Brilliance Audio v. Haights Cross

• Decision Date: 26 January 2007
• Docket Number: No. 05-1209.,05-1209.
• Citation: 474 F.3d 365
• Parties: BRILLIANCE AUDIO, INC., Plaintiff-Appellant, v. HAIGHTS CROSS COMMUNICATIONS, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

474 F.3d 365

BRILLIANCE AUDIO, INC., Plaintiff-Appellant, v. HAIGHTS CROSS COMMUNICATIONS, INC., et al., Defendants-Appellees.

No. 05-1209.

United States Court of Appeals, Sixth Circuit.

Argued: December 2, 2005.

Decided and Filed: January 26, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

ARGUED:

Terence J. Linn, Van Dyke, Gardner, Linn & Burkhart, Grand Rapids, Michigan, for Appellant. R. David Hosp, Goodwin Procter, Boston, Massachusetts, for Appellees.

ON BRIEF:

Terence J. Linn, Timothy A. Flory, Karl T. Ondersma, Van Dyke, Gardner, Linn & Burkhart, Grand Rapids, Michigan, for Appellant. R. David Hosp, Mark S. Puzella, Goodwin Procter, Boston, Massachusetts, for Appellees.

Before: KENNEDY and GIBBONS, Circuit Judges; DONALD, District Judge.^*

KENNEDY, J. (p. 374-75), delivered a separate opinion concurring in part and dissenting in part.

OPINION

JULIA SMITH GIBBONS, Circuit Judge.

Plaintiff-appellant Brilliance Audio ("Brilliance") appeals from the district court's dismissal of its claims for copyright and trademark infringement under Fed. R.Civ.P. 12(b)(6). This case presents a question that has not been considered by this or any other court—whether the record rental exception to copyright's first sale doctrine, codified at 17 U.S.C. § 109(b)(1)(A), applies to all sound recordings, or only sound recordings of musical works. Specifically, this case asks whether the exception applies to sound recordings of literary works (known as "audiobooks" or "books on tape"). We find that it does not, and thus, the district court did not err in dismissing Brilliance's claims for copyright infringement. We disagree, however, with the district court's dismissal of Brilliance's claims for trademark infringement. Following the law of our sister circuits, we conclude that two exceptions exist to the first sale doctrine under trademark law and that Brilliance's complaint, construed broadly, has alleged that these exceptions apply in the present case. Thus, we affirm the decision of the district court in respect to the copyright claims but reverse in respect to the trademark claims.

I.

In reviewing a dismissal under Rule 12(b)(6), we construe the complaint "in the light most favorable to the plaintiff" and thus draw all factual inferences in favor of Brilliance. In re Cardizem CD Antitrust Litigation, 332 F.3d 896, 909 (6th Cir. 2003). Brilliance is in the business of producing and selling audiobooks. The company has a number of exclusive agreements with publishers and authors for the sound recording rights to their works. Brilliance has copyrights in these works and protectable rights in the federally-registered BRILLIANCE trademark. Brilliance produces two versions of its audiobooks: one for the retail sales market ("retail editions") and another specifically for libraries and lending institutions ("library editions"). The two editions are packaged and marketed differently, but it is unclear how, if at all, the underlying recordings differ between the two editions.

Defendants-appellees Haights Cross Communications, Inc., Haights Cross Communications, LLC, Haights Cross Operating Company, Recorded Books, LLC, and Audio Adventures LLC (collectively "Haights") are in direct competition with Brilliance. Brilliance alleges that Haights is repackaging and relabeling Brilliance's retail editions as library editions. According to Brilliance, Haights then markets the repackaged products as Brilliance's library editions and distributes them for commercial advantage by rental, lease, and lending. Brilliance has never authorized Haights to engage in this activity. Brilliance also claims that Haights uses the Brilliance mark on the repackaged products, which constitutes trademark infringement and results in the misrepresentation that Haights has a relationship with Brilliance and that its activities are authorized.

Brilliance brought a claim in federal district court alleging copyright infringement under 17 U.S.C. § 109. Brilliance also alleged trademark infringement under 15 U.S.C. § 1114, unfair competition under 15 U.S.C. § 1125(a), dilution under 15 U.S.C. § 1125(c), common law trademark infringement, and unfair competition (collectively the "trademark claims"). Haights moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. The district court granted the motion to dismiss, and Brilliance filed this timely appeal.

We review the dismissal of a complaint on 12(b)(6) grounds de novo. Gregory v. Shelby County, Tenn., 220 F.3d 433, 445 (6th Cir.2000). The question is "whether the plaintiff undoubtedly can prove no set of facts in support of his claim that would entitle him to relief." Id. at 446. The court should accept the plaintiff's factual allegations as true but "need not accept as true legal conclusions or unwarranted factual inferences." Id.

II.

The district court found Brilliance's trademark complaints susceptible to dismissal under 12(b)(6) because the defense of first sale appeared on the face of the complaint. Construing the complaint broadly, and in the light most favorable to the plaintiff, we find this ruling to be in error.

It is true that trademark law contains a "first sale" exception that provides a defense to claims of infringement. See Prestonettes, Inc. v. Coty, 264 U.S. 359, 368-69, 44 S.Ct. 350, 68 L.Ed. 731 (1924). Under the exception, resale by the first purchaser of the original trademarked item is generally neither trademark infringement nor unfair competition. Id. The rationale for the rule "is that trademark law is designed to prevent sellers from confusing or deceiving consumers about the origin or make of a product, which confusion ordinarily does not exist when a genuine article bearing a true mark is sold." NEC Elecs. v. CAL Circuit Abco, 810 F.2d 1506, 1509 (9th Cir.1987) (citing Coty, 264 U.S. at 368-69, 44 S.Ct. 350).

However, there are two situations in which resale of a product does not fall under the first sale exception. The first situation is when the notice that the item has been repackaged is inadequate. See Enesco Corp. v. Price/Costco Inc., 146 F.3d 1083, 1085-86 (9th Cir.1998). The Ninth Circuit in Enesco looked to the Supreme Court's language in Coty in finding a requirement of adequate notice. Id. at 1086. The question in Coty was whether the defendant's repackaging of plaintiff's perfume and powder into smaller containers, which it then sold, constituted an infringement of the plaintiff's trademark. In finding that it was not, the Court stated:

A trade mark only gives the right to prohibit the use of it so far as to protect the owner's good will against the sale of another's product as his.... When the mark is used in a way that does not deceive the public we see no such sanctity in the word as to prevent its being used to tell the truth. It is not taboo. * * *

If the defendant's rebottling the plaintiff's perfume deteroriates it and the public is adequately informed who does the bottling, the public, with or without plaintiff's assistance, is likely to find out. And so of the powder in its new form.

Coty, 264 U.S. at 368-69, 44 S.Ct. 350 (emphasis added); see also Enesco, 146 F.3d at 1086 (quoting this language). We find this reasoning persuasive. When the public has adequate notice that the purchaser has repackaged the trademarked item, then the dangers of consumer confusion and trademark dilution are minimized. Absent this notice, the trademark holder risks being associated with a product that is not of the same quality as the original trademarked item. In order to properly protect trademark rights, this limit to the first sale doctrine is necessary.

The second situation in which the first sale doctrine does not apply is "when an alleged infringer sells trademarked goods that are materially different than those sold by the trademark owner." Davidoff & CIE, S.A. v. PLD Int'l Corp., 263 F.3d 1297, 1302 (11th Cir.2001) (emphasis added). We join the many circuits that have adopted a similar rule. See, e.g., Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 635 (1st Cir. 1992); Original Appalachian Artworks v. Granada Elecs., Inc., 816 F.2d 68, 73 (2d Cir.1987); Iberia Foods Corp. v. Romeo, 150 F.3d 298, 302-03 (3d Cir.1998); Martin's Herend Imports, Inc. v. Diamond & Gem Trading USA, Co., 112 F.3d 1296, 1301-02 (5th Cir.1997); see also Abercrombie & Fitch v. Fashion Shops of Ky., 363 F.Supp.2d 952, 963-65 (S.D.Ohio 2005) (adopting this rule). Like the requirement of adequate notice, the rationale behind the Davidoff exception is that a material difference in a product is likely to cause consumer confusion and could dilute the value of the trademark.

We note, though, that not all differences are material. See Davidoff, 263 F.3d at 1302. To be material, a difference must be "one that consumers consider relevant to a decision about whether to purchase a product." Id. But, "[b]ecause a myriad of considerations may influence consumer preferences, the threshold of materiality must be kept low to include even subtle differences between products." Id. The question of materiality is a fact-based inquiry requiring an examination of the products and markets at issue. See id. at 1303 (looking to the testimony of industry experts and findings that physical alterations of the good's container degraded the appearance of the product in finding a material alteration); see also Nestle, 982 F.2d at 641 (noting that materiality must be determined "on a case-by-case basis."). Thus, an allegation of a material difference cannot properly be dismissed on 12(b)(6) grounds.

Construing the complaint broadly, Brilliance has alleged that both of these exceptions to the first sale doctrine apply in the present case and thus that Haights has committed trademark infringement. The complaint claims that Haights is repackaging and relabeling Brilliance's retail editions as library editions and that the notice...