sanitizers is an additional concern during the COVID-19 crisis). Instead, in its motion for a temporary restraining order and preliminary injunction against defendant Performance Supply, LLC filed last Friday, 3M argued, “Defendant’s exploitation of a global health disaster to confuse and deceive government officials into believing that defendant is an authorized representative of 3M’s products—and offering those products for sale at inflated prices—threatens immediate and irreparable harm to 3M’s brand and to those desperately in need of [masks], including healthcare workers working on the front lines of COVID-19.” See 3M Co. v. Performance Supply, LLC, Case 1:20-cv-02949 (LAP) (S.D.N.Y.).
3M’s lawsuits attracted attention from some legal commentators, who noted tension with trademark law’s “first sale doctrine,” which allows for the resale of legitimate, branded goods—such as a used car or handbag—without liability to the seller. Brand owners have long grappled with the first sale doctrine when attempting to enforce against so-called “unauthorized distributors” of genuine goods, which have proliferated through online distribution platforms. Many brands have deployed creative tactics to try to enforce against such unauthorized distributors, including tweaking product warranties to apply only to customers who have purchased product from “authorized distributors.” In the latter example, the theory is that consumers who purchase products from unauthorized distributors that are not subject to warranty are misled into believing the genuine, but unauthorized products are the same as genuine, authorized products, when in fact, due to the absence of a warranty, the products are “materially different.” Such deception and confusion is alleged to harm the goodwill and value of a brand.
In its case against Performance Supply, 3M has engaged in a similar, but distinguishable, strategy to avoid the first sale doctrine, arguing not that the products sold by the defendant are “materially different” from those sold by 3M, but that the defendant’s bad faith “exploitation of a global health disaster to confuse and deceive government officials into believing that Defendant is an authorized representative of 3M’s products … threatens immediate and irreparable harm to 3M’s brand and to those desperately in need of PPE.” In sum, consumers may be deceived into believing that “3M is inflating its prices and condoning price gouging in the middle of a national emergency,” when according to 3M, that is not the case. In making its argument, 3M pointed to specific statements made by the defendant that could be construed as implying 3M had authorized the N95 sales—and prices—when 3M had not. In an order issued last Friday, the United States District Court for the Southern District of New York agreed with 3M, granting its application for a temporary restraining order, and issuing an order to show cause as to why the court should not issue a lengthier preliminary injunction against the defendant.
As the United States faces the COVID-19 crisis, it is likely that shortages of PPE, cleansers and sanitary equipment will continue, particularly as employers contemplate mobilizing their workforce to return to the workplace safely. In addition, other supply chain disruptions continue to occur, with recent reports of meatpacking closures causing concerns of impending meat shortages. With heightened demand for certain products and supply chain irregularities, price-gouging behavior is likely to continue. Now, it appears that brand owners may have another tool in their toolbox to enforce their rights directly against those that would personally profit at the expense of a brand owner’s goodwill and reputation.
If you would like to discuss taking action against price gougers, please contact Brownstein’s trademark and consumer protection attorneys.
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