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Unmasking the Takeaways from 3M’s Lanham Act Litigation Against N95 Mask Price Gouging

3M Company, a leading manufacturer of N95 facemasks that became ubiquitous during the COVID-19 pandemic, made headlines with a wave of lawsuits against third-party mask resellers based on alleged price gouging. While these cases likely provided some public relations benefit to 3M, they have also proven quite successful as a legal matter. 3M obtained a number of temporary restraining orders, preliminary injunctions and favorable settlements, and its actions have led to follow-up criminal actions by prosecutors.1

3M’s litigation campaign centered on Lanham Act trademark infringement and false advertising claims, some of which involve notable legal theories. For example, although the sale of genuine products at an inflated price is not a typical basis for trademark infringement, 3M has so far enjoyed success with that theory.2 The early returns on 3M’s price gouging cases highlight the flexibility of the Lanham Act and provide useful takeaways with respect to trademark and advertising law and the standards for injunctive relief.

Trademark infringement

The concept of a trademark infringement claim based on price gouging may sound unusual. But at bottom, the theory is one of reputational harm. Specifically, the defendant has used 3M’s marks in such a manner that implies an affiliation with, or sponsorship by, 3M — not only with respect to the defendant’s mask sales generally, but also with respect to the grossly inflated prices during a pandemic. In other words, consumers will believe that 3M authorized the grossly inflated prices to take advantage of the pandemic, thus harming 3M’s reputation and goodwill.

On the facts alleged in the 3M cases, some likelihood-of- confusion factors line up nicely with that theory.3 For example, while the defendant’s bad faith in using the plaintiff’s mark is frequently a non-factor in garden-variety cases, it played a central role here. In the context of a devastating pandemic, the defendants’ opportunism did not play well with courts. In one case, the court held that the defendant’s sudden switch, during the pandemic, from selling automobiles to selling N95 masks demonstrated “textbook bad faith.”4 3M’s loss of quality control over its products also played a central role (i.e., customer confusion that the safety and effectiveness of resellers’ masks would be verified by 3M under its rigorous standards). One court remarked that this was paradigmatic trademark injury, stating that the public is relying on trademarks now “more than ever” to guarantee quality and safety of heath care products.5

The 3M cases have also led to some atypical likelihood-of- confusion findings. One example is the sophistication of purchasers and the degree of care exercised in making a purchase. Specifically, purchasers who are normally sophisticated and careful, such as government entities and health care providers, will not be as careful during the COVID-19 crisis. Instead, such purchasers “must make rash purchasing decisions” because “the current state of emergency has stymied the ability of customers to take the time and conduct the diligence necessary to show extensive care.”Another example is the likelihood-of-confusion factor regarding “whether the senior user’s reputation could be jeopardized by virtue of the fact that the junior user’s product is of inferior quality.”7 Courts have found that factor to favor 3M — even in cases where the defendant is selling genuine 3M masks. To do so, courts have focused on the reputational harm from price gouging and 3M’s lack of ability to exercise quality control over resold masks, rather than evidence that the defendant is in fact selling damaged or otherwise ineffective or inferior 3M masks.8

False advertising

The advertising claims in 3M’s lawsuits tend to be more traditional. 3M alleged that unauthorized resellers made literally false claims of an affiliation with 3M or regarding the source or quality of the resold products. For example, one defendant allegedly sent emails to the Centers for Disease Control and Prevention (CDC) falsely claiming that it had 3M masks for sale and that 3M had increased its prices on the masks.9 In another case, the defendant made numerous allegedly false or misleading references to 3M in its quote to the Office of Citywide Procurement in New York (e.g., referencing 3M’s St. Paul headquarters, stating that “acceptance of the purchase order is at the full discretion of 3M” “3M chooses the [manufacturing] plant,” and that 3M will ship the products “CIF”).10

As with any false advertising case, however, falsity is only one element of the cause of action. The plaintiff must also prove other elements such as “materiality” (i.e., that the false claims are likely to influence purchasing decisions) and causation. Interestingly, some of the 3M decisions have not discussed each element, perhaps because of the early stage of the case, the egregiousness of the alleged wrongdoing, or the courts intended for some portions of the trademark analysis to also apply to the false advertising claims. For example, the materiality element of 3M’s false advertising claims could arguably be satisfied upon a showing of the importance of quality control (i.e., customer expectations that 3M verified the safety and effectiveness of the masks under its rigorous standards). In any event, where defendants make literally false statements during their alleged price gouging activities, false advertising claims may provide an established path to relief.11

Injunctive relief

In order to obtain preliminary injunctive relief under the Lanham Act, whether under a trademark or advertising theory, the plaintiff must show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable injury; (3) the balance of hardships tips in the plaintiff’s favor; and (4) the public interest would be served by the issuance of an injunction.

Courts have made some notable findings regarding these factors in the 3M cases. The first factor relates to the substantive strength of the claims as discussed above. The second factor, irreparable harm, plays a crucial role in many Lanham Act cases, which was no different here. Unsurprisingly, courts readily found harm flowing from serious allegations of bad faith amidst a pandemic in the 3M cases. “Of particular significance here and now, harm both to parties within a lawsuit and to the public may be considered when determining if failure to issue a preliminary injunction will result in irreparable harm.”12 One court found that 3M suffered harm in terms of quality control and reputation. As to quality control: “3M cannot control whether the products that Defendant is offering for sale and/or selling outside of its authorized trade channels adhere to 3M’s rigorous quality-control standards.”13 Key to that holding, 3M put forth extensive evidence of its history of rigorous quality control. Regarding reputational harm, “[n]o amount of money could repair the damage to 3M’s brand and reputation if it is associated with the crime of price-gouging at the expense of healthcare workers and other first responders in the midst of the COVID-19 crisis.”14 Moreover, the public suffered harm: “Defendant’s conduct results in a diversion of critical public resources, which places lives at risk. These resources include the time spent by public officials to pursue false/fraudulent leads and the money spent to purchase products at inflated prices. This waste of resources further diminishes the ability of public officials and procurement officers to investigate and identify other counterfeit and inferior quality supplies as buyers are pressured to place large orders swiftly for essential PPE.”15

The third and fourth factors have also overwhelmingly favored 3M. Under the third factor, the balance of harms “tips decidedly in 3M’s favor” because “it would not be a ‘hardship’ for Defendant to refrain from engaging in unlawful activities . . . .”16 As to the fourth factor, the public interest in an injunction, courts have cited the usual principle that the public has an interest in being free from confusion and deception as to the source and quality of 3M’s products. In addition, courts in the 3M cases have cited less common interests; namely, the public benefit in protecting frontline health care workers and preserving public resources in the PPE procurement process:

Unquestionably, protection of healthcare professionals who are putting their lives on the line in the fight against COVID 19 is in the public interest. Those brave and selfless professionals deserve trustworthy supply lines of authentic PPE, including N95 respirators, that are free of misrepresentations, false designations of origin, and unscrupulous profiteering. Likewise, precious public resources should not be squandered on needless inquiries and investigations into the truth and the legality of basic commercial terms and representations made in the procurement process. If the market (and the participants in the market) cannot be trusted, procurement will grind to a halt. When lives are at stake and time is of the essence, as is clearly the case in this crisis, the public interest demands accountability.17

No defenses?

In some of the 3M cases, defendants have not appeared and thus have not raised any defenses, perhaps making it easier for courts to issue temporary injunctive relief. In other cases, defendants have raised defenses, but the cases settled before a ruling on such defenses. In any event, the 3M litigation campaign remains in its infancy, and it is possible that some defendant will fight through at least the summary judgment stage to obtain a substantive ruling on defenses.

Two defenses seem most relevant: first-sale doctrine and nominative fair use. Under the first-sale doctrine, it is generally lawful to resell a product after it has been purchased from the trademark owner in an authorized sale, even if the resale is without the trademark owner’s consent. Some courts have held, however, that an exception to the first-sale doctrine applies when an unauthorized seller is reselling products that are outside of the trademark owner’s quality control. As discussed above, courts have focused on 3M’s lack of quality control over resold masks in other holdings (e.g., irreparable harm) and may apply this exception to the first-sale doctrine.

Nominative fair use refers to a defendant’s use of a plaintiff’s trademark to identify a plaintiff’s products, rather than to identify a defendant’s own products. Such use of the plaintiff’s mark, however, must not suggest sponsorship or endorsement by the plaintiff. Courts also take into account the defendant’s bad faith. Again, the 3M cases found confusion as to sponsorship and endorsement, as well as bad faith, suggesting that this defense may fail.

That said, it is early days for these cases, and there are no guarantees that a court will not come out differently on a fuller record after discovery. From 3M’s perspective, the preliminary injunctions and settlements it has already obtained may be enough to outlast the pandemic without courts reaching any substantive decisions on defenses, especially given court closures.

Conclusion

So far, 3M’s price gouging cases highlight the flexibility and breadth of the Lanham Act and show that factual circumstances can greatly affect outcomes. Concerns regarding public health and safety, especially where bad faith is involved, can overshadow traditional considerations. Indeed, even some less-obvious elements of Lanham Act claims (e.g., reduced purchaser sophistication and care during a crisis) and claims for injunctive relief (e.g., harm to the public, health care workers and procurement processes) may receive flexible treatment from courts under such circumstances.

Footnotes

(1) Civil: E.g., 3M Co. v. Performance Supply, LLC, 1:20-cv-02949, Dkt. No. 23 (S.D.N.Y. May 4, 2020). Criminal: E.g., U.S. v. Romano (S.D.N.Y.), https://www.justice.gov/ usao-sdny/pr/new-jersey-man-arrested-45-million-scheme-defraud-and- price-gouge-new-york-city-during.

(2) A few of 3M’s lawsuits also involved trademark counterfeiting claims based on the alleged sale of fake 3M masks.

(3) Trademark infringement under the Lanham Act is determined using a multi- factor likelihood-of-confusion test.

(4) 3M Co. v. Performance Supply, LLC, 1:20-cv-02949, Dkt. No. 23, at 21. (5) Id. at 25.
(6) Id. at 22.
(7) Id. at 21 (emphasis added).

(8) Id. at 14-15, 21-22.
(9) 3M Co. v. Geftico, LLC, 6:20-cv-648-Orl-41GJK (M.D. Fla. April 30, 2020). (10) 3M Co. v. Performance Supply, LLC, 1:20-cv-02949, Dkt. No. 23, at 12, 23.

(11) In addition to litera lfalsities,the Lanham Act may also reach misleading advertising claims. However, claims against misleading advertising typically require a more robust showing by the plaintiff than those against literal falsities.

(12) Performance Supply, at 13-14. (emphasis in original). (13) Id.at14.
(14) Id.at15.
(15) Id.at23-24(internalcitationsomitted).

(16) Id. at 24. (17) Id.at25-26.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 218

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About this Author

Michael R. Justus, Katten Muchin Law Firm, Intellectual Property Attorney
Associate

Michael R. Justus is a trademark and advertising attorney. He helps clients create, protect and promote global brands.

He maintains a comprehensive trademark practice, including US and international clearance, counseling, prosecution, enforcement and litigation. Mike also handles advertising counseling and disputes, including proceedings before the National Advertising Division of the Better Business Bureau.

In his trademark prosecution and counseling practice, Mike guides clients through the entire registration process...

202-625-3575