Australian Gold v. Hatfield

Citation: Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 77 U.S.P.Q.2d (BNA) 1968 (10th Cir. 2006).

Factual Background
The plaintiffs were two manufacturers and their exclusive (primary) distributor of particular indoor tanning products (i.e., creams and lotions that make it look like the wearer spent a week in the Bahamas). The primary distributor did not sell the products directly to retail outlets, but rather contracted with independent downstream distributors, which sold the products to tanning and beauty salons. Through this distribution network, the plaintiffs implemented a training program regarding the use of the products to make sure that the salon employees knew how to use the products safely.

The defendants, family members, were not trained by the plaintiffs and were not authorized as resellers of these products. Nonetheless, the defendants purchased the products from the independent distributors and resold the products over the Internet at several websites. At these websites, the defendants displayed pictures of the products and the plaintiff manufacturers’ trademarks. To drive Internet user traffic to the websites, the defendants set up their metatags for the sites to be the plaintiffs’ trademarks, and paid one Internet search engine to give the defendants’ sites premium listings whenever users input the words of the plaintiffs’ trademarks on their Internet browsers. Also to help sell the products, the defendants made it appear as if their websites were those of salons, even though this was not true. For example, the defendants changed the initial name of one of their online companies from “The Internet Marketing Guys” to “Palm Harbor Tanning and Distributing.”

Even after the defendants heard the plaintiffs’ out-of-court complaints (the termination of one distributor for selling the products to the defendants) and stopped selling the plaintiffs’ products online, the defendants continued to use the plaintiffs’ trademarks as metatags to draw customers to the defendants’ sites, which sold other, related products by other manufacturers.

The plaintiffs filed an action for trademark infringement, false advertising and unfair competition. The plaintiffs’ trademark infringement claim was based on the theory that the defendants’ actions created so-called “initial interest confusion” among consumers. Initial interest confusion occurs when a consumer seeks a particular trademark holder’s product but is lured to the product of a competitor by the use of a similar or identical trademark. The consumer may eventually realize that he or she has not found the trademark holder’s product, but some courts find this consumer confusion actionable nonetheless. The plaintiffs prevailed on this theory at trial, obtaining a verdict of $5 million in damages plus an injunction.

Appellate Court Decision
On appeal, the defendants argued that their actions were protected by the first sale doctrine, which provides that a purchaser who does no more than stock, display and resell another’s products under the producer’s trademark does not violate federal trademark law.

Upholding the jury’s verdict, the appellate court ruled that the defendants did much more than simply stock, display and resell the products. They used deceptive methods to give the impression that they were favored or authorized dealers for the products. They intentionally used the plaintiffs’ trademarks in their metatags and with search engines, without authorization. They created consumer confusion and benefited from it.