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Fashion Law

Fashion Law
A Guide for Designers,
Fashion Executives,
and Attorneys

Edited by

Guillermo C. Jimenez
Fashion Institute of Technology

Barbara Kolsun
Stuart Weitzman LLC

Fairchild Books
New York
Executive Editor: Olga T. Kontzias
Assistant Acquisitions Editor: Amanda Breccia
Editorial Development Director: Jennifer N. Crane
Development Editor: Sylvia L. Weber
Associate Art Director: Erin Fitzsimmons
Production Director: Ginger Hillman
Associate Production Editor: Andrew Fargnoli
Copy Editor: Christine D’Antonio
Cover Design: Erin Fitzsimmons
Text Design: Andrew Katz

Copyright © 2010 Fairchild Books,


A Division of Condé Nast Publications, Inc.

All rights reserved. No part of this book covered by the copyright


hereon may be reproduced or used in any form or by any means—
graphic, electronic, or mechanical, including photocopying,
recording, taping, or information storage and retrieval
systems—without written permission of the publisher.

Library of Congress Catalog Card Number: 2008940704


ISBN: 978-1-56367-778-6

GST R 133004424

Printed in the United States of America


TP09
Contents

Extended Contents vii


Preface xv
Acknowledgments xviii

I Introduction
1 Fashion Law: Overview of a New Legal Discipline 3
Guillermo C. Jimenez, Fashion Institute of Technology

II Intellectual Property Issues


2 An Introduction to Intellectual Property Protection in Fashion 35
George Gottlieb, Gottlieb, Rackman & Reisman, P.C.
Marc Misthal, Gottlieb, Rackman & Reisman, P.C.
Barbara Kolsun, Stuart Weitzman LLC
3 Fashion and Apparel Licensing 81
Barbara Kolsun, Stuart Weitzman LLC
Kristin B. Kosinski, Cislo & Thomas LLP
4 Counterfeiting 105
Barbara Kolsun, Stuart Weitzman LLC
Heather J. McDonald, Baker Hostetler

III Commercial Operations and Expansion


5 Starting the Business and Launching the Line: How to
Choose the Right Business Structure 133
Thomas M. Pitegoff, Pitegoff Law Office PLLC

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vi Contents

6 Selling and Buying: Commercial Agreements in the


Fashion Sector 160
Donald L. Kreindler, Phillips Nizer LLP
7 Employment Law Issues in Fashion 175
Elise M. Bloom, Proskauer Rose LLP
Carole P. Sadler, Coach, Inc.
8 Marketing, Advertising, and Promotion 221
Ashima Dayal, Davis and Gilbert LLP
Vejay Lalla, Davis and Gilbert LLP
William Jelinek, The Estée Lauder Companies
9 Retail Leasing for Fashion 263
Steven R. Gursky, Olshan Grundman Frome Rosenzweig & Wolosky LLP
Mitchell B. Stern, Olshan Grundman Frome Rosenzweig & Wolosky LLP

IV International Aspects
10 International Development of the Fashion Business 287
Michael F. Colosi, Kenneth Cole Productions, Inc.
Paul A. Friedman, Kenneth Cole Productions, Inc.
11 Import and Customs Issues in Fashion 319
Frances P. Hadfield, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP

About the Contributors 347


Index 348
Extended Contents

Preface xv
Acknowledgments xviii

I Introduction
1 Fashion Law: Overview of a New Legal Discipline 3
Guillermo C. Jimenez
1.1. Introduction 3
1.1.1. Defining Fashion Law 3
1.1.2. The Need for Fashion Law 5
1.1.3. Analogies to Entertainment Law 12
1.2. Fashion 101 for Lawyers 12
1.2.1. The Structure of the Business 12
1.2.2. Production Processes 14
1.2.3. Fashion Seasons 15
1.2.4. The Realities of Knocking Off and Counterfeiting 16
1.2.5. The Role of Licensing 17
1.2.6. International Aspects of Fashion Law 18
1.3. Fashion Law and the Life Cycle of the Fashion Firm 20
1.3.1. Entrepreneurship Phase: Start-Up Issues 20
1.3.2. Expansion: Growth Issues 22
1.3.3. Large Corporation Issues 24
1.4. The Elements of Fashion Law 25
1.4.1. IP Protection in Fashion, Textiles, and Apparel 25
1.4.2. Anticounterfeiting 27
1.4.3. Fashion and Apparel Licensing 27
1.4.4. Legal Structure of the Company 28
1.4.5. Selling and Buying Fashion Products:
Commercial Agreements 28
1.4.6. Labor and Employment Issues 29

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viii Extended Contents

1.4.7. Marketing, Advertising, and Promotion of Fashion:


Legal Issues 30
1.4.8. Real Estate 30
1.4.9. International Business Issues 30
1.4.10. Customs 31
1.5. Conclusion 32
1.5.1. Fashion Education and Fashion Law Schools 32
1.5.2. Fashion Law Research 32

II Intellectual Property Issues


2 An Introduction to Intellectual Property Protection
in Fashion 35
George Gottlieb, Marc Misthal, and Barbara Kolsun
2.1. Introduction 35
2.1.1. Scope of IP Law 36
2.1.2. Finding the Right IP Attorney 38
2.2. IP Protection of Fashion and Apparel in the United States 38
2.2.1. Trademarks 39
2.2.2. Trade Dress Protection 49
2.2.3. Copyright 52
2.2.4. Design Patent Protection 59
2.2.5. Utility Patent Protection 62
2.2.6. Trade Secrets 66
2.3. International Protection 67
2.3.1. International Protection of Trademarks 69
2.3.2. Protecting Copyrights 69
2.3.3. Protecting Registered or “Industrial” Designs 70
2.3.4. Protecting Patents 70
2.4. Resolving Disputes in IP 71
2.4.1. Strategies to Protect Your Company’s Rights 71
2.4.2. The Value of a Legal Opinion: The Opinion Letter 72
2.4.3. What to Do If You Receive a Cease and Desist Letter
or Are Sued 73
2.4.4. Strategies to Avoid Infringing on IP Rights 74
2.4.5. Understanding the Stakes in IP Litigation 75
2.4.6. IP Litigation in General 75
2.4.7. Copyright Disputes 77
2.4.8. Trademark and Trade Dress Disputes 77
2.4.9. Patent Disputes 77
2.4.10. Settlement 78
2.5. Conclusion 78
Appendix: Researching IP Issues: Links and References 79
Extended Contents ix

3 Fashion and Apparel Licensing 81


Barbara Kolsun and Kristin B. Kosinski
3.1. Introduction 81
3.2. What Is a License? 81
3.3. Why License? 82
3.4. Negotiating a License 84
3.4.1. Pre-Preparation 84
3.4.2. Preparation 84
3.4.3. Post-Preparation, Pre-Negotiation 86
3.5. Key Terms 87
3.5.1. Licensed Products/IP 87
3.5.2. Additional Trademark Considerations 90
3.5.3. Term and Termination 91
3.5.4. Compensation 92
3.5.5. Quality Control and Advertising and Promotion Minimums 96
3.5.6. Sales and Product Delivery Deadlines and Schedules 98
3.5.7. Representations and Warranties and Risk Controls 99
3.5.8. Miscellaneous Terms 101
3.6. Conclusion 104
4 Counterfeiting 105
Barbara Kolsun and Heather J. McDonald
4.1. Introduction 105
4.1.1. What Is Trademark Counterfeiting? 105
4.1.2. The History of Counterfeiting and Anticounterfeiting 106
4.1.3. “The Crime of the Twenty-First Century” 107
4.1.4. Identifying a Counterfeit: An Overview 108
4.1.5. A Growing Problem and the Governmental Response 108
4.1.6. Not a Victimless Crime 110
4.1.7. Anticounterfeiting Today 113
4.2. Nature of the Counterfeiting Problem 113
4.3. Agents in the Effort 114
4.3.1. Management 114
4.3.2. Preliminary Action Plan 115
4.3.3. In-House Counsel 115
4.3.4. Outside Counsel 116
4.3.5. Federal Law Enforcement 117
4.3.6. Border Enforcement 118
4.3.7. State Law Enforcement Officials 119
4.3.8. Private Investigators 120
4.3.9. Trade Organizations 121
4.4. Criminal Enforcement 121
4.4.1. Enforcement under Federal Criminal Statutes 122
x Extended Contents

4.4.2. Enforcement by State Criminal Statutes 123


4.5. Civil Enforcement 124
4.5.1. Civil Seizure Actions 124
4.5.2. Third-Party Liability Actions 124
4.5.3. Cease and Desist Letters 126
4.5.4. Foreign Matters 126
4.6. Enforcement on the Internet 126
4.6.1. Websites 128
4.6.2. Auction and “Listings” Sites 128
4.7. Conclusion 130

III Commercial Operations and Expansion


5 Starting the Business and Launching the Line:
How to Choose the Right Business Structure 133
Thomas M. Pitegoff
5.1. Introduction 133
5.2. The Business Entity 134
5.2.1. Sole Proprietorship 134
5.2.2. Partnership 135
5.3. Forming the Entity 136
5.3.1. Why Form an Entity? 136
5.3.2. Financing and Securities Laws 138
5.3.3. Which Entity? 139
5.3.4. Which State? 144
5.3.5. Transfer Restrictions 146
5.3.6. Comparing Forms of Ownership 147
5.4. Launching and Expanding the Business 148
5.4.1. The Brand 148
5.4.2. Manufacturing the Products 149
5.4.3. Licensing 149
5.4.4. Distribution 150
5.4.5. Franchising 151
5.4.6. Other Sales Arrangements 153
5.4.7. Buying a Business 154
5.4.8. Other Laws 156
5.4.9. International Expansion 157
5.5. Conclusion 159
6 Selling and Buying: Commercial Agreements in the
Fashion Sector 160
Donald L. Kreindler
6.1. Introduction 160
Extended Contents xi

6.2. The Sales Contract between the Fashion Company and


Its Retailer Customers 161
6.2.1. The Importance of Agreements to Sell and Buy 161
6.2.2. The UCC: What the Law Provides Absent a Written
Contract with Inconsistent Provisions 162
6.2.3. What Constitutes the Contract between the Fashion
Company and Its Retailer Customers 165
6.2.4. VCERP’s Position on Six Key Items of
Vendor–Retailer Relations 167
6.2.5 Putting the VCERP Provisions into Practice 168
6.3. The Purchase of Goods by the Fashion Company: Terms and
Conditions That Should Apply, and What the Fashion
Company Should Do to Implement Them 170
6.3.1. How the World Has Changed 170
6.3.2. Important Provisions in the Fashion Company’s
Purchase Order 171
6.4. The Sales Representation Agreement 173
6.4.1. Authority of the Sales Representative 173
6.4.2. Compensation 173
6.5. Conclusion 174
7 Employment Law Issues in Fashion 175
Elise M. Bloom and Carole P. Sadler
7.1. Introduction 175
7.2. Discrimination Law: An Overview 176
7.2.1. Federal Laws 177
7.2.2. State and Local Laws 189
7.3. Wage and Hour Laws 189
7.3.1. Fair Labor Standards Act and Related State Laws 191
7.3.2. Overtime and Job Classifications 193
7.3.3. Record-Keeping Requirements 194
7.3.4. Other Wage Laws of Concern 195
7.3.5. Employee Uniforms 195
7.3.6. Anti-Sweatshop Practices 197
7.4. Other Important Federal Laws 199
7.4.1. Family and Medical Leave Act 199
7.4.2. Fair Credit Reporting Act 201
7.4.3. Occupational Safety and Health Act 201
7.5. Contingent Work Force (Independent Contractors) 202
7.6. Weight Regulation of Fashion Models: Council of
Fashion Designers of America’s “Health Initiative” 204
7.7. Employment Agreements in the Fashion Industry 205
7.7.1. Nature of the Employment Relationship 205
xii Extended Contents

7.7.2. Covenant Not to Compete 205


7.7.3. Other Restrictive Covenants 207
7.7.4. Arbitration 210
7.7.5. Choice of Law 210
7.7.6. Return of Property 211
7.7.7. Assignments and Successors 211
7.7.8. Severability 212
7.7.9. Merger and Modification Clause 212
7.8. Immigration Issues in the Fashion Industry 213
7.8.1. Foreign Nationals Employed in the Fashion Industry:
Admission to the United States 213
7.8.2. General Nonimmigrant Options 214
7.8.3. H-1B Visa 216
7.8.4. Fashion Models 218
7.8.5. O-1 Visa 219
7.9. Conclusion 220
8 Marketing, Advertising, and Promotion 221
Ashima Dayal,Vejay Lalla, and William Jelinek
8.1. Introduction 221
8.2. What Constitutes Advertising? 223
8.3. Engaging Creative Personnel to Create Advertising 224
8.3.1. Contract Basics 225
8.3.2. Talent/Model/Spokesperson Contracts 233
8.3.3. Union Issues 235
8.3.4. Hiring Minors 236
8.4. Creating and Clearing Advertising 239
8.4.1. To Own or License Content? 239
8.4.2. Clearance of Third-Party Materials in Advertising 245
8.5. Regulatory Issues in Fashion Advertising 251
8.5.1. What Is an Advertising Claim? Express and Implied Claims
vs. Puffery 253
8.5.2. Performance Demonstrations 254
8.5.3. Endorsements and Testimonials 255
8.5.4. Other Advertising Claims 257
8.6. Conclusion 258
9 Retail Leasing for Fashion 263
Steven R. Gursky and Mitchell B. Stern
9.1. Introduction 263
9.2. Selecting the Right Location 263
9.3. Making the Offer 266
9.3.1. Purpose of the Letter of Intent 266
Extended Contents xiii

9.3.2. Contents of a Letter of Intent 270


9.4. Negotiating Posture 272
9.5. Assembling the Team of Experts 272
9.5.1. Selecting the Right Attorney 274
9.5.2. Selecting a Retail Leasing Broker 274
9.5.3. Choosing Other Professionals 276
9.6. Percentage Rent 277
9.7. Exclusives and Radius Restrictions 277
9.8. Construction and Architectural Design Issues 278
9.9. Signage and Displays 280
9.10. Commercial Lease Checklist 280
9.11. Conclusion 283

IV International Aspects
10 International Development of the Fashion Business 287
Michael F. Colosi and Paul A. Friedman
10.1. Introduction 287
10.2. Choosing the Right Partner 288
10.2.1. Expertise and Track Record in the Foreign Market 289
10.2.2. Financial Strength 293
10.3. Preparation 294
10.3.1. Choosing a Trademark Wisely 294
10.3.2. Trademark Rights Are Territorial 294
10.3.3. Design Protection Law in Different Jurisdictions 297
10.3.4. Knowing the Appeal of Products to
Local Tastes and Needs 298
10.4. Types of Relationships 298
10.4.1. License Agreement 299
10.4.2. Distribution Agreement 300
10.4.3. Franchise Agreement 302
10.4.4. Agency/Sales Representative Agreement 303
10.4.5. Joint Venture 303
10.5. Considerations in Negotiating and Drafting an International Deal 304
10.5.1. Rights Granted 304
10.5.2. Design Process 308
10.5.3. Retail Rights 309
10.5.4. Monetary Allowances for Visits to a Territory 312
10.5.5. Pricing Decisions 313
10.5.6. Advertising 314
10.5.7. Factory Compliance with Human Rights Standards 315
10.6. Conclusion 317
xiv Extended Contents

11 Import and Customs Issues in Fashion 319


Frances P. Hadfield
11.1. Introduction 319
11.2. The Import Process 320
11.2.1. Entry Documentation 322
11.2.2. Classification 324
11.2.3. Valuation 326
11.2.4. Valueless or Damaged Goods 328
11.2.5. Country of Origin 329
11.2.6. Marking Requirements for Apparel 329
11.2.7. U.S. Fish and Wildlife Requirements for Apparel 333
11.2.8. Entry of Commercial Samples 334
11.3. Administrative Processes 336
11.4. Litigation 337
11.5. Penalties for Violating the Customs Laws 338
11.5.1. Seizure and Forfeiture under 19 U.S.C.A. § 1595a 339
11.5.2. Liquidated Damages 340
11.5.3. Criminal Sanctions 340
11.6. Customs Audits 340
11.7. Record-Keeping Requirements 342
11.8. Customs-Trade Program against Terrorism 343
11.9. Foreign Manufacturing Issues for Importers 344
11.10. IP, Trademarks, and Importation 345
11.11. Conclusion 346

About the Contributors 347


Index 348
Preface

In the twenty-first century, fashion has achieved the status of a truly global in-
dustry. Consumers in virtually every country on the planet are now familiar
with such mass-market brands as Levi’s, Nike, Adidas, H&M, Zara, and Lacoste.
At the same time, the artistic creativity of top designers working for haute cou-
ture and luxury brands has made fashion a cultural force. The importance of a
fashion-oriented design strategy has thus increasingly become apparent in in-
dustries as diverse as automobiles, hotels, and electronic appliances.
Despite the economic and cultural importance of the fashion sector, the le-
gal profession has been slow to develop specific tools and treatises to serve its
fashion clientele. One of the reasons for this is doubtless to be found in the
highly fragmented nature of the industry. Until recently, the fashion and apparel
complex was characterized by a vast array of small- to medium-sized enterprises.
However, decades of consolidation and growth have turned many fashion com-
panies today into major international corporations. These companies typically
face certain kinds of legal issues and problems on a regular basis. It is therefore
the primary objective of Fashion Law to provide a concise but practical guide to
the most common legal issues faced by a fashion company as it grows from in-
fancy to international stature.
The text is divided into four parts. First is Part I, the Introduction. Chapter
1 provides an overview of the book and the issues covered by fashion law. It de-
scribes fashion law as an emerging course of study for students of fashion and a
specialized area for law students.
The first problem typically faced by a fashion company is how to protect
its intellectual property (IP)—especially its brand name, logo, and other trade-
marks. Part II, comprising Chapters 2, 3, and 4, addresses IP issues. Fashion
consumers are more likely to purchase a brand they can easily recognize, hence
the value of a unique and highly visible trademark. However, fashion is also
an unusually imitative industry. Fashion leaders and innovators inevitably find
that their ideas are copied by rivals. IP law allows fashion companies to obtain

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xvi Preface

some measure of protection, but it is a highly limited protection. As is set forth


in Chapter 2, fashion companies can protect logos, images, fabric prints, and
jewelry designs, for example, but they generally cannot protect fashion designs.
One of the structural characteristics of today’s fashion industry is a strong
reliance on licensing, which is discussed fully in Chapter 3. In licensing trans-
actions, the owner of IP enters into an agreement under which another party
manufactures branded fashion items pursuant to the licensor’s quality and de-
sign standards. Through licensing, a firm that has developed a famous brand
name can exploit that value in a number of countries or industries where it
might otherwise have lacked the capital to operate.
The tremendous growth in the value of fashion trademarks has unfortunately
led to a serious business problem, global trademark counterfeiting. Counterfeit-
ing is no longer a small problem for many fashion companies. It now represents
a serious drain on the corporate treasury with negative effects on consumer
goodwill. Many large fashion companies have therefore adopted highly pro-
active, collaborative approaches to fighting counterfeiting. The elements of a
successful anticounterfeiting plan are reviewed in Chapter 4.
Part III, comprising Chapters 5 through 9, deals with the commercial opera-
tion and expansion of fashion businesses. Every company needs to be set up ac-
cording to a particular legal structure as, for example, in a sole proprietorship,
partnership, or corporation. The considerations involved in making this crucial
choice are explored in Chapter 5. Later, when a fashion company is in opera-
tion, it will enter into a number of business deals with suppliers and customers.
The most common of these transactions is the commercial sale of fashion items
from a fashion company to a major retailer. The legal aspects of the commer-
cial sale transactions are analyzed in depth in Chapter 6.
Fashion companies are often obliged to employ a large number of personnel.
These employees are covered by a complex web of legal protections. The vari-
ous state and federal laws covering employee rights are reviewed in Chapter 7.
As anyone who has ever perused a fashion magazine knows, print advertising
is tremendously important for fashion firms. Today, however, new forms of ad-
vertising, particularly through electronic media, are also becoming important. A
recurrent issue faced by fashion companies is the clearance of images used in
their advertising. Images may be owned by photographers or other parties, and
the people portrayed in those images may have additional rights. In addition,
fashion advertisers may need to enter into agreements for the use of props or the
right to shoot images at particular locations. The ways to obtain legal clearance
for all aspects of the use of images in advertising is discussed in Chapter 8.
Despite the growth of e-commerce, most apparel sold today is still sold
through retail stores. The fashion company needs to carefully negotiate the
Preface xvii

lease or purchase of space for its stores. The key aspects of commercial lease
negotiations are set forth in Chapter 9.
Part IV, which includes Chapters 10 and 11, covers international aspects of
the fashion industry. When a fashion company has begun to achieve inter-
national recognition, it will inevitably be demanded be consumers in other
countries. The best and safest ways to grow internationally are discussed in
Chapter 10.
Apparel manufacturing today is a complex, global process. A single garment
may involve elements from a half-dozen different countries. It is absolutely
vital for fashion companies to be able to move products across national bor-
ders in a timely, efficient, and cost-effective manner. Proper customs and duty-
management procedures are therefore mandatory for the sophisticated apparel
company and are discussed in Chapter 11.
To introduce fashion students and industry professionals to these legal aspects
of working in the fashion business, this text relies on the expertise of contribut-
ing authors who specialize in fashion law, either in law partnerships or as inside
counsel to fashion business firms. Although designers and fashion executives
are encouraged to turn to legal counsel to ensure that they are conducting their
business in the most advantageous way that complies with the law, a basic un-
derstanding of fashion law can make their relationship with their legal advisors
more productive. Several features of the text help to make legal concepts acces-
sible to the lay reader. Boxes provide summaries of court cases and other real-life
examples of the role of law in the fashion business. Templates for agreements
illustrate the provisions that owners and managers of fashion businesses should
include in these documents. Sample Clauses familiarize readers with the legal
language that covers the rights and responsibilities of the parties to agreements.
Practice Tips discuss legal issues that should be considered as fashion designers
and executives establish procedures for conducting their business.
Law students who are contemplating a specialty in fashion law will learn
about applications of business law and IP protection to the particular, some-
times unique, conditions and practices that occur in this fascinating industry.
Acknowledgments

This book was written by a team of highly experienced attorneys and legal ex-
perts, and it is therefore fitting for us to thank our contributing authors first:
Elise M. Bloom, Michael F. Colosi, Ashima Dayal, Paul A. Friedman, George
Gottlieb, Steven R. Gursky, Frances P. Hadfield, William Jelinek, Kristin B. Ko-
sinski, Donald L. Kreindler, Vejay Lalla, Heather J. McDonald, Marc Misthal,
Thomas M. Pitegoff, Carole P. Sadler, and Mitchell B. Stern.
We would also like to thank our tireless research and drafting assistants,
Lauren Allen, Ashley Corwin, Cara Joy David, Stephen Fletcher, Shannon
Hedvat, Megan Heeter, Jean Kim, Whitney Meers, and Tina Mepani.
We are grateful to the following reviewers, selected by the publisher, for their
helpful recommendations: Jean K. Dilworth, Eastern Illinois University; Elena
Karpova, Iowa State University; Mary Littrell, Colorado State University; Erin
Parrish, University of Alabama; and Jack Rose, Johnson & Wales University.
Finally we would like to thank our highly supportive and professional pub-
lishing team at Fairchild Books, especially our editors, Olga Kontzias, executive
editor; Jennifer Crane, director of editorial development; Sylvia Weber, develop-
ment editor; and Andrew Fargnoli, production editor; and our art director, Erin
Fitzsimmons.
Guillermo C. Jimenez
Professor, Fashion Institute of Technology
Barbara Kolsun
General Counsel, Stuart Weitzman LLC

xviii
4
Counterfeiting
Barbara Kolsun and Heather J. McDonald

4.1. Introduction
Trademarks are the most valuable commodities in the fashion industry. Fash-
ion companies rely on their trademarks so consumers can identify a particular
brand’s products easily, which in turn has a bearing upon whether the consumer
elects to purchase the product. Since copyright protection for fashion designs is
limited, fashion companies must rely on their trademarks in order to help distin-
guish their products from those of their imitators.
Trademarks have the ability to stimulate consumer demand for products
globally.1 This is particularly true given the advent of the Internet. Marks indi-
cate that a particular product is associated with a certain reputation, and that, by
buying another product with the same mark, consumers are purchasing items
of the trademark owner’s standard of quality. With the increased demand for
certain trademarks, counterfeiters have realized the benefit of copying such IP.
Counterfeit products can be created at a relatively low price and can be sold for
great profits (Figure 4.1).

4.1.1. What Is Trademark Counterfeiting?

Trademark counterfeiting is the act of manufacturing or distributing a product


or service bearing a mark that is identical to or substantially indistinguishable

Whitney Meers, Cardozo Law School, Class of 2009, and Cara Joy David, Cardozo Law School,
Class of 2010, provided additional research.
1
Curtis Krechevsky, INTA and the Battle against Counterfeiting, 93 Trademark Rep. 145 (1996).

105
106 Intellectual Property Issues

Fig. 4.1. These counterfeit handbags were seized from a New York City ware-
house before they could be sold on the streets as designer merchandise.
(Courtesy of Fairchild Publications, Inc.)

from a registered trademark.2 Simply put, trademark counterfeiting is theft of


someone’s IP. People who copy legitimate products not only reproduce the
trademark owner’s original patterns and designs, but they also decrease the
value of the original products in the marketplace by making exclusive products
seem as though they are available at mass-market prices. This practice harms
the trademark owner, who seeks to maintain the exclusivity of the brand in the
marketplace, while at the same time it allows counterfeiters to capitalize off the
established goodwill and reputation of the trademark owner.

4.1.2. The History of Counterfeiting and Anticounterfeiting

People have attempted to associate brands with their products for hundreds of
years.3 For as long as people have created objects of value, they have attempted
to protect the marks that they have attached to those products.4

2
15 U.S.C. §§ 1116(d)(1)(B)(I), 1127 (2008).
3
Jed S. Rakoff & Ira B. Wolff, Commercial Counterfeiting: The Inadequacy of Existing Remedies, 73 Trade-
mark Rep. 493 (1983).
4
Id.
Counterfeiting 107

In 1946, Congress enacted legislation to protect trademarks5 that enabled


trademark owners to enforce and protect their trademarks through civil ac-
tions. However, these early laws did little to protect trademark owners against
counterfeiting.6 In 1983, brand owners again lobbied Congress for criminal
penalties against trademark counterfeiting.7 By then, the problem of counter-
feiting had escalated far beyond the trademark owners’ control,8 and the issue
was reaching crisis proportions.9 The legislature amended the 1946 statute in
1984 to criminalize trademark counterfeiting and included stiffer penalties for
counterfeiters.10

4.1.3. “The Crime of the Twenty-First Century”

Theft of IP, particularly trademark counterfeiting, is often referred to as “the


crime of the twenty-first century.”11 As technology advances, so does the ability
of criminals and infringers to copy the trademarks of others, with the hopes of
easy profits. Much of today’s counterfeiting problem is linked to China,12 al-
though Russia represents a major problem, and smaller issues are present in
such places as Argentina, Belize, Brazil, Egypt, Indonesia, Israel, Lebanon,
Paraguay, Turkey, Ukraine, and Venezuela. In Latin American countries, the
biggest problems come from domain name pirates and counterfeiters claiming
to be distributors for U.S. companies.
China’s unprecedented economic growth has been accompanied, unfortu-
nately, by rampant counterfeiting.13 Professor Peter Yu has written that

. . . the culprit behind the Chinese piracy problem is the Confucian beliefs in-
grained in the Chinese culture, the country’s socialist economic system, the leaders’
skepticism toward Western institutions, the xenophobic and nationalist sentiments
of the populace, the government’s censorship and information control policy, and
the significantly different Chinese legal culture and judicial system.14

5
Lanham Act, 15 U.S.C. § 1041 et seq.
6
Krechevsky, supra note 1.
7
Rakoff & Wolff, supra note 3.
8
Krechevsky, supra note 1.
9
Id.
10
Trademark Counterfeiting Act of 1984, 18 U.S.C. § 2320 (2008).
11
Dubbed as such by James Moody, former Chief of the Federal Bureau of Investigation’s Orga-
nized Crime/Drug Operations Division.
12
Daniel C.K. Chow, Counterfeiting in the People’s Republic of China, 78 Wash. U. L.Q. 1 (2000).
13
Id.
14
Peter K. Yu, From Pirates to Partners: Protecting Intellectual Property in China in the Twenty-First Century,
50 Am. U. L. Rev. 131, 206 (2000).
108 Intellectual Property Issues

Professor Yu suggests that China’s reluctance to embrace IP laws is due to


the perception that these laws protect only foreigners and not citizens of China,
and to the impression that such laws were adopted as the result of pressure to
comport with Western IP laws, which creates further hostility and reluctance to
abide by such laws.15
On June 20, 2006, European and U.S. officials joined forces in the form of a
joint task force to fight counterfeiting. The “EU-US Action Strategy for the En-
forcement of Intellectual Property Rights” provided a framework in which the
E.U. and United States could identify and act on common projects with indus-
try support. China and Russia were the main focus of the joint action plan.
Additionally, in October 2007, the U.S. Trade Representative announced the
launch of the Anticounterfeiting Trade Agreement to establish common stan-
dards for anticounterfeiting enforcement among numerous countries.

4.1.4. Identifying a Counterfeit: An Overview

Some counterfeits are easier to spot than others. For example, a counterfeit
handbag purchased in a flea market will usually be of very poor quality, with
loose seams and stitching. The difference in quality between the counterfeit
and an original will be visible to the ordinary consumer. However, many coun-
terfeiters today are capable of producing extremely precise imitations of famous
branded products. Such counterfeiters can mimic everything from a particular
stitching method to precise thread coloring.
Because of the difficulty in identifying such counterfeits, some companies
have incorporated product-securing devices in packaging or into the product
itself, such as thread in a label identifying the product as authentic.
Brand owners must be prepared to train investigators and law enforcement
officials, such as customs officers, in how to spot counterfeit products. Also,
trademark owners should review their counterfeiting prevention measures from
time to time in order to ensure that the measures are up-to-date, since counter-
feiters are constantly becoming more sophisticated in their methods.

4.1.5. A Growing Problem and the


Governmental Response

The International AntiCounterfeiting Coalition (IACC) estimates losses to U.S.


companies due to trademark counterfeiting to be between $200 billion to $250

15
Id.
Counterfeiting 109

billion annually.16 Globally, counterfeiting is approximately a $600 billion a


year problem.17 In 2005, Congress also noted that counterfeiting costs legitimate
employers thousands of potential job opportunities, owing in part to lost profits
and in part to the companies’ competition with illegal operations that do not
comply with national employment standards.18
In a survey conducted by the IACC, Fortune 500 companies reported that
they spend an average of between $2 and $4 million per year to combat coun-
terfeiting. Some reported spending up to $10 million.19
According to the November 2004 report of New York City Comptroller Wil-
liam C. Thompson, Jr.,20 counterfeiting accounted for $380 million lost in New
York City sales taxes, $290 million lost in New York City business income taxes,
and $360 million lost in New York City personal income taxes.21 The Los Ange-
les County Development Corporation reported that counterfeiting had deprived
state and local governments of at least $483 million in 2005.22
In recent years, Congress has taken a more proactive stance in the fight
against counterfeiting. In passing anticounterfeiting laws, Congress now recog-
nizes the importance of IP to the national economy. Laws now exist that allow
trademark owners to enforce their rights and that allow both federal and state
authorities to protect the consuming public (Box 4.1). Agencies such as the Fed-
eral Bureau of Investigation, Secret Service, and Customs Service (now part of
the Department of Homeland Security) monitor and establish trade regulations,
patrol the borders, and monitor the Internet in order to locate and prosecute
counterfeiters. Under federal laws, counterfeiters may be fined up to $2 million
and ten years in prison per infringement. Further, as many as two-thirds of the
states in the United States have adopted laws criminalizing trademark counter-
feiting. Many of these laws include felony penalties, prison terms and fines for
those convicted of crimes associated with trademark counterfeiting.23

16
See International AntiCounterfeiting Coalition, http://www.iacc.org/counterfeiting/counterfeiting
.php (last visited July 3, 2008). However, it is important to note that it is difficult to come up with a
precise figure because so much of the counterfeiting industry is below the economic radar.
17
Id.
18
S. 1984, 109th Cong. § 1 (2005). See also International AntiCounterfeiting Coalition, Facts on
Fakes, available at http://www.iacc.org/resources/Facts_on_fakes.pdf (last visited Mar. 19, 2008).
19
See International AntiCounterfeiting Coalition website, http://www.iacc.org (last visited May 28,
2008).
20
William C. Thompson, Jr., Bootleg Billions: The Impact of the Counterfeit Goods Trade in New York
City (Nov. 2004), available at http://www.iacc.org/resources/IACC_WhitePaper.pdf (last visited May
28, 2008).
21
Id.
22
Gregory Freeman, Nancy D. Sidhu & Michael Montoya, A False Bargain: The Los Angeles County
Economic Consequences of Counterfeit Products (Feb. 2007), available at http://www.laedc.org/consulting/
projects/2007_piracy-study.pdf (last visited Dec. 14, 2008).
23
18 U.S.C. § 2320.
110 Intellectual Property Issues

Box 4.1

Purse Parties: U.S. v. Ohri


In big cities, counterfeit vendors are part of everyday life. For instance, New York
City’s Chinatown is a popular spot for tourists to purchase counterfeit products.
However, in suburban areas, consumers might attend “purse parties,” parties that
serve food and drinks and sell counterfeit goods. Purse parties are more difficult
to discover and to police than retail outlets because such parties are held in pri-
vate and by invitation only.
But there are success stories. In U.S. v. Ohri, an anonymous tip from an at-
tendee at a purse party led to the arrest of a man and his son, who were later tried
for selling counterfeit handbags bearing the marks of nine different designers,
including Prada and Louis Vuitton. Federal agents found 30,000 knockoff bags
in a warehouse in Fairfax, Virginia. The arrest also connected the defendants to
others involved in the counterfeiting ring.
Source: U.S. v. Ohri, WL 150799 (E.D. Va. 2007).

Trademark owners also have at their disposal various civil remedies to pro-
tect their trademarks. Under existing laws, companies have the ability to seize
counterfeit products, permanently enjoin the manufacture and sale of such
items, remove such items from sale on the Internet, and seek monetary dam-
ages.24

4.1.6. Not a Victimless Crime

A common misconception is that counterfeiting is a “victimless crime.” It is not.


Beginning with the large corporations at the top, trickling down to the low-wage
workers who slave in barely inhabitable sweatshops, and ending with the con-
sumers of counterfeit products, counterfeiting has countless victims.
People who purchase counterfeit products often do not realize the harms
that are associated with purchasing such products. They generally just assume
they are getting a good deal for something that looks substantially similar to
a brand name product. But in reality, there are high costs, including harm to
the economy, danger to consumers’ health, and substantial funding for orga-
nized crime.

24
Id. § 1116.
Counterfeiting 111

4.1.6.1. Harm to Trademark Owners

From the trademark owner’s point of view, the obvious harm done by counter-
feiting is lost sales. People who would have elected to purchase an authentic
product either are deceived into purchasing or willingly purchase a fake.
If people who have innocently purchased counterfeits believe that the prod-
ucts are authentic but simply of poor quality, they may have reservations about
purchasing the mark owner’s products in the future. Therefore, the mark owner
is harmed not only by the fact that the person has purchased a non-genuine
product, but also by the fact that the consumer may choose not to purchase gen-
uine items from that trademark owner in the future. The money that companies
lose when people purchase counterfeit products, coupled with the money that
corporations spend to fight such counterfeiting efforts, significantly increases
operating costs.

4.1.6.2. Harm to Consumers

Consumers also lose when they purchase non-genuine products. Counterfeiting


is successful because counterfeiters find ways to take shortcuts in manufacturing.
This poses a substantial threat to the health and safety of consumers because of
a lack of quality control. Counterfeiting operations often work below the radar of
international standards and therefore do not comply with minimum public safety
requirements. For products such as clothing, this means that garments may be
washed in substances that are toxic or that are proven skin or eye irritants. Coun-
terfeit sunglasses may not be shatterproof or protect eyes from ultraviolet rays.
It is essential to get the message out to consumers. One highly effective
public relations strategy is for a group of fashion companies to launch a major
public awareness campaign. For instance, the hair-care company Paul Mitchell
had television commercials stating that its products are sold only in salons and
that products purchased elsewhere are not guaranteed by the company and may
be dangerous. For several years, Harper’s Bazaar has devoted one issue a year to an-
ticounterfeiting, and this has become a popular venue for fashion companies to
place anticounterfeiting ads. There are also lower cost alternatives. For example,
a company should designate a place on its website where consumers can report
counterfeiters. If possible, labels should also clearly state “only sold in. . . .”

4.1.6.3. A Drain on Law Enforcement

Counterfeiters generally run all-cash businesses and avoid keeping records or


paying taxes. This is problematic on many levels. Cash-only operations leave no
112 Intellectual Property Issues

paper trail, a situation that can make large-scale counterfeiting operations dif-
ficult to investigate. It also allows counterfeiters to easily hide their assets once
they are tracked by law enforcement.
Because they have no records, it is impossible to ascertain whether coun-
terfeiters are complying with international human rights health and safety
standards in their factories. The likelihood is that most of them are not in com-
pliance, because it costs money to comply with such standards.
Organized crime and terrorist organizations are increasingly involved in
counterfeiting operations.25 Counterfeiting has become big business, with or-
ganized criminal enterprises establishing manufacturing and distribution net-
works in the United States, Europe, and Asia. Many of these criminal groups
ship counterfeit products through the same sophisticated routes that they use
for narcotics trade.26 Congress recognized the correlation between organized
crime and counterfeiting when it enacted federal criminal copyright and
trademark piracy laws under the Racketeer Influenced Corrupt Organizations
(RICO) Act.27 At the International Conference on IPR in Lyon, France in 2001,
hosted by Interpol, the relationship between counterfeiting and funds for terror-
ist activities was discussed.28 Some of the groups that the government has en-
countered through its anticounterfeiting operations include al Qaeda, Hamas,
Hezbollah, and the Irish Republican Army.29 In fact, Interpol states that coun-
terfeiting is not merely a single source of funding for such organizations, but
that it is becoming the preferred method of funding for these groups.30 The FBI
compiled evidence of a direct link between the sale of counterfeit merchandise
in the streets of New York and the terrorists who bombed the World Trade
Center in 1993.31

25
See generally Maureen Walterbach, International Illicit Convergence: The Growing Problem of Transna-
tional Organized Crime Groups’ Involvement in Intellectual Property Rights Violations, 34 Fla. St. U. L. Rev. 591
(2007).
26.
Anna-Liisa Jacobson, The New Chinese Dynasty: How the United States and International Intellectual
Property Laws Are Failing to Protect Consumers and Inventors from Counterfeiting, 7 Rich. J. Global L. & Bus.
45 (2008).
27
International AntiCounterfeiting Coalition, The Negative Consequences of International Intellectual
Property Theft: Economic Harm, Threats to the Public Health and Safety, and Links to Organized Crime and Ter-
rorism Organizations (Jan. 2005), available at http://www.iacc.org/resources/IACC_WhitePaper.pdf (last
visited May 28, 2008).
28
Kathleen Millar, U.S. Customs Today, Financing Terror: Profits from Counterfeit Goods Fund Terror-
ist Attacks (Nov. 2002), available at http://cbp.gov/xp/CustomsToday/2002/November/interpol.xml (last
visited Dec. 14, 2008).
29
Id.
30
Public Testimony of Ronald K. Noble, republished in The Links between Intellectual Property Crime
and Terrorist Financing, 108th Cong. (July 16, 2003), available at http://www.interpol.int/Public/ICPO/
speeches/SG20030716.asp (last visited Mar. 20, 2008).
31
Willy Stern, Why Counterfeit Goods May Kill, 36 Bus. Wk., Sept. 2, 1996, at 6.
Counterfeiting 113

4.1.7. Anticounterfeiting Today

18 U.S.C. § 2320 prohibits trafficking in counterfeit labels, patches, and medal-


lions bearing a copy of a registered trademark that are unattached to any goods.
Mark owners are currently pushing legislation that, in the case of a “famous”
mark, would remove the burdensome requirement that the spurious mark be
used in connection with goods or services identical to those for which the genu-
ine mark is already registered.

4.2. Nature of the Counterfeiting Problem


The Unites States Code defines a counterfeit as “a spurious mark that is identi-
cal with or substantially indistinguishable from the original registered mark” in
15 U.S.C. § 1127, 15 U.S.C. § 1116(d)(1)(B)(i), and 18 U.S.C. § 2320(e)(1). Under
19 C.F.R. § 133.21(a), this standard is reached when the “copying or simulating
mark or name” is either “an actual counterfeit of the recorded mark” or “is one
which so resembles it as to be likely to cause the public to associate the copying
or simulating mark with the registered mark or name.”32
All counterfeits are infringements, but not all infringements are counterfeits.
Counterfeiting is narrower in scope than trademark infringement and applies
only to marks made to look identical to the actual mark. (The “confusingly sim-
ilar” standard for infringement is a lower threshold to reach.)
If Company X, which makes shoes that look exactly like, or very close to,
Company Y’s shoes and also bear Company Y’s trademark, then Company X is
engaging in blatant counterfeiting. Company X is attempting to capitalize off
Company Y’s name and brand. However, if Company X creates a pair of shoes
with a pattern and trademark similar to Company Y’s, but not exactly the same,
then there is less likelihood that this product will be considered counterfeit. It
may, however, be found to infringe Company Y’s trademark because consumers
may find the products “confusingly similar” when they look at the products in
the marketplace.
Ultimately, the differences between counterfeiting and infringement are
important because they lead to different consequences. Infringement gener-
ally results in an injunction, a legal remedy that prohibits the defendant from
manufacturing and selling the product, and sometimes in monetary damages.
Counterfeiting, on the other hand, may not only result in an injunction and

32
Montres Rolex, S.A. v. Snyder, 718 F.2d 524 (2d Cir. 1983).
114 Intellectual Property Issues

monetary damages, but also can result in criminal penalties, such as fines and
imprisonment.
A further defining aspect of trademark counterfeiting is that in order to con-
stitute a counterfeit, the mark must be used on the same type of goods or ser-
vices as are covered by the mark owner’s registrations according to 15 U.S.C.
§ 1116(d)(1)(B). Generally, companies that manufacture products must file trade-
mark registrations specifically defining which types of products their marks will
be used on. For example, most countries use the International Classification
of Goods and Services. Under this system, “Class 25” covers clothing, which
includes clothing, footwear, and headgear.33 If Company X has a valid trade-
mark registration for Class 25 products, then it has the exclusive right to place
its mark on such products. However, a person who wishes to put Company X’s
mark on a toy, which is covered by Class 28,34 may not be guilty of trademark
counterfeiting, although there may be a trademark infringement or copyright
infringement issue in doing so under the doctrine of related use.35 Box 4.2 de-
scribes another situation in which the determination of the type of infringement
of IP rights is at issue.

4.3. Agents in the Effort


It is the responsibility of trademark owners to protect their trademarks and en-
force against the unauthorized use of those marks. This includes taking initia-
tive to protect their trademarks against counterfeit products.

4.3.1. Management

Trademark enforcement begins at the top. Management must be aware of the


problem of counterfeiting and drive the company’s enforcement efforts. Man-
agement must cooperate with in-house and outside counsel and law enforce-
ment to designate contacts for various needs that may arise, including the
production of affidavits of authenticity, the identification of counterfeit goods,
providing testimony where necessary, and supporting civil litigation.
Not only is executive management integral in the counterfeit fight, lower-
level business and sales personnel must also be cognizant of the problem. Those
in sales are usually closest to the marketplace and are often the best suited to

33
http://www.wipo.int/classifications/fulltext/nice8/enmain.htm.
34
http://www.uspto.gov/web/offices/tac/tmfaq.htm#Application018.
35
J. Thomas McCarthy, McCarthy on Trademarks and Unfair Comp. 17:15 (4th ed. 2008).
Counterfeiting 115

Box 4.2

The Gray Market: Zino Davidoff SA v. CVS Corp.


Products that are authentic but sold through illegal channels of distribution,
commonly called gray market products, blur the line between counterfeits and
authentic items. Because prices for products will often vary substantially from
country to country, transporters will purchase products legally from authorized
dealers in countries where the products are less expensive and will transport them
without authorization to retailers in other countries where the products are more
expensive. In legitimate trade, the difference in price is usually attributable to
shipping prices, taxes, and quality-control standards.
In the recent case of Davidoff SA v. CVS Corp., Davidoff, alleging various Lan-
ham Act and state law trademark claims, moved to enjoin CVS from selling gray
market Davidoff perfumes. CVS argued that it should not have to stop selling
such products because it had purchased the perfumes from authorized dealers.
Because an injunction will be granted only where there is a likelihood of suc-
cess on the merits of the claim, the court addressed whether Davidoff had appro-
priate monitoring efforts in place to make its products protectable against gray
market perfumes. The court found that Davidoff’s UPC monitoring system was
sufficient, and that, since UPC codes had been scraped off, such absence of UPC
codes constituted a “material difference” from an authentic product, allowing an
injunction under the Lanham Act. The case is now on appeal.
Source: Zino Davidoff SA v. CVS Corp., 06 Civ. 15332 (S.D.N.Y. 2007).

see or hear about counterfeit products. Other business personnel may be par-
ticularly well-placed to notice differences in importing patterns and can help
the legal team determine where to direct its efforts.

4.3.2. Preliminary Action Plan

Trademarks and domain names should be registered in all countries where the
trademark owner sells, manufacturers, or distributes products or components. In
addition, it is often wise to register trademarks in advance in large markets like
China and Russia, in order to avoid problems when the brand becomes known.

4.3.3. In-House Counsel

In-house counsel plays an important role in the battle against counterfeiting.


Such counsel should determine an appropriate anticounterfeiting strategy,
116 Intellectual Property Issues

maintain close contact with outside counsel and investigators hired to conduct
anticounterfeiting operations, and work directly with investigators and law en-
forcement to monitor anticounterfeiting progress. In large companies, in-house
counsel’s duties may consist solely of combating counterfeiting operations.36
However, in most corporations, anticounterfeiting involves only part of such
counsel’s responsibilities.37
Experienced in-house counsel can assist investigators in formulating appro-
priate procedures to conduct local sweeps in targeted geographic locations.38 A
program administrator at the paralegal level will be instrumental in helping the
corporation throughout the process.39 It is important for that person to be able
and willing to work with law enforcement to determine the authenticity of prod-
ucts and to track the chain of custody of counterfeits.40 This person should also
be trained to identify counterfeit product.41
One of the most important functions of in-house counsel and related staff
is maintaining an evidentiary chain of custody. It is imperative to have files on
each civil and criminal action related to maintenance of the brand mark. In-
cluded in these files should be a chain of custody form and the affidavit discuss-
ing the counterfeit product in question, with details about how it was discovered
and how it differs from the authentic product. If all the necessary documents
are in one place, they can be easily accessed by, or forwarded to, the party deal-
ing with enforcement.42

4.3.4. Outside Counsel

In many cases, in-house counsel must turn to outside counsel for assistance in
fighting counterfeiting. The role of outside counsel varies with the type of case
involved and the amount of responsibility taken by in-house counsel. Generally,
outside counsel becomes a key player when civil litigation is involved because,
in many states, corporations cannot represent themselves in court.43
It is generally ideal for in-house counsel to retain control of the anticounter-
feiting program because they can help set the parameters of such a program and

36
Barbara Kolsun & Nils Victor Montan, “Building a Comprehensive Counterfeiting Program,”
in Trademark Counterfeiting in the United States, at 7 – 6 (Brian W. Brokate & Dawn Atlas, eds., Interna-
tional AntiCounterfeiting Coalition 2008).
37
Id.
38
Id.
39
Id.
40
Id.
41
Id. at 7 – 7
42
Id.
43
N.Y. C.P.L.R. § 321(a) (2008).
Counterfeiting 117

help shape its overall strategy.44 In-house counsel should carefully consider the
qualifications of any outside counsel chosen to represent the company.45 For in-
stance, many law firms involved with copyright and trademark registration and
licensing know little about how to successfully combat counterfeiting. Further,
pricing should be considered in selecting a law firm to work with, as mark en-
forcement can become extremely expensive. Some law firms will charge hourly
rates, but it may be more cost effective to establish a flat fee for cease and desist
letters, affidavits, and other matters preliminary to litigation.
Outside counsel must become familiar with the in-house counsel’s role in
combating counterfeiting in order to establish a cohesive anticounterfeiting pro-
gram. This will likely involve regular reports and updates, so that both in-house
and outside counsel will be aware of the progress made in investigations and
actions.

4.3.5. Federal Law Enforcement

Customs and Border Protection (CBP)46 and Immigration and Customs En-
forcement (ICE)47 are two of the most significant allies in enforcing laws against
counterfeiting. CPB and ICE conduct investigations at the borders; at major
international ports such as Los Angeles, CA, and Newark, NJ; and at various
other ports throughout the country.
The FBI also serves an essential role in investigating counterfeiters. Because
of the established link between counterfeiting and organized crime, money
laundering and terrorism have received increased interest from the FBI’s Com-
puter Crimes division.
ICE (Figure 4.2) is the largest investigatory agency run by the U.S. govern-
ment.48 ICE agents use a variety of tactics to combat counterfeiting, includ-
ing the National Intellectual Property Rights Coordination Center, ICECyber
Crimes Center, and ICE Attaché Offices overseas. In 2007, ICE and CBP
confiscated nearly $200 million in counterfeit or pirated merchandise nation-
wide.49

44
Kolsun & Montan, supra note 36, at 7 – 9
45
Id.
46
http://www.cbp.gov.
47
http://www.ice.gov.
48
U.S. Immigration and Customs Enforcement, Fact Sheet: Border Enforcement Security Task Force,
available at http://www.ice.gov/pi/news/factsheets/080226best_fact_sheet.htm (last visited May 18,
2008).
49
U.S. Immigration and Customs Enforcement, ICE Arrests 4 Illegal Aliens, Seizes $5 Million in
Counterfeit Merchandise in Alabama, available at http://www.ice.gov/pi/news/newsreleases/articles/080502
montgomery.htm (last visited July 7, 2008).
118 Intellectual Property Issues

Fig. 4.2. Smuggling or dealing in counterfeit goods is a se-


rious violation of the law. Criminal penalties may include
large fines and prison sentences. (Photo courtesy of ICE.)

4.3.6. Border Enforcement

CBP is designed to combat terrorism and to encourage legal trade in the


United States. However, CPB can only confiscate products that it knows to be
counterfeit.
Trademark owners must record their registered trademarks with U.S. Cus-
toms and other relevant customs organizations throughout the world, depending
on the scope of the counterfeiting problem. This recordation enables Customs
to seize counterfeit goods at the border and stop their entry into commerce.
Recordation in the United States is simple, can be done online (see Figure 4.3),
and is relatively inexpensive.
In order to maximize the benefit of recordation with Customs, trademark
owners must engage in training agents and inspectors at key ports of entry. The
IACC Foundation (http://www.iaccfoundation.org/) has an active training pro-
gram through which trademark owners can participate in meaningful and tar-
geted training of Customs and other law enforcement entities. These programs
are effective and are relatively inexpensive (even cheaper for members in the
United States, costing about $250 per session plus travel). Training materials
should be short (no more than a page or two), concise, and up-to-date. They
Counterfeiting 119

should identify by name, address, phone number, and e-mail a contact that
is current, reliable, and expert in identifying counterfeits of the brand’s mer-
chandise. Pictures of registered marks, authentic labels, and hardware should
be included in this material. Officials should be given instructions only about
what the trademark holder knows the officials can seize. Recordations should
be routinely updated. Countries where authentic goods are manufactured often
change as do personnel and product styles.

4.3.7. State Law Enforcement Officials

Because of shifts in federal priorities, local law enforcement agencies find


themselves increasingly involved in enforcement of trademark laws. State law
enforcement often deals with local manufacturers, distributors, street vendors,

Fig. 4.3. Trademark owners should record their marks


(called recordation) through the U.S. Customs and Border
Protection website, as this enables Customs to confiscate
counterfeit items. (Photo courtesy of CBP.gov.)
120 Intellectual Property Issues

retailers, “house parties,” and others involved in the manufacture and sale of
counterfeit merchandise.
State law enforcement officials who are willing to tackle small-scale cases are
among the most valuable resources for anticounterfeiting programs. Local law en-
forcement agents who begin with small seizures can eventually engage in widely
visible deterrence efforts. Smaller busts often lead to much larger busts; as with il-
licit drugs or weapons operators, each counterfeit vendor has his or her suppliers.
Such officials can also provide a network in which local law enforcement
can cooperate with the larger federal agencies to help successfully enforce IP
rights (Box 4.3).

4.3.8. Private Investigators

Private investigators can help an anticounterfeiting effort in many ways that go


beyond routine investigations. Ideally, private investigators will be local because
they will know the local law enforcement networks and counterfeiting patterns.

Box 4.3

The Local Level: Counterfeiting and the NYPD


Counterfeiting is a rampant problem in many of America’s metropolitan areas.
For instance, a single, routine bust in New York City in 2005 led to the discovery
of a warehouse filled with counterfeit shoes, handbags, and clothing worth up to
$2 million. The New York City Police Department has initiated many investiga-
tions as the result of a larger plan by Mayor Michael Bloomberg to crack down on
counterfeiters. For the program, the Mayor’s Office of Special Enforcement en-
gages multiple city agencies including the New York City Building Department,
Police Department, Fire Department, Department of Consumer Affairs, District
Attorney’s Office, and the local tax authorities in a multiagency program combat-
ing landlords who knowingly rent to counterfeiters. In 2007, raids throughout
New York City led to the seizure of counterfeit goods reportedly worth $25 mil-
lion. During five weeks in early 2008, city officials targeted lower Manhattan and
confiscated over $1 million in counterfeit goods and closed down thirty-two shops
that housed such goods.
Multiagency programs such as the one in New York are a valuable asset to
mark owners. Los Angeles now has a similar program in place, and the IACC is
working with other cities to adopt this model.
Sources: Ross Tucker, New York Seizes $2M in Counterfeit Goods, Women’s Wear Daily, Sept.
30, 2005; Christine Hauser, City Agents Shut Down 32 Vendors of Fake Items, N.Y. Times, Feb.
27, 2008.
Counterfeiting 121

Private investigators can act as useful intermediaries between trademark owners


and their lawyers and law enforcement. Many private investigators come from
the world of federal and state law enforcement and are invaluable resources in
building anticounterfeiting investigations.
Private investigators can go undercover to purchase counterfeit goods at retail
shops, as well as much more: They have resources that allow them to track coun-
terfeiting operations in order to help get to the source of the larger operation.
They can troll the Internet, searching for bargains that seem to be “too good to be
true.” They can further pose as purchasers from retailers and websites, authenti-
cate counterfeit products on behalf of the trademark owner, educate law enforce-
ment in these techniques, and assist law enforcement in building their case.
Competent investigators have strong law enforcement contacts in multiple
jurisdictions. A well-chosen investigator relieves some of the burden of investi-
gation from law enforcement officials, who are often overwhelmed with other
cases. While hiring a private investigator can be expensive, the benefits they offer
can be immediate. Like outside counsel, investigators should be chosen based
on their expertise in anticounterfeiting cases. The best sources of referrals are
other brand owners and the IACC. It is prudent to use a relatively small number
of good and cost-effective private investigators to effect criminal actions.

4.3.9. Trade Organizations

There are many trade organizations that unite trademark holders and support
their fight against counterfeiting. These include the IACC,50 the International
Trademark Association,51 the Recording Industry Association of America,52 the
Motion Picture Association of America,53 and the American Apparel and Foot-
wear Association.54 While this list is not exhaustive, each of these organizations
can be of tremendous help to trademark holders who are developing and imple-
menting anticounterfeiting strategies and programs.

4.4. Criminal Enforcement


Laws that protect trademark owners from counterfeiting and other infringe-
ments may be enforced by federal or state criminal statutes.

50
http://www.iacc.org.
51
http://www.inta.org.
52
http://www.riaa.com.
53
http://www.mpaa.org.
54
http://www.apparelandfootwear.org.
122 Intellectual Property Issues

4.4.1. Enforcement under Federal


Criminal Statutes

Criminal penalties for counterfeiting can be severe. Because counterfeiters


usually engage in large-scale operations, they may commit a number of federal
crimes in the same enterprise. These federal crimes may include money laun-
dering (the act of supplying money to an illegal cause), mail and wire fraud
(crimes committed through the U.S. post office or over the wires), and con-
spiracy to commit such offenses. In addition, counterfeiters may also be charged
with tax evasion and human rights violations. Besides the CBP, ICE, and FBI,
other federal agencies, such as the U.S. Postal Service; the Secret Service; the
Bureau of Alcohol, Tobacco, and Firearms; and the Internal Revenue Service,
can assist with enforcement.
It can sometimes be difficult to persuade federal prosecutors to become in-
volved with a counterfeiting case. Since the federal dockets are full of other
cases involving crimes that are perceived as a greater public threat than “a few
fake purses,” federal agents may be unaware of the relatively serious harms of
counterfeiting.
Increasingly, federal prosecutors are becoming more aware of the gravity of
the problem of counterfeiting. For example, in one recent case, what began as
a small bust led to the arrest of four individuals as well as the seizure of more
than 20,000 counterfeit products and materials to make up to 50,000 more. The
estimated costs of the counterfeit products came to more than $1 million. While
the case was initially filed in state court, authorities decided to move it to fed-
eral court when they discovered evidence of the defendants’ funneling money
to Texas. Having the case heard in federal court enabled pursuit of more serious
(federal) criminal penalties than would have been allowed under state law, as
well as allowed the use of federal resources to engage in a more thorough crimi-
nal investigation than state resources would have allocated.55
The following federal criminal statutes are helpful in combating counter-
feiting:

▶ The Stop Counterfeiting in Manufactured Goods Act (H.R. 32). This law was passed
on March 16, 2006 (Public Law No. 109-181) and establishes prison terms up
to twenty years and fines up to $15 million. It now adds mandatory forfeiture,
destruction, and restitution provisions.
This law strengthens U.S. laws against trading counterfeit labels and pack-
aging. While it was already illegal to manufacture, ship, or sell counterfeit

55
Shaun Tolson, Prison Time for Peddlers of Phony Purses, The Boston Herald, Apr. 10, 2007, at 4;
Shelley Murphy, Cache of Knockoff Bags Triggers Federal Case, The Boston Globe, Nov. 4, 2005, at A1.
Counterfeiting 123

products, this legislation closes a loophole allowing the shipment of falsified


labels or packaging, which counterfeiters could then attach to fake products
in order to cheat consumers by passing off poorly made items as brand-name
goods. It also requires those convicted of counterfeiting to reimburse the le-
gitimate business they harmed.
▶ 18 U.S.C. § 2320 Trafficking in Counterfeit Goods or Services Anticounterfeiting Consumer
Protection Act of 1996. The relevant text of the statute is included here:
Whoever intentionally traffics or attempts to traffic in goods or services and
knowingly uses a counterfeit mark on or in connection with such goods or ser-
vices shall, if an individual, be fined not more than $2,000,000 or imprisoned
not more than 10 years, or both, and, if a person other than an individual, be
fined not more than $5,000,000. In the case of an offense by a person under this
section that occurs after that person is convicted of another offense under this
section, that person convicted, if an individual, shall be fined not more than
$5,000,000 or imprisoned not more than 20 years, or both, and if other than an
individual, shall be fined not more than $15,000,000.

Other Federal Statutes that can be used to prosecute counterfeiters include:

▶ 18 U.S.C. § 2319—Criminal Infringement of a Copyright


▶ 18 U.S.C. § 1961 et seq.—RICO
▶ 18 U.S.C. § 371—Criminal Conspiracy
▶ 18 U.S.C. §§ 1956, 1957—Money Laundering
▶ 18 U.S.C. § 1341—Mail Fraud
▶ 18 U.S.C. § 1343—Wire Fraud
▶ 18 U.S.C. § 542—Entry of Goods by Means of False Statements
▶ 18 U.S.C. § 545—Smuggling Goods into the United States

4.4.2. Enforcement by State


Criminal Statutes

Approximately two-thirds of the states in the United States have criminal coun-
terfeiting statutes. Other states that do not have anticounterfeiting laws can still
prosecute the crime under other offenses, such as fraud. New York, California,
and Florida, leaders in the movement against counterfeiters, have enacted se-
vere criminal state law penalties for counterfeiting.56

56
N.Y. Penal Law § 165.70 et. seq. (2008); Calif. Penal Law § 350(a)-(g) (2008); Fla. Stat.
§§ 831.02 – 034 (2008).
124 Intellectual Property Issues

4.5. Civil Enforcement


Civil enforcement of IP rights has advantages and disadvantages. For example,
a civil suit can result in a settlement, as well as the seizure of the counterfeiter’s
products. Unfortunately, counterfeiters have discovered advanced ways to hide
their assets.

4.5.1. Civil Seizure Actions

In cases where counterfeit goods are being sold, trademark owners can seek re-
course by filing a civil action and seeking an ex parte seizure order, allowing for
the seizure of goods.57 An ex parte seizure proceeding is brought by one party in
the absence of another (i.e., the trademark owner does not inform the alleged
counterfeiter in advance that the trademark owner wishes the judge to order
a seizure of the goods). The party seeking the ex parte relief argues that if the
counterfeiter were given notice the counterfeiter would be likely to flee or de-
stroy the illegal goods. In addition to permanent injunctive relief, plaintiffs can
often recover profits, damages, costs, and attorney’s fees.
There are currently near mandatory treble damages in civil counterfeiting
cases.58 Plaintiffs, in lieu of actual damages, which are often very difficult to
prove, may request statutory damages.59 Damages are $500 – $100,000 per in-
fringing mark, and, if conduct is willful, up to $1,000,000 per mark. Plaintiffs
cannot, however, request additional attorney’s fees in addition to the statutory
damages.60

4.5.2. Third-Party Liability Actions

Retailers and vendors are the easiest targets of a lawsuit. However, they often
do not have as many financial resources as others in the operation. Because
vendors are often only the point of sale and are not engaged in any manufactur-
ing operations, the money damages that can be recovered from them may be
minimal. Despite this, lawsuits against vendors can offer effective deterrence.
Further, lawsuits against vendors will sometimes result in admissions as to

57
15 U.S.C. § 1116.
58
Id. § 1117(b).
59
Id. § 1117(c).
60
K & N Engineering, Inc. v. Bulat, 259 Fed. App. 994 (9th Cir. 2007) (holding that, in counterfeiting
cases, Plaintiffs cannot recover attorney’s fees in addition to statutory damages).
Counterfeiting 125

sources and locations of counterfeit goods. Therefore, lawsuits against vendors


can sometimes lead to effective results.
Trademark owners can also file lawsuits against third parties, such as land-
lords and flea market owners, that rent space to counterfeiters. These targets are
attractive candidates for lawsuits because of theories of contributory infringe-
ment 61 and vicarious liability.62 For example, a flea market owner can be liable
for knowingly allowing a vendor to sell counterfeit products on its property.
Usually, flea market owners and other property owners have greater financial
resources, which can effectively increase settlements or money gained from law-
suits. Further, this approach may deter property owners from allowing vendors
of counterfeit products to sell on their property in the future.63
Even though counterfeiting is a billion-dollar industry worldwide, the people
who make the most money are those at the top of the chain. Retailers make just
a small portion of proceeds, while the behind-the-scenes distributors may take
in millions of dollars. Because of this, mark owners must decide wisely when to
pursue litigation against a person or entity that is suspected of selling counterfeit
products. For example, a raid at a flea market might lead to several arrests, but
judgments against the flea market vendors may result in uncollectible defaults.
For this reason, third-party actions may be highly useful to mark owners. In a
flea market case, the flea market owner may be held liable on theories of vicari-
ous and/or contributory liability if the owner had knowledge of the illegal act
and failed to take appropriate steps to stop it from occurring on its premises.
Property owners are attractive candidates for third-party liability actions be-
cause they have at least one asset from which the mark owner may be able to
collect damages: the property. Lawsuits against property owners can be very ef-
fective in helping to cure the counterfeiting problem.
“Vicarious” liability applies when one party induces another to infringe a
trademark. This theory is applicable, for example, when a person is supplying a
product, knowing that it will be sold on the market as a counterfeit.64
In some cases, landlords may face liability from additional statutes. For in-
stance, in New York, landlords can be held responsible for the illegal conduct

61
Contributory infringement occurs when the defendant does not control the direct infringer,
but knowingly assists the direct infringer or somehow provides the means for the infringement.
62
Vicarious infringement is when the direct infringer is an agent or business partner of the defen-
dant. It must be proven that such a relationship exists.
63
For more information on these cases, see Hard Rock Café Licensing Corp. v. Concession Svcs., Inc., 955
F.2d 1143 (7th Cir. 1992); Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996); UMG Record-
ings, Inc. v. Sinnott, 300 F. Supp. 2d 1924 (E.D. Cal. 2004).
64
Heather J. McDonald, Counterfeit Goods on Premises: Third Party Liability Actions Target Owners of
Property Where Business Is Conducted, 238 N.Y.L.J., Oct. 29, 2007, at S2, col. 2.
126 Intellectual Property Issues

of their tenants when, after being put on notice, the landlords take no action.65
Internet Service Providers (ISPs) that knowingly host websites selling counter-
feit goods can also be held contributorily liable.66

4.5.3. Cease and Desist Letters

In combating counterfeiters, the first step may be to send a cease and desist
letter. The letter generally will provide notice to the target that the trademark
owner is aware of its counterfeiting activities. These letters may stop the prob-
lem, for example, when a person claims not to have known the product he or
she is selling is counterfeit or when the target is a fixed location like a retail
store. At the very least, such letters will put the counterfeiter on notice, which
is proof of willfulness if the conduct continues. A company should have a stan-
dard letter on file that can be customized for the individual situation (see, e.g.,
Figure 4.4). Responses from counterfeiters should be replied to immediately in
writing, and the company should follow up by visiting the counterfeiters to con-
firm compliance.

4.5.4. Foreign Matters

Effective anticounterfeiting outside the United States requires the assistance of


foreign investigators and counsel. Local experts understand the language, laws,
and legal system of the country. Further, in countries where enforcement is dif-
ficult, foreign investigators and counsel will be in the best position to advice on
the most expedient and practical way to proceed.

4.6. Enforcement on the Internet


Over the last few years, counterfeiters have taken advantage of the Internet to
sell goods on websites, including auction and classified ad sites. Because infor-
mation is transmitted so quickly to a large number of people, and it is difficult
to verify the authenticity of the products until consumers receive them, counter-
feiting websites on the Internet have proven to be a problem of unprecedented
proportions for trademark owners.

65
N.Y. Real Prop. § 231 (2008)
66
Gucci Am., Inc. v. Hall & Assocs., 135 F. Supp. 2d 409 (S.D.N.Y. 2001).
Counterfeiting 127

via federal express


Manager
Fashion Jewelry
4321 86th Ave.
Brooklyn, NY 10000
Re: [Trademark/Copyright]
Our File: NY/97-004
Dear Sir/Madam:
We are writing on behalf of John Doe Jeanswear Company (“JDJC”), owner of the john doe trademarks (the “Trade-
marks”), regarding your sale of garments bearing counterfeits of the trademarks described below.
You are hereby advised that under federal law, only John Doe has the right to use the “john doe” name and
trademarks on a wide variety of products, including jeans and T-shirts. These rights are evidenced in the trademark
registrations owned by JDJC and granted by the U.S. Patent and Trademark Office, including Registration Number
for the trademark john doe.
Use of the Trademarks on merchandise, labels, or tags without the express written consent of JDJC is a violation of
both federal and state law. Both making such merchandise and selling it is illegal. Violators of these laws not only face
criminal prosecution, but may have their illegal goods, as well as the means of making or selling the goods, and their
business records seized. Infringers may also be required to pay damages up to three times their profits or three times
JDJC’s damages, as well as having to pay our legal fees if we must go to court to stop the illegal use.
You should know that JDJC does everything possible to protect its interests in its name and marks, and seeks all the
penalties listed above if we do not receive cooperation from an unauthorized user. You should also know that no one
is authorized to manufacture, advertise, offer for sale or sell any products utilizing the Trademarks without the express
written permission from JDJC. Any merchandise you may obtain from, or which is offered to you by anyone other than
JDJC is most likely to be counterfeit or stolen property.
Our investigator recently purchased from your store merchandise that bears counterfeits of the Trademarks. We
hereby demand that you:
1. Immediately cease and desist from further distributing, and/or selling this infringing merchandise bearing the Trade-
marks; and
2. Remove from sale all infringing items in your possession or under your control which bear the Trademarks includ-
ing jeans, T-shirts, silk screens, promotional items or merchandise of any kind or nature bearing, or items used to
manufacture or reproduce the Trademarks. Any sales to the public taking place after your receipt of this letter will
constitute intentional and willful violations of our company’s rights. Moreover, each unit of counterfeit or infringing
merchandise in your possession or control constitutes evidence of our company’s claims, and serious legal conse-
quences would result from any failure by you to preserve all such evidence. You may not contact your vendors in
writing or orally to return this evidence to your vendors or otherwise dispose of it or inject it back into the stream of
commerce.
We also demand:
1. That within 24 hours of our delivery of this letter to you, you provide your written commitment that you have ceased
all sales of counterfeit garments bearing the Trademarks or infringing versions thereof, your store and every other
wholesale or retail location owned or controlled by you;
2. That within five (5) days of our delivery of this letter to you, you provide us with copies of all documents, corre-
spondence, purchase orders, pro forma invoices, correspondence and all other records of every kind relating to your
manufacture, purchase, distribution, sale and marketing activity with respect to all merchandise bearing counterfeits
or infringements of the Trademarks. Such records should include, without limitation, documents reflecting the
purchase price or factory price of all counterfeit products sold by you;
3. That within five (5) days of our delivery of this letter to you, you provide us with a list of every other wholesale or retail
location owned or controlled by you in which the counterfeit garments are or have been sold, and list of sources from
which the counterfeit goods were obtained; and
4. That within five (5) days of our delivery of this letter to you, you provide to us all information and documentation
relating to the number of units of counterfeit merchandise within your possession and control, including any out-
standing orders of the counterfeit merchandise, the number of units of such merchandise heretofore sold by you,
whether sold at your store or any other wholesale or retail location owned or controlled by you, or to any other person
or entity, and the sales price for each unit sold.
If you do not agree to these demands, JDJC will take the strongest possible legal action. Having received this letter,
you now have actual notice of JDJC’s exclusive rights to the use of the Trademarks. Any continued sale of such items
would constitute a willful infringement of JDJC’s rights.
Nothing in this letter shall be construed as a waiver or relinquishment of any rights or remedies of JDJC.
Very truly yours,

Fig. 4.4. Model cease and desist letter. (Source: Barbara Kolsun & Nils Victor Montan, Build-
ing a Comprehensive Counterfeiting Program, in Trademark Counterfeiting in the
United States, at 7-62 [Brian W. Brokate & Dawn Atlas eds., 2008].)
128 Intellectual Property Issues

4.6.1. Websites

One of the biggest challenges in the fight against counterfeiting lies in the web-
sites that sell products that are clearly counterfeit. These sites, which often look
authentic, in reality are not licensed to sell authentic product and are selling
counterfeit products. Similar sites purport to sell “replica” merchandise with dis-
claimers indicating that they are for “novelty purposes” or otherwise disclosing
the fact that the merchandise being sold is not genuine. These types of websites
are currently common on the Internet. It is important to know that such sites
are illegal, as there is no “replica” or “disclaimer” defense to counterfeiting.
High visibility combined with difficulty in identifying volume sellers makes
target selection and determination of priorities difficult. Tactics to fight these
types of sites include sending cease and desist letters to the site as well as to the
ISP hosting the site. Such letters should point out the penalties of contribu-
tory infringement and request removal of the site. Advanced tactics allow Web
hosts to hide counterfeiters, which Web hosts often list under fake names and
addresses and in countries that do not comply with U.S. IP rights standards. If
these websites and hosts are found, the most effective remedies are initiated by
filing civil lawsuits. If a lawsuit uncovers a larger operation, trademark owners
may wish to involve law enforcement in their efforts.

4.6.2. Auction and “Listings” Sites

Online auctions and listings websites are notorious for their popularity with
counterfeiters. Companies such as eBay and Yahoo! are two of the largest, but
there are dozens of others. These sites have become a digital flea market for the
sale of counterfeit merchandise.
Under current law, the burden is on mark owners to monitor their rights. In
order to fight auction and listing sites effectively, trademark owners must moni-
tor sites and contact them to terminate counterfeit auctions (“Notice and Take
Down”). Trademark owners can make use of special utilities provided by the
sites to authorized mark owners, such as eBay’s Verified Rights Owner (VeRO)
Program, which allows IP owners to quickly report listings that they believe in-
fringe their property rights.67 Mark owners may need to designate an in-house
employee, investigator, or outside counsel to manage this piece of an anticoun-
terfeiting program. Unfortunately, anonymity through deficient Internet gover-
nance and third-party services (proxy service, broker sites) makes investigation

67
See How eBay Protects Intellectual Property (VeRO), available at http://pages.ebay.com/help/tp/programs
-vero-ov.html (last visited May 28, 2008).
Counterfeiting 129

very difficult and time-consuming. Additionally, international exposure makes


establishing jurisdiction problematic and may make enforcement of remedies
difficult, even once jurisdiction is established (see Box 4.4).
Trademark owners should pressure sites to monitor auctions and listings for
phrases that blatantly indicate merchandise is counterfeit (e.g., “replica,” “faux,”
“cannot guarantee authenticity”) and cancel them. However, very few products
sold are actually advertised as counterfeit. Trademark owners should encour-
age online auctions to have notification policies for mark owners when Internet
purchasers wish to return products that they believe are counterfeit.

Box 4.4

eBay: Limited Gains against a Tremendous Counterfeiting Problem


While eBay’s Verified Rights Owner (VeRO) Program allows mark owners to eas-
ily report products that they believe infringe on their IP rights, the sheer number
of listings and items for sale via the Internet’s premiere auction site has made
removing counterfeit goods seem like a virtually insurmountable and expensive
problem. In the United States, courts have frequently taken the position that it is
the mark owner who must police the online auction and sales sites. On July 14,
2008, the U.S. District Court for the Southern District of New York ruled against
Tiffany & Co, which had filed a suit against eBay Inc. in 2004, claiming the on-
line site had not taken adequate measures to remove imitation Tiffany jewelry
from its site. The judge stated plainly that, under current law, the mark owner
has the responsibility of protecting its own trademark. As long as eBay did not
allow listings from sellers who it knew, or should reasonably have known, were
selling counterfeits, the auction site could not be held liable to Tiffany on the
grounds of infringement.
While this decision dealt a significant blow to the anticounterfeiting fight in
America, eBay was the one hit abroad. Just two weeks before this U.S. decision, a
French court ordered eBay Inc. to pay LVMH Möet Hennessy Louis Vuitton and
sister company Christian Dior SA $63.2 million for allowing both fake and unau-
thorized goods to be listed for sale on the site. While it is not the first ruling of
its kind against eBay Inc. (earlier that same month France’s Tribunal de Grande
Instance in Troyes ordered eBay to pay approximately $31,058 to Hermés for that
same reason), it is the most significant and may encourage other major brands to
go after the company. eBay, which claims it spends more than $20 million a year
trying to remove illegal goods from its site, has said it will appeal the ruling.
Sources: Christina Passariello & Mylene Mangalindan, EBay Fined over Selling Counterfeits,
Wall St. J., July 1, 2008; Alexandria Sage, From Handbags to Diamonds, eBay a Target, but Safe,
Reuters, July 1, 2008; Katya Foreman, Court Rules for Hermés in EBay Counterfeit Suit, Wom-
en’s Wear Daily, June 5, 2008; Tiffany (NJ) Inc. and Tiffany and Company v. eBay Inc., 04 Civ.
4607 (S.D.N.Y. 2008).
130 Intellectual Property Issues

4.7. Conclusion
Counterfeiting is a serious problem that many trademark owners must combat
with significant resources. As the value of a brand grows, so too does the likeli-
hood of counterfeiting.
Because counterfeiting is a crime, law enforcement officials are a trademark
owner’s best allies in the battle against counterfeiters. Routine busts can provide
inroads into larger counterfeit organizations. Working together with corpora-
tions, in-house counsel, outside counsel, and lawmakers, trademark owners can
successfully combat the counterfeiting problem evident today.
Through lobbying, trade organizations (like the IACC and INTA), and the
U.S. Chamber of Commerce, brand owners must continue to reach out to edu-
cate consumers about the dangers of counterfeit products. Consumers also must
be aware that when they purchase counterfeit products, they are supporting
deplorable factory conditions and financing organized crime operations. Very
high costs come with getting a “good deal” on a counterfeit article of clothing or
accessory.