Are you considering starting a business that involves selling unauthorized merchandise such as fake Gucci handbags? The sale of counterfeit goods (as described below) is illegal, as you’re probably aware. But what does that mean for you? Will the trademark owner be able to find you? What will that owner do upon finding you?
What Is Counterfeiting?
Counterfeiting is a form of trademark infringement. It’s the act of making or selling lookalike goods or services bearing fake trademarks. For example, a business deliberately duplicating the Adidas trademark on shoes is guilty of counterfeiting.
The standard of trademark infringement–likelihood that consumers will be confused–is self-evident in counterfeiting: The counterfeiter’s primary purpose is to confuse or dupe consumers.
Counterfeiting isn’t limited to consumer products like watches and handbags. For example, a website that copied the Playboy Bunny logo for adult sex subscription services was assessed $10,000 for trademark counterfeiting. (Playboy Enterprises Inc. v. Universal Tel-A-Talk Inc., 1999 WL 285883 (E.D. Pa. 1999).)
It’s still counterfeiting even when the people buying and selling the merchandise are aware that it isn’t from the real source–for instance, that the clothing isn’t made by Calvin Klein. That’s because even when a buyer knows that the product is a fake, the product can still be used to deceive others.
Are all knockoffs counterfeits?
The term “knockoff” is often used as a substitute for “counterfeit.” But the terms aren’t exactly synonymous. Some knockoffs might imitate an established product without infringing. That could be the case because the underlying work—a dress, for example—cannot be protected under the law, meaning that a knockoff doesn’t violate any legal rules.
How bad is the counterfeiting problem?
The marketplace is littered with millions of counterfeits relating to brands like Gucci, Louis Vuitton, and Dolce & Gabbana. The Zippo lighter has been the target of massive counterfeiting—depending on where you are in the world, the percentage of fake Zippos can be between 5% and 50%. The ripoffs eventually cut into sales, generally causing revenues to drop by 25% and forcing the company to lay off 15% of its employees.
Let’s go back to our opening questions. The short answer is that selling counterfeit goods is a bad idea for a business. There are three big problems:
(1) If the trademark owner chases you, you can quickly lose all of your business investments and assets (all your fake Gucci bags) and much more (you may be pursued for your personal property and home).
(2) There’s no predictability to your business because your success is tied to not being discovered by the trademark owner.
(3) You’ll need an illegal connection to obtain or import these products.
How will you get caught?
Most illegal distributors are caught as a result of online sales (for example, eBay has powerful anti-counterfeiting rules and will banish violators), or because someone (sometimes a disgruntled customer or competitor) reports them. Trademark owners will pursue you, and if they find you, they will seek to make an example of you. In other words, it’s a little like cheating on your taxes. You might get away with it for a while, but when you’re discovered, very bad things are likely to happen.
Proving the case
Proving trademark infringement is easier when dealing with counterfeits because there is usually no need to conduct a factor-by-factor analysis of likelihood of confusion. Courts have said that, by their very nature, counterfeit goods cause confusion. (Gucci Am., Inc. v. Duty Free Apparel, Ltd., 286 F. Supp. 2d 284 (S.D.N.Y. 2003).)
The remedies for trademark counterfeiting under the Lanham Act are much harsher than for traditional trademark infringement. Unless a court finds some mitigating circumstances, intentionally using a counterfeit mark (and related behavior) may lead to an award of three times the profits or damages (whichever is greater), plus reasonable attorney’s fees. (The counterfeiter must have duplicated the trademark on the kind of goods or services for which the trademark was federally registered. That means that, for example, it’s not counterfeiting to put the Gucci mark on automobile seat covers, as these are not goods for which Gucci has a registered trademark.)
A mere offer to sell counterfeit products can also trigger counterfeiting liability. For example, an individual offered to sell counterfeit jeans and provided a sample to an undercover police officer. Proof of actual production or sale of the jeans wasn’t necessary to prove counterfeiting.
Similarly, an Internet Service Provider (ISP) that hosted several websites selling fake Louis Vuitton merchandise could be liable for contributory infringement. The district court likened the ISP in this case to a proprietor of the flea market found liable for contributory infringement. (Louis Vuitton Malletier v. Akanoc Solutions, 591 F.Supp.2d 1098 (N.D. Cal. 2008)).
If You Get a Cease-and-Desist Letter
If you get a cease-and-desist letter, the following scenarios are possible:
- You keep selling the knockoffs; the lawyer files a lawsuit, gets a default judgment, and enforces it against you personally (assuming you're not an LLC or incorporated) or against your business.
- You stop selling the knockoffs; the lawyer drops the whole thing.
- You stop selling; the lawyer sends a second letter, gets no response, files a lawsuit, and gets a default judgment.
- You blow off the letter and keep selling the knockoffs. The lawyer is impressed with your moxie and decides to hire you as an investigator of trademark counterfeiting. You do really well in that position, give up your handbag business, and eventually write a book about the knockoff industry.
Actually, the last choice–the Catch Me If You Can scenario—isn't very likely at all. If you continue to sell without either fighting the letter or otherwise responding, the lawyer will most likely pursue you.
Does Forming an LCC or Corporation Shield You From Counterfeiting Lawsuits?
Converting your business to an LLC or corporation can establish limited liability and will shield you from personal liability in some instances, meaning that the lawyers can only go after your business assets. But your liability is likely to be tied to your status at the time of the infringement. So, if you were a sole proprietor when you got a cease-and-desist letter, then you're probably going to be treated that way (personally liable) in court, even if you later convert to an LLC or a corporation. In addition, keep in mind that the LLC/corporate “shield” also won't protect you if you:
- personally guarantee a loan or lease
- owe federal or state taxes
- act negligently (people are injured by your handbags), or
- fail to abide by corporate rules.
If you get a cease-and-desist letter, you need to determine whether the lawyers are right—that is, whether whatever you sell infringes. If yes, you should abandon the infringing items. If you're not infringing, you should consider whether you want to fight or move on. If you fight, you may be able to have some luck fighting takedown notices, but keep in mind that if you're dragged into court, you'll be hit hard in your bankroll and the only guaranteed winners will be the lawyers.