The Eastern District of New York's recent decision in S&L Vitamins v. Australian Gold is another troubling case for consumers who shop online. The case involves one of a series of claims by Australian Gold, which makes tanning lotions, against those who sell its products for discounted prices on the Internet. Australian Gold sells its lotions to distributors, who contractually promise to resell the products only to retailers that offer a "salon environment." According to Australian Gold, this contract term is designed to ensure that retailers receive adequate training on how to use the products. Although I can't say whether Australian Gold's tanning lotion really requires a lot of training to use, a more likely explanation for the provision comes from the fact that the company's products are sold by third parties on the Internet at prices far below the prices available at salons. By cutting out low-priced Web resellers, the company can keep its products priced at a level that the market could not otherwise support.

S&L Vitamins bypassed Australian Gold's business model by purchasing the lotions from salons in bulk and reselling it online at half the retail price. Australian Gold claimed that S&L's conduct gave rise to several causes of action, including copyright and trademark infringement, unfair competition, tortious interference with contract, and false advertising.

On a positive note, the court granted summary judgment to S&L on most of Australian Gold's claims. Among other things, the court held that posting thumbnail images of Australian Gold's products for purposes of selling the product online did not infringe Australian Gold's copyright in the design of the product's label, a holding that is plainly correct. However, the court allowed Australian Gold's trademark and tortious interference with contract theories to proceed. That's the part that's not good for consumers.

The court correctly recognized that merely reselling a product under its trade name cannot by itself constitute trademark infringement. Nevertheless, the court was persuaded by Australian Gold's argument that, by posting thumbnail pictures of the tanning products on S&L's website next to S&L's own trademarked name and logo, and by including the phrase "All Rights Reserved" beneath the thumbnail pictures, S&L had "gone beyond merely stocking and displaying" the products. Despite a disclaimer on S&L's site that it was "not affiliated with ANY Tanning Lotion manufacturer," the court concluded based on these facts that consumers might be confused into believing that Australian Gold had authorized or endorsed sale of its products on the S&L site.

Consumers, however, surely understand that everything they buy online is not manufactured by the website where they buy it. Nobody thinks Amazon.com makes the books or eBay.com makes the collectibles that can be purchased on those sites. Nor would any consumer believe that the phrase "All Rights Reserved" implies some sort of authorization by Australian Gold. Moreover, it's not at all clear that the question of whether consumers would think that Australian Gold authorized S&L to sell its products is even relevant to the trademark infringement issue. S&L doesn't need Australian Gold's authorization to sell its products, so whether consumers believe that S&L has authorization or not seems beside the point. Consumers cannot be said to have been misled or otherwise harmed when they purchase an authentic product from an unauthorized source at a reduced price.

Also troubling was the court's resolution of the interference with contract claim. The court found that Australian Gold's contracts with its distributors prohibited sales to anyone other than tanning salons and that there was at least some evidence that S&L knew of these agreements when it resold the products on the Internet. Although S&L bought its lotion from salons rather than from the distributors who had contracted with Australian Gold, the court thought that even such "circuitous conduct" could constitute interference with contract. Even assuming this holding is correct, the court seems to have missed a key element of the tort of interference with contract: the requirement of wrongfulness. Buying products off the shelf and reselling them at a discount is an example of capitalism at work, not of the sort of wrongful conduct that gives rise to tort liability. After all, S&L never agreed that it would not sell Australian Gold products on the Internet, and it should not be bound against its will to follow the anticompetitive agreements of others.

As Ron Coleman wrote in his brief in defense of S&L: "Trademark law is designed to protect consumers by preventing customer confusion, not to protect a manufacturer's inflated price structure and network of distributors by preventing truthful, accurate advertising." By vigorously pushing expansive claims of infringement, however, companies like Australian Gold are using the trademark laws to protect their own profits instead of consumers.