§ 4.03 Defenses to the Crime of Trademark Counterfeiting

JurisdictionUnited States
Publication year2020

§ 4.03 Defenses to the Crime of Trademark Counterfeiting

The defenses that might be raised under Section 2320 of the United States Code can be categorized into three parts.224 The first are specific defenses, provided directly in Section 2320, such as the so-called "gray market goods" and "overrun goods" defenses. In the second category are Lanham Act defenses and limitations that the statute explicitly incorporates. Congress did not explain how to adapt those defenses and limitations, developed in civil proceedings, for criminal proceedings. It presumably left that task to the courts. The third category consists of the general defenses that derive from sources outside Section 2320, such as the statute of limitations. Each category of defenses is discussed in the sections below. Note that there is no reason for a legitimate manufacturer to ever be charged with trafficking in counterfeit goods. While the final version of the TCA did not include a "safe harbor," the legislative history of the Act provides that if a person takes the steps outlined in the "safe harbor" provision that was part of the Senate TCA bill that "it would be virtually impossible to establish, in either a civil or a criminal case, that he or she 'knowingly' used a counterfeit mark."225 The safe harbor provision requires that the person seeking the safe harbor notify the trademark owner thirty days before acting and labeling the goods or materials, so as to disclaim any connection with the trademark owner.226 The first-sale doctrine under copyright law is not available as a defense in prosecution for trafficking in counterfeit labels.227

[1] Defenses Expressly Provided in Section 2320

The most straightforward defenses under Section 2320 of the United States Code are those provided expressly and completely in that statute. These defenses relate to "overrun goods" and "gray market goods."

[a] Overrun Goods Exemption

Unlike the Lanham Act, Section 2320 expressly excludes the authorized use of a mark for all types of goods from the definition of "counterfeit mark." Specifically, the statute excludes from the definition of counterfeit mark any mark that is:

"used in connection with goods or services, or a mark or designation applied to labels, patches, stickers, wrappers, badges, emblems, medallions, charms, boxes, containers, cans, cases, hangtags, documentation, or packaging of any type or nature used in connection with such goods or services, of which the manufacturer or producer was, at the time of the manufacture or production in question, authorized to use the mark or designation for the type of goods or services so manufactured or produced, by the holder of the right to use such mark or designation."228

This part of the statute comes into play when a manufacturer is authorized to produce a certain amount of goods, but in fact produces a greater number of goods (an "overrun"). Despite the lack of authorization for the overrun, the overrun goods produced in this way are outside the definition of "counterfeit" under the Act. This defense is to be narrowly construed; for example, by excluding overrun goods from the scope of "counterfeit mark," Congress intended that the defendant would bear the burden of proof with respect to authorization to produce such goods.229

The legislative history provides an example of the protection afforded by the overrun goods exclusion. If a licensee had been authorized to make 500,000 umbrellas bearing a trademark owner's mark and the licensee manufactured without authorization an additional 500,000 umbrellas bearing that mark during the course of the license, the manufacturer on a proper showing would be protected by the exclusion.230 Congress apparently believed that because the trademark owner was already in contractual privity with the offender, whose standards of production were apparently satisfactory to the trademark holder, criminal sanctions would be unnecessary. Congress concluded that "[t]he contractual and other civil remedies already existing make it inappropriate to criminalize such practices."231

This analysis holds only for the specific type of goods that the licensee is authorized to produce. For other types of goods, the licensee cannot be presumed to live up to the standards of the trademark holder, or even to be in privity in any relevant way with him. Thus, Congress narrowly drafted the overrun goods exclusion to apply only where the licensee was "authorized to use the mark or designation for the type of goods or services so manufactured or produced."232 Congress effectuated its intent that the overrun exclusion cannot be claimed where a licensee produces a type of good other than the one for which he is licensed. For example, "if a licensee is authorized to produce 'Zephyr' trench coats, but without permission manufactures 'Zephyr' wallets, the overrun exception would not apply."233 Obviously, the exemption also would not apply if the putative licensee had never been authorized to use the trademark at all.

This statutory defense has not been utilized in any reported opinion, although one defendant argued that this exemption was sufficiently unclear to render the statute unconstitutionally vague.234 The defendant questioned at which stage of "production" authorization was needed. The court rejected this vagueness challenge, holding, based on the plain language of the statute, that Congress intended the exception to be limited to those goods or services for which authorization existed "during the entire period of production or manufacture."235

[b] Gray Market Goods

The principle of gray market trademark law is that the importation of a product that was produced by the owner of the United States trademark or with its consent, but not authorized for sale in the in the U.S., is trademark infringement only if there are material differences between the foreign and domestic product.236 In making this determination, "[t]he courts have applied a low standard of materiality, requiring no more than showing that consumers would be likely to consider the differences between the foreign and domestic products to be significant when purchasing the product for such differences would suffice to erode the goodwill of the domestic source."237 The rationale underlying the minimal requirement is that "[a]ny higher threshold would endanger a manufacturer's investment in product goodwill and unduly subject consumers to potential confusion by severing the tie between a manufacturer's protected mark and its associated bundle of traits."238 The court explained that "the consuming public, associating a trademark with goods having certain characteristics, would be likely to be confused or deceived by goods bearing the same mark but having materially different characteristics."239 Thus, by distinguishing domestic goods from gray market goods that bear a material difference, thereby finding trademark infringement, "the two fundamental policies of trademark law: to protect the consumer and to safeguard the goodwill of the producer" are upheld.240 Material differences are not limited to physical differences but may include differences in services and guarantees between the authorized and gray market goods, as well as accompanying documents such as instruction manuals.241 The differences also include allegations of interference with quality control procedures.242 Congress carefully considered gray market goods and intended that they fall outside of the statute.243

This distinction makes sense since by definition, similar to overrun goods, the trademark owner has sanctioned the use of the trademark on the gray market goods and has thus concluded that those goods are up to its standards of quality. If the trademark owner believes that the gray market goods are not meeting its quality standard, the trademark owner has civil redress for a number of offenses, such as breach of contract. The criminal law of trademark counterfeiting is intended to protect a reliance on trademarks, not on distribution channels. If a third party chooses to arbitrage the differential rates a manufacturer charges in different markets, the manufacturer either will have to enforce its distribution network more effectively, or equalize its prices. Either way, the concerns of the criminal law, such as defrauding the consumer or misappropriation of intellectual property, are not as clearly present.244

[c] Repackaging Genuine Goods

Title 18, Section 2320(f) of the United States Code provides: "Nothing in this section shall entitle the United States to bring a criminal cause of action under this section for the repackaging of genuine goods or services not intended to deceive or confuse." The legislative history of the STOP Counterfeiting Act explains that

"[b]ecause the bill amends the definition of a counterfeit trademark to include packaging and labeling formats, which can be used lawfully by a variety of business, this language is intended to clarify that repackaging activities such as combining single genuine products into gift sets, separating combination sets of genuine goods into individual items for resale, inserting coupons into original packaging or repackaged items, affixing labels to track or otherwise identify genuine products, [and] removing genuine goods from the original packaging for customized retail displays are not intended to be prosecuted as counterfeiting activities under the amended title."245

Case law in this area is consistent with Section 2320(f). In United States v. Hanafy,246 the defendants were charged with violating Section 2320 for repackaging individual genuine cans of baby formula into trays for resale. The defendants marked the shipping trays with reproductions of the authorized marks and resold the trays. The Fifth Circuit affirmed the district court's holding that such conduct does not violate Section 2320 finding that, although repackaging the goods without the manufacturer's approval or control might violate civil...

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