3M’s litigation crusade: the price-gouging saga

One unfortunate legal issue that has gained traction as a result of the COVID-19 pandemic is severe price-gouging by unscrupulous resellers. They seek to take advantage of the high demand for pandemic-specific necessities, such as hand sanitisers, face masks, essential groceries, and of course, toilet paper.

Such price-gouging schemes have triggered a slew of new lawsuits under consumer protection statutes. Some companies have sought to extend federal trademark law to prevent this same price-gouging from harming their brands and business reputations.

A string of cases filed by 3M Company is instructive regarding the circumstances in which companies may be entitled to seek relief under the Lanham Act against bad actors falsely associating their brands with the resale of products at highly inflated prices.

The more traditional route for a plaintiff to combat price-gouging is to seek recovery under state anti-price gouging statutes. For example, in late April, individuals filed a class action at the US District Court for the Northern District of California against various producers and wholesalers, such as Whole Foods, Costco, and Amazon, who allegedly tripled the cost of eggs between the onset of the pandemic and the end of March.

Plaintiffs claimed that these defendants violated California’s anti-price gouging statute, which prohibits raising the price of consumer goods and services by more than 10% after the governor or president declares a state of emergency. Violation of the statute constitutes a violation of unfair competition laws, which in turn entitles plaintiffs to restitution and injunctive relief.

An alternative avenue

Trademark owners may have an alternative avenue of relief for price-gouging in the Lanham Act, as demonstrated by a series of ongoing cases filed by 3M.

In April, 3M launched a nationwide trademark litigation campaign against “opportunistic third parties that are seeking to exploit the increased demand for plaintiff’s 3M-brand N95 respirators by offering to sell them for exorbitant prices, selling counterfeit versions of them, and accepting money for 3M-brand N95 respirators despite not having the product to sell and/or never intending to deliver the product to the unwitting buyer”.

“3M has committed to donating all recoverable damages, costs, and fees to charitable COVID-19 relief organisations.”

Under trademark law, 3M is entitled to seek injunctive relief and also actual damages, including potentially a disgorgement of profits. Restitution under the price-gouging statute in California is limited to the difference between the price plaintiffs paid for a product and the value received.

3M has committed to donating all recoverable damages, costs, and fees to charitable COVID-19 relief organisations, which demonstrates not only its altruistic motives, but also its efforts to preserve the goodwill of its business.

The 3M cases present egregious circumstances but also lessons for other companies facing similar price-gouging.

For example, in 3M Company v Performance Supply, 3M filed suit for trademark infringement, trademark dilution, and false advertising under the Lanham Act, among other state claims, against an unauthorised distributor who allegedly advertised and offered for sale millions of 3M-branded respirators to the New York City’s office of citywide procurement at a grossly inflated price: more than 500% of 3M’s list price. 3M has chosen not to increase the price for its masks, despite a hike in demand.

In its motion for a temporary restraining order and preliminary injunction, 3M argued that Performance Supply’s “exploitation of a global health disaster to confuse and deceive government officials into believing that defendant is an authorised representative of 3M’s products—and offering those products for sale at inflated prices—threatens immediate and irreparable harm to 3M’s brand and to those desperately in need of PPE, including healthcare workers working on the front lines of COVID-19”.

3M further argued that, in the absence of an injunction, it would suffer irreparable harm because of its inability to control the quality of its goods sold by an unauthorised, third-party distributor, and thus was unable to control its reputation should the goods fail to meet the quality and performance standards set by and expected of 3M .

Performance Supply did not respond to the motion, but even if it had, the court’s eventual order suggests that any opposition would have had little, if any, impact on the results. On May 4, 2020, the US District Court for the Southern District of New York issued a temporary restraining order and preliminarily enjoined Performance Supply from further deceptive conduct in connection with 3M.

Given Performance Supply’s egregious behaviour, “it is no surprise that defendant confused New York City procurement officials into believing that defendant was an authorised vendor of 3M-brand N95 respirators”, said the court.

Lessons learned

One hurdle that trademark owners could expect to encounter in such circumstances is the first sale doctrine, which may limit a rights owner’s ability to control the downstream resale of genuine products.

The New York court in 3M’s case did not expressly raise this doctrine in its order, but it did acknowledge that 3M lacked control over the quality of its goods, finding this to be a reason why 3M would likely suffer irreparable harm.

This reference suggests that the quality control exception to the first sale doctrine, as well as the alleged actual confusion caused by Performance Supply’s efforts to falsely hold itself out to be affiliated with, or endorsed by, 3M, was sufficient on its face to address any first sale doctrine concerns in this case.

To date, the injunction against Performance Supply is one of at least three victories that 3M has secured in its litigations against these bad actors.

The US District Court for the Eastern District of California and the US District Court for the Middle District of Florida also granted temporary restraining orders against other defendants that similarly attempted to trade off the goodwill of 3M’s brand in connection with the sale of overpriced N95 respirators.

So far, 3M has forged ahead with at least eight federal cases pending, in states including California, New York, Florida, Indiana, and Wisconsin, providing multiple venues to help expand the jurisprudence on the value that trademark law can provide in bringing injunctive and monetary relief to victims of dishonest opportunists.

3M’s success so far suggests that other brands may want to follow suit if they similarly experience price-gouging by third-party resellers that is negatively impacting their business reputation, their company, and their customers.

Angela He is an associate at Sideman & Bancroft. She can be contacted at:  ahe@sideman.com

Zachary Alinder is a partner at Sideman & Bancroft. He can be contacted at:  zalinder@sideman.com