Fighting Off-Shore Counterfeits

 

Joshua Kaufman © 2005

Everyday we enter a store and find thousands of products adorned with artworks. In some products such as frame prints or paintings, art is the focus of the product.  In others art is the dominant feature, for instance, on placemats, decorated mugs, clock faces, labels, linens and kitchenware and still other products, they are enhanced by the artwork, such as decorative borders, patterns and designs.  On those visits to the store we come upon the thousand upon thousands of items whose ordinariness is enhanced by the artwork embedded on them.  Those items would be ignored no matter how efficient the utility but for the eye-catching art and design work. The art sell the items and the artist controls the art, or is supposed to.

The products may not be produced without the consent of the copyright owner. No matter what type of product or style of art the artwork is protected by copyright.  How the imagery is used, on what products, where and how it is distributed is the prerogative of the copyright owner.  The exploitation by anyone, almost anywhere in the world, of an artwork requires the permission of the copyright owner or their agent.  In the parlance of the industry permission to use a copyrighted image is called a license.  If a product is manufactured, distributed, imported, sold at wholesale or retail without the consent of the copyright owner, without a license, it is an illegal act, an infringement, and the goods are counterfeits.  .  Tens of thousands of counterfeit products appear on store shelves everyday valued in the tens of millions (if not more) of dollars.  Each one of these items should be providing a royalty payment to the artists whose works have been copied on the product.  The loss to artists is in the tens of millions of dollars every year. 

In the United States, copyright owners are not without recourse.  If infringing products are found at a store, the store and its owners are liable, so are the distributors who supply the products to the store; the importer is likewise liable, and of course, the manufacturer who actually created the infringing goods.  The excuse, “I didn’t know it was an infringement” or “I bought it from a reputable source” or “they certified in my PO that they had the rights” are of little or no consequence in copyright infringement actions.  The old cliché “ignorance is no excuse” reigns supreme in copyright infringement actions.  A copyright owner may go after anyone or all of the entities or individuals in a chain of sale.  Everyone who handles the counterfeit goods is liable.  And often, it is not only the entities that are liable, but the individuals in the entities such as employees, owners, or officers may also be held to be individually liable.  A copyright owner can obtain an injunction against the continued sale of the counterfeit goods.  It can have them seized and destroyed.  Copyright owners are entitled to be reimbursed for the losses incurred as a result of the infringement and for the profits allocated to the infringement of each of the infringing parties. If the copyright had been registered with the Copyright Office of the Library of Congress at the time of the infringement in addition to their actual damages, they would be entitled to have their attorney’s fees paid by the infringers and at their election, statutory damages, which can be as much as $150,000 per infringement assessed against an infringing party. 

When a copyright owner finds that one of their works has been infringed upon, it is often the case that others are being infringed upon by the same people in a like manner.  Since seeking remedies can be expensive, particularly if the copyright owner has not previously registered their copyrights, there is nothing to prevent one or more aggrieved copyright owners from jointly pursuing all those in the stream of commerce who are liable to them for the infringement.  In fact, about 40 copyright-owning entities have formed the Art Copyright Coalition whose sole purpose is to share information on infringements and infringers and then to jointly pursue infringers wherever they may be found.  More information on our Copyright Coalition can be found at www.artcc.org or by calling them at (202) 344-8500.

If the infringers are found online in cyber stores, websites, online auctions, selling counterfeits, U.S. law again provides useful tools to assist the copyright owner.  Under the DMCA law the copyright owner can, in addition to their regular remedies, go to the website host, the ISP, and demand the removal of any infringing material from the website and at times might even be in a position to have the entire website taken down.  The process is a bit technical but a very efficient, effective and relatively inexpensive remedy.  In terms of auctions, e-Bay has established an effective system for removing infringing works from auctions under their VeRo program. 

Overall, for U.S. infringements, be they in stores or online, a copyright owner has many arrows in their quiver which they can use to shoot down an infringer, but like everything else in the United States, infringements are going offshore.  The crooks have joined corporate America and are outsourcing.. Today, most of the infringing goods we located, stopped, seized and destroyed on behalf of our clients, come from abroad.  They fall into two categories:  the outsourced goods and the foriegn bred counterfeits.  With today’s technology, specifically websites, digital camers and scanners, copying a work for the purposes of “knocking it off” is literally child’s play.  Anyone with even a rudimentary knowledge of computers can either download, digitize or scan an image.  From these downloads or scanned images to have them reproduced and appear on products is a simple mechanical act that can be accomplished in any one of tens of thousands factories around the worlds.  The foreign infringer scours the web, comes to trade shows in the United States, Canada or Europe picking up the latest tearsheets, photos, taking pictures in booths, visiting U.S. stores, all at the singular purpose of seeing what is currently popular so that they can go home and create very cheap counterfeit products.  Many if not most of the countries that the counterfeiters call home have copyright laws on the books and have signed international treaties guaranteeing the rights of foreign copyright owners in their countries.  However, it is a far cry from having a law on the book or signing a treaty guaranteeing a foreign copyright owner rights and then actually enforcing against home-grown pirates.  It is not a matter of Third World countries not having copyright laws; it is a matter of their refusal to enforce them.

China, of course, is the most notorious country for not enforcing the rights of foreign copyright owners.  It is not only in the visual arts but in computer software, movies, music, Chinese counterfeiting, redefines the word rampant.  Statistically the counterfeit goods coming in to the United States are overwhelmingly coming from China.  In addition to the activities discussed above, many Chinese factories have legitimate contracts with U.S. companies and create legitimate goods.  Unfortunately, after they fulfill the legitimate orders they simply keep on manufacturing the goods and go into business in competition with their customers selling their knock-offs.  What exacerbates the problem in this type of situation is the goods are the exact same as legitimate goods  as they are being manufactured by the same factories according to the same specs.  The difference is, of course, that the Chinese are selling them at a much lower price.  Why not?  They have no R&D costs, no royalties to pay and all the initial set-up costs which are often one of the most expensive parts in a manufacturing process already have been paid for by their customers.

How to stop these Chinese (and other offshore) pirates has been a vexing question.  U.S. law does not apply in China so the DMCA take-down provision does not help in shutting down Chinese-based websites.  You cannot sue in the United States for infringing actions that solely occur abroad.  U.S. Courts do not have jurisdiction for extra-territorial infringement.  In order to sue in the United States some part of the infringing activity must take place on U.S. soil.  This can be the design, the manufacture, the shipping, the exporting, importing or sale in the United States.  One of the difficulties in acquiring jurisdiction over the foreign infringers in the United States is that many of the transactions with the infringers are done in what is called FOB basis.  In these transactions the infringing activities do not take place in the United States, rather the totality of the Chinese companies actions occur in China.  An FOB transaction, in essence,  is when the transfer of ownership of the goods occurs overseas, specifically at the time that the goods are loaded on board the ship at the point of demarcation; thus the transfer of ownership of the goods to the U.S. company actually occurs in the Chinese port.  Thus, the illegal importing, distribution and sales are all being undertaken by the U.S. entity and not by the Chinese manufacturer as their ownership and relationship to the counterfeit goods ends at the point of transfer of ownership at a port somewhere in China.  As such the Chinese infringers, when there is  an FOB transaction are outside the reach of the U.S. courts. 

On the other hand for transactions in which the ownership occurs after the goods have reached the United States, then the U.S. courts will have jurisdiction over them and they can be sued in the United States.  The difficulty in these situations is that you might obtain  a U.S. judgment but all the Chinese entity’s assets, at first blush, appear to be in China where it is impossible to get your U.S. judgment enforced.  A resolution to that dilemma seems to be in the offering.  There is a new weapon available to copyright owners in fighting overseas counterfeiters.  It is information.  Since 9-11 the U.S. government has required that certain information be provided to it prior to the time a ship leaves a port bound for the U.S.  The information is transmitted in electronic form and is available from companies that have compiled it on a subscription basis.  One such company can be found at www.manifestjournals.com.  To obtain this information, you have to subscribe to the website.  You can either arrange to have unlimited access or prepay for a fixed number of searches.  (This service is available to Art Copyright Coalition members as part of their membership dues.) 

Manifest Journals database lists the name of the shipper, the recipient, the contents of the cargo, the port of shipment, the port of entry, the shipment document numbers and much more.  Armed with this information, how does a copyright owner use it to their advantage?  Let us say you find infringing goods in Big Box “X”.  You enter Big Box X’s name, the type of goods; you’ll be given a listing of the name and contact information of everyone who is shipped Big Box X those types of goods.  Usually in your negotiation with Big Box X they will also provide you with their source of the infringing goods.  Then you can enter the name of the shipper and find out to whom else they are shipping these types of goods.  Further investigation at those stores will likely reveal other infringers as well who can then be contacted and additional  infringements can be stopped. 

Since most legitimate stores do not wish to deal in counterfeit goods and certainly are not interested in being embroiled in copyright infringement suits, upon being notified that they are being sold infringing goods, often stop dealing with the infringing entity.  If it happens enough to the counterfeiters, they may very well stop infringing on the aggressive copyright owner’s works and simply knock-off someone else.  No one is naïve enough to think that the counterfeiters are simply going to pack up and go away until there is strict enforcement in their home countries but this is a case of where the squeaky wheel can be enough of a pain to the counterfeiters that they will choose one of the tens of thousands of other less aggressive copyright owners to knock-off.  Though it doesn’t solve the universal problem, it certainly can solve the particular copyright owner’s problem.

Also using the data base you can identify a container on its way that has infringing goods, you can then have it seized at the border by US Customs and have the goods destroyed.  Using the database can give you this type of information and in a timely fashion.  Remember, you get the information around the time that the shipment is being loaded  and it takes days if not weeks for it to cross the Pacific and land in a U.S. port.  The Customs seizure procedure is complex but can be made to work (Note:  it is essential that a copyright owner has their copyright registrations in place ahead of time as copyright registration is a prerequisite to U.S. Customs assistance.  If the copyrights are not registered ahead of time by the time, even on an expedited basis, the copyrights are registered, it may be too late.)

For those many transactions that are not FOB, the foreign companies can be sued, as we stated before, in the United States.  One can assume that most of the Chinese counterfeiters or other offshore infringers will not show up in the United States to defend their claims and in due course, with a relatively modest amount of expenditure and legal fees, a judgment can be acquired against the offshore infringer.  But the question remains, how to collect on the judgment.  It serves no copyright owner’s purpose simply to get a judgment that can be used for wallpaper.  There needs to be a process in which the judgment can be translated into cash.  This can be accomplished in one of two ways:  (1) once again using your database, you can track the infringer’s future shipments to the United States and seized the goods with a Writ of Attachment, even if they are not infringing goods, at the port of entry before they are transferred to the U.S. owner.  It is no different than seizing any other creditor’s goods to satisfy a judgment.  Another way of translating your judgment into hard cash is to seize money owed to the foreign counterfeiters.  Since you now know who their customers are by using the database, any of those entities which are purchasing the goods on net terms, 10/30/60 days net, owe money to the infringers, those are also assets of the infringers which can be seized. So when you know shipment, even of non-infringing or unrelated goods, has recently been sent to the U.S. companies; there is a good chance that the U.S. company will owe the counterfeiters money.  You serve a Writ on them and they are required to turn the money over to you to satisfy your judgment and not to the counterfeiter. 

It is a hard fight but a worthwhile one and ironically, in many cases, turns out to be a money-maker.  When you go after everyone in the stream of infringement and recover the profits of the importer, the distributor, the jobber and the retailer, you’ll find that often you have collected a significant amount of money; even though no one wants to be infringed upon recovering thousands upon thousands of dollars, certainly eases the pain.

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Joshua Kaufman is a partner in the law firm of Venable, LLP. While he is based in Washington, DC, his practice is national in scope. He is one of the country’s foremost attorneys in the field of copyright, art and licensing law. He is a frequent speaker and has published over 200 articles on various topics in the field. He is also an adjunct professor of law at American University Law School. A large number of his articles can be read and downloaded from his web site at www.jjkaufman.com