New House Bill Introduced to Combat Online Sales of Counterfeit Goods

On March 2, 2020, Representative Nadler, on behalf of himself, Reps. Collins, Roby and Johnson, introduced a new bill directed to holding U.S.-based e-commerce websites (“US Platforms”) accountable for policing the use of their sites for potential misuse by third-party counterfeiters, and ensuring that these counterfeiters have fewer opportunities to distribute their counterfeit products in the U.S. market.

The SHOP SAFE Act of 2020 (H.R. 6058) – which stands for Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce – seeks to create “incentives” for US Platforms to verify the legitimacy of participating third-party sellers and the authenticity of their products before allowing them to use these US Platforms as distribution channels for their goods. See Press Release, “Collins, Nadler, Roby, Johnson Introduce SHOP SAFE Act to Protect Consumers from Dangerous Online Counterfeits,” Mar. 2, 2020 (“The bill incentivizes platforms to engage in a set of best practices to curb the presence of counterfeits on their sites.”) (emphasis added).

The full text of the bill was posted by the House Judiciary Committee, although this copy does not reflect the assigned bill number. See also Section-by-Section Summary (also posted by the House Judiciary Committee); Public Bills and Resolutions, 166 Cong. Rec. 41, H1437-H1438 (daily ed. March 2, 2020) (brief statement of Rep. Nadler introducing the bill).

In particular, the Bill proposes to amend 15 U.S.C. § 1114 by imposing contributory liability for trademark infringement on a US Platform that allows a third-party seller to traffic in counterfeit goods that “implicate health and safety” through the platform, unless the following conditions are met:

  1. The “third-party seller is available for service of process” in the U.S.;
  2. Before any (allegedly) infringing act occurred, the US Platform took the following steps to prevent its site from being used that way:
    1. Verified “through governmental identification and other reliable documentation”, the identity, principal place of business and contact information of the third-party seller;
    2. Required a verification and attestation of the “authenticity of goods on or in connection with which a registered mark is used”;
    3. Required the third-party seller to sign a contract that included the following mandatory terms:
      1. The “third-party seller agrees not to use a counterfeit mark in connection with sale, offering for sale, distribution, or advertising of goods on the platform”; and
      2. The third-party seller consents to jurisdiction of US Courts with respect to claims relating to the third-party seller’s participation on the US Platform;
    4. Displayed “conspicuously on the platform” the verified contact information for the third party seller (i.e., “verified principal place of business, contact information and identity”) as well as the country of origin and manufacture of the goods and the location from which the goods would be shipped;
    5. Required the third-party seller to only use images of the products that the seller “owns or has permission to use” and that “accurately depict the actual goods offered for sale on the platform”;
    6. Implemented proactive technical measures for pre-screening of goods against the marks registered through the USPTO (at no cost to the registrant of the registered trademarks) before the goods are displayed to the public – to ensure that the third-party seller is not using a counterfeit mark;
    7. Implemented a program to expeditiously disable or remove a third-party seller’s product listing that reasonably could be determined to have used a counterfeit mark – again at no cost to the registrant of the registered trademarks;
    8. Terminated use of the platform by any third-party seller that has engaged in more than three instances of using counterfeit marks in connection with goods offered through the US Platform;
    9. Implemented a program to ensure that terminated sellers do not rejoin or remain on the platform under a different seller identity or alias – again, at no cost to the registrant; and
    10. Provided the information verified under Section (a), above, for any third-party seller who used a counterfeit mark on goods offered through the platform, to relevant law enforcement and (upon request) the registrant.

One could read these conditions as requiring a US Platform not only to have effective screening mechanisms in place to prevent counterfeiters from using its site in the first place, but also to have taken the full laundry list of steps to avoid its own liability.  In other words, it appears that the US Platform must also have identified this potential counterfeiter before the alleged counterfeiting activity occurred, kicked it off the US Platform before the accusation was made, turned the contact information of the counterfeiter over to law enforcement, and prevented the counterfeiter from participating in the platform again, even under a different name. It is not unreasonable to believe that at least one of these steps will be missed, or that the programs implemented by the US Platforms will not be sufficiently robust enough to effectively identify and prevent counterfeiters from using their platforms for illegal activities. Unless they simply stop doing business with third-party sellers – which could completely change the business model of sellers like Amazon, eBay or Walmart.

This Bill essentially requires US Platforms to refuse to allow third-party sellers who fail to meet these criteria to sell their products on their platforms – presumably on the theory that if US Platforms refuse to allow these sellers to use their sites to further their counterfeiting schemes, then the potential avenues for distribution of such counterfeit goods would evaporate. At least in theory.

While the Bill does not eliminate the perennial “whack-a-mole problem” by preventing known counterfeiters who are blocked from a site from simply creating a new identity and resuming their counterfeiting activities under a different name – it does shift the burden for combatting this problem onto the US Platform who would be hosting these sellers and (theoretically) receiving a portion of the sales, or at least a listing fee, in exchange. The recordkeeping and pre-screening requirements this might impose on entities like Amazon or eBay could be significant – particularly since a large portion of their current business model incorporates offering products for sale by third-party sellers.

Damages Available under Current Statute for “Counterfeiting”

Recall that courts are required to award “three times the profits or damages, whichever is higher, along with a reasonable attorney’s fee”, upon a finding of counterfeiting, although a plaintiff can elect to recover statutory damages between $1,000 and $200,000 per counterfeit mark, or up to $2 million in the case of willful counterfeiting. 15 U.S.C. § 1117(b), (c). Sharing in the statutory damages as a contributory infringer could be extremely expensive for the ecommerce platforms, and this possibility could certainly “incentivize” them to engage in more robust policing of potential counterfeiting using their services – but it would undoubtedly also dramatically increase the cost of doing business under their current business models.

Potential Commercial Impact of this Bill

The screening program contemplated by the Bill may also cause US Platforms to simply close down the third-party seller aspect of their business – particularly if they determine that implementing an effective program to evaluate their current pool of third-party sellers is simply too expensive to undertake. As a result, perhaps this Bill would effectively put an end to third-party sellers offering their products for sale through large ecommerce sites because of these ramp-up costs alone.

It is also possible that this new construct would negatively impact smaller businesses based in the U.S. who do not engage in “counterfeiting” as we typically think of it – but instead merely adopt a trademark of their own that is confusingly similar to an already registered mark – and thus would cause the small business to be excluded from these US Platforms. Perhaps rather than engaging in the kind of fraud we think of when someone says “counterfeit,” these smaller business simply did not conduct a pre-use trademark clearance search before adopting a mark and using it in connection with manufacturing sufficient quantities of a product to have enough to sell once orders started coming in. Assuming the US Platforms develop a screening model that runs that trademark clearance search against the USPTO’s database before allowing a third-party seller to offer their goods through their platforms, one could foresee that these infringers would be blocked from the platform. Does this now impose an obligation on third-party sellers to conduct trademark clearance searches before launching their products or trying to get on these US Platforms?

Finally, what if the third-party seller has indeed created a low-quality knockoff of a well-known branded product – and uses its own trademark on the product. Arguably, this seller would not be excluded from the US Platform under the program required by the Bill because they are not using a counterfeit mark. If the user of that particular US Platform simply searches for the generic product name (such as “smoke detector” or “cellphone charger cable”) and sees products that are cheaper than the brand-name product – they are not protected against purchasing low quality goods that look the same and appear to offer the same basic functions. As a result, perhaps this Bill would not actually protect consumers from purchasing low-quality knockoffs through these US Platforms.

Department of Homeland Security’s Report

Notably, the Department of Homeland Security recently released a report detailing the breadth and scope of the availability of counterfeits proliferation. DHS Report, “Combating Trafficking in Counterfeit and Pirated Goods: Report to the President of the United States,” Jan. 24, 2020. Two of DHS’s primary recommendations were to “Ensure Entities with Financial Interests in Imports Bear Responsibility” (at 5) and require entities with financial interests to engage in “Significantly Enhanced Vetting of Third-Party Sellers” (at 6). This Bill appears to directly respond to these recommendations.

Bill Status

Immediately upon introduction, the Bill was referred to the House Committee on the Judiciary – but it appears that a related hearing was held before the House Committee on Energy & Commerce – “Buyer Beware: Fake and Unsafe Products on Online Marketplaces,” on Wednesday, March 4, 2020 at 10:00am. While this hearing was not directly tied to the Bill, it covered the same subject. See Pre-hearing memorandum submitted by the Chair of the Subcommittee on Consumer Protection and Commerce, Rep. Pallone, on February 28, 2020. Witnesses who testified at this hearing included representatives from Amazon, eBay, Apple, Consumer Reports and Public Citizen. Id.

2014 ABA IPL Section White Paper Directed to Online Piracy and Counterfeiting

In 2014, the ABA’s Section of IP Law proposed that U.S.-based intermediaries (such as payment processors, advertising networks, ISPs or search engines, among others) be incentivized to help stop the proliferation of counterfeit products directed to U.S. consumers. See A Section White Paper: A Call for Action for Online Piracy and Counterfeiting Legislation, 2014. A principal target of the analysis at the time were “Predatory Foreign Websites” (id. at 8) – on the theory that these sites would be stand-alone online locations for U.S. consumers to purchase counterfeit products. In particular, the Task Force working on this White Paper explained that the term “Predatory Foreign Website” was used to refer to a

limited category of foreign-originated websites engaged in large-scale piracy of U.S. copyrighted content (in this case, any work created in the U.S., covered by the Copyright Act, capable of dissemination through electronic means) or counterfeiting of U.S. trademarks (in this case, intentional use of a spurious trademark that is identical to or substantially indistinguishable from an authentic trademark, in connection with products that are not [offered for sale] by the trademark owner or its agent). In particular, while the conduct itself may be identical to that prohibited under existing law, these specific actions are not readily subject to adjudication in the U.S. because the website is either beyond the jurisdiction of U.S. enforcement authorities entirely or, even if technically subject to such jurisdiction, is beyond the reach of such authorities to enforce a judgment against them. This limited scope of illegal conduct is the focus of this White Paper.

Id. (emphasis added).   For more on this topic, see earlier posts on this blog.

For more information about the New Bill: