"Shelter chic": can the U.S. government make it work?

AuthorMontanaro, Kristina Rae
PositionGovernment donations of seized counterfeit goods to charitable institutions

ABSTRACT

This Note discusses government donations of seized counterfeit goods to charitable institutions and the implications of these practices. The Customs and Border Protection (CBP) contributions to the Red Cross for the Hurricane Katrina relief effort serve as a backdrop for important concepts. In making these contributions, the CBP relied on its emergency authority and a presidential proclamation to avoid basic statutory requirements that it (a) obtain consent from the right holders and (b) de-trademark counterfeit goods prior to donation. While the donations inarguably benefitted countless disaster victims and freed up valuable CBP warehouse space, they may have had a detrimental impact on trademark holders' rights and the U.S. government's image as a forerunner in global IP rights enforcement. Additionally, the CBP's post-Katrina contributions raise concerns as to the legality of such donations under federal and international law. This Note weighs the various interests at stake and ultimately suggests policies for avoiding the unnecessary sacrifice of trademark holders' rights in future government donations.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. The Costs of Counterfeiting i. The Economic Cost ii. The Human Cost B. Legal Authority i. The TRIPS Agreement ii. U.S. Customs Duties iii. Emergency Authority III. LEGAL IMPLICATIONS A. Under TRIPS i. The WTO Panel Report a. Defective Goods b. Harm to Reputation c. Later Sales of Donated Goods d. Release into the Channels of Commerce ii. Application to the CBP's Donations a. Release into the Channels of Commerce b. Disposal Outside the Channels of Commerce B. Under U.S. Law IV. POLICY IMPLICATIONS: SENDING MIXED SIGNALS A. The Message to U.S. Citizens B. The Global Message V. RECOMMENDATIONS VI. CONCLUSION I. INTRODUCTION

The children displaced by Hurricane Katrina may have been the new kids at school that fall, but at least they were dressed to impress. Thanks to the federal government, their back-to-school wardrobes boasted a variety of fashion-forward labels. After surviving a natural disaster that left many homeless and with nothing but the clothes on their backs, displaced Katrina victims in Texas and Mississippi were permitted to choose from several hundreds of thousands of articles of brand-new, knock-off designer clothing donated by the Customs and Border Protection (CBP) division of the Department of Homeland Security. (1)

During the fall of 2005, the CBP joined the list of various charities, businesses, and other organizations that contributed to the Hurricane Katrina relief effort. (2) Customs workers emptied several warehouses full of seized counterfeit goods into CBP tractor-trailers for distribution to displaced victims finding refuge in places like the Houston Astrodome. (3) The donations, which eventually exceeded twenty million dollars in value, (4) included everything from knock-off designer jackets, t-shirts, pants, and hats, to counterfeit bedding, toys, and even dog food. (5)

Criticism of the federal government's delayed response to Katrina was severe.[degrees] But praise for the CBP's donations, by contrast, was emphatic. (7) Finally, it seemed, the government had done something right: useful items, which would have otherwise been destroyed, were put to good use, (8) and customs enjoyed the added benefit of extra warehouse space. (9) Under this pragmatic solution, everyone seemed to win.

Amidst the resounding praise, however, there was a nearly inaudible voice of dissent. The CPB donations may have been a blessing for the victims of Katrina, but they were a nightmare for the owners of the affected trademarks. (10) Most counterfeit goods entering United States' borders go undetected by law enforcement, so these items represented the small percentage of counterfeit goods that did not fly under the radar. (11) Customs authorities impounded these items, yet ultimately they were redistributed to the public by the same hands that seized them. (12)

In its act of charity, the federal government sacrificed the rights of the trademark holders. The CBP made no attempts to first contact the trademark holders to gain consent for the donations. (13) The CBP also made no efforts to remove or obscure the infringing trademarks (i.e., to "de-trademark" the goods) prior to redistribution. (14) Instead, CBP officials imprudently and unilaterally doled out goods that prominently--and erroneously--displayed designer names. (15)

The affected trademark owners were, unsurprisingly, less than enthusiastic about the government's generosity. (16) The CBP's donations raised legitimate business concerns for several prominent brands. After all, these companies certainly did not spend millions of dollars in high-end advertising only to be associated with "shelter chic." (17) Moreover, the trademark owners could exercise no control over the quality and safety of these donated goods that would necessarily be associated with their products. (18) This being said, "[w]ould any prominent brand be churlish enough to tear a faux-designer blanket away from a shivering family?" (19) As Professor Susan Scafidi points out, nobody would want to "run the public relations risk of taking candy from babies--or clothing from Katrina victims." (20) But the interests at stake were not as simple as the wellbeing of displaced U.S. citizens versus the property rights of U.S. corporations.

Even less audible than the voices of the trademark holders were the voices of a separate set of victims halfway around the world, victims whose losses were more tangible than future lost sales or brand image deterioration. These victims are the casualties of the various terrorist groups funded by counterfeit trade, (21) as well as laborers in foreign counterfeit factories, who earn a fraction of minimum wage in conditions tantamount to slave labor. (22) Adamant in its condemnation of these practices, the U.S. government has been at the forefront of international intellectual property (IP) law enforcement. (23) Yet by nevertheless distributing the fruits of foreign oppression to U.S. disaster victims in an effort to "lift the nation's spirit," (24) the government may have undercut its own position on IP enforcement, sending the implicit message that the suffering of U.S. victims is more compelling than the suffering of victims overseas. (25)

The Katrina donations raised a number of concerns, including the legality of the federal government's donations, and more broadly, the state of the government's policy on counterfeit trade. This Note weighs (a) the global interests in ending the harms related to the counterfeit goods industry; (b) the interests of the government in contributing to national emergency relief; and (c) the property interests of the trademark holders involved. Part II discusses the harms associated with counterfeit trade and introduces the relevant legal authority, while Part III analyzes the legal implications of these actions while applying provisions of international and federal law. Part IV addresses the international policy implications raised by the CBP's donations, and lastly Part V evaluates potential options for future CBP donations. Ultimately, this Note argues that the CBP unnecessarily sacrificed the rights of trademark holders and thereby violated provisions of international trade law in making its donations to the Katrina relief effort.

  1. BACKGROUND

    1. The Costs of Counterfeiting

      i. The Economic Cost

      The magnitude of international counterfeit trade should not be underestimated. Counterfeit goods make up an estimated ten percent of all products sold worldwide, (26) and these products are not confined to the fashion industry. (27) In 1985, Business Week referred to counterfeiting as "[p]erhaps the world's fastest-growing and most profitable business." (28) A decade later, Fortune Magazine named it "the crime of the twenty-first century." (29) In the last twenty-six years, counterfeiting has grown from a $5.5 billion-per-year business to a $600 billion-per-year industry. (30) Known as a highly-lucrative business with relatively low risks, it continues to grow exponentially. (31) Its success lies in consumer ignorance; counterfeiting flourishes where other illegal industries fall short because consumers continue to think of it as a "victimless crime." (32)

      To the contrary, we are all victims of counterfeiting. (33) The harm touches everyone affected by the resulting job shortages and the loss of tax revenues that could be used to improve schools, roads, and other community functions. (34) Specifically, counterfeiting has cost an estimated 750,000 Americans their jobs and costs the city of New York alone an estimated $1 billion per year in tax revenues. (35)

      Trademark owners incur substantial costs as a result of counterfeiting. The most obvious of these is a loss of sales revenue from consumers choosing counterfeit goods over their more expensive counterparts. (36) But trademark owners also experience deferred costs, as the free availability of counterfeits results in a loss of consumer goodwill and brand prestige. (37) Traditional trademark theory posits that "[w]hen a firm invests in its reputation by delivering a promised quality, it develops goodwill with its customers. Trademarks allow consumers to identify the products of companies that have satisfied them in the past. Thus, a trademark becomes an asset to the firm, embodying its accumulated goodwill." (38) When a counterfeiter produces products disguised as those of a legitimate brand but cuts corners with the quality of the products, the accumulated goodwill in the legitimate brand decreases. (39)

      In addition, modern marketing has significantly enhanced the value of trademarks. (40) Trademarks traditionally served to identify the sources of products, but today they also "adorn" products. (41) Consumers now see the logo as an essential part of the product itself and perhaps as a new commodity...

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