202003.17

Online counterfeiting and consumer safety: commentary on the March 4, 2020 hearings before the U.S. House of Representatives

On March 4, 2020, several members of the Consumer Protection and Trade subcommittee (energycommere.house.gov/subcommittees) — a branch of the Energy and Trade Commission of the House of Representatives of the United States (energycommerce.house.gov) —, held a hearing devoted to the safety of products made available to the public on online market platforms. The debates were mainly chaired by President Frank Pallone and by Congresswoman Jan Schakowsky. Were auditioned:

  1. Dharmesh Mehta, Vice President of Worldwide Customer Trust and Partner Support Amazon;
  2. Ms. Amber Leavitt, Associate General Counsel and Head of IP, eBay;
  3. Jeff Myers, Senior Director for Intellectual Property, Apple;
  4. Andrew Love, Head of Brand Security / Investigations / Global Enforcement, Specialized Bicycles;
  5. David Friedman, Vice President, Advocacy Consumer Reports; and
  6. Ms. Lori Wallach, Director, Global Trade Watch Public Citizen.

Their hearings and testimonies are available on the website of the Energy and Trade Commission of the House of Representatives (energycommerce.house.gov).

This hearing took place as part of the national week devoted to consumer protection (consumer.ftc.gov). It is also worth recalling that it occurred when the Covid-19 pandemic raised many concerns. As such, some members of the House of Representatives introduced the issue of consumer safety concerning medical equipment which floods the marketplaces with plenty of keywords such as “covid-19” and/or “coronavirus”. Mr. Mheta assured that Amazon was deploying all the efforts necessary to remove the products which guarantee a cure and, more generally, all the bad operators who try to take advantage of the current situation. Zero tolerance applies.

Counterfeiting, an endemic phenomenon

All statistical studies on counterfeiting from official bodies such as the Organization for Economic Cooperation and Development (oecd.org, 2019-03-18), the European Union for Intellectual Property Office (euipo.europa.eu), the European Commission (ec.europa.eu, 2019) or the U.S. Homeland Security (dhs.gov, 2020-01-24), indicate that this phenomenon has constantly been increasing for years. The most recent reports, drawn up by these same institutions, also reveal that all industrial and commercial sectors are now concerned. This is a reality that we witness every day at IP Twins.

During the hearings held on March 4, 2020, in the House of Representatives, the interveners delivered numerous examples of counterfeits dangerous to the health and safety of consumers. Many of these examples can be found in our monthly press review: weapons, drugs (iptwins.com, 2018-12-11, No. 27), refrigerator filters, bicycle helmets (iptwins.com, 2019-06-06, No. 23), bicycles, airbags (e.g. iptwins.com, 2018-08-27, No. 10), toys (D. Friedman, Testimony Before the United States House of Representatives Committee on Energy & Commerce Subcommittee on Consumer Protection and Commerce, March 4, 2020, pp. 4-5 and, eg: iptwins.com, 2018-11-05, No. 7 and 10), batteries and cells (eg: iptwins.com, 2018-10-01, No. 17 ; iptwins.com, 2019-11-12, No. 14 and 32).

Many other examples could have fueled this grim list: medical equipment (e.g. iptwins.com, 2018-12-11, No. 3), food and drink (e.g. iptwins.com, 2018-10-01, No. 3; iptwins.com, 2019-05-19, No. 15), water filters (e.g. iptwins.com, 2019-12-05, No. 28); pesticides (e.g. iptwins.com, 2019-05-19, No. 24), cosmetics (e.g. iptwins.com, 2018-12-11, No. 6), children’s diapers (e.g. iptwins.com, 2019-05-19, No. 11), ink cartridges (e.g. iptwins.com, 2019-05-19, No. 25), cement (e.g. iptwins.com, 2018-10-01, No. 10), tobacco (including electronic cigarettes and the refills: iptwins.com, 2019-05-19, Nos. 30 and 41), which are more dangerous than the authentic ones. In this matter, exhaustiveness is impossible. At the hearings on March 4, 2020, it has been suggested (once again) that counterfeits in the textile, luxury goods, and accessories sectors — often symbolized by handbags —, did not present the same degree of dangerousness. This is not entirely true. It is important to keep in mind that companies in these sectors regularly examine the counterfeits seized, and discover components that are known to be harmful to health: “Even counterfeit leather bags and shoes can pose multiple health risks of consumers” (Cour des comptes, Lutter contre les contrefaçons, Février 2020, pp. 37-38).

Online platforms: preferred channels for the distribution of counterfeits

Each year, the Office of the United States Trade Representative (USTR) lists the most notorious online and physical counterfeit spots outside of the United States (Special 301 Out-of-Cycle Review of Notorious Markets). Each edition is an opportunity to recall the consequences of counterfeiting on safety and health, employment, the economy, and the environment. The USTR collects grievances from owners of intellectual property rights. For the year 2018, the following companies and associations, among others, responded to this call for comments: Chanel (iptwins.com, 2018-11-16), Maus Frères (iptwins.com, 2018-11-15), the American Apparel & Footwear Association (AAFA) (iptwins.com, 2018-10-18), the Union des Fabricants (Unifab) (iptwins.com, 2018-11-22), and the Alliance for Safe Online Pharmacies (ASOP Global) (iptwins.com, 2018-11-20). The reasons adopted against these platforms are the following (alternatively or cumulatively):

  • counterfeit volumes;
  • lack of responsiveness (a period of five days to delete a listing is considered to be far too long);
  • failure to cooperate;
  • excessive requirements for demonstrating the enforceability of intellectual property rights;
  • the too lax conditions of registration as a seller;
  • refusal to provide the information necessary to identify the counterfeiters;
  • the absence of a system for detecting or blocking repeat offenders;
  • the limited means made available to intellectual property rights holders to stop the violation of their rights;
  • the difference in treatment between international companies and SMEs.

The USTR does not include American companies in this disgraceful inventory, the report having a geopolitical aim and function. Be that as it may, holders of intellectual property rights do not hesitate to designate American companies in their complaints. Thus, the platforms Amazon, eBay, iOffer, Facebook, Instagram, Bonanza, Google Shopping, and Wanelo.com have been designated in the 2018 contributions. In addition, some of them (in particular, Amazon and eBay) appeared in the list published by the European Commission (iptwins.com, 2018-12-16).

Political will to fight counterfeiting

Online markets must put consumer safety and responsibility before profit (Jan Schakowsky)

The hearings of March 4, 2020, took place in a context strongly marked by a real political will to fight online counterfeiting.

Following the Memorandum from the U.S. President of April 3, 2019 (iptwins.com, 2019-04-05), the Department of Homeland Security released on January 24, 2020, a series of measures to combat counterfeiting, including online counterfeiting (iptwins.com, 2020-01-29). On January 31, 2020, the President of the United States signed an executive order entitled “Ensuring Safe & Lawful E-Commerce for U.S. Consumers, Businesses, Government Supply Chains, and Intellectual Property Rights” (whitehouse.gov, 2020-01-31), immediately supported by a statement by Ambassador Lighthizer (U.S. trade representative) (ustr.gov, 2020-01-31). On 26 February 2020, Congressman Bob Latta (latta.house.gov) proposed the adoption of a law aimed at countering the effects of the general data protection regulation (eur-lex.europa.eu) on Whois databases. The entry into force of the general data protection regulation or GDPR on May 25, 2018, caused an earthquake by imposing the silence on most of domain name registries (iptwins.com, 2020- 03-18). More recently, on March 2, 2020, Democratic and Republican representatives introduced a bill entitled “Shop Safe Act” aimed at “protecting consumers and businesses from the online sale of counterfeit and dangerous goods” (iptwins.com, 2020-03-03).

Finally, opening the meeting, Congresswoman Schakowsky, who had already tackled the problem of counterfeiting in 2005 (schakowsky.house.gov), stated that section 47 U.S. Code § 230 of the Communications Decency Act (law.cornell.edu), which has been the subject of debate for several years, “is in need badly of reforms“. Logically, she categorically objects to this law being incorporated into international trade negotiations. In doing so, Congresswoman Schakowsky follows in the footsteps of President Pallone and Mr. Walden. In a letter of August 6, 2019, the latter urged Ambassador Lighthizer not to “export” this provision internationally (energycommerce.house.gov, 2019-08-06). As a reminder, Section 230 protects Internet intermediaries against content emanating from third parties.

China was at the heart of these hearings (sometimes in a more political than diplomatic tone). There is no question that counterfeit goods are most often produced in China. However, it would be wrong to suggest that counterfeiters are all in China. It is not uncommon for counterfeits to be assembled or labeled in the recipient territories (e.g., iptwins.com, 2018-08-27, No. 8iptwins.com, 2020-03-09). Also, the act of importing such goods constitutes in itself an act of counterfeiting. Citizens or residents of the United States (eg, iptwins.com, 2018-08-27, Nos. 7 and 8iptwins.com, 2019-10-01, No. 48iptwins.com, 2019-05-19 , Nos. 35, 37, 38 and 43), Singapore, (eg: iptwins.com, 2019-09-22, No. 16), or France (eg: iptwins.com, 2018-12-11, No. 6), and other countries are regularly prosecuted for importing counterfeits and/or reselling them online. Besides, the studies of the official bodies mentioned above do not refer exclusively to China:

  • Hong Kong SAR;
  • The United Arab Emirates;
  • Turkey;
  • Singapore;
  • Thailand;
  • India;
  • Malaysia;
  • Germany;
  • The United States;
  • Mexico;
  • Morocco;
  • The Netherlands;
  • Bangladesh
  • etc.

(e.g. OECD and EUIPO, Trends in Trade in Counterfeit and Pirated Goods, 2019, Figure 4.1., p. 40).

It should also be noted that the hearings on March 4, 2020, took place a few weeks after the signing of the Trade Agreement between China and the United States (ustr.gov). The very first chapter, which follows a little preamble, is precisely that which is devoted to intellectual property, which tells about the priority given by the United States Department of Commerce to the respect for intellectual property in economic and commercial exchanges with China. This chapter includes a section E dedicated to online platforms, a section F devoted to geographical indications, and a section G concerning the production and export of counterfeit goods. The United States and China are strengthening their intellectual property cooperation (Section J). However, they have not gone so far as to include in this Agreement a judicial cooperation clause aimed at recognizing and enforcing the judgments of their respective judicial institutions (section 1.28.1 relates only to the execution of judgments at the domestic level).

This political will to fight counterfeiting is gaining strength not only in the United States but also in France (iptwins.com, 2020-03-09), and at the European Union level in the context of discussions on the revision of the Directive 2000/31/E.C. on electronic commerce, which should lead to the birth of the Digital Services Act in the course of 2020-2021. Interinstitutional discussions are underway (European Commission, Long term action plan for better implementation and enforcement of single market rules, COM (2020) 94 final, 2020-03-10).

Brand owners and consumer associations

During the hearings held on March 4, 2020, not surprisingly, consumer associations (Advocacy Consumer Reports and Public Citizen) and holders of intellectual property rights (Apple and Specialized Bicycles), but also some congresswomen and congressmen, blamed, even blasted online platforms (Amazon and eBay). In summary, the reasons are substantially similar to those adopted, recurrently, in the Special 301 Out-of-Cycle Review of Notorious Markets reports:

  • The lack of reactivity;
  • Too lax conditions of registration as a seller;
  • The lack of an effective system for detecting repeat offenders;
  • False comments intended to improve the visibility of an article (a point on which Mr. Friedman strongly insisted);
  • The absence of traceability of the articles and identification of the source.

The efforts of platforms (Amazon and eBay)

Amazon and eBay recalled the efforts made to strengthen cooperation with intellectual property rights holders and consumer protection associations.

In recent years, Amazon has deployed tools, teams, and programs to reduce the percentage of counterfeits on its platforms, including programs called “Amazon Brand Registry” (amazon.com), “Project Zero” (amazon.com), and “Transparency” (amazon.com). Mr. Mehta states that in 2019 alone, Amazon invested $ 500 million and that a team of 8,000 employees is committed to fighting fraud (D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, p. 2). As for eBay, the company also invests in detection tools and offers an intellectual property rights protection program called “Verified Rights Owner (VeRO).”

Concerning fake comments and reviews, Amazon claims that its teams check no less than 45 million comments weekly and that they act in cooperation with intellectual property rights holders and judicial authorities (D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, pp. 2-3).

These efforts are undoubtedly commendable and, as Mr. Love recalled during the hearings, “there is much worse!“. However, these measures are insufficient. “Project Zero” from Amazon and “VeRO” from eBay have the effect of transferring part of the costs necessary for the fight against counterfeiting to holders of intellectual property rights. As for “Transparency”, the program is only useful if the authentic producer agrees to sell his products on Amazon.

Regarding refunds, M. Mehta adds that every customer is protected by the Amazon warranty: “every Amazon customer is also protected by our A-to-z Guarantee. If a customer suspects an issue with any product they purchase – whether from Amazon or a third-party seller – Amazon ensures the customer is taken care of and in the case of third-party sellers, Amazon will refund the purchase price if the seller refuses to do so (D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, p. 3). On the consumer side, the only possible approach to this refund policy is that Amazon could not do less. Note that Amazon does not fundamentally reject the principle of subsidiarity since it agrees to replace its contractual partners in the event of contractual breach or default by the latter.

Representatives from Amazon and eBay said that their respective teams proactively delete large volumes of items daily. Despite such efforts, the questions arise of the reappearance of the same articles and recidivism of bad actors.

More convincingly, Mr. Mehta (for Amazon) stated that Amazon is participating (alongside eBay, Zulily, FedEx, DHL and UPS) in a pilot project launched by the customs and the protection of state borders United (CBP). The “Section 321 Data Pilot” project aims to collect detailed data on packages valued at less than 800 USD. The participating companies are invited to provide in advance, in particular, the following data: the origin of the package, its content, and the recipient. The objective of this pilot project is to verify whether the method will allow the authorities to detect and intercept packages containing illegal items, including counterfeits. This project is scheduled to end in August 2021 (federalregister.gov, 2019-07-23cbp.gov, 2020-01-08). The results of such a project are particularly awaited since the use, by counterfeiters, of small parcels, is a trend confirmed in all the statistical studies relating to counterfeiting (cf. above).

Finally, to conclude this series of highlights from the hearings on March 4, 2020, Ms. Leavitt (for eBay) was invited to specify the measures adopted to ensure that counterfeit airbags are not sold on eBay. Ms. Leavitt confirmed the possibility of selling airbags while specifying that eBay requires guarantees of traceability.

Identifying the bad actors: the heart of the matter

Amazon is making considerable efforts to create the image of a society in which we can have confidence (David Friedman).

Trust is built on knowledge. This is why French law has been called “Law for Trust in the Digital Economy” (Loi pour la Confiance dans l’Économie Numérique). It includes provisions that oblige the merchants to reveal the information necessary to identify them in order for third parties to be able to engage their responsibility.

The need to identify counterfeiters, like all cyber criminals, is at the heart of the resolution of February 26, 2020, aimed at restoring the application of the principle of transparency to Whois databases (iptwins.com, 2020-03-18).

Congresswoman Eshoo (eshoo.house.gov) expressed dismay at the difficulty consumers experience in identifying the seller of an item on Amazon. It is indeed a real obstacle course, whereas the information making it possible to identify the source could judiciously be displayed on the same page of the product description. This information should, at a minimum, be as follows: company name, legal form, postal address, email address, registration number and individual identification number, legal representative. At a minimum, because it would be more appropriate to require a liability insurance policy or even proof of a security deposit with a third party receiver. Special measures and procedures should be taken regarding the personal data of sellers who are individuals. In any event, the information provided should be strictly verified by the intermediary. This would strengthen consumer trust and comfort owners of intellectual property rights.

Detecting counterfeits and dangerous products is not enough. The sale of counterfeit goods and articles that do not comply with the security levels imposed by laws and regulations must be condemned, which supposes that the platforms clearly identify their contractual partners. Amazon (D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, p. 6) and eBay (A. Leavitt, D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, pp. 3-4) ensure that they cooperate closely with the judicial authorities in criminal proceedings. This demonstrates, at least, that identifying the wrong operators is not impossible.

Solutions for dispute resolution

According to Mr. Mehta, in 2019, Amazon set up a pilot project to facilitate the resolution of utility patent disputes, by offering sellers a forum to challenge the accusations of intellectual property rights holders. The objective was to provide the parties with a forum by which they could submit their dispute to an impartial and independent third party, within the framework of a low-cost process (4,000 USD), making it possible to obtain a decision quickly, the costs incurred weighing on the losing party (D. Mehta, “Statement before the U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce”, March 4, 2020, pp. 4-5). The idea is appealing, but it has a significant drawback: Amazon is not a party, but a sort of dispute settlement institution.

One could go further and consider the possibility of imposing erga omnes arbitration agreements on platforms and sellers. Such an arbitration agreement would be, in this case, the agreement by which the platform and the seller make an offer to settle future disputes by arbitration to any third party (the beneficiary) who considers that it is prejudiced by the activity of the platform and/or the seller. As for the beneficiary, it could be holders of intellectual property rights, or even consumer protection associations. The consent meeting mechanism would, therefore, be similar to that of the Uniform Domain Name Disputes Resolution Policy (UDRP), but the nature of the procedure and the decision would be different: the procedure would be arbitration and the decision, an arbitral award, unlike the UDRP (as it stands). The distinction is fundamental because, thanks to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, such awards could be enforced in almost all states (the list is available on the website of the United Nations), of which:

  • China ;
  • Hong Kong SAR;
  • the United Arab Emirates;
  • Turkey ;
  • Singapore;
  • Thailand;
  • India;
  • Malaysia;
  • Germany;
  • The United States;
  • Mexico;
  • Morocco;
  • The Netherlands;
  • Bangladesh;
  • etc.

That is to say, the leading countries of manufacturing and assembly of counterfeits (OECD and EUIPO, Trends in Trade in Counterfeit and Pirated Goods, 2019, Figure 4.1., p. 40). It should also be ensured that online commercial acts fall within the definition of arbitrability, regardless of the legal nature of the parties: natural or legal person (which refers to subjective arbitrability). A solution based on arbitration would only be viable only if the parties can be identified appropriately (iptwins.com, 2020-03-09). This obligation should legitimately weigh on the platform. Otherwise, the platform, which has failed in its obligation to identify its contractual partner, should replace the latter in the arbitral proceedings.

An alternative solution is also possible. Even in cases where the counterfeiters can be identified, the international nature of online commerce often makes sentencing difficult unless there is an existing bilateral convention facilitating judicial cooperation in criminal and/or civil and commercial matters between the states concerned. For example, the Agreement on mutual legal assistance in civil and commercial matters signed on May 4, 1987 between France and China, and which has since been incorporated into French law by Decree No. 88-298 dated March 24, 1988, includes an article 19.1 which provides:

“Decisions in civil and commercial matters made after the entry into force of this Agreement by the courts of a Contracting Party and which have become final shall be recognized and enforced in the territory of the other Party (…)”.

This provision has already been applied in contractual matters (iptwins.com, 2019-11-08). Admittedly, counterfeiting falls within the tort field. However, the sale of counterfeits constitutes a contractual breach. Furthermore, in any event, the scope of the Agreement between France and China covers civil cases, which includes torts. Since the Agreement is applied in contractual matters, why should it not be brought into action in tort matters? It remains to question the conditions of territorial jurisdiction set by French case law (for an example, see iptwins.com, 2020-02-05), which would risk limiting the effectiveness of the text and the resulting mechanism. In this context, Paris City of Law could absorb the online infringement litigation, particularly given its long-standing expertise in infringement disputes. The actors concerned should take up these questions so that, in line with the international chamber of the Paris Commercial Court, the Paris Judicial Court would equip itself with an international chamber enriched with a quasi non-territorial jurisdiction (it would suffice, at most, that intellectual property rights are protected in France), composed of bilingual judges and specialists in intellectual property matters.

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IP Twins is an ICANN-accredited domain name registrar with 15 years of experience in domain name strategy and management. We represent trademark holders in UDRP proceedings.

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