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Week Ending February 17, 2006
HR 32 to provide criminal penalties for trafficking in counterfeit marks.
BRIEF
Congress finds that trafficking in counterfeit goods (for the purpose of this act, goods labeled or packaged to indicate that they are made or distributed by a particular business when in fact they are not) is resulting in a loss of tax revenue and job loss to the tune of $200 billion yearly.
Few items with a proven successful market are not counterfeited but the predominant industries impacted by the crime include auto parts, electrical appliances, medicines, tools, toys, office equipment and clothing. Not only is there a loss of profit for the copyright or trademark holder but the prospect of unsafe items is also a threat. The bill goes further to make it illegal to traffic in the counterfeit packaging that includes patches, stickers, wrappers, badges, emblems medallions, charms, boxes, other containers that are counterfeit.
Fines under current law are range from $2 million to $5 million and from ten years imprisonment to 20 years.
Although countries are often identified as breaking the law it is individuals in those countries who actually commit the crime. According to the Dept. of Homeland Security the top five offending countries from which offenders operate are People's Republic of China, Hong Kong, Mexico, South Korea, and Malaysia.
The Senate agreed to the bill with an amendment that primarily expanded the list of goods and services protected und the act to include: intentional trafficking or intent to traffic "in labels, patches, stickers, wrappers, badges, emblems, medallions, charms, boxes, containers, cans, cases, hangtags, documentation, or packaging of any type or nature, knowing that a counterfeit mark has been applied thereto, the use of which is likely to cause confusion, to cause mistake, or to deceive,''
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Sponsor: Representative Joe Knollenberg (R-MI-9th)
Vote: Passed House by voice vote (May 23, 2005) Passed Senate amended by Unanimous Consent Feb. 15, 2005. The House agreed to the Senate amendment by voice vote March 7, 2006
Cost to the taxpayers: CBO concludes no additional cost to the taxpayers. The bill would allow the government to prosecute cases it normally would not have been authorized to pursue.
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MORE INFORMATION
PURPOSE, BACKGROUND AND NEED FOR THE BILL
H.R. 32, the `Stop Counterfeiting in Manufactured Goods Act' would enhance criminal penalties for those who traffic in counterfeit products. Under this legislation, 18 U.S.C. Sec. 2320 would be expanded to include penalties for those who traffic in counterfeit labels, symbols, or packaging of any type with knowledge that a counterfeit mark has been utilized. Additionally, this legislation would require the forfeiture of any property derived, directly or indirectly, from the proceeds of the violation as well as any property used, or intended to be used in relation to the offense. This legislation also requires that restitution be paid to the owner of the mark that was counterfeited.
An amendment in the nature of a substitute to H.R. 32 was adopted by the full Committee to include specific language clarifying that repackaging activities conducted without intent to deceive or confuse are not subject to the criminal prosecution established under this legislation.
The proliferation of counterfeit products in recent years creates not only a threat to legitimate businesses, but also to consumers. Many of the products that are falsely labeled are labeled with brand names or trademarks that consumers know and trust. The mislabeling of genuine products creates a false sense of security for consumers. Additionally, some of the counterfeited products, such as prescription or over-the-counter medications, could have serious health consequences if they are used by an unsuspecting consumer.
Federal Bureau of Investigation (`FBI'), Customs, and Immigration Customs Enforcement Agents (`ICE') estimate that sales of counterfeit goods are enriching criminal organizations by up to $500 billion in sales per year. By midyear for fiscal 2003, the Department of Homeland Security (`DHS') had reported 3,117 seizures of counterfeit branded goods including cigarettes, books, apparel, handbags, toys and electronic games with an estimated street value of about $38 million--up 42 percent from 2002.
The fiscal 2003 midyear report the top five offending countries of origin are the People's Republic of China ($26.7 million), Hong Kong ($1.9 million), Mexico ($1.6 million), South Korea, ($1.4 million) and Malaysia ($1 million). The International AntiCounterfeiting Coalition, (`IACC') estimates that counterfeiting results in more than $200 billion a year in lost jobs, taxes and sales. Fortune 500 companies spend an average of between $2 million and $4 million a year each to fight counterfeiters.
In addition to counterfeiting general retail products, many counterfeiters are engaged in the sales of products which may present substantial threats to the health and safety of consumers. The Food and Drug Administration (`FDA') estimates that although the prevalence of counterfeit pharmaceuticals is hard to determine, estimates suggest that upwards of 10 percent of drugs worldwide are counterfeit, and in some countries more than 50 percent of the drug supply is made up of counterfeit drugs. Counterfeit drugs may include products without the active ingredient, with an insufficient quantity of the active ingredient, with the wrong active ingredient, or with fake packaging. The FDA website indicates that counterfeit drugs can have serious consequences for consumers. According to the FDA, patients who receive counterfeit medications may experience unexpected side effects, allergic reactions, or a worsening of their medical condition. Additionally, the FDA has found that a number of counterfeits do not contain any active ingredients, and instead contain inert substances, which do not provide the patient any treatment benefit.
The Automobile Manufacturers Association indicates that counterfeit auto parts comprise a $12 billion global problem--$3 billion in the U.S. alone. In terms of lost jobs, the Department of Commerce estimates that the U.S. auto industry could hire over 200,000 more workers if the counterfeit auto parts trade disappeared. In addition to the economic losses and loss of jobs for American workers, consumer safety is also at risk by counterfeit automobile parts. The U.S. automobile industry has reported a number of instances of brake failure caused by brake pads manufactured from wood chips.
According to the FBI's Financial Institution Fraud Unit, counterfeit products cheat the U.S. of tax revenues, add to the national trade deficit, subject consumers to health and safety risks, and leave consumers without any legal recourse when they are financially or physically injured by counterfeit products. The FBI has identified counterfeit products not only in pharmaceuticals and automobile parts, but also in such products as airplane parts, baby formulas and children's toys. In addition to misrepresenting products and services, counterfeiters have also misrepresented product testing and certification organizations.
At the Subcommittee on Crime, Terrorism, and Homeland Security hearing on combating trafficking in counterfeit products, the Subcommittee received testimony indicating that commerce in counterfeit labels, tags, containers, and documentation bearing the registered trademarks of manufacturers of genuine goods often occurs separately from illegal commerce in countrfeit goods themselves. As a result, packaging, labels, or tags bearing the registered mark are often matched with the goods downstream and applied to products or services that are not manufactured by the owner of the mark.
The products and services to which these counterfeit labels, tags, documents, containers, and packaging are applied often do not meet the product qualities or the safety or performance requirements of the manufacturer of the genuine product or the product testing and certification organization. As a result, these products can be unsafe to users and consumers who are deceived.
SECTION BY SECTION ANALYSIS
The following discussion describes the bill as reported by the Committee.
This section makes findings with regard to the prevalence of counterfeit products in the United States and the threat to public safety.
Under this section, section 2320 of title 18 would be expanded to include penalties for those who traffic in counterfeit labels, symbols, or packaging of any type knowing a counterfeit mark has been applied.
18 U.S.C. Sec. 2320(a) would be modified, under this section, to allow a criminal cause of action for intentionally trafficking or attempting to traffic in labels, patches, stickers, wrappers, badges, emblems, medallions, charms, boxes, containers, cans, cases, hangtags, documentation, or packaging of any type or nature knowing that a counterfeit mark has been applied thereto, the use of which is likely to cause confusion, to cause mistake, or to deceive.
This modification is intended to overrule the holding in the case United States v. Giles, 213 F.3d 1247 (10th Cir. 2000), where the court of appeals overturned a conviction under 18 U.S.C. Sec. 2320, holding that, based on the current language of the statute, no criminal liability could attach to trafficking in labels, patches, medallions, boxes, containers, cases, documentation, packaging and the like bearing registered marks, where the item bearing the registered marks were not attached to the goods.
This section would amend current law to require the forfeiture of any property derived, directly or indirectly, from the proceeds of the violation as well as any property used, or intended to be used in relation to the offense. This is intended to provide forfeiture and destruction provisions similar to those already enjoyed by copyright and trade secret holders. The current trademark counterfeiting law only provides for the discretionary destruction of the counterfeit goods themselves. This section will change current law to require both the destruction of the counterfeit goods and the forfeiture of any assets traceable to illegal counterfeiting activities.
This section will also permit the forfeiture and destruction of any property/equipment used to aid in the commission of the violation. The current language is simply inadequate for domestic enforcement purposes and, more importantly, prevents U.S. free trade negotiators from seeking stronger anti-counterfeiting enforcement provisions in bilateral or multilateral agreements with U.S. trading partners. Because the majority of counterfeit goods are produced overseas, it is imperative that other countries provide for forfeiture and destruction remedies similar to those called for in domestic law. Under this section, a victim of the offense is entitled to recover restitution from the defendant.
The definition contained in 18 U.S.C. Sec. 2320(e) are amended by this section to reflect the criminal cause of action that was created in 2320(a). Accordingly, the definition of a counterfeit mark now also includes marks applied to labels, patches, stickers, wrappers, badges, emblems, medallions, boxes, containers, hangtags, documentation, or packaging of any kind or nature.
The final subsection of this legislation includes language to ensure that a criminal cause of action will not be brought against an individual or business that repackages genuine goods or services without deception. The language of this section was modified by an amendment in the nature of the substitute to further clarify that this section was not intended to allow criminal actions against persons who repackage genuine goods or services with no intent to deceive or cause confusion as to the authenticity of the products therein. 1
[Footnote]
[Footnote 1: This savings clause is consistent with the court of appeals decision in United States v. Hanafy, 302 F.3d 485 (5th Cir. 2002)(unadulterated and unexpired genuine baby formula, repackaged with manufacturer's trademark in trays in manner so that purchaser could see expiration dates does not give rise to criminal liability under 18 U.S.C. Sec. 2320).]
The phrase `the use of which is likely to cause confusion, to cause mistake, or to deceive' is not intended to create a new element for this cause of action, but it reiterates what is already reflected in the definition of `counterfeit mark' in Section 2320(e)(1), that the application of the counterfeit mark to a label, patch, tag, container, document, packaging and the like must have the effect of being likely to cause confusion, mistake or deception. See United States v. Hon, 904, F.2d 803, 806 (2nd Cir. 1990). 2
[Footnote]
[Footnote 2: See United States v. Hon, 904, F.2d 803, 806 (2nd Cir. 1990)(rejecting narrow construction of confusion requirement stating `Congress was concerned not only that `trademark counterfeiting . . . defrauds purchasers, who pay for brand-name quality and take home only a fake,' but also that `counterfeiters [can earn] enormous profits . . . by capitalizing on the reputations, development costs, and advertising efforts of honest manufacturers at little expense to themselves.' S.Rep. No. 98-526, supra, at 4-5, reprinted in 1984 U.S. Code Cong. & Admin. News at 3630-31.)]
Because the bill amends the definition of a counterfeit trademark to include packaging and labeling formats, which can be used lawfully by a variety of businesses, 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, removing genuine goods from original packaging for customized retail displays are not intended to be prosecuted as counterfeiting activities under the amended title 18 U.S.C. Sec. 2320.
In making a determination as to whether to bring a cause of action under the new section 2320 in cases involving the repackaging of genuine goods, it is expected that the Government will consider evidence tending to show an intent to deceive or confuse such as altering, concealing or obliterating expiration dates, or information important to the consumer use of the product such as safety and health information about the quality, performance, or use of the product or service; statements or other markings that a used, discarded, or refurbished product is new; or statements or other markings that the product meets testing and certification requirements. Also relevant to a decision to bring a criminal action under this section would be a meaningful variance from product testing and certification requirements, placing seals on product containers that have been opened and the original manufacturer's seal has been broken, or altering or otherwise adulterating the genuine product.
In compliance with clause 3(e) of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman):
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