The US already applies domestically the Digital Millennium Copyright Act (“DMCA”) which sets severe penalties on reverse engineering, cracking and unauthorized distribution of copyrighted works.  The US sought to build into ACTA a super DMCA which would require enforcement even beyond that authorized by the DMCA and the rulings of various US courts.

Key elements which have been dropped from the draft include mandatory liability for internet service providers (the companies that give you access to the internet) for materials transmitted on their networks and a “three strikes you’re out” rule which would effectively ban a person from the Internet after three file sharing violations.

In addition to these key Internet terms several issues remain in dispute and may not survive to the final draft:

• The US wants to limit the treaty to trademarks and copyrights while the European Union wants the treaty to apply to all intellectual property.
• The US wants to prohibit all circumvention technology, subject to exceptions which do not undermine the technology.  This system is no unlike the current DMCA method of granting limited exceptions such as for personal phone unlocking.
• The US wants courts to have discretion and not be required to assess legal costs against infringer.
• The US wants criminal penalties for unauthorized copying of films shown in a public forum.
• The US wants to prohibit digital rights management circumvention technology even when its use does not constitute copyright infringement (a position rejected by US courts).  This would effectively create a new right of non-circumvention delinked from any traditional intellectual property concept.  In this respect the US seems to be seeking a way of overturning US legal precedent by enactment of the treaty thereby avoiding internal debate on the implications of the change.

The case under review arose from a suit by the Omega, SA, manufacturer of the well known watch by that name, against Costco Wholesale Corp. to block sales of genuine Omega watches manufactured in Switzerland, sold abroad and then shipped in the gray market to resellers in the US who sold them to Costco.  The Omega watches bear a copyrighted globe design on the underside of the watch.

Omega alleged violations of its distribution rights under 17 U.S.C. 106(3) and unauthorized importation of a copyrighted work(the globe design) in violation of 17 U.S.C. §602(a).   The district court granted summary judgment to Costco based on its defense under the first sale doctrine.

The Ninth Circuit reversed, holding that pursuant to L’Anza the first sale doctrine set forth in Section 109(a) does not apply to foreign-made copies of a U.S. copyrighted work, unless those same copies have already been sold in the United States with the copyright owner’s consent.

The case under review therefore raises a slightly different factual situation from L’Anza.  Unlike in  L’Anza which involved US made goods exported and then re-imported in the gray market, the decision under review involves foreign manufactured and sold goods which are were imported into the US for resale.  The fact that the goods are even more clearly not subject to protection under the L’Anza definition suggests that the Court may be ready to reconsider its earlier decision.

One interesting theory argued in the original case was the question of whether the manufacturer of a primarily non-copyrightable commercial product can imbue it with all of the elements of copyright protection by merely adding a design to the exterior.  Particularly where the consumer cannot be said to be purchasing the product because of the copyrighted work.  It was argued in the briefs that a compulsory royalty free  license may be created under such circumstances.  Stevens seem to mention this theory favorably in the decision.

We will be watching the case closely.

At trial, Office Depot obtained a judgment and assigned it to DS Holdings in 2000.  DS went after 190 domain names that were registered in Zuccarini’s name. DS sought to have a receiver appointed over the domain names. The district court granted DS’s request to have the receiver appointed, and Zuccarini appealed. Zuccarini’s appeal focused on whether it was proper to appoint the receiver in the Northern District of California, since the domain names were not necessarily “located” there.

The court of appeals applied California law to the question of whether domains constituted property.  The Court ruled that domains were intangible property subject to seizure.  Then, taking guidance from elements of the Anti-Cybersquating Consumer Protection Act (ACPA), although ACPA was not implicated in the case, the Court found in rem jurisdiction where the “registrar, registry, or other domain name authority” is located.

For a more thorough review of the decision see Eric Goldman’s Blog.

To prevent Beltronics from discovering that Midwest’s inventory had been supplied by the two distributors, the distributors either replaced each radar detector’s original
serial number label with a phony label or removed the original label altogether
before shipping equipment to Midwest.  On rare occasions, when the distributors
supplied Midwest with a radar detector bearing an original serial number label,
Midwest removed the label prior to resale.

In September 2007, Beltronics filed suit against Midwest alleging (1) counterfeiting and federal trademark infringement under 15 U.S.C. § 1114; (2) false designation or origin under 15 U.S.C. § 1125; and (3) trademark infringement, unfair competition, and passing off in violation of state law.  Beltronics also sought a preliminary injunction.  The preliminary injunction was granted and Midwest appealed.

On appeal the 10th Circuit rejected the argument that “material” differences should be limited to physical differences.    The absence of manufacturer warranty service was material difference enough.   While affirming that adequate disclosure could insulate the sale, the 10th Circuit affirmed the lower court’s rulling that the disclosure placed on the product listing by Midwest was insufficient.  Midwest’s disclosure stated:

WARRANTY – WE PROVIDE A 1 YEAR DEFECTIVE
REPLACEMENT WARRANTY.  THE MFG WILL NOT HONOR
THE WARRANTY IF PURCHASED OFF EBAY.  SINCE WE
HONOR THE WARRANTY, THE SERIAL NUMBER HAS BEEN
REMOVED AND RETAINED BY US.

The district court rejected this disclosure as insufficient because no notice was provided on the products themselves and the disclosure failed to address software updates and other support elements.  Evidence of actual confusion by consumers contacting Beltronics for warranty service further sealed the decision.

But first the caveat.   In approaching this book the reader is warned to be aware of a potential blind spot for the practitioner.   The author, while clearly accomplished and well informed in the area of law, falls prey to the persuasiveness of his own arguments and ignores potentially persuasive rebuttals.   His position is one that sees no good in the parallel market.  A practitioner’s reliance in such arguments without an adequate appreciation of the counter-arguments can undermine the attorney’s credibility with the Court.  Reading the book one often feels that he or she is reading a brief without reading the response.

The author’s clear bias against the parallel market is nowhere more clear than where he lectures manufacturers who knowingly exploit the parallel market as a vehicle for developing brand identity or for selling off excess goods.   Since the manufacturer has a right to control the manner of distribution of his or her brand, it is certainly the height of hubris to preach to them when they themselves exploit the parallel market for their own purposes.  One is left feeling that in the author’s opinion the parallel market is not gray but black.

So after this introduction you might expect a negative review of GRAY MARKETS.  On the contrary, I think that for the attorney or businessman seeking to obtain a good general understanding of strategies and tactics that can be used to discourage and combat parallel market sales, Mr. Suden’s book provides a well informed survey of legal and market strategies.  The book is broad in its coverage if somewhat US centric.  It does not cover all strategies, particularly market techniques that have been employed in Europe to identify regional parallel market sales.   That said, what it does cover is far more comprehensive and well informed than anything that I have previously seen.

I therefore recommend this book to anyone seeking to structure a comprehensive anti-parallel market strategy for his or her company or clients with the caveat that it be read with a clear vision of its obvious bias and with great caution in its mingling of counterfeiting with legitimate parallel market trade.  Likewise, for the parallel market reseller, this book provides a great preview of likely court arguments and legal strategies that need to be anticipated in this challenging trade.

To buy a copy of the book please click the following link: Gray Markets: Prevention, Detection and Litigation

A remaining provision which has drawn fire is the creation of an IP “czar” within the White House. The Bush administration has objected to this as an usurpation of executive authority. Nevertheless this latter provision remains in the act and raises the questions of whether the White House will exercise its veto.

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.

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.”