September 2006 - Counterfeiting

Costly Faux Pas

By Greg Sater

If you sell counterfeit products, be advised, your days as an ERA member are numbered!

Thanks to the efforts of Jorge Hane, Linda Goldstein and the ERA Counterfeiting Task Force (of which I am a member), a new mechanism for counterfeiting redress has been developed: Any ERA member that is found to have engaged in the sale of a counterfeit product will have its membership terminated. This article summarizes how the new program will operate.

If an ERA member contends that another ERA member is involved in the sale of a counterfeit product, the complaining member will advise the ERA. That starts the process.

After receiving notice, ERA will refer the matter to the American Arbitration Association (AAA). A form will be sent to both parties, which will initiate the fact-finding process. The AAA will provide an independent fact-finder to the two parties who will solicit evidence from both sides. A written report will be issued within 60 days. The report will contain a conclusion as to whether or not the accused ERA member in fact sold a counterfeit product. To be clear, this fact-finding will have no legal impact outside ERA, although the report may be used if subpoenaed in a legal case. It will have no legal impact on the accused party, other than their expulsion from ERA, in the event that the fact-finder determines that counterfeiting has occurred.

Both the reporting ERA member and the accused ERA member must agree to participate in the fact-finding procedure; must agree to share the cost of the procedure, which is expected to be approximately $3,000+ each; and must agree to cooperate with the fact-finder and provide the fact-finder with the evidence that is requested.

After the fact-finder issues a written decision, several things can happen:

1 If the report concludes that a counterfeit product was sold, and both parties agree with the report, the accused party’s ERA membership will be terminated for one year. There shall be no resulting publicity or other announcement.

If the results of this first fact-finding process show that the allegation of counterfeiting was not proved, the party who made the allegation is obligated to promptly reimburse the accused party for the cost of the fact-finding procedure. If the accusing party fails to do so, its ERA membership will be terminated.

2 If the report finds that a counterfeit product was sold, and the accused party disagrees, but does not appeal, then its membership in ERA will be terminated for one year. The accused party may request an appeal within 10 days. The process simply will consist of a second fact-finding procedure, using a second fact-finder appointed by the AAA. The accused must assume responsibility for the total cost of the second fact-finding procedure, which will be approximately $6,000+.

3 In the appeal process, the second fact-finder will re-examine the evidence gathered in the initial fact-finding process during a further 60-day period in which additional information may be requested from one or both parties before preparing a written report. During this time, the accused party will maintain its ERA membership. If the second fact-finder issues a report which is in agreement with the initial finding that a counterfeit product was sold, the ERA membership of the accused party will be terminated for one year, with no further right of appeal. If the second fact-finder issues a report that concludes that the allegation of counterfeiting was not proven, the accused party’s ERA membership will remain intact.

4 If an ERA member is accused of being involved in selling a counterfeit product, and refuses to participate in the fact-finding program; refuses to pay its half of the cost for the program; or refuses to cooperate with the fact-finder, its ERA membership will be terminated for one year.

The bottom line is this: Participation in the fact-finding program is mandatory for ERA members, and will be a condition of membership as stipulated in the ERA Bylaws and as attested on the membership application as of September 15, 2006.

In addition, if a company is ejected from ERA as a result of this program, its principals may not rejoin ERA during the one-year period under another name. And if, during the one-year period, the company continues to be involved in selling counterfeits, the ERA expulsion period will be extended to three years.

5 Last but not least, if, in a court of law, an ERA member is found to have sold a counterfeit product, then that member’s ERA membership will be automatically terminated. The need to undergo the fact-finding process will not be necessary.

Because this is a new program, its protocols may evolve in the coming months, but ERA’s leadership believes that the program is a step in the right direction. After all, no ERA member should be involved in selling a counterfeit product. While people can argue about the merits or demerits of other forms of competition, such as using a similar trademark or trade dress or selling an alleged “knockoff,” in ERA’s view there is no reasonable excuse for counterfeiting.

After all, counterfeiting involves luring in consumers and persuading them to buy a product because of a well-known trademark, and generally also with packaging and product design elements that look like they come from the true manufacturer and owner of the trademark, that it bears and giving those consumers an inferior copy. No ERA member should be involved in that.

ERA’s anti-counterfeiting program will be officially launched during this year’s annual convention. Information about the program and the impact of counterfeiting on DR companies will be the subject of “Kicking Out the Counterfeiters - Practical and Proven Solutions” educational session. Jean Baker, AAA vice president, will be a panelist.

Greg Sater is an attorney with Rutter Hobbs & Davidoff Inc. in Los Angeles. He can be reached at (310) 286-1700, or via e-mail at [email protected].


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