§ 3.03 Trafficking in Counterfeit or Illicit Labels

• Jurisdiction: United States
• Publication year: 2020

§ 3.03 Trafficking in Counterfeit or Illicit Labels

Another imporiant criminal statute that protects creative works is Title 18, Section 2318 of the United States Code,²⁸⁴ which adds protection to creative works by specifically prohibiting trafficking in counterfeit or illicit labels designed to be affixed to phonorecords, copies of computer programs, motion pictures and audiovisual works, as well as trafficking in counterfeit documentation or packaging for computer programs.²⁸⁵

Congress first enacted Section 2318 in 1962 to address concerns about the "widespread practice" of phonograph records being counterfeited and sold in interstate commerce.²⁸⁶ In fact, Congress enacted this section before it amended the Copyright Act in 1972 to include sound recordings.²⁸⁷ The legislative history of Section 2318 notes that the sale of counterfeit records resulted in the loss of profits to the music industry as well as the loss of tax revenue for the federal government.²⁸⁸ Furthermore, it notes that such counterfeiting "is a particularly insidious crime because the counterfeit product is marketed as a legitimate product, with the package and graphics being forgeries or close facsimiles of those of the authentic product."²⁸⁹ Thus, consumers may also suffer by mistakenly purchasing what are often inferior products.²⁹⁰

Initially, a violation of Section 2318 was a misdemeanor offense with up to a $1,000 fine and a one-year prison sentence. However, in response to the rapid increase in counterfeiting operations, the involvement of organized crime,²⁹¹ and the development of technology that has made counterfeiting easier, Congress has significantly broadened the protections and enhanced the penalty provisions of Section 2318.²⁹² Congress amended the statute in 1996 to include labels or documentation related to computer programs.²⁹³

At least one commentator has suggested that because the infringement of sound recordings may be a criminal violation of the Copyright Act, Section 2318 "may have outlived its usefulness."²⁹⁴ However, at least one court has distinguished the elements of Section 2318 from those under Section 2319 and upheld a conviction for trafficking in counterfeit labels."²⁹⁵ However, this ignores a number of important aspects of Section 2318 that may, in fact, in certain circumstances make it more appealing to federal prosecutors than the Copyright Act. On December 23, 2004, President Bush signed into law the Anticounterfeiting Amendments Act of 2004,²⁹⁶ that amends Section 2318 by creating a definition of illicit labels as genuine labels that are, in general: (1) being used or otherwise distributed without the authorization of the copyright owners, or (2) knowingly falsified to indicate a higher number of licensed users or copies than authorized by the copyright owner unless the certificate or document is used by the copyright owner solely to monitor or track the copyright owner's distribution channel.²⁹⁷ The definition is intended to explicitly cover the situation where "legitimate authentication features"²⁹⁸ are bundled with counterfeit products or counterfeit labels were seized before being bundled with the counterfeit items.²⁹⁹ Prior to this amendment, it was unclear whether these types of situations were a violation of Section 2318. The Prioritizing Resources and Organization for Intellectual Property Act of 2008³⁰⁰ also amended § 2318 to provide the mandatory forfeiture of "(A) Any article, the making or trafficking of which is prohibited under . . . § 2318 . . . (B) Any property used, intended to be used, in any manner or part to commit or facilitate the commission of an offense . . . (C) Any property constituting or derived from any proceeds obtained directly or indirectly as a result of the commission of an offense. . . ."³⁰¹ It also provides for restitution for victims pursuant to the Mandatory Victim Restitution Act.³⁰²

Section 2318 also provides for a civil cause of action with statutory damages and a forfeiture provision similar to the above criminal forfeiture provision.³⁰³ For example, Microsoft obtained summary judgment for violating Title 18, Section 2318 of the United States Code, against a defendant who sold certificates of authenticity, which are certificates included with software to help end-users verify that they have received genuine Microsoft software.³⁰⁴ In another case, the district court awarded Microsoft a total of $2,255,000 for 902 counterfeit or illicit labels sold or acquired and possessed with the intent to sell.³⁰⁵ As to the availability of defenses under this statute, one court has held that the first-sale doctrine under copyright law is not available as a defense in prosecution for trafficking in counterfeit labels.³⁰⁶

[1] Elements for Conviction Under Section 2318

In order to obtain a conviction under Section 2318 the government must establish the following: (1) the defendant trafficked in labels or computer software documentation affixed or designed to be affixed to a phonorecord, a computer program or other audiovisual work; (2) the labels or documentation were counterfeit; (3) the defendant acted "knowingly"; and (4) federal jurisdiction is appropriate because the work is copyrighted or for other reasons.³⁰⁷

[a] Trafficking

The first element requires that the defendant trafficked in labels for phonorecords, motion pictures, audiovisual works, computer programs, literary works, pictorial, graphic or sculptural works and works of visual art. For computer software, the government may show that the defendant was trafficking in documentation or packaging. The term "traffic" is defined broadly by statute to mean to "transport, transfer or otherwise dispose of, to another, as consideration for anything of value or to make or obtain control of with intent to so transport, transfer or dispose of."³⁰⁸

Courts have upheld a broad reading of this element under Title 18, Section 2320 of the United States Code, which prohibits trafficking in counterfeit goods³⁰⁹ and contains a definition of that term that is identical to the definition contained in Section 2318. Under the former section, courts have not insisted that the thing "of value" received as consideration be financial payment. For example, the Sixth Circuit upheld the conviction of a defendant for violating Section 2320 even though the defendant did not receive financial payment for the counterfeit labels and containers he supplied to the undercover FBI agent.³¹⁰ The court held that this element had been met because the undercover agent was providing the defendant with a continuing supply of counterfeit products. Thus, the court found that a jury could have found beyond a reasonable doubt that the defendant was providing the labels and containers in exchange for the undercover agent's "goodwill," and that "such 'goodwill' can be considered a thing of value in the form of an intangible asset."³¹¹ This reading of the term "traffic" is consistent with the legislative history of Section 2320, which notes that "[o]f course, the consideration can take many forms and the courts should analyze transactions based on their substance and not on their form.³¹²

It should be emphasized, however, that despite the broad reading of the term "to traffic," Section 2318 is limited to activity by one who transfers the goods from himself or herself to another. In other words, it does not include those who knowingly acquire counterfeit articles solely for personal use.³¹³

[b] Counterfeit or Illicit Labels or Documentation

Prior to the 2004 amendment, the government was required to prove that the labels or documentation was counterfeit. Subsequently, Section 2318 includes both counterfeit and illicit labels. Counterfeit labels are labels which appear to be genuine when, in fact, they are not.³¹⁴ For example, the Sixth Circuit affirmed the trial court's determination that DVD labels that "appeared to be 'home made,' were of poor quality, contained misspellings, and were not centered" appeared to be genuine, but were not, and were thus counterfeit labels.³¹⁵ This requirement is intended to distinguish this offense from the "bootlegging" or "pirating" of recordings or tapes. Counterfeit records or tapes are works, which are made to appear legitimate whereas bootleg or pirated records and tapes are copies with no pretense of legitimacy. Thus, only trafficking in counterfeit items is prohibited.³¹⁶ This does not mean the counterfeit labels must be a copy of genuine labels that previously existed.³¹⁷ In that respect, Section 2318 is different from Section 2320 that requires that the counterfeit mark in question be identical with, or substantially indistinguishable from a mark registered for those goods or services on the principal register in the Patent and Trademark Office.³¹⁸

If the items involved are counterfeit labels, the government must prove that the counterfeit label was affixed or designed to be affixed to a phonorecord, computer program, or other audiovisual work.³¹⁹ Prior to the 1982 amendment, it was unclear whether Section 2318 applied to counterfeit labels affixed to computer software, since computer software has been classified as a "literary work" under copyright law.³²⁰ However, since the statute has been amended, it explicitly applies to computer software.³²¹

Since the language of the statute includes the term "designed to be affixed," the government does not have to prove that such labels were actually affixed to an item, for a defendant to be convicted under Section 2318. In other words, a defendant cannot escape liability by shipping the labels and recordings or items separately.³²²

With the passage of the Anti-counterfeiting Amendments Act of 2004, Section 2318 includes "illicit labels" which are different from counterfeit labels because they are authentic labels that are being used "without the authorization of the copyright owner" or are "knowingly falsified to designate a higher number of licensed users or copies than authorized by...