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Rockwell Automation, Inc. v. Radwell International, Inc.

United States District Court, D. New Jersey

December 30, 2019

Rockwell Automation, Inc. Plaintiffs,
v.
Radwell International, Inc., Defendants.

          OPINION

          ROBERT B. KUGLER UNITED STATES DISTRICT COURT JUDGE

         Before the Court in this action concerning, among other things, trademark infringement is a motion [“the motion”] (ECF Doc. 331) of defendant Radwell International, Inc. [“Radwell”] against plaintiff Rockwell Automation [“Rockwell”] under Federal Rule of Civil Procedure [“Fed. R. Civ. Proc.” or “Rule”] 56(a) for partial summary judgment on Counts I,[1] III,[2]and V[3] of plaintiff's second amended complaint [“the complaint”] (ECF Doc. 140). The motion is based on the argument in ECF Doc. 331-1 that recent United States Supreme Court authority ends the judge-made “material difference” theory of trademark infringement and therefore these Counts fail.

         The COURT HAVING REVIEWED the parties' submissions without a hearing as endorsed by Rule 78.1 (b), and for the reasons below, and for good cause shown, The Court DENIES the motion for partial summary judgment as to Counts I, III, and V of the complaint. An appropriate Order accompanies this Opinion.

         1.0 Background and Procedure

         The parties already aware of the lengthy procedural history in this action, what follows is an abridged version of that history which focuses on information relevant to the motion. Plaintiff Rockwell classifies itself as the world's largest firm that makes and sells a large number of products for various uses in industrial automation systems. Complaint, ECF Doc. 140: ¶5. Safety and reliability of these products and their parts are of paramount importance not only to customers, but to Rockwell as a manufacturer to minimize quality problems and/or products liability claims. All of Rockwell's products bear one or more of its U.S. registered trademarks, [4] which Rockwell asserts are source identifiers to its U.S. customers of its strict warranty, quality control measures, and customer support for each product sold in the U.S. Id.: ¶23-29. To preserve its warranty and quality control, Rockwell sells its trademarked goods only through a contract-delimited supply chain of authorized distributors. Id.: ¶24. To become Rockwell-authorized, a distributor must obligate itself via an executed agreement with Rockwell NOT to sell Rockwell goods to “non-value-added resellers”. Id.: ¶28. Specifically, Rockwell has created a closed and exclusive supply chain of its trademarked goods by obligating a vertical supply network of authorized distributors to sell Rockwell trademarked goods ONLY to those customers who will NOT re-sell the goods on the gray market. Id. Thus, only authorized distributors may sell Rockwell's goods to only those purchasers who must forego re-sale in unauthorized markets.

         On 6 July 2015, Rockwell initiated this action against defendant Radwell. On 16 February 2016, it filed a first amended complaint and on 28 March 2017 a second amended complaint, which is the complaint that controls here. The complaint has the following claims relevant to the motion: trademark infringement under 15 U.S.C. §1114 (Count I), false designation of origin under 15 U.S.C. § 1125(a)(1)(A) (Count III), and statutory unfair competition under N.J. Stat. Ann. §56:4-1 et seq. (Count V). It alleges Radwell has been selling in the United States certain products bearing Rockwell trademarks but which are unauthorized and unlawful gray goods. Complaint, ECF Doc. 140: ¶¶185-196. The complaint further alleges Radwell is not an authorized dealer of Rockwell goods in the U.S. Consequently, those goods Radwell has sold in the U.S. [“Radwell gray goods”] have been imported and/or sold in the U.S. without Rockwell's warranty, quality control and customer support and are therefore materially different from Rockwell U.S. goods. As unauthorized gray goods bearing Rockwell's trademarks, Radwell goods appear identical to Rockwell U.S. goods. However, Radwell gray goods lack the quality control, safety, warranty, and other quality benefits, which Rockwell alleges make Radwell goods inferior. Id. at ¶¶147-150. The complaint alleges the Radwell gray goods confuse the public as to their source and quality and thereby infringe Rockwell's trademarks and are consequently unlawful. Id. at 196-273.

         Rockwell also alleges that it sells only to authorized dealers or in a very limited way directly to customers. Id. at least at ¶158. Further, Rockwell claims, in order to get around the barrier that Radwell was not an authorized U.S. distributor of Rockwell goods, Radwell committed fraud by creating a purchasing network of third party agents that bought Rockwell goods from Rockwell authorized distributors and sold them to Radwell. Id. at ¶¶151 - 174; ¶¶188-191. Thus, it is Rockwell's contention that its authorized distributors, intending to meet their contractual obligations to Rockwell, nonetheless sold goods they did not know were intended for Radwell's ultimate purchase. Id. at ¶¶129 and 161. Radwell in turn re-sold the goods in the U.S. without authorization from Rockwell.

         Rockwell alleges Radwell has deceived its authorized distributors to breach their distributorship agreements and/or received unauthorized Rockwell Products from unauthorized sources (Id. at ¶¶ 113-119, 205-206). Rockwell further alleges Radwell was only able to re-sell these products through a deceptive marketing scheme, largely through an internet site that advertises the products as “Radwell verified substitutes” for authorized Rockwell products. Id. at ¶¶123-127.

         On 6 September 2017, Rockwell petitioned the International Trade Commission [“ITC”] to institute an investigation of several respondents including Radwell pursuant to 19 U.S.C. §1337 [“the investigation” or “§337 investigation”][5], In the ITC petition, Rockwell alleged the same claims as in the complaint. On 10 October 2017, the ITC instituted an investigation into Rockwell claims. On 21 November 2017, in response to Radwell's motion to stay the litigation, this Court ordered discovery in this matter stayed, pending the final resolution of the related ITC proceedings. ECF Doc. 278:2.

         On 12 July 2018, Radwell voluntarily entered into a consent order stipulation with the ITC by which it agreed it would stop selling, importing, and selling for import any goods bearing Rockwell marks. On 20 July 2018, the ITC Administrative Law Judge [“ALJ”] issued an initial determination, which formally approved Radwell's consent stipulation, and which constituted an ITC consent order and formally terminated the investigation as to Radwell. On 15 August 2018, the ITC Commission in full accepted Radwell's consent stipulation; the ITC consent order became effective; and the stay of discovery (ECF Doc. 278:2) in this matter was terminated.

         On 12 March 2019, Radwell filed this summary judgement motion (ECF Doc. 331); the opposition (ECF Doc. 350) and reply papers (ECF Doc. 369) were timely filed.

         2.0 Parties Contentions

         2.1 Defendant

         Defendant Radwell's foremost argument is that, after the Supreme Court's ruling in Lexmark, [6] intellectual property [“IP”] rights have been held exhausted upon the first sale of the items covered by those rights, whether domestic or international, unless there is an express statutory exception to the contrary. Further, Radwell argues, since the first sale doctrine applies to goods and services covered by registered trademarks and as the Lanham Act lacks an express exception to the first sale doctrine, the IP rights in the Rockwell goods sold in commerce inside or outside of the U.S. were necessarily exhausted under Lexmark upon Radwell's purchase of Rockwell-marked goods. Moreover, lacking an express statutory exception to the first-sale doctrine, the Lanham Act can provide Rockwell no statutory basis to sue Radwell for trademark infringement and the ancillary counts depending on that infringement. ECF Doc. 369: 2.

         Radwell's argument relies on what it regards as the necessary inference of Lexmark: that the judge-made exception of “material differences” between the marked item sold or authorized by the mark owner and the gray good sold by a downstream marketer, even if unauthorized, is now without legal support. In other words, Radwell contends Lexmark abolished the doctrine that the sale of gray goods, even if “materially different” from the goods authorized for sale in the U.S., necessarily creates consumer confusion as to the source of those goods. It further contends that another Supreme Court case, Kirtsaeng, [7] involving the domestic and international exhaustion of copyrighted gray goods supports this interpretation.

         The “material differences” doctrine, which is judge-made law, has been an exception to the doctrine that the first sale of a good covered by IP exhausts the IP owner rights in the good. And it is this doctrine that Rockwell has relied on to base its trademark infringement and ancillary claims. Radwell asserts that, since Lexmark, Rockwell cannot argue that its goods, sold in its approved marketing chain and bearing certain warranties of quality and safety, are “materially different” from the same Radwell goods, which lacked those warranties.

         Radwell argues Lexmark did away with “the material differences” doctrine by asserting the first sale doctrine trumps every sale unless there is a statutory exception. Therefore, the quality and safety assurances of Rockwell to its U.S. purchasers cannot, without a statutory exception in the Lanham Act, create a “materially different” good than a Radwell gray good, which lacks those warranties. ECF Doc. 369:8. Radwell argues, regardless of who sold the Rockwell marked good in the U.S. and regardless of whatever assurances were or not attached to that good, the Rockwell's rights in those goods were exhausted whenever or wherever first sold, with or without the mark owner's authorization. Ultimately, Radwell argues Lexmark held an absolute exhaustion of IP rights after first sale applies, unless there is a statutory, not a judge-made, exception, which Radwell notes the Lanham Act lacks.

         2.2 Plaintiff

         Rockwell avers the Radwell gray goods were not authorized first sales that exhausted Rockwell's IP rights in the goods. This is because of Radwell's fraud. Radwell lied to authorized dealers in order to buy these goods and then sold them without the warranties of quality, safety, and customer service that Rockwell required of its authorized distributors. ECF Doc. 350: 1 and ECF Doc. 350-1:2.[8] Rockwell therefore asserts the Radwell gray goods were not and could never be authorized sales of Rockwell goods but were instead “materially different” in their quality, safety, and replacement warranties, which Rockwell effected only for authorized goods sold in the U.S. Put simply, having been bought outside of the U.S. for re-sale within the U.S., Radwell gray goods lacked Rockwell warranties.[9] Nonetheless, the ultimate U.S. purchaser would very likely not know the Radwell gray goods lacked the Rockwell warranties, which would create consumer confusion as to the source of the goods, especially when it came time for the U.S. purchaser to request Rockwell's compliance with a warranty and was refused. ECF Doc. 350: 1.

         Consequently, Rockwell argues the Radwell gray goods were “materially different” from authorized U.S. goods in that being sold without Rockwell authorization in the U.S., they lacked the warranties of authorized U.S. goods. Because of these material differences, the Radwell gray goods cannot invoke the first sale doctrine, no matter how many times they were sold and re-sold in the United States. The “material differences” exception to the first sale doctrine for marked gray goods is set forth in long-standing judge-made law, impelled by the inevitable consumer confusion roused when gray goods materially differ from U.S. authorized goods. Ultimately, such consumer confusion is the hallmark of trademark infringement. Id. at 8-9.

         Rockwell also contends Radwell is precluded under the doctrines of res judicata, collateral estoppel, and law of the case from asserting the defense that the first sale doctrine bars Rockwell's trademark infringement claim. Rockwell states Radwell has already raised and lost on this defense twice before. Id. at 6.

         3.0 Legal Standards

         3.1 Summary Judgment Generally

         Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). An issue is “genuine” if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc.,477 ...


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