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Let’s Get Real About Eliminating Fake Goods

Tue, 06/09/2009 - 8:30am
David Wotherspoon and May Cheng, Fasken Martineau

Counterfeiting is often regarded as a harmless way to pick up a luxury look at a fraction of the designer price; in the current economic climate, it’s not surprising that many consumers might embrace buying illegal goods as a harmless means of discount shopping.
 
But this innocuous, “no-harm/no-foul” view of counterfeiting is itself a fakery. Bogus goods are, in fact, a dangerous enterprise that threatens lives and livelihoods.
 
Far from an isolated amateur act
The U.S. Commerce Department estimates piracy and counterfeiting costs U.S. businesses between $200 billion to $250 billion a year. According to MarkMonitor, a San Francisco-based counterfeiting research firm, instances of “cybersquatting” -- using a domain name that capitalizes on an established brand, increased steadily throughout 2008, up 18 percent year-over-year to more than 1.7 million instances. The number of e-commerce sites devoted to selling counterfeit goods also rose, to more than 87,200 -- up 46 percent compared with the year-ago period.
 
Those ubiquitous Louis Vuitton purses sold on bedsheets by street vendors don’t represent an isolated amateur act -- they are directly linked to fake housing components, fake vaccines and even fake airplane parts. The ever-growing counterfeiting problem, fueled by the anonymity and ease of the Internet, has led to: ruined homes in Florida because of suspected counterfeit drywall; fake alcohol sent overseas untaxed and with unknown contents; phony Malaria drugs that don’t work and lead to deaths around the world.
 
Federal, state and local crackdowns on counterfeiting often only reveal how large the problem is. In late April, police in New York uncovered more than 100,000 counterfeit items spread out over 118 rented warehouse spaces in Bay Ridge, Brooklyn. Everything from fake designer clothes and handbags, to phony Nike shoes bearing the likeness of Barack Obama were discovered. The goods recovered amounted to $20 million worth of counterfeit merchandise according to the New York Times.
 
Clearly, this is not a problem centered on a distant shore. Much of the counterfeit goods encountered are distributed here in North America. Some 70 percent of those “brandjacking” Web sites that offer fake goods using established names are hosted in the United States; only 1 percent of the sites are hosted in China, which is so often accused of counterfeiting.  
 
Canada, which is not normally considered a hot bed for fraud, is very much a part of the international chain of counterfeit commerce -- much of it originating in Vancouver as a key point of distribution. In fact, on April 30, 2009, Canada was elevated to the United States Trade Representative’s “Priority Watchlist” for IP infringement, putting it alongside China, Russia, India and Indonesia as a major source of counterfeit goods, proving the problem is widespread and international, not merely centered in Asia.
 
What was once a cottage industry has now become a highly sophisticated network of organized crime that threatens economic development and devalues corporate reputations. Counterfeiting of pharmaceuticals, auto parts and even airplane components is growing more common. Last year the U.S. Air Force noted that an “unknown number” of phony airplane parts had found their way into Air Force and Navy planes. The Federal Aviation Administration estimates 2 percent of the 26 million airline parts installed each year are fakes -- not a reassuring thought to anyone who flies.
 
Pirated goods fuel $700 billion in global trade
On a global scale, counterfeiting now accounts for between 5 percent and 7 percent of world trade, worth an estimated $700 billion a year, a figure that is constantly rising due almost exclusively to sales via the Web.
 
The surge in online sales of counterfeits has occurred for three main reasons: the Internet provides an easy way to exchange goods without prominent marketing; it offers a way to conduct illicit business in a manner that is largely untraceable; it is a form of trade which, even if traced, is fraught with jurisdictional obstacles to enforcement. 
 
The World Intellectual Property Organization points to multiple effects of counterfeit products, including loss of sale revenues, tax revenues and legitimate employment, as well as market destabilization, and even a decline in investment as manufacturers lose trust in the marketplace. But there are also cultural consequences where there is a disincentive to engage in creative work, resulting in an unsound environment for invention and cultural output. 
 
Some counterfeit products available online represent a significant public health and safety concern. Given that pharmaceuticals, cosmetics, DVDs and CDs, mechanical parts, appliances, and food are all subject to piracy, the risk for consumers can be enormous. 
 
From Chinese drywall to fake drugs
A recent round of counterfeit alerts indicates the importance of safety standards among the simplest and most everyday goods. Chinese home products manufacturer Knauf Tianjin has been investigating whether counterfeit drywall made its way into numerous new homes across Florida, where reports have surfaced of houses permeated with the rotting egg smell of decaying drywall.

Even more pressing concerns are phony pharmaceuticals. These drugs can be deliberately mislabeled with respect to their contents or their source, and the dangers presented are immediately apparent. 
 
Despite the paucity of direct links, it's widely accepted that pharmaceutical counterfeiting is increasing and that there are more ways now than ever to procure drugs from unlicensed sources. The World Health Organization estimates that between 1 percent and 10 percent of drugs sold around the world are counterfeits, and as many as 50 percent in some countries. Imagine that in the midst of the recent swine flu outbreak, that half of the doses of antiviral medication might not be the real thing -- and you begin to realize the chilling impact of the problem.
 
Some fake medications may contain toxic or poisonous chemicals, the result of which can be tragic.  In 2007, a 57 year old resident of British Columbia was slowly poisoned to death by tainted pills purchased from an online pharmacy. The sedatives -- antidepressants and acetaminophen -- were found to contain dangerously high levels of toxic metals used as fillers, including uranium, lead, titanium, tin, and even arsenic. According to Canada’s British Columbia Regional Coroner, the pills were likely purchased from an online pharmacy fraudulently claiming to operate out of Canada, but likely located overseas.
 
Internet facilitates sale of bogus goods
Counterfeiting could not promulgate in its current form without a medium, which increasingly is the Internet. The web provides ideal conditions for counterfeit commerce, as sellers, and sometimes buyers, do not want attention drawn to their businesses. 
 
It is difficult -- and often impossible -- to police commerce conducted online. The anonymous nature of Internet communication allows for frequent contact between buyers and sellers without either party gaining any insight into the others’ identity, background, or even country of residence. Perpetrators can be located anywhere in the world, creating obvious jurisdictional issues around regulation and prosecution, even if they can be found.
 
Results across various jurisdictions have been mixed. In an earlier case, courts in France ruled in favor of fashion giant LVMH (which owns such brands as Louis Vuitton, Christian Dior, Givenchy, Tag Heuer and Fendi) when it sued eBay for negligence regarding the sale of counterfeit goods on its popular auction site. By contrast, a similar suit launched in the U.S. federal court by Tiffany & Co. was rejected because the protection measures employed by eBay in order to reduce counterfeit sales were ruled adequate.
 
The standard is not whether eBay could reasonably anticipate possible infringement, but rather whether eBay continued to supply its services to sellers when it had reason to know of infringement by those sellers.
 
The law does not impose liability for contributory trademark infringement on eBay for its refusal to take such pre-emptive steps. The result of the application of this legal standard is that Tiffany & Co. must ultimately bear the burden of protecting its trademark
 
Need for a global online solution
There are several available remedies to consider for taking a bite out of counterfeit goods, some of which were outlined at the most recent Global Congress on Combating Counterfeiting and Piracy, namely:

  • Intermediaries should take steps to prevent and deter counterfeiters including contractual due diligence, responding to rights owners, filtering illegal content, refusals to host online sales, and removal of illegal sites.
  • Governments should partner with Internet service providers to develop sanctions aimed at prevention. They should most certainly increase law enforcement resources, strengthen legal regimes and support international cooperation.
  • Support Interpol’s program “Dedicated Internet Anti-piracy Capability.” Governments must also encourage meaningful cooperation between legitimate manufacturers and distributors, along with law enforcement, and certainly with retailers and consumers.
  • Support postal services in various jurisdictions -- in the U.S., Canada and elsewhere -- in their efforts to implement measures to prevent shipments of fakes through the post.

An Internet adjudication process
Civil remedies available under trademark and copyright law both in the U.S. and Canada depend on the diligence of rights’ holders. Online counterfeiters are especially difficult to sue as they frequently operate in the shadows or in jurisdictions with weak enforcement standards. Further, civil remedies are typically only pursued by large companies as they are often prohibitively expensive.

A more promising solution may be an Internet-based adjudication process similar to international and national domain name dispute resolution procedures. The rules might be adapted to address online counterfeit sales. Domain name registration agreements could be amended to submit to online dispute resolution in the event of complainants that registrants use sites for the sale of counterfeit goods.
 
The dispute resolution process proposed would not supplant the civil remedies for online counterfeits, but be complementary. One solution could be the cancellation or transfer of the domain name to the complainant to avoid further abuse of the domain by the registrant. Even though this proposal may only provide partial or temporary relief as the goods may still be sold elsewhere on or offline, the ability to quickly halt online sales would provide a first line attack on the counterfeit market.
 
The economic, cultural and public safety implications of online counterfeiting are well documented; the scope and anonymity of the Internet create disastrous potential if this issue is left unchecked. The sale of counterfeit goods online, hampered by jurisdictional and evidentiary issues, is in need of a global online solution. 
 
The introduction of a fast, efficient and functional mechanism for IP rights owners to shut down the sale of counterfeit products is a necessary next step in stemming the tide of counterfeit goods that are prevalent in the North American market and throughout the world. Through a combination of legal, private and alternative dispute resolution initiatives, important positives steps may be achieved.

David Wotherspoon is a litigation partner in Vancouver with Fasken Martineau and a member of the firm’s Technology and Intellectual Property groups. He frequently advises clients on matters stemming from counterfeiting of intellectual property. He can be reached at dwotherspoon@fasken.com 
 
May Cheng is chair of  Fasken Martineau’s  Toronto Intellectual Property Group. Her IP litigation work spans trademarks, patents, copyright, industrial designs, and trade secrets. She can be reached at
 mcheng@fasken.com 

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