How to combat counterfeiting

This article first appeared in World Trademark Review issue 67, published by Globe Business Media Group – IP Division.
To view the issue in full, please go to www.WorldTrademarkReview.com

Counterfeiting is one of the biggest threats facing brand owners, threatening profits, corporate reputation and, potentially, customer safety and loyalty. However, creating a resilient anti-counterfeiting strategy can be challenging given the global nature of the crime, as well as local nuances which come into play in different jurisdictions.

With this in mind, World Trademark Review has assembled a panel of industry experts from around the world – Ai-Leen Lim from AWA Asia in China; Dmitry Sando from Gorodissky & Partners in Russia; Harley I Lewin from McCarter & English in the United States; and Nina Moshynska from Gorodissky & Partners in Ukraine – to discuss how brand owners can construct a sophisticated action plan and outline strategies for fighting illicit trade in their jurisdictions.

What are the fundamental building blocks of a successful anti-counterfeiting strategy?

Dmitry Sando (DS): We believe that the fundamental building blocks are as follows. First, register and maintain the relevant IP rights and ensure that these are entered in the customs register. Reliable tools for tracking fakes and online infringements are also important, as is a trusted local counsel who can engage in a flexible IP enforcement strategy with respect to particular infringements. It is worth cultivating close ties with enforcement agencies so as to ensure that you are alerted promptly of any potential infringements and also to have a better understanding of their approach. Active PR campaigns for your registered IP rights, as well as local enforcement actions, can also be helpful. If you are awarded compensation for infringement of your rights, this can go some way to recouping the cost of such activities.

Nina Moshynska (NM): To me, the fundamental building blocks of a successful anti-counterfeiting strategy are as follows. First, create and develop an IP portfolio; then inform the enforcement authorities of whom they should contact should they become aware of any IP-based infringements and crimes. You also need to inform the public about the poor quality of counterfeit goods, how to distinguish them from original goods and any successful cases. It is then important to monitor the market regularly for possible infringements and to engage in pre-trial measures (ie, send warning letters, negotiate with infringers and obtain written obligations from infringers). It is also vital to protect your rights at the customs border and to initiate administrative or criminal prosecution against infringers. Consider actions based on unfair competition laws and via court proceedings.

Are there particular counterfeiting challenges which are unique to your jurisdiction or trends that brand owners need to be aware of?

NM: In Ukraine, foreign economic trade has increased and the market for imported goods – especially those bearing famous brands – has expanded in recent years. However, brand owners do not always play their part in monitoring the market, checking the goods which carry their brands and taking enforcement measures against infringers. Fortunately, the Ukrainian legal and enforcement system provides a wide variety of measures which can be used to enforce trademark rights. Brand owners should ensure that their brands enjoy legal protection in Ukraine as registered trademarks, company names or well-known trademarks. Further, they should regularly monitor and enforce their trademark rights in case unauthorised products appear on the market.

DS: Parallel imports are prohibited in Russia, so there is every opportunity to combat them. While the Federal Anti-monopoly Service (FAS Russia) is being lobbied to legalise parallel imports – particularly with regard to automotive parts, medicines and perfumery and cosmetics – Russia is a member of the Eurasian Economic Union (EAEU) and this issue must therefore be decided within the framework of the whole union. While the relevant commission has convened several times, no decision has yet been issued.

In June 2016 it was made obligatory to send a cease and desist letter to an infringer before filing a civil lawsuit. When planning an enforcement strategy, rights holders should first ensure that the asserted trademark is being properly used before taking any action against an infringer. They should thus be prepared to collect and submit evidence of use in Russian commerce (eg, advertising materials, agreements and invoices), especially in the event of a potential non-use cancellation action, which may be instituted by an infringer as a counteraction.

What are the key enforcement agencies that mark owners can work with in your jurisdiction and how should these efforts be focused?

DS: An anti-counterfeiting strategy should certainly be built in close cooperation with law enforcement agencies. In Russia, for example, the main bodies responsible for anti-counterfeiting are the police, Customs, FAS Russia and the courts. The cooperation of rights holders is crucial in this regard – a large number of infringers go unpunished because rights holders do not initiate cases due to the small number of infringing items. Customs has a limited time (10 days for intellectual property entered in the customs register and seven days for ex officio actions) to decide whether to initiate an administrative case. In both cases the term of suspension may be extended by another 10 days, allowing the rights holder an additional opportunity to act. However, there have been cases in which the rights holder did not answer at all or answered only after several reminders. Depending on the nature of the infringement, it can be helpful to deal with one particular body or to deal with several at the same time.

NM: In Ukraine, the key enforcement agencies include the police, Customs, the Fiscal Service, the anti-monopoly authorities and the consumer protection authorities. Cooperation with the police and Customs is essential for any brand owner. The customs register allows counterfeits to be tracked at the border and the following legal action to be taken before illegal goods enter the market:

• destruction of counterfeits;
• removal of unlawfully applied marks from goods or packaging;
• commencement of administrative proceedings and confiscation of counterfeits; and
• initiation of civil action against the owner of the counterfeits.

Meanwhile, the police force is the key agency for combating counterfeits in the market, conducting investigations to discover illegal goods and taking legal action against infringers. Close cooperation between rights holders and the police is thus essential. It is the rights holder which confirms the counterfeit origin of the goods and whether its IP rights have been infringed. The police can then initiate administrative or criminal proceedings to confiscate and destroy the counterfeits and impose penalties on infringers.

How do brand owners go about registering intellectual property with Customs in your jurisdiction?

NM: Ukrainian law provides for the possibility of filing an application with Customs to add a trademark to the register. A trademark can be entered in the register for six months or one year (with the possibility of further renewal). No fees or guarantee payments are required. Once a trademark has been entered in the register, its owner can control imports and exports of related goods bearing the mark and take legal action against the import or export of counterfeits. Customs registration has thus become an effective and widely applied enforcement measure.

DS: There are certain regulations under which brand owners can register their rights with Customs in Russia. The main requirement is to have a registered trademark and file an application with Customs, accompanied by a description of the distinctive features of both genuine and fake goods. Customs can enter a trademark in the register only where the applicant submits evidence of previous or existing infringements (evidence from other jurisdictions is also accepted), along with an insurance contract or bank guarantee, in order to protect importers from the unjustified seizure of their goods. Once these conditions are fulfilled, the trademark will be registered for a one-year term, which can be extended indefinitely. The rights holder can also pursue infringers by filing a petition to initiate administrative, criminal or civil action against imports of counterfeits or filing a civil claim against parallel importations. As mentioned earlier, Russia is a member of the EAEU. There are no customs borders within this, which means that goods entering any member state may be freely transported to any other member state. Thus, it is recommended that trademarks be registered in all member states; otherwise, an infringing product may freely enter a country where the relevant trademark is not registered and then be moved to a country where the trademark at issue is registered.

Beyond the registration of rights, how else can brand owners best develop an effective relationship with Customs?

DS: In Russia, registration with Customs is a powerful tool to prevent infringement. When counterfeit goods are identified, the whole consignment is stopped and prevented from entering the Russian market. Customs can also contact an authorised local representative of the rights holder and notify it about the shipment. Even where the rights in question are not entered in the register, Customs can still stop suspicious goods ex officio. Cooperation on the part of the rights holder is crucial when dealing with Russian Customs, which is very active when it comes to seizing counterfeit goods – our firm receives between 30 and 40 inquiries from Customs every week. However, if the consignment is small, the rights holder does not always initiate an administrative action and the goods are released. If this happens repeatedly, Customs may exclude the trademark from the register. The recommendation here is that rights holders be more active.

NM: Ukrainian customs legislation empowers officials to take legal action against counterfeits even if the related trademark has not been entered in the customs register. Where officials discover a shipment that is suspected of containing counterfeit goods, they may suspend this at the border and inform the brand owner, which can then examine the suspended shipment and take legal action if its trademark rights have been infringed. Thus, close communication between rights holders and customs officials is essential. Rights holders are advised to provide Customs with any available information on suspicious shipments or persons suspected of importing or exporting counterfeits. The register remains a key instrument for enforcing trademark rights with help from Customs.

What are the ‘must-have’ clauses to be included in manufacturing, distribution and other supply chain contracts to prevent counterfeiting and grey goods issues?

DS: While no clause can safeguard against counterfeiting, when concluding a contract rights holders should investigate potential partners and conclude contracts with reliable ones only. There are cases where partners in trade sell counterfeit goods alongside originals. Occasional checks can rectify such situations if the partner does not stick to its goodwill obligations. While initiating civil cases on parallel imports would help to solve this problem, unfortunately, brand owners seldom take such action. At the same time, a typical clause should include at least a recognition of the IP rights by the counterparty with respect to the owner, an obligation to combat infringement where an exclusive licence is granted, provisions on keeping the IP object valid in the territory and limits on both sales with respect to a particular territory and further sub-licensing.

Other important aspects include restrictions with respect to e-commerce, periodic checks with respect to the quality of the goods and relevant penalties for breach of these provisions.

NM: I would recommend that certain clauses be included in manufacturing, distribution and other supply chain contracts to prevent counterfeiting and grey goods issues. The first is liability for the sale of goods of improper quality and for the manufacture of more goods than are prescribed by the contract. The second is a prohibition on the use of the producer’s protected goods without the rights holder’s authorisation. There should also be a choice of applicable law and arbitration clause. The contract should further include reporting requirements, limitations regarding the territory of sale of the goods and specification of product lines covered by the contract. Consider also including non-compete obligations within the term of validity of the contract or thereafter, as well as post-termination obligations. While the Protection of Economic Competition Law prescribes that control of distributor activities may be regarded as anti-competitive and lead to liability, it does permit certain limitations in contracts, such as the term and territory of use of the IP object, the type of permitted activities and minimum production volumes – unless these limits fall outside the rights holder’s legal rights.

What is the current position in your jurisdiction with regard to online infringement and the availability of counterfeits (including on social media)?

NM: Protection against infringement of IP rights, including online, is covered by Ukrainian law and applied in practice according to established case law. Key measures to combat the sale of counterfeit goods online include monitoring infringements and sending cease and desist letters (it is not uncommon for this to be sufficient to stop a violation), initiating administrative or criminal prosecution before the police (the strongest restraint measure) and applying to the anti-monopoly authorities to initiate unfair competition proceedings. The inclusion of IP rights in the customs register is an important tool, and rights holders can file actions in courts or address the administrators of social media platforms to report abuse. There are difficulties enforcing IP rights online where the infringing domain registrar or website hosting provider is located outside of Ukraine (in such cases, attorneys in the respective countries may be involved), or where the identity or location of the infringer cannot be established based on the available details (in which case additional investigation or involvement by the enforcement agencies may be required).

DS: Online trade is difficult to deal with because of its trans-border character. However, Russian lawyers are often successful in prosecuting infringers on the Internet – particularly when these are located in Russia. The first step is to have the relevant site notarised and to establish contact with the person or company trading in the counterfeit goods. After that, a test purchase can be made. If the purchase is made on a cash-on-delivery basis, the courier can be followed back to his or her office, after which a raid can be conducted with the assistance of the police. Ultimately, online infringement remains difficult to deal with and there is no single blueprint for tackling every situation. In each case, an individual approach should be considered. Under recent amendments to Russian law, an information intermediary is liable for breaching IP rights in the information-telecommunication network on general grounds if it is informed of an infringement by the rights holder, but fails to act. In this regard, Russian domain name registrars and administrators of social networks are quite cooperative in combating online infringement promptly without the need for further enforcement. Popular e-commerce platforms are also quite open to helping brand owners to take prompt action against infringements.

Do you foresee new challenges arising from particular new technologies (eg, three-dimensional printing) and how should counsel prepare for these?

NM: We are concerned about the application of Ukrainian law to IP creation, exploitation and protection, when new technologies are involved. Several issues remain unresolved by the law in its current state, including authorship of works created using new technologies. Ukrainian courts often provide interpretations of active legislation, which can then be applied to atypical cases. In addition, they tend to implement EU legislation and practice, as well as that of other countries. Counsel are advised to monitor the relevant legal interpretations, amendments and case law of the European Union and other developed countries, such as the United States and the United Kingdom. Being aware of the approaches applied by the legislatures and courts of other countries will help you to develop an enforcement strategy for clients and protect their interests.

DS: For our part, we do not see any significant new challenge arising from 3D printing, since 3D printed copies which infringe IP rights can be combated effectively by a standard IP enforcement toolkit, including copyright and trademark infringement actions, as well as raid actions conducted by the police.

What arguments can in-house counsel make to secure additional budget or to demonstrate the need for additional resources to fight anti-counterfeiting?

DS: One argument is that the sale of counterfeit products ruins the market for original traders. Aside from satisfying demand for the goods from alternative and unreliable sources, counterfeit goods are of inferior quality, which can be damaging to the brand owner. Ultimately, the image of a trademark suffers most because of the poor quality of the counterfeit goods. Having an additional budget to address counterfeiting is thus crucial because IP enforcement needs to be carried out properly (but not excessively). The main argument in this case might be that where IP rights are enforced poorly, there is a risk of losing or damaging the brand identity, consumers and profits.

NM: Counsel should bear in mind the following key arguments when communicating with brand owners. First, the sooner they take measures against counterfeits, the more effective such measures will be. For example, taking complex measures against a wholesale importer or manufacturer of counterfeits prevents further illicit goods from entering the market. Thus, investing resources at an earlier enforcement stage is more time and cost effective than tracing the counterfeits later on and acting once the infringements have multiplied in the market. Second, point to the harmful consequences of counterfeits proliferating in the market, which can be harmful to consumers due to the bad quality and unknown origin of the materials used to make them. Finally, the poor quality of counterfeits sold on the market may affect the brand’s reputation, since the consumers will associate the brand with the inferior goods which they purchase. Thus, a generous budget for fighting counterfeits can be seen as saving a brand’s reputation.

Where no extra budget is available, what are the most effective ways of controlling costs to free up existing budget?

DS: Perhaps unexpectedly, our recommendation would be to pursue all infringers, because they are highly attuned to a brand owner’s approach to protecting its rights. Where an infringer sees that a brand owner is taking a zero-tolerance approach to counterfeiting, it will switch its attention to another brand which is not quite so zealous. So in the long run, paying attention to each instance of infringement can save you money. Administrative proceedings (eg, enforcement actions with Customs and police) are quite cost effective. In particular, stopping fakes and parallel imports at the border is much less expensive than trying to take them off the market – although it is not possible to recover costs in such proceedings. However, recovering litigation costs from the losing party is an option in trademark infringement (civil) cases. The applicant (plaintiff) must prove the fact that fees were incurred and the amount of these. The respondent may dispute both and demonstrate that the fees are excessive. A court usually tends to reduce the amount of fees claimed if it considers the amount to be unreasonable.

NM: For me, among the most effective ways to free up existing budget are the following. First, cooperate closely with the state enforcement authorities (ie, the police and Customs). Administrative and criminal actions initiated by the state enforcement authorities are not only effective, but also budget friendly. The related proceedings require minimum participation from the rights holder, while the greater part of the investigation – evidence gathering and participation in the court proceedings – is carried out by the state authorities. Additionally, requesting monetary damages from the infringer at various stages of the enforcement (this may include monetary settlement at pre-trial stage, mutual settlement during the court proceedings and claiming damages as a result of the court proceedings) is an important strategy. Finally, a smart choice of the partner agencies involved in enforcement actions (eg, translation agencies, forensic examination institutions and marketing research agencies) can help to keep the costs reasonable and free up the existing budget for applying additional enforcement measures.

Are there any other issues you would like to raise?

NM: We would like to emphasise the role of preventive measures in preventing sales of counterfeits. Notification of law enforcement agencies about the client’s intellectual property and regular communication help to expose and halt infringements on the market. Additionally, it is important to raise awareness among consumers of the low quality and potential danger of counterfeit goods and communicate well with managers of large shopping malls and online trading platforms. Additionally, applying technical tools (eg, holograms, smart cards, biometric markers and inks) may be useful in protecting and authenticating genuine products. Ultimately, preventative measures are helpful in reducing quantities of counterfeit goods on the market and save time and costs related to further legal actions.

DS: A final observation is that it is a great advantage when rights holders can demonstrate that the marks being used in the IP enforcement strategy are well known among Russian consumers. Thus, we recommend securing well-known status for trademarks where possible, via a special procedure at the Russian Patent and Trademark Office, for the purposes of proving infringement and the bad-faith intention of infringers (including domain name administrators). Well-known status provides extended legal protection to the trademark with respect to dissimilar goods and services if its use by another party will be associated by consumers with the rights holder and may damage its lawful interests.