Pros and Cons of Using Criminal Counterfeiting Laws to Fight Trademark Counterfeiting

Civil, Criminal or Both?
Professionals: Leora Herrmann
Date: June 2006

Counterfeiting and piracy are on the rise, as fakes of everything from movies to designer clothes to electronics and pharmaceuticals are sold in record numbers. Because counterfeiting is more profitable than drug dealing and other illegal money-making schemes, it has attracted organized crime and terrorist groups, to which proceeds of counterfeiting are being traced.  In response, Congress recently enacted the federal Stop Counterfeiting in Manufactured Goods Act, closing loopholes in the federal criminal anti-counterfeiting law, providing for forfeiture of any property used in counterfeiting or derived from the proceeds of counterfeiting, and requiring that convicted counterfeiters pay restitution. 

The result?  Brand owners are increasingly seeking -- and getting -- the help of law enforcement in their fight against the counterfeiting epidemic. 

Relying on the criminal justice system to combat counterfeiting has both pros and cons.  Let’s look at some of them:

• Incarceration:    Federal criminal prosecution has real teeth, often resulting in prison time.  In our experience, an arrest does not necessarily cause a counterfeiter to stop.  But, if convicted and sent to prison, the counterfeiter would be hard put to continue his operation.  
• Deterrence:  For some brand owners, this is the #1 reason to proceed criminally. In January 2006, a federal judge in Miami set a milestone by sentencing two counterfeiters to six years in prison for trafficking in counterfeit cell phone batteries and components. Sentences like this, particularly if well publicized, send a loud message to would-be counterfeiters and the retailers who sell their fakes.  Under the Stop Counterfeiting in Manufactured Goods Act, the U.S. Sentencing Commission must review and is authorized to amend the federal sentencing guidelines for violations of the federal counterfeiting laws, 18 U.S.C. §§2318 and 2320.  This may encourage other federal judges to also hand down stiffer sentences in counterfeiting cases.  The deterrent effect of a federal prosecution depends, to some extent, on how well publicized it is. Some brand owners, concerned about eroding consumer confidence in their products, are reluctant to generate publicity in which their brands are named.  Even when publicity is desired, the media is not always interested in carrying the story.  The brand owner must then employ other creative means to get the word out.
• Less work and expense:  Proceeding criminally usually entails less work and expense for the brand owner than would a civil action.  After all, the brand owner is only a witness in a criminal case, not a party.  However, to interest law enforcement authorities in the case, brand owners must conduct a thorough private undercover investigation to blaze a trail for the ensuing government buys.  Prosecutions must be monitored, and prosecutors must be educated about trademark law and convinced to seek significant penalties including jail time.  Thus, while the government carries the brunt of the burden in a criminal proceeding, to ensure a satisfactory result, the brand owner and its counsel must play a major role.

While these are both attractive reasons to seek criminal prosecution, there are drawbacks:

• Delay:  Even sympathetic police and federal agents may not be able to marshal the resources to move quickly, or at all.  If they don’t, the counterfeiters and their counterfeit goods may disappear.
• State criminal prosecution may be toothless :  In Florida and other states, judges are loath to send counterfeiters to overcrowded jails for offenses the judges don’t take very seriously.  As a result, the word on the street here is that state prosecutions are merely a cost of doing business.  If federal agents cannot be persuaded to undertake an investigation, it may be possible to persuade the U.S. Attorney to indict significant counterfeiters following a local police investigation or arrest.  The key here is early communication between the brand owner, the local police and the Assistant U.S. Attorney so that the possibility of federal prosecution is on the agenda from the beginning.
• Forfeiture is a mixed blessing:  Under the revised federal statute and some state laws, the government may bring civil forfeiture proceedings against counterfeiters.  It’s rewarding to have the government haul off a counterfeiter’s equipment, but forfeited funds go to the government, not the brand owner.  While we have had some success persuading authorities to remit a portion of the forfeited funds to the brand owner, this is not typical.  The government may strip a well-heeled counterfeiter’s bank accounts , leaving little or nothing to satisfy restitution orders and civil damage awards.
• Restitution vs. Damages:  As a practical matter, restitution is limited to the brand owner’s costs of investigation and any actual lost sales.  Proving lost sales is often impossible.  On the civil side, damages are readily available.  Indeed, a brand owner who is not satisfied to recover regular trademark damages can opt for statutory damages.  In our experience, federal judges are inclined to give large statutory damage awards to brand owners who present their case convincingly.  If the judgment is collectable, a civil case against a flush counterfeiter can generate significant income.  Of course, criminal and civil proceedings are not mutually exclusive.  If the government does not seize all significant assets in a forfeiture proceeding, the counterfeiting victim is free to seek civil damages even after restitution has been paid.
• Control:  The government controls the criminal process.  It decides whether to take a case, who to investigate, arrest and prosecute, what plea bargain to offer and accept, and how to proceed at trial and sentencing.  A frustrated brand owner may be asked to refrain from moving against targets it regards as significant while the government investigates the targets it has chosen.

Criminal proceedings are not incompatible with civil proceedings, but they can complicate them:

• Insurance:  The “advertising injury” provisions in many commercial general liability (CGL) insurance policies cover trademark claims.  Thus, brand owners have a good shot at recovering damage awards against insured retailers and other traffickers who have CGL coverage.    However, GCL policies exclude intentional conduct.  As knowledge or intent is required to establish a criminal violation, an arrested counterfeiter’s CGL carrier will refuse to pay out on a civil counterfeiting judgment.
• Fifth Amendment:  Once arrested, a counterfeiter is sure to invoke the 5th Amendment in response to any discovery promulgated in a civil suit.  To protect the defendant, the civil court may, but is not required to, stay the brand owner’s action pending resolution of the criminal case.
• Extortion and ethical concerns:  It is unethical for a lawyer use the criminal process to induce an adverse party to pay money in settlement of a civil claim.  Such conduct can also amount to criminal extortion.  In cases where criminal and civil actions proceed in tandem, counsel must take great care not to create even the appearance that the brand owner is conditioning its endorsement of a plea agreement on the defendant’s agreement to pay damages in settlement of the civil case. 

For more information, contact lherrmann@kpkb.com.