Most distributors know that they can be held liable for distributing counterfeit or infringement products if they have knowledge that they are infringing.
But some are still buying into the “urban myth” that they can't be liable if they have no actual knowledge that a product at issue has a problem, according to Sarah Bruno, an associate at Arent Fox, which acts as general counsel for the Motor & Equipment Manufacturers Association (MEMA) and Heavy Duty Manufacturers Association (HDMA).
In an HDAW Business & Technical Theater Session, “Brand vs Non-Brand: Who is Taking the Risk?” she said that's a dangerous belief.
“One of the most common misconceptions is that distributors can't be liable for distributing counterfeit goods or product that's subject to a lawsuit due to a defect or some harm caused to consumers or end users,” she said.
“You can be liable if you are actively participating in a counterfeit scheme. Active participation is actually doing something — applying labels to a product, for example. There was a case where a distributor was applying labels to non-legitimate batteries and co-mingling them with legitimate batteries and reselling them. They were found liable of counterfeiting. In a more unusual scenario, a distributor in Microsoft was found liable for merely failing to remove product from shelves after getting notice that it was counterfeit. The distributor argued, ‘Hey, I have a right to resell product.’ The court said no.”
She added that liability is not limited to active participation. Distributors can be liable for simply “ignoring” what appears to be illegal.
“Distributors are liable for being ‘willfully blind’, meaning they should have known about the counterfeit goods or they failed to inquire,” she said. “Factors the courts have considered: Where were the goods purchased? Were they purchased on secondary markets, from a country that should have raised a red flag for distributors? Were the goods sold with the authenticating documentation? Does the quality differ from the quality expected by consumers? What is the pricing of the goods? Is there evidence on billing slips? Different coding or language? It doesn't have to be all of these factors. There have been cases where there was just one.
“You have to pay attention to the details. You should be checking packaging slips: Do they look tampered, altered, or raise red flags for other reasons? You should be checking quality. Is the product of the quality that you expected? Safety standards: Does the product include the safety specifications? Country of origin: Was the product manufactured in the country that you expected? If it typically comes from Europe and is now coming from India, that may be a red flag for you. Trademarks and logos: Do they look authentic?”
She said companies should protect themselves contractually by: having an agreement with the manufacturer that asks them to indemnify the company for any claim of infringement; having a warranty provision from the manufacturer attesting to the legitimacy of the product; being vigilant and looking for the red flags and then taking action when they are encountered; and notifying the manufacturer when there is a suspected counterfeit-goods problem.
She said there are three different scenarios where a distributor can be found liable for product liability:
It can be “strictly liable” if it is in the chain of distribution. This means that it can be found liable without any evidence that they were negligent or acted willfully.
If the advertising or product label indicates the product is manufactured by the distributor.
If the manufacturer is located outside of the US. In that instance, the distributor can be liable for 100% of the damages.
“Trust your gut,” she said. “If something doesn't seem right, pull it, or contact the manufacturer and put them on notice of the problem. The best thing you can do is buy the brands you trust. Buy the brands you know are going to give the quality you've come to expect.”
Issues for the panel
The forum also included a panel discussion moderated by Anthony Lupo, a partner at Arent Fox. The panel included: Paul Johnston, senior director of Meritor Wabco; Marc Karron, president of Total Truck Parts; Joe McAleese, president/CEO of Bendix Commercial Vehicle Systems; and Mike Scoll, VP of sales and marketing for ECCO.
Lupo: “One of the primary concerns of a branded company is protecting their trademark. They spend a huge amount of R & D in testing in ensuring that when you buy a certain product, you know what you're getting. If a product does not meet those standards, there are ramifications that affect not only future purchases but the goodwill of the product as a whole. Companies could view their intellectual property as not just a name, but colors, packaging, or the shape of product.”
McAleese: “We have a lot of patent protection on our product portfolio. We've been in business 75 years and have developed many firsts in the braking business, and we have patent protection. We have the Bendix swoosh. We have trademarks on many alpha-numerics such as MD3 or AD9. They need to be used properly in any advertising.”
Lupo: “I sort of view this as a time bomb waiting to happen. It's only a matter of time before some offshore product blows up, and then you're going to hear an industry outcry.”
Karron: “If we sell inferior products and those cause a tragic result, that plays directly into this right-to-repair issue. We do have a responsibility to everybody else in this room to make sure that product meets appropriate safety standards. Specifically for distributors, the brand we sell creates the draw for the customers that come in. Obviously service and availability are important, but also the brands. And that helps define our brand, how we're perceived in the market. And it also attracts other suppliers. If we're successful in selling name brands, more brands will want to come into our location and be represented by our company. We've found that brands attract the right people. We want the best ones to land in our location.
“For the end user, brands are important because it defines their expectation of performance and value. They know that when they come in and buy a Meritor or Bendix part, or others, that part will give them all of what they're paying for. When they're buying something that's not necessarily a brand, they're taking more risk. Some of the liability falls onto their shoulders if they make a mistake and put the wrong part on their truck. The liability protection for these customers … everywhere we go, we see a much more conscious understanding of this. In some cases it actually hurts us because some of fleets only buy from OEMs because that's the only way they can be assured they get the brands they want.”
Lupo: “As a distributor, what are your tips on how to represent brands?”
Karron: “Suppliers are becoming more concerned about what lawyers say, and not doing a good enough job differentiating products. The most important thing they have to do is show there is a value in buying their product and paying extra money, something we can take to customer: ‘Buy a Bendix part, even though it's 5% more than the other guy's part. It's worth it because you'll get A, B, C, D.’ The way the process has worked, you come up with some sort of test analysis, put together a promotion, and then a lawyer puts his thumbs-down, and that's how far it goes. If we don't have tools to define the differentiation and value, we have to go to the other product. We can't convince the customers that there's value in paying the higher price for a product. That's going to mean for our survival that we have to move off that brand.
“It also provides value to distributors. With economies the way they are, we see suppliers consolidating their territory. We have fewer opportunities to work with reps and fewer opportunities to get quality training. When we can get training directly to the fleet, it creates that linkage between the brand that the vendor has, our brand, and that particular customer.”
McAleese: “We as the supplier community have not done a sufficient job in providing our distribution partners with the right sell information — the right value equation — on what they need to go sell that product to fleets. When a branded product is a premium, there's a reason: Because of the training we provide, the after-sales support, the troubleshooting, the performance of the product, the life-cycle cost of the product.”
Lupo: “Have you ever taken action against distributors who are distributing counterfeit?”
Scoll: “We have in a couple of instances where we've had distributors take a photo of our product, put it in a catalog, and then substitute product that looks similar but is not manufactured with the same quality components. And the price is substantially lower. We have done cease-and-desist letters.”
Lupo: “Why should I buy a branded product over a less expensive product? Why wouldn't I take that risk?”
Johnston: “Clearly it starts with product performance and durability. When a product is designed and sold to an OEM, it has a function and a desired outcome to last a certain amount of time. That product will definitely fit the application. In North America, we have a broad environment to work in, and products are designed not just for Palm Beach or California, but the entire scope of the North American marketplace. When you look at the federal motor carrier requirements — albeit there is not a true regulation that says it must be serviced by an OEM part — clearly the regulation's intent states that the vehicle be serviced and be put back in like-new condition. There's definitely an implied performance.
“Our fleets at the end of the day are expecting longer life and less performance degradation. We continue to drive those improvements in our daily activities in the product we deliver to the aftermarket channel. We work two to three years with a supplier regardless of their location around the world to qualify, validate, and ensure that the products they're selling us are consistently produced to our specifications. I don't think many industries pay that kind of due diligence as it relates to supplier qualifications and certification.”
Lupo: What do you think are the economic benefits for distributors to sell branded products?
Karron: “In all the years I've been in the industry, there are three fundamentals for success in distribution. It's not rocket science. You have to have successful differentiation in your market, the most positive value proposition, and you have to make the most profit from the parts you sell.”
McAleese: “You should be able to make more dollars per product sold by selling branded, but when you look at buying branded products, you get a lot more from me and should have a much higher expectation than just getting a branded product. When you buy Bendix or another branded product, you're getting the training and education we put out there. You're getting the SWAT team that goes out and helps with troubleshooting. You're getting the 800 number. There are a lot of other elements in the brand package you're getting from us that improves the economics for you.”
Lupo: “You have taken a very aggressive stance in protecting intellectual property. There must be a financial hit. Can you speak about that?”
McAleese: “We have been very aggressive in defending the Bendix brand. If you look at the overall revenue loss from counterfeit product for us, it's not that significant — maybe $5 million. I'm not saying that's insignificant, but it's not a $100 million number. But we have been very aggressive with intellectual-property protection. We focus on three elements: getting protection, whether it's patents or trademarks; we go out and do a lot of training and education in the field, and my legal counsel has testified in front of Congress about this subject; and after that, we do enforcements, with cease-and-desist letters or carrying it all the way to litigation.
“Why do we do that? In my mind, it's very important for us as an industry that we do this and take this seriously. The things that are coming out of brake manufacturers to improve safety on the highways — whether it's reducing stopping distance through higher performance drum brakes or bringing stability systems to market or other safety systems — we're really driving highway safety into the future at the new-product level. For us to turn a blind eye to what's happening in the field would be a horrendous mistake for us and the industry. It's up to us to go out and bring that message to the marketplace.”