Criminal enforcement of counterfeiting in post-sale contexts

Author: Jesus Ivan Mora Gonzalez (Post-Doctoral Researcher, Max Planck Institute for Innovation and Competition)

United States v Foote, 413 F 3d 1240 (10 Cir, 2005) 6 July 2015

Journal of Intellectual Property Law & Practice (2015) doi: 10.1093/jiplp/jpv145, first published online: September 2, 2015

The Court of Appeals for the Tenth Circuit, in United States v Foote, holds that the statutory elements, ‘likely to cause confusion’ ‘to cause mistake’ or ‘to deceive’ (s 2320, Title 18 of the United States Code), are not restricted to instances in which direct consumers are misled by the counterfeit goods, but extends to post-sale contexts where the general public could be confused about their commercial origin.

Legal context and facts

In 2002, Mr Jerome Foote was convicted in the District Court of Kansas of trafficking in counterfeit goods based on the selling of one single counterfeit Mont Blanc in violation of the s 2320, Title 18 of the United States Code. The court sentenced Mr Foote to thirty-seven months' imprisonment, three years of supervised reliance and a fine of US$104.000. Mr Foote appealed to the Court of Appeals for the Fourth Circuit claiming that he had openly advertised that he sold counterfeit merchandise, which he called ‘replicas’, and that he had informed each customer that his merchandise was fake. Because his customers were never misled into thinking that they were purchasing authentic merchandise, the s 2320 should not be applicable to his conduct.

The Court of Appeals rejected Mr Foote's claim and confirmed the conviction and sentence based on the following arguments:
Section 2320, Title 18, of the United States Code defines a counterfeit mark as a spurious mark that is likely to cause confusion, mistake or deceive, which includes post-sale confusion, that is, the proof of likelihood of consumer confusion is not restricted to the point of sale where direct purchasers are confused or deceived by the counterfeit goods.

The trade mark holder's ability to use its mark to symbolize its reputation is harmed when potential customers see counterfeit goods and identify these goods with the trade mark holder in post-sale contexts.

The correct test to be applied in the commercialization of counterfeit goods is whether the defendant's use of the mark was likely to cause confusion, mistake or deception in the general public.

The decision of the Court of Appeals highlights the normative controversy over trafficking genuine fake goods and the best normative strategy to forbid its commercialization. For those who sell ‘replicas’ to consumers, the legal justification of this conduct could be explained as follows. A system of exclusive entitlements for distinctive signs implies a restriction in free competition that cannot be legitimized by itself since that would mean putting ‘the cart before the horse’, ie, trade mark exclusive rights must identify the public interest that justifies any restriction in free competition. If a trade mark is defined as a distinctive sign that communicates the real origin of goods to consumers, the reliability of this information has the ability to justify trade mark exclusive rights by means of protecting the consumer interest in not being misled about the real source of the goods. Consequently, if consumers know that they are buying counterfeit goods and wish to acquire them as reasonable substitutes at a lower price, the trade mark reputation of the original source would not be damaged and the commercialization of ‘replicas’ should be regarded as fair competition.

Trade mark holders obviously reject this normative approach, claiming that counterfeiting is always unfair competition and the place where goods are sold should not be taken into account as the paradigm to delegitimize the criminal law enforcement of trade mark exclusive rights. According to the post-sale confusion test, the statutory element ‘likely to cause confusion’ should not be examined from the perspective of the average consumer who buys reasonable substitutes at the point of sale, but from the general perspective (real and potential purchasers) in post-sale contexts where the proof of consumer confusion at the point of sale is irrelevant since the defendant's use of the mark could lead individuals, other than the real purchasers, to mistakenly believe that a product was manufactured by the trade mark holder.

In most federal cases where post-sale confusion has been proved, the trade mark holder's loss is justified through the potential damage to trade mark reputation, that is, when manufacturers of counterfeit goods offer these goods to consumers, those manufactures allow consumers to acquire the prestige of owning what appears to be the more expensive product. A loss in the trade mark reputation, therefore, could occur when a sophisticated buyer purchases a knockoff or ‘replica’ and passes it off to the public as the genuine article, thereby confusing the viewing public and achieving the status of the genuine article at a knockoff price.

The aim of the post-sale confusion test, therefore, seems very clear. If the point of sale is the main obstacle to forbidding the selling of counterfeit goods, the point of sale must be removed and replaced by a post-sale context that enables trade mark holders to prove the existence of the risk of consumer confusion. This approach, however, faces serious difficulties when mens rea is a key element to justify a prison sentence:
The scope of trade mark exclusive rights is extended to futuristic consumer behaviour where those who have bought counterfeit goods could interact with other individuals that could be potential purchasers of genuine goods. Any evidence of ‘likely to cause confusion’, therefore, is examined in a context where the point of sale has no legal value, but this context is simply hypothetical. At the point of sale, consumers are not only misled about the real origin of the goods, they also wish to acquire them in order to get reasonable substitutes at a lower price. Would it be reasonable to extend the evidence of mens rea to hypothetical contexts where the statutory element ‘likely to cause confusion’ is easier to prove?
The proof of ‘likely to cause confusion’ is transformed dramatically. The traditional relationship between consumer and trade mark holder is replaced by a peer-to-peer consumer inter-relationship regarding the ability to buy social distinctiveness, that is, the proof of ‘likely to cause confusion’ should be based on who is really able to consume original goods. Is it reasonable to justify a prison sentence based on the evidence of mens rea in those situations where some consumers could ‘cheat’ other consumers about their ability to buy social distinctiveness?

The person who commercializes ‘replicas’ knows simply the circumstances of the point of sale as the meaningful context for those consumers who are willing to acquire those products. Would it be reasonable to extend the proof of mens rea beyond the real context where the ‘replicas’ are sold?

The counterfeit goods' capability to be viewed and examined by the general public becomes a discriminatory approach to marginalize all those cases where consumers decide to not display those goods. How could mens rea be proved when consumers decide not to show off the ‘replica’ in front of other potential consumers?

Practical significance

The post-sale confusion test highlights that any normative reasoning based on the evidence of likelihood of consumer confusion gives unsatisfactory solutions when mens rea must be proved in order to justify a prison sentence against those who commercialize genuine fake goods. If the target of selling ‘replicas’ is not to mislead consumers about the real origin of goods, but to be a parasite on trade mark reputation by offering substitute goods at a lower price, the proof of ‘likely to cause confusion’ is not an efficient strategy, unless it is accepted as distortion in the source theory.

The key thing to be discussed is not the point of sale and what kind of argumentative strategy based on the proof of likelihood of consumer confusion is more efficient to solve that problem, but the incorrect use of this paradigm for situations that demand an alternative approach to protect the trade mark holder's interests. This is especially relevant when trade mark holders have to face the trafficking of genuine fake goods with the ability to challenge the traditional justification of trade mark exclusive rights based on the indication of origin. The post-sale confusion test appears as an easy way to prove the ‘likely to cause confusion’ when there is not consumer confusion at the point of sale; however, that easy way brings serious difficulties justifying a prison sentence.

An alternative approach could be the removal of ‘likely to cause confusion’, ‘to cause mistake’ or ‘to deceive’ as a necessary statutory element, but this removal would raise another important question: What is the legal justification of trade mark exclusive rights? This raises two additional key questions. Who is responsible in the event that a product injures consumers? Would trade mark holders be responsible in the event that counterfeit goods injured consumers? The concept of implicit representation of product safety in the marketplace protected by trade mark holders could be a new path for the criminal enforcement of trade mark exclusive rights when the aim is not to mislead consumers but to take unfair advantage of the reputation of famous marks.

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