August 2005 - Combating Couterfeiting

Simple methods, such as registering with the U. S. Patent and Trademark Office, can help protect your product from falling victim to this growing epidemic.

By Greg Sater

It is maddening, but I can pretty much guarantee you based on experience that if you have a successful product on television right now, then somewhere in China somebody is making a counterfeit of it, and soon enough it will be loaded into a container with a lot of its friends and shipped to a port of entry near you.

If you are one of those who feel, not without reason, that counterfeiting is such an overwhelming tsunami of a problem that it is just not worth fighting against, then read no further, because this article is not for you.

This article is for those in the electronic retailing and direct response marketing industry, and like the ERA leadership, which is now working hard on the problem, who prefer to subscribe to and draw determination and strength from the more defiant and immortal words of Jon Belushi, “Was it over when the Germans bombed Pearl Harbor?” If you believe that the answer is “no” (or you do not yet want to concede that the answer might be “yes”) and you believe in fighting the good fight, then read on, because this article is for you.

WHAT IS COUNTERFEITING; WHAT CAN YOU DO ABOUT IT?
Although the line is not always clear, in principle a counterfeit is more than just a similar-looking “knock off”or “copy cat”product. A counterfeit as defined in the Lanham Act is a product that bears a trademark that is identical to or substantially indistinguishable from your genuine registered trademark, 15 U. S. C. § 1127. In addition to the name, of course, the design of the counterfeit product itself usually imitates the design of your genuine product in every major detail.

Because, as noted, the Lanham Act defines counterfeiting in relation to a registered mark, the first thing you need to do is make sure your mark is registered with the U.S. Patent and Trademark Office. The next thing you need to do is register it overseas in all countries in which you have a fear of counterfeiting (especially China).

Your next step should be to take your registration and lodge a copy of it with U.S. Customs, which has the power to seize counterfeit goods as they come into the country, assuming it can find them, 19 USC 1526; 19 CFR 133. 1. For an insignificant fee, you add your registered trademark to the database of U.S. Customs, along with information identifying your authorized manufacturers and distributors, after which the government goes to work for you! Remember, you also can add your registered copyrights to the U.S. Customs database, so that pirate copies of your videos, manuals or other copyrightable items, which you include for your customers with your product (or, in some cases, which constitute your product) also can be seized if they are found.

While the customs system is imperfect (critics say porous) it sometimes works, and it is getting better. In 2004, there were more than 7,000 seizures by U.S. Customs worth $140 million. That was double the figure from 2003, and in 2005, the figure is expected to double again due to a new Department of Homeland Security initiative known as STOP or strategy targeting organized piracy (www. stopfakes. gov).

SO, IF YOU HAVE DONE ALL THAT, WHAT’s NEXT?
The answer depends on your budget, investigative abilities, and degree of luck. Counterfeiters do not come knocking on your door announcing themselves. They need to be discovered. I recommend being proactive and having someone in your company or on behalf of your company actively looking for counterfeits. Is your product offered for sale on Internet sites, for example, on Websites that advertise and claim to have inventory of many “As Seen On TV” products? What about eBay? Swap meets? Make purchases and see what is fulfilled. Is it authentic? Also, pay attention to returns you get from people who think they bought your product. Did they buy a counterfeit? If so, where?

In my experience, most clients have come up with innovative, ever-evolving methods in which to secretly mark their products during the manufacturing process so that later on they can differentiate between a real and a fake (although I am not at liberty to discuss those methods herein and it depends on the kind of product). You should do that, too. You also should have someone local maintaining some oversight over the factories you are using. Unfortunately, the reality is that in this business, you also need to check on the distributors with whom you are working, or think you are working, in each foreign territory. You know they are airing your show, but do you know what they are fulfilling their orders with? Have they perhaps bought a certain number of units from you, to appear legitimate, but are actually, unbeknownst to you, also delivering cheaper counterfeit units to many of their customers, to increase their profit margin?

Counterfeiters and those in the supply chain to whom they sell their products can be very savvy. If you can think of it, they are doing it. If your product comes with many items in one package, like cosmetics, they will obtain your genuine products in your genuine packaging, replace some but not all of the genuine units with fakes, and reseal the package. If they sell on Internet Websites, they will obtain some of your real product, and keep it on hand, to argue they had no reason to know that the counterfeit one they shipped was a counterfeit, and it was they who were unknowingly duped.

If they know it is your trademark that is registered with customs and not technically your product’s design, they will manufacture and ship the identical goods without a trademark on them, then attach your mark after the goods reach their destination. Often those responsible never take physical possession of the goods themselves, but have the raw materials and components made by subcontractors, who then send them to other subcontractors to assemble, who then ship them directly to freight forwarders, who then ship them overseas to distributors who claim not to know the goods are fake, with nobody in the chain knowing anybody else or admitting they know anybody else.

But again, as noted, it was not over “when the Germans bombed Pearl Harbor.” You can fight back.

COUNTER ATTACKS
Let’s start by discussing what you can do within the United States. If and when you identify someone in the U.S. or is subject to jurisdiction in the U.S. who is selling a counterfeit of your product, you can and should apply to a federal judge for an ex parte order authorizing the seizure of all of those goods, wherever they can be found within the judicial district, without prior notice to the defendant, along with the seizure of “the means of making” the goods and all “records documenting the manufacturer, sale or receipt of things involved in such violation,” 15 U. SC. 1116.

These seizure remedies (along with asset freezes, which also can be obtained in this Rambo-style fashion) can be very powerful tools in litigation, not only to stop and bring pressure to bear on the defendants whom you have sued here in the U.S. , but also to obtain key information you desire about the identities of their foreign suppliers (if as part of the seizure you can obtain data or documents identifying those suppliers).

Beyond ex parte preliminary relief, the Lanham Act provides for the destruction by the court of the counterfeits and related materials, 15 USC 1118. It also provides for the recovery of actual damages or, as a much easier alternative, statutory damages. If the defendant is found to have traded in the counterfeits intentionally, treble damages or treble profits are available, along with attorneys’ fees, 15 USC 1117. While intent is hard to prove, in order to obtain trebling and attorneys’ fees, willful blindness will not help the defendants. Under the case law if a defendant who has sold a counterfeit contends he did not know it was a counterfeit, you can still persuade the court that he failed to inquire as to its authenticity because he was afraid of what that inquiry would yield; and therefore, should be found to have had the necessary intent.

Counterfeiting also is a crime in the United States, 18 USC 2320. It also is a predicate act under the Racketeer Influenced and Corrupt Organizations Act or RICO. Remedies can include the seizure of vehicles and storage facilities used.

Many states also have enacted their own anti-counterfeiting laws, which can prove useful. (For example, in California, Business & Professions Code section 14340 creates numerous civil remedies, including for the ex parte seizure of counterfeit goods for trademarks that have been registered under the state rules.)

Of course, by themselves, none of the foregoing legal remedies in the U.S. can stop those who are counterfeiting in China or in other locations beyond our borders.

The media in this country sometimes report that there is nothing we can do, in terms of pursuing effective legal actions versus counterfeiters in China. That, however, is not the case. In fact, there have been companies that have had significant successes, of late, against counterfeiters in that country and in other countries in the region such as Hong Kong. The key is to associate a knowledgeable law firm in China and obtain its help from day one, before you even have tested your show and certainly before you roll out.

The problems we face in that country most often arise not from a lack of law to apply, but from the unfortunate tendency of some local law enforcement to look the other way (since counterfeiting is such big business).

China has utility model patents as well as design patents. It also has a system of protection for registered trademarks (based on first-to-register, not first-to-use). It is also possible to register unique product package designs with words or characters and there is copyright protection, without a registration requirement. There also is an unfair competition statute that can be used to protect unregistered marks, packaging and trade dress. Before you make or sell any product, you should consider registering both the mark and the design in China. Use local counsel who not only know how to work the registration system to your advantage, e.g., applying in a plethora of classes whether or not you truly intend to sell goods in all of those classes, but also know and have personal connections in the literal maze of different government agencies who will have jurisdiction over the counterfeiters, once they come out of the woodwork.

CAN YOU WIN THE WAR?
Enforcement in China can occur in four ways: administrative action, civil legal action, criminal action, and customs seizures. Administrative actions cannot get you damages, but are quick and cheap and can result in seizures that provide evidence that you then can use in a civil action for damages. Different enforcement bodies exist for design patents, copyrights, trademarks and unfair competition. There also is a system for customs enforcement in China, in which one must separately register one’s rights.

Depending again on your budget, you can have your local counsel there hire private investigators at a reasonable price to monitor trade shows, wholesale markets, retail outlets, factories, and points of assembly or shipment (and pay off informants).

In Hong Kong, as in China, one can register a trademark and also a design; unregistered trademarks are protectable under the passing off laws. And interestingly, Hong Kong recognizes “3D copyright,” meaning you can protect your product’s design there simply by saying it is a 3D reproduction of your original drawing of the product. What’s more, Hong Kong allows for civil litigation in which your attorneys can get ex parte seizure orders called “Anton Pillar orders,” permitting them to enter suspects’ premises to search for and seize infringing products, documents, and financial data, all of which can help identify those behind the counterfeiting as well as shipments of counterfeit goods that you missed that are already on their way to their destination.

Sometimes, the best you can hope for (and perhaps all you can afford) is to find, seize and destroy the merchandise. At other times, there may be a realistic opportunity to recover damages and attorneys’ fees.

However, one of the key goals always must be the seizure of documents such as financial data, shipping records and e-mails that can identify suppliers, affiliates and co-conspirators. Because, otherwise, all you have done is cut off one head of a multi-headed hydra, without striking at its core.

Douglas Clark agrees. He is an attorney at the Lovells law firm in China who has helped clients fight counterfeiting in that country. Clark, in fact, advises against immediately taking action against factories that are discovered to be involved in producing counterfeits, because they usually are subcontractors or middlemen who will deny knowledge of the identity of those who are truly behind it. His advice is to wait (at the risk of some product escaping) and to try to obtain, by stealth, information about those in charge. “You can boast about how many millions of dollars in fake goods you seized last year,” Clark says. “But really, often the smartest plan is to wait, don’t make a move, get more information, then try to go after the people.” He adds that if you bust down the door without such research, you will hear: “I was given this by ‘Mr. Chan,’ which is like saying ‘Mr. Smith,’ and you will never identify ‘Mr. Chan.’”

Clark recently helped Miracle Blade, LLC, a subsidiary of direct marketing and multichannel retailer Sylmark LLC stop a substantial portion of the rampant counterfeiting of its popular Miracle Blade III kitchen knife product. After a retained investigator learned of counterfeits being offered at a show and made an appointment to see samples and to identify some of those involved, Clark filed a lawsuit against certain defendants in Hong Kong, based on Hong Kong’s 3D copyright law, and obtained an Anton Pillar order there which, ex parte, resulted in the seizure of records that revealed the identity of the manufacturer in China. Clark then used that information to sue the manufacturer in China based on Miracle Blade, LLC’s registered design patent in that country, for Miracle Blade. “Score one for the good guys,” says Laurie McLaughlin, in-house counsel for Miracle Blade.

Jeff Tuller of Savvier in Carlsbad, Calif., also has had success fighting the good fight. Savvier has taken vigorous legal action here in the United States against anyone and everyone whom he has discovered to be selling a counterfeit version of his popular 6 Second Abs product. “Whenever we have identified anyone selling what we suspect to be a counterfeit of it, we’ve obtained seizure orders here in the U.S., without notice, and we’ve seized their inventory as well as records that have helped us to trace the source,” Tuller explains. “We also have had the good fortune of U.S. Customs recently identifying and seizing an inbound container of counterfeit 6 Second Abs, as it was about to enter the U.S.”

Ben van de Bunt of Guthy-Renker says he and everyone else in this industry must take a stand and “cannot throw in the towel, when it comes to counterfeiting. “Guthy-Renker is careful to register its IP rights, including with U.S. Customs, and is diligent in monitoring the Internet and other venues for anyone offering counterfeit versions of its products, such as Proactiv Solution. Van de Bunt notes, “What is interesting to me is that, as we in this industry got better at shutting down the people who a few years ago were importing illegal gray market goods with impunity, the problem has now shifted to straight counterfeiting.”

“I’d say many of the products that we make end up being counterfeited,” says Amir Tukulj, president of Thane Direct. “It is a growing trend these days. It’s exasperating, but we have to fight it, and we will succeed.”

ERA board member Jorge Hane agrees. “Although it will be hard to do, we will win this war against counterfeiting. We will win it,” he says.

What I tell my clients, in this regard, is that, with your product and your show, from day one, you need to envision and plan for your success, not for your failure. In other words, assume you are going to succeed and understand, going in, that as soon as you do succeed you will be counterfeited, you will be knocked-off, you will see “your” product being sold by others on the Internet, you will be upset by it, and you will regret it if you have not laid the legal foundation for an effective litigation campaign against it (for instance, if you have not timely registered your IP rights) so you should plan ahead now for that success by retaining and using not only U. S. -based counsel but also counsel in Asia, to lay the foundation for the battle that lies ahead. After that, when your product takes off, you have to be vigilant about who you are doing business with-several direct marketers I know have sent foreign distributors masters of their show, because the distributors bought a small quantity of product, only to later discover that their show was being aired and that significant orders were being fulfilled not with their product but with counterfeits.

As an ERA member, what you also should do is get involved. ERA President and CEO Barbara Tulipane says, “I would like our members to report instances of suspected counterfeit goods to us.” She adds, “This is particularly true if they suspect that an ERA member, or an apparent affiliate of a member, is involved in any way. “If that turns out to be the case, Tulipane says, “ERA has the power to suspend or revoke ERA membership, and will do so. “The same kind of scrutiny might be applied to non-members who purchase passes for ERA events because, as one marketer who asked to be anonymous noted, “There are non-members who we let walk the ERA shows who we know have been involved in selling counterfeits. They ought not be given a ticket.”

The ERA would like to hear what you have to say. It is currently considering different ways to deal with the counterfeiting problem, so if you have a suggestion, now is a good time to make it.

To deal with the problem of counterfeits offered by Internet Websites that have nobody behind them who is subject to jurisdiction in the United States (thus creating a problem for any counterfeiting litigation filed against them) some are suggesting ERA should advocate for legislation that would require Websites to disclose whether or not those behind them are in the U.S. and can be sued here. (It is beyond the scope of this article, however, to analyze whether such legislation would be lawful.) Others are suggesting that ERA should develop a self-certification program for members, so that if they are involved in the chain of distribution and are selling a product, for example, on the Internet, then as a member they would need to sign a form certifying that they have made an inquiry to the owner of the rights in the product as to whether the units they are selling are authentic and authorized; a member’s continued membership in ERA then would be made contingent upon that certification being true, resulting in a simple basis for expulsion from ERA in the event it was untrue.

If you are still on the sidelines on this issue, there is one final reason why you may want to reconsider, and join the rest of us in this war against the counterfeiters: according to the Department of Homeland Security, terrorist organizations have now recognized the high profit margins involved in counterfeiting and copyright piracy-profit margins that exceed those in the drug trade-and are entering the business in order to fund their operations against us and our way of life.

Greg Sater is an attorney with Rutter Hobbs & Davidoff Inc., a law firm based in Los Angeles. He can be reached at (310) 286-1700, or via e-mail at [email protected] com. We would appreciate your feedback. To submit comments, please point your browser to counterfeitingaug.marketing-era.com.

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