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.