Counterfeits from China. It is the phrase grabbing headlines. Everything is counterfeited -- pharmaceutical products, automotive parts, tooth paste, dog food, and circuit breakers. Manufacturers of counterfeit goods -- primarily in China but elsewhere, too -- are mass producing your products with alarming frequency. Some products are obvious fakes or pose no substantial risk of harm. Others -- like toothpaste and circuit breakers -- are less obviously fake and potential killers. The counterfeits and the risks they pose will ruin your company's reputation, damage its goodwill, and cause potentially costly litigation when one of the counterfeits fails catastrophically.
You do not have to sit on the sidelines while governmental authorities and agencies attempt to police borders, order recalls, institute criminal actions, and navigate the delicate landscapes of foreign governments on their own time-tables and consistent with their own budgets and priorities. Instead, you can take control to protect your company by initiating civil proceedings against the U.S.-based network that distributes the counterfeits. You may be surprised at how effective your company can be using U.S. federal courts to seize counterfeits, sanction recalls, collect monetary settlements and judgments, and put counterfeiters out of the business of selling knock-offs of your products. The Lanham Act provides a powerful weapon to owners and holders of trademarks to stop counterfeiters from flooding the market with fakes. Companies are beginning to take a stand against counterfeits and the people who deal in them, winning compensation for damages to their goodwill and reputation and disgorging the counterfeiters' profits. You can too.
The Scope of the Problem
The statistics are startling. Annual global costs of counterfeiting are estimated to be more than $500 billion, with the U.S. economy's share at as much as $250 billion annually. Counterfeiting has grown to 5-7% of world trade. 750,000 U.S. jobs have been lost to counterfeit merchandise. Gone are the days when counterfeiting only vexed the manufacturers of luxury goods such as handbags and watches sold on the streets of New York City. Today it is estimated that 1 to 10% of all drugs are counterfeit. In developing countries, up to 30% of drugs can be counterfeit. From drugs to computer chips to automobile parts to shoes to electrical products to shampoo -- the counterfeiters' reach is wide and varied.
But the statistics only begin to paint the picture of this colossal problem for U.S. companies. Far less quantifiable is the devastating impact that counterfeiting has on a company's brand and its commitment to safety and quality. Left unchecked, pervasive counterfeiting may result in consumers associating a brand name with a negative connotation, or being less inclined to purchase widely counterfeited products for fear they will get a fake. Indeed, brand strength and a perceived commitment to quality are intangible assets that can and far exceed a company's tangible assets. In this age of rampant global counterfeiting, protecting your company's intellectual property is not an option -- it is an imperative.
Leave China to the Pros
China remains the hub for counterfeits, manufacturing and exporting the vast majority of counterfeits that flood the U.S. and European markets. China's economy is enjoying unprecedented growth, fueled by foreign direct investments, which includes the introduction of foreign intellectual property. But some of this intellectual property in the form of patents, copyrights, and trademarks is being diverted into China's illegal economy, spawning a sophisticated and intricate network of counterfeiters with unfettered access to your intellectual property and your markets.
Despite its national government's cooperation with anti-counterfeiters world-wide, China's local governments are often complicit in or turn a blind-eye to the counterfeiting trade, and are protective of whatever boost to the local economy manufacturing counterfeits provides. Jobs, after all, rule in even a controlled economy. Couple this coziness with the limitations to China's laws and regulations, and you have a conundrum in terms of how to untangle the counterfeiting morass there. For example, Chinese regulations permit the seizure of counterfeited products but perhaps not the seizure of counterfeiting equipment. That technical deficiency in the laws leads to counterfeiters rebounding very quickly following a raid of their manufacturing facility. They simply close the shop that was raided, and open up a new one down the street, using the same equipment that got them into trouble in the first place. They likewise create cottage industries to manufacture components at various locations. Components are then assembled and shipped out to prevent the facility from being raided and caught with a large enough quantity of counterfeits to warrant serious penalties or prosecutions.
The cost of bringing your counterfeiting fight to China can be significant. Chinese Customs officials sometimes demand that foreign companies pay substantial holding fees to have the officials examine suspected counterfeits. Even without the obstacles posed by local governments, limited regulatory support, and costs, it is difficult to find the counterfeiters in China, and even harder to permanently put them out of business.
The China conundrum aside there is no question that your company must raise its profile with the governmental and non-governmental agencies battling counterfeiting in China and take certain steps outside the litigation realm to ensure that your interests are protected. But, consider leaving the heavy-lifting in China to the pros. The International Anti-Counterfeiting Coalition and Office of U.S. Trade Representatives ("USTR"), to name only two, are organized and focusing their efforts on China.
The Department of Customs and Border Protection is another important ally in your anti-counterfeiting campaign. Provided your trademark is registered on the Principal Register of the Patent and Trademark Office, you can record your trademark with U.S. Customs. If your trademark is recorded with U.S. Customs, Customs officials can then seize imports of your counterfeited product and notify you when the counterfeits have been detained. This notification will inform you of the country of origin, importer and exporter, and the quantity of the counterfeit products seized. Augment the recording of your trademark with actively educating U.S. Customs officials at ports known to receive counterfeits on how to spot a counterfeit of your product.
You should not be an island in your anti-counterfeiting campaign. In fact, you must forge multiple alliances and you must take certain steps to employ the assistance of governmental and non-governmental agencies. You also must be aware of efforts in China and other foreign countries, providing assistance where you can. But it is within your company's individual power to wage a fight against the counterfeiters on your turf, where you are most comfortable and most able to prevent counterfeits from entering your distribution channels -- in U.S. federal courts. By instituting civil proceedings against U.S.-based distributors of counterfeits under the Lanham Act, as well as those importers and manufacturers over whom you can assert jurisdiction, you can realize results quickly and make a genuine impact on the demand for counterfeits of your product. Unlike anti-counterfeiting efforts in China, there is no learning curve here in the U.S., no local governments blocking your progress, no unfavorable laws and regulations preventing you from achieving your goal.
The Lanham Act: Your Company's Greatest Weapon Against Counterfeiters
The Lanham Act is a federal statute under which your company may bring a federal claim for trademark infringement. Section 32 of the Lanham Act prohibits any person from using a counterfeit of a registered mark in commerce, or putting a counterfeit mark on labels or packaging intended for use in commerce. The Lanham Act is a powerful tool for trademark holders because it imposes strict liability on sellers of counterfeit goods. This means that no intent to deceive or pass off one's goods as another's needs to be demonstrated. There is no good faith defense available to a seller of counterfeit goods. Thus, if you show that a distributor imported or sold a counterfeit of your product, or merely offered to sell the counterfeit without consummating the sale, that defendant will be found liable under the Lanham Act irrespective of whether they claim to not have known that they were dealing in counterfeits.
Pursuing Lanham Act claims against counterfeiters has a significant upside for trademark holders because the available remedies are ample. If your company prevails on its Lanham Act claim, it can obtain a permanent injunction against the counterfeiter. You may also obtain damages caused by the infringement, costs of the action, and, under certain circumstances, attorneys' fees. Specifically, your company may disgorge the profits unlawfully derived from the defendant's sale of counterfeit circuit breakers. Your company may also be entitled to compensatory damages, which represent its lost opportunity to sell genuine products to those who purchased counterfeit products from the defendant. Alternatively, if you are not able to substantiate the defendant's profits because they lack the necessary documentation, your company may elect to recover statutory damages that range from $500 to $100,000 per counterfeit mark per type of counterfeit product sold. The judge does have the discretion to determine where on that sliding scale of statutory damages your case should fall.
The bonus under the Lanham Act is that if your company is able to show that the distributor was willful in the importation, sale, or offering for sale of counterfeits or willfully blind to the fact that it was importing, selling, or offering to sell counterfeits, damages will be trebled and attorneys' fees will be awarded. And it is mandatory, not discretionary, for a federal judge to treble damages as a consequence of finding willfulness. Such an award may be quite substantial.
Yet another benefit to the Lanham Act is that it empowers trademark holders to petition the court to authorize an ex parte seizure of all counterfeit products and related materials and documents in the possession of a counterfeiter without prior notice to that defendant. This requires the advance approval of the U.S. Attorney's office. This is an excellent way of catching a counterfeiter by surprise. Distributors suspected of counterfeiting or named in a federal lawsuit are notorious for hiding, selling off, or destroying their counterfeits. An ex-parte seizure catches counterfeiters before they can run and hide and destroy the evidence. Under an ex parte order, you can seize counterfeits, documents, manufacturing equipment, and computers.
In your company's fight against counterfeiters, The Lanham Act with its many facets is undoubtedly your greatest weapon.
Your Target: U.S.-Based Distributors of Counterfeits
The manufacturing of counterfeits may occur as far away as Asia, but someone besides the Chinese and other foreign manufacturers is responsible for importing and selling the counterfeits in the United States. It is the U.S.-based distributors who create demand for the counterfeits, enjoying the bargain-basement prices and buying in suspiciously large volumes. If you aggressively and systematically use the Lanham Act in U.S. federal courts to disable the distribution networks, you can and will realize substantial benefits and play a direct part in eradicating the counterfeiting of your products and the theft of your intellectual property.
It only takes one report of a counterfeit product being imported into or sold in the U.S. to launch your investigation and begin fighting back. Whether it comes in the form of U.S. Customs informing you that a U.S.-based distributor has attempted to import counterfeits into the United States, or a customer calling you directly to report the sale of a counterfeit, you now have a defendant to pursue who will invariably lead you to a large network of distributors who buy counterfeits from each other, and resell them to others. Start by suing the defendant who either imported the counterfeit or sold it down stream. Once you have an active Lanham Act claim in federal court, use it as a vehicle for conducting broad discovery which will not only bolster your claim against that defendant, it may lead you to a number of additional defendants.
More specifically, demand production of the defendant's documents reflecting purchases and sales of your product, counterfeit or authentic, and demand an inspection of the defendant's inventory. If the produced documents reveal suspicious transactions, issue third-party subpoenas to all of the companies and individuals with whom your defendant dealt. You will quickly amass evidence against numerous potential counterfeiters doing business right here in the U.S. The same holds true for the inspection. If you find additional counterfeits at the inspection, determine from whom the defendant purchased the counterfeits. The sources may be future defendants.
As the trademark holder, be mindful that you are the plaintiff and that you have been wronged, your intellectually property callously stolen. Be aggressive. Armed with concrete evidence that the U.S.-based distributors imported, sold, or offered to sell counterfeits emphasizing the strict liability governing the case, you will be successful at leveraging favorable settlements if that is your goal, or prevailing at trial if you are not satisfied with the settlement offered. If you have evidence of willfulness or blind willfulness, your position is that much stronger.
Any settlement or judgment should include the following components: (1) a monetary amount reflecting the disgorgement of the defendants' profits, compensatory damages, with an even higher figure to account for attorneys' fees, and trebling of damages if you have evidence that the defendant acted willfully or was willfully blind; (2) a recall of any counterfeits sold; (3) ongoing audit rights entitling you to periodically inspect the defendant's inventory and records; and (4) a permanent injunction barring the defendant from importing and selling counterfeits.
Word will travel fast among U.S.-based distributors of your product and the entire illegal distribution channel that you are one trademark holder who will not tolerate the counterfeiting of its products and is fighting back. The cost of litigating a losing a battle against you will serve as a disincentive to U.S.-based distributors and give them serious pause before importing and selling counterfeits of your product. Your company's intellectual property is one of its greatest assets. Send a strong message to the counterfeiters that you will go to great lengths to protect it. If you are aggressive and relentless, the counterfeiters will find a product to counterfeit with a passive trademark holder or, better yet, get out of the counterfeiting business altogether.
Your company's anti-counterfeiting campaign will be fought on many fronts, at U.S. ports, in rural China, and in federal court to name a few, and will require you to partner with governmental and non-governmental agencies whose efforts are key to your success. But it is within your direct power to make a fast and effective impact on the counterfeiting of your products. Arm yourself with the Lanham Act and take 'em to court.
Brian W. Lewis and Nicole Nocera are partners and E. Tim Walker is an associate in the Litigation Department at Wildman Harrold (Chicago). They counsel manufacturing and other clients regarding protecting their products and supply chains from counterfeiting. http://www.wildman.com/