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 and what will they do if they do find you?

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) and (2) there’s no predictability to your business because your success is tied to not being discovered by the trademark owner, and (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 order to prevent others from doing the same. In otherwords, it’s a little like cheating on your taxes. You may get away with it for a while but when you are discovered, very bad things are likely to happen.

Are all knockoffs counterfeits?

The term “knockoff” is often used as a substitute for counterfeit. That’s not exactly true. Some knockoffs may imitate an established product but may not infringe. That could be the case because the underlying work --  a dress, for example, -- cannot be protected under the law, so a knockoff doesn’t violate any legal rules.

How bad is the counterfeiting problem?

The marketplace is littered with millions of counterfeits whether it’s Gucci, Louis Vuitton, or Dolce & Gabbana.  The Zippo lighter has been the target of massive counterfeiting – depending where you in the world, the percentage of fake Zippos can be between 5% and 50%. The ripoffs eventually cut into sales causing revenues to drop by 25% and forcing the company to lay off 15% of its employees.

What is counterfeting

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.

The standard of trademark infringement -- likelihood that consumers will be confused -- is self-evident in counterfeiting, because the counterfeiter’s primary purpose is to confuse or dupe consumers.

It’s still counterfeiting even when the people buying and selling the merchandise are aware that it is not from the real source – that is, everybody knows it’s not 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. By the way, counterfeiting is not limited to consumer products such as watches and handbags. 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 U.S. Dist. LEXIS 6124 (E.D. Pa. 1999).)

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. In one case involving two merchandising companies, a federal district court ruled that by their very nature, counterfeit goods cause confusion. (Bravado International Group Merchandising Services v. Ninna, Inc., U.S. Dist. LEXIS 78040 (E.D. NY October 6, 2008)).

Punishment

The remedies for trademark counterfeiting under the Lanham Act are much harsher than for traditional trademark infringement and unless a court finds some mitigating circumstances, triple damages or profits and a reasonable attorney fee award will be awarded if the counterfeiter knew that the goods were counterfeit and intended to offer them for sale. In addition, the counterfeiter must have duplicated the trademark on the goods or services for which the trademark was federally registered. For example, it is not counterfeiting to put the Gucci mark on automobile seat covers, as these are not goods for which Gucci has a registered trademark.

An offer to sell counterfeit products can also trigger liability as a counterfeiter. 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 was not 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 ISPs in this case to the 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

The following scenarios are possible after receiving a cease and desist letter:

• 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 and files a lawsuit and gets a default judgment. 
• you blow off the letter, keep selling the knockoffs, and 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 approach -- isn't very probable at all. If you continue to sell without either fighting the letter or otherwise responding, the lawyers will most likely pursue you because, as the young people say, that's how they roll.

Does forming an LCC or corporation shield you from these lawsuits? Converting your business to an LLC or corporation can establish limited liability and will shield you from personal liability in some instances -- 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're a sole proprietor when you got the letter, then you're probably going to be treated that way (personally liable) in court, as well, even if you later convert to an LLC or corporation. In addition, keep in mind that the LLC/corporate shield also won't protect you from the following:

• You personally guarantee a loan or lease.
• You owe federal or state taxes. 
• You act negligently (people are injured by your handbags).
• You fail to abide by corporate rules. 

That Said Dept. That said, perhaps you should reconsider your business model (as well as your business entity). First, you need to determine whether the lawyers are right -- that is, are your bags infringing? 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 (we'll talk about them more this week) 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.