The Gray Blog

U.S. Customs and Border Protection (”CBP”) has released its mid year intellectual property (”IP”) seizure statistics for 2008.  Patterns that are evident from these numbers are a significant increase in value of goods seized per shipment and the continued growth of China as a source of IP violations.

The domestic value of goods seized for IP violations at the mid-year point of Fiscal Year (FY) 2008 increased by 2.7% to $113.2 million (M) from $110.1M at the mid-year point of FY 2007.  The total number of IP seizures decreased by 1%, from 7,245 to 7,166.   This suggests a higher value per seizure.  It is important to remember that at least some portion of these seizures are genuine parallel market goods which CBP detains under dubious claims that they may be counterfeit.  CBP demands a letter of authorization from the brand owner which is invariably denied and leads to seizure of the merchandise.

China was the source of the largest number of CBP IP seizures at mid-year FY 2008 with a domestic value of $96.7M, accounting for 85% of the total value seized.  In FY 07, China accounted for 80% of seizure value.  Of even greater concern is the fact that China is the source of 90% of “safety & security” IP seizures.  Safety & Securty seizures generally involve pharmaceuticals and other items viewed as dangerous to the health and safety.

As if the China numbers were not already significant, Hong Kong is treated as a separate entity by CBP for statistical purposes.  That said, Hong Kong qualified as the second largest source of IP related seizures.  Total seizures amounted to more than $5.5 million.  No other country amounted to more than $2 million in seized goods or more than 1% of total seizures.

Clearly the problem with counterfeits originating from China seems to be worsening.  This is not surprising considering the soft glove approach towards China’s IP enforcement policies.
Footwear was the top commodity seized at mid-year FY 2008 with a domestic value of $40.3M, which accounted for 36% of the entire value of infringing goods.

The categories of Handbags/Wallets/Backpacks, Cigarettes, and Sunglasses had significant increases in domestic value at mid-year FY2008 over mid-year FY 2007 values.   Overall the number of footwear seizures has declined by 48% indicating a large increase in the value of the shipments seized.

Finding good books on the parallel market is not an easy task. Despite its long and prominent history in US and European legal practice, the parallel market is usually relegated by most writers to a chapter regarding diversion of goods. It is therefore a treat to find an entire treatise devoted to the parallel market. The fact that it is both readable and intelligent is a plus.

Parallel Trade In Europe, by Christopher Stothers, published by Hart Publishing is just such a treat. As revealed by its title, it explores the history and development of the parallel market trade in Europe. Mr. Stothers, a solicitor working for Milbank, Tweed, Hadley & McCloy LLP, in London, clearly has developed a broad and rich understanding of the topic.

The experience with the parallel market in Europe is very different from that in the US. The difference in how parallel market rights apply “inside the community” versus “outside the community” has no familiar parallel in US practice. Similarly re-packaging restrictions follow unique restrictions. As a result, the book provides European practitioners with a great refresher and non-European practitioners with a very readable introduction.
Sample chapter headings include:

2.I.B. Industrial and Commercial Property
2.IV.A. General Rights to Prevent Repackaging.
2.VI. Rights which are not Subject to Exhaustion
3.I. Art. 81. Anti-compettitive Agreements
5.I.B. International Exhaustion under Community Legislation
5.I.E. Internal Enforcement.

Overall, Parallel Trade in Europe will provide the casual reader with a great overview of the fascinating history and status of parallel market law in Europe and will provide the professional practitioner with an invaluable reference resource. I enjoyed the book and highly recommend it.

Apple, Inc., manufacturer of the well known line of computers and software, filed suit on July 3 in the federal district court for the northern district of California against Florida company Psystar, Inc.   The suit alleges counts for violation of its shrink wrap license, trademark and copyright infringement.  Psystar has been manufacturing and selling a line of computers which sell pre-installed with Apple’s OSX operating system.  Apple’s shrink wrap license which comes with OSX specifically requires that the software be installed only on Apple branded computers.  Psystar has previously expressed defiance at claims that it might be violating Apple’s rights.  Statements that Apple’s license might violate US monopoly law have been attributed to Psystar employees.  We will monitor.

After a devastating ruling from a French Court, reported previously in the Gray Blog, and a user revolt over terms of payment, E-Bay has finally received some good news.  In a sixty page decision District Court Judge Richard J. Sullivan of the  U.S. District Court for the Southern District of New York has ruled against Tiffany on all counts.  The Court vindicated anti-counterfeiting procedures presently employed by eBay and other online auction services and confirmed that the burden of policing online sellers rests squarely on the shoulders of the trademark owner.  The decision in this case is in stark contrast with recent decisions by French courts which seek to obligate the on-line services to serve as gatekeepers, content monitors and policemen for their users.

The lawsuit filed by famous jeweler, Tiffany Inc., sought damages against online auction house dBay for the sale of counterfeit silver jewelry items sold in the service from 2003 to 2006.  The suit alleged counts for direct and contributory trademark infringement, false advertising, unfair competition, and direct and contributory trademark dilution.

Tiffany acknowledged that the users of the eBay service rather than eBay listed and sold the counterfeit articles.  Tiffany argued, however, that eBay was on notice that the problem existed and that this created an obligation to investigate and control the problem.  Tiffany effectively wanted eBay to refuse to post any listing with five or more Tiffany items and to suspend any seller whom Tiffany suspected to be involved in infringing activity.  eBay defended that it was Tiffany’s burden to monitor the site and to bring violations to its attention.

The Court rejected Tiffany’s position on various grounds.  The Court concluded that the generalized allegations of trademark infringement made by Tiffany were insufficient to impute knowledge or a reason to know of trademark infringement to eBay.  Although eBay had a generalized knowledge of counterfeiting activities on its site, “it took reasonable steps to address the wrongdoing through general anti-fraud measures.”

In conclusion the Court stated that while it is not unsympathetic to Tiffany’s plight “the law is clear: it is the trademark owner’s burden to police its mark and companies like eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their websites.”

Ben Jones of TorrentFreak reports that Swedish prosecutor’s office has refused to investigate allegations of wrongdoing by a Swedish police allegedly on the payroll of a content provider during the course of the criminal investigation.

Pirate Bay is a leading internet file sharing site based in Sweden which is often accused of facilitating the piracy of movies and audio files.  Many content providers such as film studio Warner Bros have sought to use the Swedish legal system to shut down Pirate Bay.  Recently during a criminal investigation Jim Keyzer, the lead investigator revealed that he was working for Warner Bros on a social networking site.

Warner Bros initially denied that the officer was on their payroll during the investigation.  The Pirate Bay filed a criminal complaint for bribery against the officer.   After the complaint was filed Warner Bros admitted that the officer was working for them.  Nonetheless the Swedish prosecutor’s office has refused to investigate and has stated that “[there is] no reason to believe that a crime has been committed by anyone employed by the police.”

The commercial court in Paris has awarded luxury bag maker LVMH Moet Hennessy Louis Vuitton (”LVMH”) and fashion house Christian Dior Couture (”Dior”) 38.6 million euro ($61 million) as damages against eBay for the sale of counterfeit and parallel market goods on its online auction site.  Amongst the court’s findings were statements that eBay was guilty of gross misconduct by failing to put into place appropriate measures to prevent the sale of counterfeit goods. This precedent setting decision obligates online auction services to prevent illegal activity.  Moreover, eBay is exposed to continuing penalties is accused products are not removed from the site.

This decision comes hot on the heels of a recent decision by another French court awarding Hermes International 20,000 euro, or $31,600, for failing to adequately supervise sales of allegedly counterfeit products.  By French standards the amount of the judgment in the LVMH decision is substantial.  Most commentators have suggested that it will embolden a rash of similar suits by other luxury brand owners.

eBay has responded to the decision by announcing it intent to appeal and by releasing public statements labeling the decision a major strike against the consumer and on-line resellers.  eBay insists that it take reasonable precautions against the sale of counterfeit goods.  However, eBay has previously taken the position that since it never takes physical possession of the goods traded on its site, it is unable to guarantee that counterfeit goods will be caught in every instance.  As recently as late 2006, eBay launched its latest anti-counterfeiting initiative .  This initiative included restrictions on the listing of brand name items and on cross border trade.

One troublesome aspect of the decision is the chilling effect that it is likely to have on the on-line resale of genuine branded goods.  The heightened risk of decisions such as this one, if not reversed, will make it difficult of on-line resellers to allow the sale of any branded products.  As a result, brand owners will effectively be able to extend their control over products beyond the first sale effectively making themselves gatekeepers for litigation shy online auction houses.

The decision by the commercial court of Paris could bode badly for eBay on this side of the pond where it faces a similar lawsuit filed by Tiffany and Co. in the United States.    The Tiffany case likewise accuses eBay of facilitating the sale of counterfeit goods and serving as an instrumentality of illegal activity.   A decision in the Tiffany case is expected soon.

In an important opinion regarding the first sale doctrine, judge James S. Otero of the United States District Court for the Central District of California has ruled in UMG Recordings v. Augusto, No. CV 07-03106 (C.D.Cal.June 28, 2008), that the first sale doctrine protects the sale of promotional music CDs originally distributed with alleged restrictive licenses.

UMG Recordings, Inc. (“UMG”) owns the copyright to numerous songs and produces CDs containing those songs. As a pre-release promotional item, UMG often creates and distributes by unsolicited mail promotional CDs which may contain different art work or songs. These promotional CDs are labeled with the following language:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.

Augusto purchased a large collection of promotional CDs. He then sold them on the online auction site eBay as rare collectibles not available in stores. UMG sent Augusto a cease and desist letter accusing Augusto of copyright infringement. When Augusto continued to sell the CD’s UMG filed suit for copyright infringement. Augusto brought a counterclaim against UMG for violation of section 512(f) of the Digital Millenium Copyright Act (“DMCA”) alleging that UMG knowingly misrepresented to eBay that Augusto’s auctions infringed UMG’s copyrights in order to induce eBay to stop Augusto’s auctions. The parties filed cross-motions for summary judgment in the lawsuit.

The Court rejected the existence of a license and held that the sales were protected by the first sale doctrine on two independent grounds. First the Court analyzed the nature of the alleged license. One hallmark of a license is the owner’s intent to regain possession. In this case UMG did not intend to regain possession of the promotional disks. Another Hallmark of a license is a recurring benefit to UMG from the CDs. The absence of a recurring benefit suggested a gift rather than a license. Finally, the only apparent benefit to UMG from the alleged license is to restrain trade, a purpose contrary to law and public policy. Although the promotional CDs were distributed for free, the Court noted that the first sale doctrine applies after the “first authorized disposition by which title passes.” 2 Nimmer § 8.12[B][1][a]. Based on these grounds, the language on the CDs did not constitute a restrictive license and its conveyance to the initial recipient exhausted UMG’s rights to the CDs.

As a second ground for finding that the first sale rule applied, the Court also ruled that the promotional CDs constituted a gift under federal postal law since they were distributed by mail. The Postal Reorganization Act prohibits “the mailing of unordered merchandise” without “the prior expressed request or consent of the recipient.” 39 U.S.C. § 3009(a), (c).5 This merchandise “may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender.” 39 U.S.C. § 3009(b).

Notwithstanding its finding that the promotional CDs were gifts and that their sale was protected by the first sale rule, the Court rejected Augusto’s counterclaim. The Court stated that 9 under § 512(f) of the DMCA, a copyright owner may be held liable for damages caused by an erroneous invocation of the notice and takedown provision only if the owner did not possess a subjective good faith belief that its copyright was being infringed. The Court found that UMG had a subjective good faith belief that Augusto was infringing its copyrights. This belief was buttressed by consent judgment which Augusto had signed in a prior case accepting that selling promotional CDs constituted copyright infringement.

In non-gray market news, the Court of Appeal for the Tenth Circuit has held that a computer wireframe model that is unadorned and lacks any creative context, one that merely reproduces the image of a car without shading lighting or surrounding objects, does not constitute copyrightable content. In Meshwerks, Inc. v. Toyotta Motor Sales U.S.A., Inc. No. 06-4222 (10th Cir. June 17, 2008) the Court affirmed a ruling from the lower court denying copyright protection to such works. The Court nonetheless denied a motion claiming that the suit had been frivolous and seeking attorneys fees and stated that “[f]ar from being frivolous, this suit presents a novel and consequential question focused on the copyrightability of images in a relatively new technological medium.”

As part of its 2003 advertising campaign, Toyota decided to use digital models of some of its vehicles on its website and on various other media. Through its advertising agency Toyota hired Meshwerks, a Utah corporation to do the digital modeling. “Digitizing involves collecting physical data points from the object to be portrayed. In the case of Toyota’s vehicles, Meshwerks took copious measurements of Toyota’s vehicles by covering each car, truck, and van with a grid of tape and running an articulated arm tethered to a computer over the vehicle to measure all points of intersection in the grid. Based on these measurements, modeling software then generated a digital image resembling a wire-frame model. In other words, the vehicles’ data points (measurements) were mapped onto a computerized grid and the modeling software connected the dots to create a “wire frame” of each vehicle.” At this point further manual shaping had to be done to accurately map every element and shape of the vehicle.

Meshwerks completed the project and delivered the work to Toyota for use in its advertising campaign. The dispute arose when Toyota and its advertising company tried to use the digital models for new advertisements. Meshwerks claimed that they had only authorized a single use of the works. Furthermore, Meshwerks sought and obtained copyright registration for the models. Presumably a work made for hire agreement was not executed as part of the engagement.

Much of the decision was devoted to a comparison with photography related copyright cases. In that respect the Court stated that “the photographer is entitled to copyright solely based on lighting, angle, perspective, and the other ingredients that traditionally apply to that art-form.” quoting Nimmer on Copyright § 3.03[C][3]. By contrast “Meshwerks had nothing to do with designing the appearance of Toyota’s vehicles, distinguishing them from any other cars, trucks, or vans in the world. That expressive creation took place before Meshwerks happened along, and was the result of work done by Toyota and its designers; indeed, at least six of the eight vehicles at issue are still covered by design patents belonging to Toyota and protecting the appearances of the objects for which they are issued.” To the extent that the wiremesh models were later placed in ads which showed lighting, angles, colors and other creative context, those were creative additions which would follow but where not inherent in the original wireframe models. Those were creative additions by those “who came after Meshwerks left the scene.”

The Court concluded that merely copying a copyrighted work without adornment does not create a new copyrighted work. To the extent that the copy is adorned, the only that which is added is apt to be protected. “[A] putative creator who merely shifts the medium in which another’s creation is expressed has not necessarily added anything beyond the expression contained in the original.”

The House of Representatives has passed the Prioritizing Resources and Organization for Intellectual Property (PRO IP) Act (H.R. 4279) a bill which creates a new position of “copyright enforcement czar” in the executive branch called, the Intellectual Property Enforcement Representative. The position is established in the White House to represent and advise the president on IP issues. The bill was introduced by House Judiciary Committee chairman John Conyers Jr. last December and passed the house with a strong vote.

Amongst the other features of the bill, it creates a special IP police with the right to seize property from alleged copyright infringers. The bill would also amend other laws as follows: (1) provide a safe harbor keeping minor errors in a copyright registration from preventing judgment for infringement; (2) allowing criminal prosecution of non-registered copyrights; (3) require courts to basically issue gag orders preventing disclosure of evidence in copyright infringement cases; (4) revise guidelines for civil damages in copyright infringement and counterfeiting cases; (5) enhanced civil and criminal provisions (including restitution) and (6) prohibit importing and exporting of infringing copies of copyrighted works.

While this law is heralded as providing additinal protection to copyright owners, it seems to ignore the experience of the accused in similar areas of law. In the drug area, for example, the accused are often deprived of their property through seizure for months or years while litigating cases which may, if the accused has the funds to support the litigation, be ultimately overturned without any remediation to the wrongly accused. Provisions in the law extending criminal protection to unregistered works and the mandated judicial gag order create potential dark holes of into which the inocent might wander.

The law provides no requirement that the consumer be provided with adequate notice of copyright or with publicly discernible methods for identifying infringing works. No companion bill has been introduced in the Senate.

Sorry for the long hiatus but the it has been quite a year. I hope to make time to keep the blog updated again with the new developments in the Parallel Market.
On the personal front I am pleased to announce that I have formed my own firm Espinosa | Trueba PL. With my partner William Trueba, a registered patent attorney and our staff of professionals and of-counsel we hope to provide the highest quality domestic and international intellectual property services.
You can reach us at our temporary offices:
Espinosa | Trueba PL
3001 SW 3rd Ave.
Miami, Fl. 33129
Tel. 305-854-0900
Fax 305-285-5555
jespinosa@etlaw.com
Our temporary web page is located at www.etlaw.com.
I remain enormously grateful to my previous firm Kluger Peretz Kaplan and Berlin PL and its excellent attorneys and hope to work with them in the future. We also owe a debt of gratitude to our friends at De la O, Marko, Magolnick & Leyton for providing us with a temporary home.
To my friends at INTA whom I missed seeing this year, all the best and I hope to see you next year.

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