Counterfeit crisis

HOW DAMAGING is the proliferation of Intellectual Property (IP) theft? It costs American companies between $200 billion and $250 billion a year in revenue. On top of that, counterfeit goods constitute an estimated 5%-7% of world trade.

Heavy Duty Aftermarket Week hosted a hard-hitting seminar, “The Impact of Counterfeit Parts,” with Heavy Duty Distribution Association (HDDA) executive director Lee Kadrich outlining the legislative attempts to fight back and attorneys Anthony Lupo and Sarah Bruno explaining the legal ramifications.

“It's become a serious issue for the industry,” Lupo said. “We're seeing it appear in ways we haven't seen before.”

Kadrich said the battle is being waged on one front by the Coalition Against Counterfeiting and Piracy (CACP), a cross-industry group created by a joint initiative between the US Chamber of Commerce and the National Association of Manufacturers to act as the interface between US business and the US Government's Strategy Targeting Organized Piracy Program.

He said there are three key elements to the industry initiative:

  • Working with Congress to get strong anti-piracy legislation enacted.

  • Supporting the Bush Administration on improved enforcement.

  • Stressing the importance of public-private partnership.

Some 60 House members have cosponsored the Stop Counterfeiting in Manufactured Goods Act, HR32. Introduction of companion legislation in the Senate is expected.

The Automotive Aftermarket Industry Association (AAIA) first addressed trademark piracy with the 1984 Trademark Counterfeiting Act, which for the first time made counterfeit trafficking a federal crime punishable by fines and imprisonment. But existing law is inadequate in that it does not mandate the destruction of the equipment and materials used to make the fakes. The copyright law already has mandatory destruction provisions, and HR 32 would add them to the trademark law.

In addition, sophisticated counterfeiters today can sell the counterfeit versions of the trademarks on labels, patches, and medallions, for use by others who affix them to counterfeit products. HR 32 would clarify that the law prohibits such trafficking.

Kadrich said he expects President Bush to sign the bill, after which “it will become an important deterrent we can add to our arsenal against piracy. A stronger US law empowers our negotiators to seek similar provisions from our trade partners.”

Kadrich also lauded Strategy Targeting Organized Piracy (STOP!), which was announced in October 2004 to better coordinate the federal agencies charged with IP enforcement and increase efforts to protect IP at home and abroad.

Defining the problem

Lupo said goods are protected by patents, copyrights, trademarks/trade dress, and contracts.

Potential infringement for selling other party's goods comes through distributor liability (vicarious and contributory infringement), Internet enforcement (Ebay and Alibaba), and trade show infringement.

He said it's important to define the problem. A counterfeit good is a knockoff of lesser value with Grade A infringement.

“It's where somebody takes your trademark and affixes it on a product usually of lesser quality, but not always,” said Lupo, a partner with Arent Fox who co-chairs the Entertainment/Intellectual Property Group of the firm, specializing in copyright, entertainment, trademark and e-commerce law. “I spent a lot of time in Asia and saw a lot of Grade A infringement. It's so good that manufacturers can't even tell that the infringement is occurring, so the products sometimes have to be put through massive tests to even determine whether it's counterfeit or not. So it's difficult for you to determine you're selling counterfeit parts.”

Lupo said a gray-market good is a legitimate product that make its way into unauthorized channels, and there is no likelihood of confusion because it is a legitimate product.

“Maybe a manufacturer wants to capitalize in different markets around the world, so maybe they sell it to Morocco at half the price it sells for in the US,” he said. “That legitimate product ends up making its way into the US and cannibalizing the market at a much lower price. There is no trademark infringement.”

Registering patents

Bruno talked about protecting products with patents, saying patents must be registered.

She said it's unusual to think about truck-equipment products as being protected by copyright, but they can be. Protection can extend to chips and embedded software, elements of the product design, packaging or labels, and catalogs and brochures.

She said products can be protected with trademarks and still not have a circled “R,” so a company needs to get permission before it uses the trademark.

With trade dress, the design and color of a product may also be protected, but it will not extend to functional aspects. She said Owens Corning was able to stop a third party from using pink insulation because there was “no functional purpose” for that color. It actually increases the manufacturing costs, but effectively identifies the source of Owens Corning's goods.

Part numbers can be protected as a trademark, but they must be non-descriptive and function as a trademark.

“Example: If there's a set of letters and numbers that applies to a component or part that is used by every company in the industry, you're not going to be able to claim this protection,” she said. “But if a company comes up with its own letters and numbers to apply to the components and they only use it on their products, they may be able to claim trademark rights.”

Lupo said a company can protect itself by inspecting the warranty. He said effective license agreements include obtaining warranties of non-infringement, obtaining indemnities, being on notice if the deal is too good; and withholding some payment if possible.

He said a company should never allow its supplier to register its trademark.

“We had a situation in Indonesia where Goodyear had licensed a tire manufacturer,” he said. “They didn't really enforce it as they should have. The licensee tried to sell the trademark back and tried to get a termination fee out of Goodyear. Goodyear didn't pay attention because it was a small nuisance. But this infringement was an impressive thing. The licensee ended up distributing goods all around the world and so Goodyear had to run around, chasing the product down. That got Goodyear's attention. When you're dealing with foreign countries with foreign intellectual property rights, it's very difficult to get infringement.”

Talking about potential infringement for selling another party's goods, Lupo said there is distributor liability via the Internet (for selling on your company Web site and for selling on Internet auction sites such as eBay and Alibaba) and at trade shows.

He said a distributor can be held liable for selling infringing or counterfeit product; if it looks too good, it probably is (inquiry notice); can be held criminally liable; can also be sued for personal injury if the distributor knew or had reason to know it was infringing; and knowledge is required for trademark infringement.

Types of infringement

With vicarious infringement, there must be a direct copyright or trademark infringement (copyright is easier); the distributor has the ability to control and supervise the infringement; the distributor was financially benefiting from the infringement; and financial partnership is required.

With contributory infringement, it must be shown that there was a copyright or trademark infringement; the distributor must have known (or had reason to know) of the infringement; there are notice letters or visits by investigators; and the distributor contributed to the infringement by failing to stop it.

“What can you do?” Bruno asked. “Ask for permission to use the logos and let them know you're selling their products. Or send a notice letter with a response date. That's a little bit risky because there is an argument on their end: ‘Hey, I never gave you permission to use it. I know you sent me a letter, but (my secretary) no longer works in this office. It was sitting on somebody's desk for two years.’ If that's the case, they'd have an argument that you never had permission.

“You can also negotiate a license or include a notice and takedown provision on your Web site. Basically, this says, in case of an infringement, contact (a certain person) and that person would be responsible for taking off the infringing material. Make sure somebody is designated at your company.”

She said that with infringement at trade shows, a company should remove product from the exhibit if alerted to infringement. The trade show may shut down your booth if you are distributing infringing goods and you can be held liable for vicarious or contributory infringement.

She said companies should educate themselves by going to seminars and paying attention to any manuals they are receiving from their suppliers and manufacturers.

“A lot of times they will highlight the intellectual property they think is important,” she said. “It's good for you to know that so that you can know what you can use and can't use.”

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