Counterfeit Law Blog

The Lanham Act authorizes a district court to grant an ex parte order for the seizure of items involved in the unlawful use of a counterfeit mark, including goods, counterfeit marks, the means of making such marks, and records.  Under the statutory procedure, a court that issues an ex parte seizure order must schedule a hearing, generally within 15 days after the date the seizure order is issued.   At that hearing, the party who obtained the order has "the burden to prove that the facts supporting findings of fact and conclusions of law necessary to support such order are still in effect.” In order to continue the seizure order, the court must make the following findings:

(i) an order other than an ex parte seizure order is not adequate;

(ii) the applicant has not publicized the requested seizure;

(iii) the applicant is likely to succeed in showing that the person against whom seizure would be ordered used a counterfeit mark in connection with the sale, offering for sale, or distribution of goods or services;

(iv) an immediate and irreparable injury will occur if such seizure is not ordered;

(v) the matter to be seized will be located at the place identified in the application;

(vi) the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application; and

(vii) the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person.

If the party who obtained the order does not meet its burden of proof, the seizure order will be dissolved or modified.

In Beltronics USA, Inc. v. Midwest Inventory Distribution LLC, the federal district court in Kansas decided November 13, 2007 to dissolve an ex parte seizure order it had previously issued to Beltronics because, after conducting the required hearing, the court was not satisfied that the defendants would destroy, move, hide, or otherwise make the seized goods inaccessible, or that an order other than an ex parte seizure order would not be adequate to ensure that Beltronics would have adequate remedies if the defendants are ultimately found to have infringed Beltronics’ trademark.

The court was swayed by the absence of evidence that the defendants were “the type of fly-by-night defendants who will seek to evade the couirt’s jurisdiction.” The defendants had never failed to appear in court when required to do so, there was no prior legal action against them, and there was no other indicia that they would be unlikely to comply with a court order. Noting that the defendants are incorporated businesses with inventories, assets, and a fixed physical presence that sell merchandise other than Beltronics equipment, the court concluded that they would have much to lose if held in contempt of a court order. Consequently, the court could not find that  an order other than an ex parte seizure order would not be adequate to protect Beltronics. On the grounds that Beltronics has not made the showings required by the ex parte seizure statute, the court dissolved the seizure order and directed Beltronics to return the seized goods to the defendants. At the same time, however, it entered a preliminary injunction prohibiting the defendants from selling or offering for sale any Beltronics goods which do not bear an original Beltronics serial number label. In addition, in order to ensure the preservation of evidence, the court prohibited the defendants from destroying, modifying, moving, hiding, or otherwise making any such goods inaccessible during the course of the litigation.

The Ninth Circuit federal court of appeals decided a case July 3 that has discouraging implications for brand owners who had hoped that courts would hold credit card companies liable for contributory or vicarious infringers for continuing to process credit card charges incurred by customers purchasing pirated and counterfeit goods on the Internet. Over a vehement dissent by Judge Kozinski, a majority of the panel hearing the case ruled that credit card companies that had been given actual notice that specified websites were selling pirated images could not be held secondarily or vicariously liable for copyright or trademark infringement for continuing to process charges made by purchasers of the pirated photos.

The case, Perfect 10, Inc. v. Visa Intern. Service Ass’n, 2007 WL 1892885 (9th Cir. 2007), involved infringements of what the plaintiff referred to as “tasteful copyrighted images of the world's most beautiful natural models” that were owned and published by the plaintiff, Perfect 10. Perfect 10 alleged that numerous websites stole its images, altered them, and illegally offered them for sale online. Instead of suing these direct infringers, however, Perfect 10 sued Visa, MasterCard and other entities that processed credit card payments to the allegedly infringing websites after being notified that some of the sites’ consumers were using their credit cards to purchase infringing images.

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For what appears to be the first time, a federal judge in Oklahoma has ordered the plaintiff recording companies in a music piracy case to pay a defendant's attorney's fees.  The July 16, 2007 ruling required the companies to pay Deborah Foster attorney's fees in the amount of $68,685.23.

Ms. Foster  was sued in 2004 after being identified as the owner of an Internet account that had been used to illegally download pirated music.  Ms. Foster steadfastly maintained that she had never illegally downloaded music.  Although she apparently acknowledged that the downloading "may" have been done by her daughter or husband, Ms. Foster never unequivocally identified the perpetrator.  Eventually, the recording companies voluntarily dismissed their lawsuit against her.   Ms. Foster then moved for attorney's fees.  Last February, asserting that the recording companies "failed to allege any facts in their Complaint that would support Ms. Foster's secondary copyright infringement liability," that the Complaint was devoid of facts that could support a finding of direct liability, and that the plaintiffs had "initiated the secondary liability claims to press Ms. Foster into settlement after they had ceased to believe she was a direct or 'primary' infringer," the court granted Ms. Foster's motion for attorney's fees. Its ruling this month set the amount of the fees to be paid.

According to Variety, the RIAA has issued a statement saying, "We respectfully believe that this ruling is in error and is an isolated occurrence. Our interest in these cases is enforcing the rights of the record companies and artists, while fostering an online environment where the legal marketplace can flourish and the music industry can invest in the new bands of tomorrow. In the handful of cases where the person engaging in the illegal activity in the household is not the person responsible for the ISP account, we look to gather the facts quickly and do our best to identify the appropriate defendant."

The Sixth Circuit Court of Appeals has narrowly construed the Record Rental exception to the copyright first sale doctrine, ruling that it does not apply to sound recordings of literary works, i.e., audio books. In Brilliance Audio, Inc. v. Haights Cross Communications, Inc., 2007 WL 188103 (6th Cir. Jan. 26, 2007), the audiobook publisher, Brilliance Audio, sued Haights Cross Communications for copyright and trademark infringement. Brilliance’s beef was that Haights was repackaging and relabeling retail editions of Brilliance’s audio books as library editions and then distributing them via rental, lease, and lending.

Both copyright and trademark law contain a “first sale” exception that provides a defense to claims of infringement. The default rule of the "first sale doctrine" in copyright is that the copyright holder controls the right to the underlying work, but the owner of a particular copy can dispose of it in any manner he or she wishes. 17 U.S.C. §109(a). However, in response to rampant piracy of popular music recordings, Congress carved out a limited exception to the first sale doctrine-- the Record Rental Amendment of 1984 -- which states that, “unless authorized by the owners of a copyright in the sound recording[,] ... and ... in the musical works embodied therein, [ ] the owner of a particular phonorecord ... may [not], for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that phonorecord ... by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending.” 17 U.S.C. §109(b)(1)(A). Brilliance asserted that its audio books fell within this exception to the first sale doctrine. The court disagreed.

The court’s analysis started with the observation that the statute is somewhat ambiguous as to its scope. On the one hand, the record rental exception explicitly applies to all “sound recordings,” a term defined elsewhere in the Copyright Act to include both musical and non-musical works. On the other, it states that sound recordings may not lawfully be rented, leased or loaned unless authorized by the “owners of a copyright in the sound recording ... and ... in the musical works embodied therein.” It then noted that, at the time Congress adopted the exception in 1984, its exclusive focus was on protecting the music industry. Finally, it observed that the exception upsets the traditional bargain between the rights of copyright owners and the personal property rights of individuals who own a particular copy , extending the copyright monopoly for a limited set of works. In order to protect the bargain between copyright owners and personal property owners, the court declined to construe the exemption from the first sale doctrine any more broadly than explicitly mandated by Congress. Brilliance’s copyright claim was, therefore, dismissed.

However, Brilliance faired better on its trademark claim. Under the first sale rule in trademark law, resale by the first purchaser of a repackaged trademarked item does not constitute infringement so long as (1) the reseller gives the public adequate notice that the item has been repackaged and (2) the resold item is not materially different from those sold by the trademark owner. Brilliance’s complaint asserted that Haights’ notice of repackaging is inadequate because it creates the misrepresentation that Haights has a long-standing relationship with Brilliance and that Brilliance authorized and sponsored its activities. As a result, it alleged, there is a likelihood of consumer confusion that will dilute the value of the trademark. Brilliance also asserted that its genuine library edition is different from its retail edition and that, by repackaging retail editions as library editions, Haights altered the product in a manner likely to cause consumer confusion. Because of these allegations, the court refused to dismiss Brilliance’s Complaint for trademark infringement. Ultimately, however, the success of its claim will depend on whether it can, indeed, convince a judge (or jury) that Haights’ notice is inadequate to prevent confusion or that the differences between the retail and library versions of its audiobooks are sufficiently material that passing one off as the other is likely to confuse consumers.

The RIAA filed suit against Mediaservices, Inc., owner of the Russian music website AllofMP3.com last week.  The RIAA complaint is not yet available on PACER.  However, Good Morning Silicon Valley reported that the Complaint, filed in federal court in New York, alleges that more than 11 million songs were illegally downloaded from AllofMP3.com between June and October 2006 and seeks statutory damages of $150,000 for each unlawful download.  If the RIAA prevails, this would result in trillions of dollars in damages, an award that, by all accounts, would be unenforceable in Russia.

The RIAA lawsuit is the latest in a series of efforts to stop AllofMP3.com.  The site was described in the U.S. Trade Representative's 2006 Special 301 Report as  a "pirate website"  and by U.S. Trade Representative (USTR) Susan Schwab as "at the top of the 'notorious markets' list ... the Web's number one pay-per-download music site whose catalog consists of illegal copies of music from U.S. recording artists and other right holders."  The site typically charges users less than a dollar to download an entire album .  While AllofMP3.com claims to pay a 15% royalty to Russian music licensing societies, these societies are not authorized by U.S. rights owners to license their music. 

In the fall of 2006, Mastercard and Visa stopped accepting charges made at AllofMP3.com.  The site switched to xrost prepaid icards.  Then, in late November, the USTR announced that Russia had agreed "on the objective of shutting" down the site.  The agreement, reached in connection with negotiations regarding Russia's accession to the World Trade Organization (WTO), also requires Russia "to work to enact" legislation by June 1, 2007 that would prohibit licensing societies from acting without right holder consent. 

However, as of today, AllofMP3.com is still up and running.  AllofMP3.com's owner, Mediaservices, asserts that its web site complies fully with Russian law and that U.S. purchasers may lawfully download songs from the site, citing Section 602(a) of the U.S. Copyright Act, which exempts from the general prohibition against importation of infringing works the importation of a single copy of an infringing work acquired outside the U.S. for personal use, Section 1008 of the Act, which prohibits infringement actions based on the noncommercial use by a consumer of a recording device for making digital or analog musical recordings, and the first sale, fair use and back-up exceptions.  While we can anticipate that AllofMP3.com will raise these arguments in defense to the RIAA lawsuit, it is very unlikely that it will prevail on any of them.  Instead, the court is likely to find in favor of the rights holders.  While such a ruling would be difficult, if not impossible, to enforce in Russia, it might put further pressure on the Russian government to take action against the web site in order to appease the U.S. and other countries that have objected to its failure to shut down AllofMP3.com.  If nothing else, a court ruling in favor of the music industry would make clear to U.S. purchasers that downloading music from AllofMP3.com is illegal.

The FDA's Addendum to FDA's Guidance for Industry: PDMA Pedigree Requirements -- Questions and Answers Related to the Preliminary Injunction Ordered 12/5/06 in RxUSA Wholesalers, Inc. v. HHS was posted today.   The Addendum presents the FDA's interpretation of Judge Joanna Seybert's December 4, 2006 decision granting a preliminary injunction against implementation of  a regulation promulgated under the Prescription Drug Manufacturing Act ("PDMA") that was designed to combat the distribution of counterfeit drugs.  The regulation, 21 C.F.R. § 203.50,  would require secondary drug distributors to provide their buyers with a pedigree including "the business name and address of all parties to each prior transaction involving the drug, starting with the manufacturer.”  However, authorized distributors would be exempt from the pedigree requirement.  Judge Seybert enjoined enforcement of the regulation on the ground that the plaintiffs were likely to succeed on their claim that

were the Rule were to go into effect while the exemption for authorized distributors existed, the result would completely defeat the purpose of the PDMA. Pedigree information would not be available for any drugs moving through commerce. Any drugs passing through an authorized distributor would contain no pedigree information due to the statute's exemption. Unauthorized distributors would be unable to comply with the Rule. They would be unable to provide complete pedigree information for all prior sales up to the manufacturer because - as the FDA has found - most drugs pass at least once through authorized distributors who do not provide pedigree information. And according to Plaintiffs, manufacturers refuse to sell products directly to Plaintiffs so they have no choice but to purchase from authorized distributors.

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But the Rule would essentially wipe out all the unauthorized distributors, leaving only authorized distributors who are exempt from the pedigree requirement. So none of the drugs ultimately going to the American consumer would contain pedigree information because the drugs would be provided solely through authorized distributors who are exempt from the pedigree requirement. Accordingly, the Court rejects Defendants' objections to the Magistrate's findings regarding Plaintiffs' likelihood of success on the merits.

While finding that the plaintiff's were likely to succeed on their challenge to the regulation, Judge Seybert emphasized "that Congress had a rational basis when it required unauthorized distributors to provide pedigree information for the drugs it distributed."  Her opinion recognized that the "PDMA's pedigree requirement is important and necessary in light of Congress's findings that 'most of the drugs that were counterfeits, stolen, expired, or obtained through fraud were handled by secondary wholesalers, who were not authorized to distribute that manufacturer's product.' H.R. Rep. No. 100-76, at 17 (1987)," and that "PDMA's purpose 'is to protect American consumers from mislabeled, subpotent, adulterated, expired, or counterfeit pharmaceuticals, which are being dispensed under existing law and practice, and to restore competitive balance in the marketplace.' Id. at 6."  She concluded, however, that the FDA's regulation would thwart, rather than advance, this purpose.

Judge Seybert's decision maintains the status quo pending the final outcome of the challenge to the regulation.  For more information and commentary regarding this case, see Jayne Juvan's blog, Juvan's Health Law Update and Dr. Adam Fein's DrugChannels.
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On Friday, Universal Music Group sued MySpace.com, a unit of News Corp. since September 2005, for allegedly encouraging, facilitating and participating in users' unauthorized reproduction, adaptation, distribution and public performance of copyrighted works. The suit focuses on MySpace features that allow users to insert music and videos on their MySpace pages and facilitate sharing of content by users. According to the L.A. Times, the lawsuit, filed in federal court in Los Angeles, describes MySpace as a "vast virtual warehouse" of pirated works from musicians including Universal artists Mariah Carey, Diana Krall and U2.

In an action brought by Louis Vuitton in the U.S. District Court for the Eastern District of Virginia against Haute Diggity Dog, purveyors of the "Chewy Vuiton" dog toy and dog bed, the court held on Friday that the recently-amended federal anti-dilution law should apply to LVM's claim for injunctive relief based on events that occurred before the amendment's effective date.

Under the amendment to the dilution law, the standard for liability is whether a mark or trade name is likely to cause dilution, rather than whether actual dilution has occurred.

As this case involved an obvious parody, it is not surprising that the court also granted Haute Diggity Dog and the other defendants summary judgment on LVM's trademark infringement, dilution, counterfeiting and copyright infringement claims:

The name "Chewy Vuiton" is, like "Timmy Holedigger," an obvious parody of a famous brand name. The fact that the real Vuitton name, marks, and dress are strong and recognizable makes it unlikely that a parody-particularly one involving a pet chew toy and bed--will be confused with the real product.

The decision is reported at 2006 U.S. Dist. LEXIS 80575.

Under New York City's nuisance abatement law, the city can obtain injunctions against counterfeiting operations, obtain fines from landlords whose buildings house such operations, and force them to post bonds and to submit new tenants for city approval. On October 23, New York City Mayor Michael Bloomberg announced an "aggressive campaign" to use the nuisance abatement law against the owners of buildings in which video piracy operations are taking place. At the same time, Bloomberg proposed that the State of New York revise its criminal code to make the recording of movies in theaters a Class A misdemeanor, punishable by up to one year in prison, with subsequent convictions Class E felonies, punishable by up to four years in prison. Currently, illegally recording a motion picture is only a violation. (The MPAA estimates that nearly half of all camcorder-generated pirated DVDs are made in New York City theaters, while 43 percent of all pirated DVDs seized in the U.S. and 20 percent of those seized worldwide are made in the city).

As reported in the NY Times, over the last couple of years, New York City has used the nuisance abatement law to seize close to $50 million in counterfeit goods and shut down 15 buildings in the area of Broadway and 34th Street that had been used almost entirely by counterfeiters.

Ultimately, the effectiveness of nuisance actions depends on how receptive judges are to the city's requests for enforcement. In a decision that was released yesterday, the New York Supreme Court's Appellate Division reversed a November 2005 lower court ruling that let defendants Khalid Ahmed and Mouman Outlet, Inc. off the hook for their alleged use of a building to house a counterfeiting operation. The trial judge had vacated a preliminary injunction against Ahmed and Mouman Outlet under the nuisance abatement law after they convinced the court that they had removed all counterfeit goods from their premises. The appellate court held that the injunction should not have been vacated because the city has an "ongoing right to ensure that [they] do not subsequently recommence their illegal activities in the same location."

Earlier this year, in Marvisi v. Greenwich Insurance Company, reported at 2006 U.S. Dist. LEXIS 32840, the federal district court in Manhattan ruled that a landlord was not entitled to coverage under the "personal and advertising injury clause" of his commercial general liability insurance policy for claims that New York City brought against it under the nuisance abatement law. The city's action asserted that Marvisi created a "criminal nuisance . . . by knowingly conducting and/or maintaining the subject premises as an illegal establishment where persons gather for purposes of purchasing, selling, and/or possessing merchandise bearing counterfeit trademarks." In the same decision, Judge Griesa held that the Marvisi's insurance did not cover civil claims brought against him by Rolex, Louis Vuitton and Fendi which alleged that he induced and aided the infringement of their registered trademarks by providing his tenants with a "safe haven and marketplace" in which counterfeit goods could be sold and that he is vicariously liable for his tenants' sale of counterfeit goods because he controls the property and derives financial benefit from the tenants' infringing activities.

A NY store owner who delegated the day-to-day operation of his store to an independent contractor has been held in contempt and ordered to pay $330,000 in statutory damages plus attorney's fees after the plaintiff discovered that the store was selling counterfeits in violation of a preliminary injunction. The court had little difficulty holding the owner responsible for the counterfeiting activity of the store operator based on the fact he was the sole owner of the store and, therefore, had both a direct financial interest in the infringing activities and the authority to supervise the independent contractor--"he had the authority to fire or replace her, or even shut down the store, at least temporarily until compliance with the Court's prelimi nary injunction could be ensured." The September 27, 2006 decision in Yash Raj Films (USA) v. Bobby Music Co. is reported at 2006 U.S. Dist. LEXIS 69582.

On August 11, in Au-Tomotive Gold, Inc. v. Volkswagen of Am., Inc., 457 F.3d 1062, the 9th Circuit reversed a decision of the Arizona federal district court that had created a safe haven for trademark infringers and counterfeiters. The district court held that a manufacturer's unauthorized VW and Audi license plates and key chains were not counterfeits because "[t]he VW and Audi logos are used not because they signify that the license plate or key ring was manufactured or sold (i. e., as a designation of origin) by Volkswagen or Audi, but because there is a[n] aesthetic quality to the marks that purchasers are interested in having." It concluded that this use of the marks is "protected under the aesthetic functionality doctrine" of trademark law and entered an order declaring that Auto Gold's "license plates, license plate frames and key chains displaying Volkswagen and Audi trademarks . . . are not trademark infringements and/or trademark counterfeiting." On August 11, 2006 the 9th Circuit correctly reversed this ruling.

Generally, functional features can't be protected as trademarks. Courts have relied on this principle to hold that a purely decorative use of a designation is not "trademark use" and does not establish trademark rights. The district court relied on these "aesthetic funcionality" cases to hold that Auto Gold's decorative use of the AUDI and VOLKSWAGEN trademarks is functional and, therefore, not unlawful. The 9th Circuit reversed, correctly holding that the unauthorized use of someone else's source-identifying trademark to decorate one's product constitutes trademark infringement and counterfeiting.