1 Combating Counterfeit Goods in the United States Robert A. Lipstein Crowell & Moring, LLP February 18, 2004 Copyright 2004 Crowell & Moring LLP

2 The Infringing “ZBOX” Macrofirm’s new DVD electronic game console –Unique “Z” signature on the top and front panel of the console –Macrofirm has US and EU trademark registrations to the word “ZBOX”, and to the “Z” design –Macrofirm has registered copyrights in certain embedded coding in the controller that acts as an electronic “handshake” to establish the authenticity of DVD games inserted into the controller Macrofirm has a tough OEM manufacturing contract with China Electronics Manufacturing, Ltd.,(CEM) to produce the ZBOX for Macrofirm’s global distribution Asian Imports has begun to export ZBOX consoles to the US and the EU. –The consoles are, in appearance and operation, identical to the genuine consoles. –Macrofirm has confirmed that the consoles are not produced within the scope of the OEM Agreement. CEM most likely is producing the counterfeit ZBOX consoles on the midnight- 6 am shift, using casings and components produced by unauthorized parts manufacturers in China. Macrofirm has determined that the “electronic handshake” technology is used in the infringing ZBOXes. Macrofirm has confirmed that there are “thousands” of consoles in two warehouses in New York, awaiting delivery to metropolitan New York electronics retailers who have significant e-commerce activities. Macrofirm has similarly confirmed that “thousands” more of the consoles are in a warehouse in Belgium, awaiting delivery to electronics retailers in key EU cities, who likewise have significant e- commerce activities.

3 Domestic - Lanham Act Federal Registrants –Offer for sale, distribution or sale of counterfeit good is a violation of §32(1)(a). Court may require seizure of the goods - §34(d)(1) Attorneys’fees available Treble damages or profits (whichever is greater) is required absent extraordinary circumstances - §35(b) Statutory damages are available as an alternative - §35(c) Destruction of Articles available Non-Registrants –Section 43(a) as a “false designation of origin” Court may not require seizure Actual profits and damages only - §35(a) Attorneys’ fees available Destruction of articles

4 Imports – Lanham Act Section 42 –Extends scope of the Lanham Act to importation of counterfeit goods. –Includes both registered and non-registered marks –Foreign entities from countries with similar laws can sue w/o ownership of U.S. Reg. or U.S. operations. Provides same avenues for relief as domestic action.

5 Imports - Tariff Act of 1930/Trademark Counterfeiting Act of 1984 Tariff Act of 1930 (19 USC §1526): –Any merchandise of foreign manufacture bearing a counterfeit mark … imported into the United States in violation of the provisions of section 1124 of Title 15, shall be seized and, in the absence of the written consent of the trademark owner, forfeited for violations of the customs laws. Trademark Counterfeiting Act of 1984 (18 USC §2320): –Criminal Amends the 1930 Act to declare trafficking in imported counterfeit goods or services a federal crime. Excludes actions where maker of goods was authorized at time of production –Civil Added changes to the Lanham Act to include allow judicial seizure orders and treble damages Excludes actions where maker of goods was authorized at time of production

6 Imports - Anti-Counterfeiting Protection Act of 1996 Criminal: –Made trafficking in counterfeit goods subject to RICO –Defined “Contraband” to include counterfeit goods –Extended definition of “counterfeit label” to include labels on computer programs Civil: –Permitted seizures of goods by Federal officers –Statutory damages as an alternative to actual damages $500-$100,000 per mark per type of good, up to $1million if willful violation Other: –Customs must destroy seized goods, unless TM owner consents to some other disposition, and the goods are not a threat.

7 Imports - ITC Section 337 Action Section 337 of the Tariff Act of 1930: –Infringement of a registered U.S. patent, copyright, trademark, or mask work is an unlawful practice in import trade. –Section 337 also reaches: other unfair methods of competition and unfair acts in the importation and subsequent sale of products in the United States, the threat or effect of which is to destroy or substantially injure a domestic industry, prevent the establishment of such an industry, or restrain or monopolize trade and commerce in the United States. If a violation is found, the ITC can: –Bar importation of the goods (exclusion order) –Require that the party cease and desist from violations –Issue civil penalties of up to $100,000 a day or twice the value of the imported articles for violations of orders

8 Imports - Recordation with Customs Generally –TM owner must have Federal Registration –Will seize goods with marks that “copy or simulate” (similar to likelihood of confusion) Unless counterfeit, owner of goods can take back goods or delete mark in question (and re-try later) However, if counterfeit, triggers counterfeit provisions of the Lanham Act –Largely ineffective, as only about 5% of goods are inspected TM owner can provide Customs with information regarding ports of entry, etc. –Customs & Border Protection seized $94 million in FY 2003.

9 Lanham Act v. Section 337 Lanham Act Pros –Domestic or Imported Counterfeits –Seizure available –Actual Damages/Atty Fees –Treble/Statutory/Damages –Destruction of Goods –Injunctive Relief –Can sue w/o registration –Foreign entities from countries with similar laws can sue Cons –Jurisdiction/Venue Issues -- enforcement against foreigners can be problematic –Seizure requires compliance with 34(d)(4)(B) –No seizure w/o reg –No treble damages w/o reg. –No stat. damages w/o reg. Section 337 Pros –Speed –Exclusion during/after proceeding –Cease and desist orders available –Penalties for violations of orders –In rem action avoids jurisdictional problems –Seizure available Cons –Imports Only –Presidential Override (but rare) –Without TM Registration, will have to meet the injury requirement –Domestic Industry Requirement –No damages or attorneys’ fees

10 Stopping the Counterfeit Zbox- Lanham Act Do the available remedies provide relief? –Injunction - YES - Prevent future goods from entering the country –Seizure - YES - stops the goods already in the U.S. from distribution during proceeding. –Damages - YES - but more likely statutory damages due to no evidence of sales/lost profits, and even so, treble damages not likely to be substantial. –Destruction of the Articles - YES - eliminates existing U.S. goods Is Client likely to be successful on the claim(s)? –TRO/PI/SEIZURE – LIKELY – great harm, likelihood of success, public interest served –Party - who do you sue? CEM? AI? U.S. Distributors? Will this stop them? –Jurisdiction – MAYBE – where (port of entry?) –Success on Merits – LIKELY – not genuine goods, use of identical mark –Enforcement - Injunction/Seizure OK; Hard to obtain monetary relief

11 Stopping the Counterfeit Zbox- Section 337 Do the available remedies provide relief? –Exclusion/Cease & Desist - YES - Prevent future goods from entering the country –Seizure - YES - stops the goods already in the U.S. from distribution during proceeding. –Damages - NO - But would they have been recoverable? –Destruction of the Articles - YES - eliminates existing U.S. goods Is Client likely to be successful on the claim(s)? –Exclusion/Cease & Desist/Seizure/Destruction - YES only requires infringement to succeed (could use for gray market, too) –Enforcement - Easier that Lanham Act – CBP stops goods at the border –ITC can assess penalties for non-compliance with order –Presidential Override - UNLIKELY – Not a hot button issue (such as re- importation of drugs)

12 Other Options Breach of contract/Rescission of contract –Is Success on merits likely - YES –Does the available remedy provide relief - NO Does not address goods already in the U.S./coming to the U.S. Goods have been reverse-engineered, so can continue to make and send even after termination of agreement. No monetary recovery likely Foreign Jurisdiction Remedy –China IPR regime must meet WTO/TRIPS obligations –ETS case shows that litigating in Chinese courts can work Finding included seizure, injunction and damages –Could be considered in conjunction with U.S.-based alternatives