Everyone knows that fencing stolen goods is a crime. But is it also trademark infringement? Courts disagree. A recent decision starkly illustrates the role—and the limitations—of federal trademark law in addressing this issue.

Key Takeaways

• Trademark law has potential benefits for brand owners targeting the resale of stolen goods, but there are unsettled questions about its application.
• Courts are split on whether the first sale doctrine—which allows purchasers of genuine trademarked products to resell them without the brand owner’s permission—applies at all to stolen goods.
• Where the first sale doctrine does apply, state consumer protection law may pose a hurdle to brand owners asserting the “material differences” exception to the doctrine.

Theft is an ancient problem, but the anonymity and scale of modern e-commerce have created a superhighway for the resale of stolen goods. Federal trademark law has a number of benefits for brand owners dealing with fenced products. The federal Lanham Act provides a uniform, strict-liability standard for adjudicating claims that applies across the country, avoiding varying state laws and associated defenses for good-faith purchasers. Trademark law provides a remedy against resellers of stolen goods even where the brand owners have already introduced the goods to the market. Registered trademarks provide certain evidentiary presumptions to owners of registered marks and can be used on many online platforms to facilitate efficient takedowns. And federal trademark law authorizes remedies that aren’t necessarily available under the patchwork of state laws, including potential statutory damages, treble damages, disgorgement of profits, attorneys’ fees, import bans, and ex parte seizures.

The utility and limitations of this strategy are illustrated by Flycatcher Corp. Ltd. v. Affable Avenue LLC (linked here). There, three truckloads of SMART SKETCHER-branded educational toys were stolen in transit. The brand owner found the stolen goods being resold by various online merchants at “unusually discounted prices” and brought suit in the Southern District of New York under the Lanham Act and New York law.

The defendants invoked the first sale doctrine, which allows parties to resell genuine goods even if they bear the trademark of a third party. As the Second Circuit has explained, “[a]s a general rule, trademark law does not reach the sale of genuine goods bearing a true mark even though the sale is not authorized by the mark owner.” Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 61 (2d Cir. 1992). The doctrine plays an important role in the marketplace—it’s the reason resale platforms (not to mention thrift stores and pawn shops) can exist at all.

Courts disagree about whether the first sale doctrine applies at all in stolen-goods scenarios. As Flycatcher recognized, some courts have made the intuitive observation that a theft is not a valid “first sale.” See, e.g., Klein-Becker USA LLC v. Englert, 2007 WL 1933147, at *5 (D. Utah 2007) (“[T]he first sale doctrine only covers the stocking and reselling of genuine products. … It has no application to stolen goods because ‘one approved sale’ has not ‘already occurred.’”).

Others, however, have interpreted “first sale” less literally, suggesting that once a brand owner introduces a line of goods into the marketplace, it gives up the right to challenge individual sales of genuine goods as infringing. See, e.g., ML Fashion, LLC v. Nobelle GW, LLC, 2022 WL 313965, *16 (D. Conn. 2022) (“the mere selling of the products does not make any statement” about the products’ provenance).

The Flycatcher court was able to sidestep the dilemma by applying the “material differences” exception—in other words, a genuine product becomes infringing if it is altered in a way that impacts consumers. The exception is sometimes used to target the sale of customized or refurbished products.

Here, however, the court applied the material differences exception to an intangible product feature—the manufacturer’s warranty. Flycatcher told the court that because it would refuse to honor the warranty on stolen goods, the stolen goods were “materially different” than authorized ones.

Flycatcher’s argument ran head-first into a counterargument based on state consumer protection law. A New York statute provides that warranties cannot be limited “solely for the reason that such merchandise is sold by a particular dealer or dealers.” The court held that this state law precluded Flycatcher’s right to deny warranty coverage for sales governed by New York law, thereby neutralizing the “material differences” argument for those specific sales.

Flycatcher was able to narrowly escape dismissal, however, because the defendants had failed to show the existence of an “analogous provision in every state in which the goods were sold.”

Although Flycatcher’s claims were allowed to proceed, the case provides little comfort for brand owners if it means that the first sale doctrine applies in certain states but not others. After all, one of the most important benefits of trademark law in this context is its uniform nationwide standard.