When It’s Too Good To Be True: The Underground Market For Intellectual Property

BEVERLY A. BERNEMAN

Partner


When It’s Too Good To Be True: The Underground Market For Intellectual Property

Introduction

Intellectual Property (“IP”) protection serves two sets of interested parties. First, the owners of the IP protect their investment in the creative parts of their businesses. Second, the users of the products and services can be confident that the protected IP fulfills their expectations. However, an underground market exists for IP goods and services. The underground market operates in both the business to business (“B2B”) and business to consumer (“B2C”) world. The following discussion identifies these markets and the potential liability for sellers and buyers in the underground market.

Counterfeit Goods

Counterfeit goods are fake replicas of an authentic product. The producer of counterfeit goods competes directly with the owner of the superior IP, the real product, by taking advantage of the owner’s creation of the market. Counterfeit goods include food, drinks, clothes, accessories, electronics, auto parts, toys and so on.

The production and sale of counterfeit goods is a global problem. It affects the economy and consumer confidence. In some cases, it can expose consumers to potential health problems or even death. Customs can block the international trafficking of counterfeited goods but it is not a failsafe protection.

Here are some signs of counterfeited goods:

  1. The source of the goods is suspect such as street vendors.
  2. The packaging is shoddy using faded colors or low-grade printing.
  3. The look or feel of the product is suspect such as electronics that weigh less than the original or clothing that has frayed stitching.
  4. The goods are missing items such as instruction manuals or power cords.
  5. The goods include giveaways that normally are not included such as a carrying case with counterfeit electronics.

The mere offer to sell counterfeit goods can expose the seller to liability. Sellers of counterfeit goods face criminal as well as civil liability. Criminal penalties include fines up to $5 million and imprisonment for up to 10 years or both. Owners can also file civil IP infringement actions that could result in substantial judgments for actual damages, punitive damages and attorneys’ fees. Buyers of counterfeit goods generally do not incur criminal or civil liability.

Gray Market Goods

Gray market or parallel goods are genuine products that are distributed in markets not intended by the IP owner. The gray market generally involves goods that have price differential depending on the market. For instance, a manufacturer may have one model it sells in Asia at a lower price than a variation of the model being sold in the U.S. at a higher price. Some gray market goods involving copyrights can be legitimately sold in the U.S. In 2013, the U.S. Supreme Court decided that textbooks purchased overseas with the permission of the copyright owner could be resold in the U.S.

The sale of gray market goods exposes the seller to various types of IP infringement laws that could result in substantial judgments for actual damages, punitive damages and attorneys’ fees. While a buyer generally escapes liability, the buyer purchases goods that may not be of the same quality as non-gray market goods.

Tampered Goods

Whether in the B2B or B2C realm, the purchasers of certain types of products expect an appropriate level of performance or safety. In order to assure the purchasers of the quality of the goods, manufactures will include certification labels or bar codes. The manufacturer may develop different levels of goods for different markets and may cost less as a result. Like gray market goods, the seller acquires the low cost goods intended for one market and then sells it at a higher market price in the unintended market. However, the seller tampers with the goods by obliterating the certification marking. By obliterating the certification marking, the seller hopes that the goods cannot be traced to its unauthorized dealer. Here are some signs of tampered goods:

  1. A holographic marking or bar code is destroyed or obliterated.
  2. The packaging has been opened and then resealed.
  3. The packaging is different from packaging used by the original manufacturer.
  4. The “ship from” address on an invoice is suspect.

The sale of tampered goods exposes the seller to various types of trademark infringement laws that could result in substantial judgments for actual damages, punitive damages and attorneys’ fees. While a buyer generally escapes liability, the buyer may purchase goods that do not perform as expected and the manufacturer may not honor any warranties.

Non-Licensed Goods

The rise of the Internet gives easy access to imagery (photos, drawings, designs, etc.). But not all imagery is free to use. Most of the imagery is owned by someone and requires a license to use. Generally, stock imagery companies, like Getty Images, Shutterstock and Thinkstock, license and manage the use of the imagery.

Both the seller and purchaser of unlicensed imagery can be subjected to infringement suits. Even the purchaser who believed the seller has the right to license the images can be held liable for infringement. Due to the availability of statutory damages and attorney’s fees in some copyrights case, the damages can far exceed the cost of an authorized license.

Conclusion

Sellers and purchasers of branded products, images and other goods should be wary of putting them into the stream of commerce without verifying their origin. A business model based upon the underground market carries considerable risk of criminal and civil liability. Buyers should also be cognizant of the warning signs where the seller’s right to sell the goods is suspect