In the April 24, 2012, Federal Register, Customs & Border Protection (CBP) published new rules governing how it will process goods thought to bear counterfeit marks; see CBP IP Enforcement Disclosure. Responsible for the enforcement of intellectual property rights laws and regulations at the border, CBP is making changes to Subpart C of Part 133 of the CBP regulations regarding 1) the detention of suspect merchandise; 2) the disclosure of information to right holders during detention of suspect goods; 3) expanding the definition of “counterfeit trademark” to “counterfeit mark” under the regulation; and 4) the length of time goods suspected of being counterfeit may be detained. The goal of these changes is to enhance CBP’s capability to interdict increasingly sophisticated counterfeit products that threaten national security and public health and safety.

The Trade Secrets Act, 8 U.S.C. 1905, bars unauthorized disclosure by government officials of sensitive and proprietary information (“protected information”) received in the course of their official duties. Case law has interpreted “protected information” broadly so as to include just about all business and financial data reported to the government. At the same time, Section 818(g) of the National Defense Authorization Act for Fiscal Year 2012 (NDAA) permits CBP to share information with rights holders if the mark is suspected of being copied or simulated, but for the sole purpose of “determining whether the products are prohibited from importation.” In order to remove any doubt about what data may be shared, CBP published its April 24 notice, which is said to work like this.

If CBP suspects a violation, it will give the importer seven (7) working days to submit evidence showing the mark or trade name is not counterfeit, meaning you have to have a cooperative supplier, have done all your due diligence ahead of time, and have it properly documented in your records. If the importer fails to respond or his response is deemed inadequate, CBP will share with the rights holder information that appears “on the merchandise and/or its retail packaging, images (including photographs) of the merchandise and/or its retail packaging in its condition as presented for examination, or a sample of the merchandise and/or its retail packaging in its condition as presented for examination.” Disclosures may include “any serial numbers, dates of manufacture, lot codes, batch numbers, universal product codes, or other identifying marks appearing on the merchandise or its retail packaging in alphanumeric or other formats.” CBP retains the right to provide redacted or unredacted samples to the rights holder, despite these new provisions. Under the regulations, the only use the rights holder may make of the materials provided is to assist CBP in determining whether or not the goods are counterfeit.

There will now be a thirty (30) day detention period that begins when the merchandise is presented for examination and may be extended an additional thirty (30) days. The detention notice period remains unchanged, meaning the five (5) day time frame in 19 C.F.R. 133.25 stands. Thereafter, if CBP is still not convinced the mark is legitimate, the goods will be seized and excluded. Following seizure, CBP provides the rights holder with the date of importation, port of entry, merchandise description, quantity, name and address of manufacturer, importer and exporter, and country of origin. The requirement for the rights holder to provide a bond and return the materials also remains unchanged.

The new provisions took effect immediately for reasons of national security threats and government procurement concerns over counterfeit integrated circuits and electronic components that have found their way into the supply chain of the U.S. military and other parts of the government. CBP, in particular, and the U.S. government, in general, understandably want to put a stop to that. Therefore, the new regulations were characterized as interim but final, meaning they took effect right away, but the comment period remains open until June 25, 2012.

What should companies do when importing goods that bear a mark belonging to a third party?

  1. What steps do you take to determine whether the goods you are importing bear any trademarks? Do your purchase orders and other contracts make clear which marks should/should not be affixed to your goods and/or their packaging? Do you have written assurances of compliance from your suppliers?
  2. Once you determine your goods have a mark on them, how do you make sure your supplier has the right to affix that mark on the products being sold to you? If he purchased the goods elsewhere and is reselling them to you, how do you determine the goods were purchased from an authorized/legitimate source?
  3. Do you get pictures of the goods and separate ones of their packaging -- all clear and easy to read -- from your supplier in advance of payment and shipment so you can do your due diligence and confirm the supplier’s right to use the marks? Have you run into the situation where the supplier sends you pictures but the goods/packaging arrives with more marks on them than you knew about or vetted? Do you check the PTO and CBP websites to identify which marks have been recorded?
  4. What documents does your supplier provide that prove his right to use the trademark(s) on your products? Is he only giving you the first and last page of his agreement? If so, how can you be sure the agreement actually covers your goods, has no exclusions that affect your product’s admissibility, and are valid at time of both shipment and entry? In some cases, you may actually have to get copies of the suppliers’ royalty payments to the brand holder to satisfy yourself the supplier is in compliance with all of the legal requirements.
  5. If you are the rights holder, have you made things as easy as possible for your customers and CBP by listing all your authorized licensees on your website in a user-friendly/easily searchable manner? If not, have you provided another straightforward means for the public and the regulators to identify your authorized business partners?

These new regulations raise two significant areas of concern.

First, due diligence today goes beyond just making sure your supplier can fabricate the goods you want, to specification, on time, and at the agreed-upon price. The supplier’s ability to work with you to document the right to use the marks on your goods is critical. It does you no good to pay for your goods and have them shipped to the port of entry, only to have them seized/excluded because the supplier really does not have all the written authorizations you need.

The second area of concern is grey-market goods. Just as the import process has a first-sale doctrine when it comes to valuation, so, too, is there a first-sale doctrine with trademarked goods. In the trademark context, essentially, first sale means once a trademark holder has sold his goods, the buyer is free to dispose of them as he wishes, subject, of course, to any limitations imposed by contract between buyer and  the brand-holder/seller. Using the example of computers, we will presume laptops are made in China by the brand holder, who sells them to a distributor whose sales territory is Hong Kong. The distributor sells the laptops to a buyer in Hong Kong who sells them to your supplier who wants to sell them to you for import into the U.S.

Those laptops will have several trademarks on them, such as the manufacturer’s name and logo, the logo for the operating system, and perhaps even the name and logo of the processor manufacturer, to name the most common. You may find those marks and perhaps others on the outer carton, too. If your supplier purchased them from a seller in Hong Kong, how do you establish the laptops were made by the brand-holder/manufacturer so they are admissible for U.S. import purposes? The simple answer is get a copy of the invoice on which the seller purchased the laptops from the distributor and the invoice on which the distributor purchased the laptops from the brand-holder/manufacturer. In reality, the likelihood of being able to get either invoice is slim to nil. Neither vendor is likely to part with the documentation out of fear of getting into trouble with the brand holder. There is a good deal of reluctance to share these sorts of sourcing details with a third party for purely competitive reasons as well. Should you make the deal anyway? Not unless you can get other documentation that directly ties the goods to their original manufacturer, thereby allowing importation into the U.S. as legitimate, not counterfeit, goods.

Remember, even if you walk away from the branded goods when seized, you still face a civil penalty for violating the trademark laws by importing counterfeit goods. So you lose the goods and face a fine on top of having paid for goods you cannot deliver to your customer, for whom you now must find alternate goods, or face additional serious commercial consequences with your buyer.

Will the emphasis on trademarks in the construct of this new rule cut into grey-market goods, i.e., those sold by the brand holder to a third party who now resells them? The NDAA standard allows CBP to inquire of the brand holder if it “suspects” goods violate a brand holder’s rights. This seems to be a pretty low standard for inquiry. The fear is many more goods will end up detained and ultimately seized. While brand holders certainly have their hands full when it comes to counterfeit goods, one has to wonder in what ways these new regulations will change how business is done. Get ready to defend your marks and goods!

U.S. – Colombia Trade Agreement Takes Effect

The U.S. – Colombia Trade Agreement finally took effect on May 15, 2012. In Colombia, the first day was marred by a bombing in Bogota, which may well be unrelated to the Agreement itself.

Detailed information about the Agreement can be found on the U.S. Trade Representative's website: USTR re Colombia Trade Agreement. Like every other trade agreement, it is important to study the text to ensure you fully understand the benefits you can get under its provisions and what it will cost you to comply. Take time now to make sure your commercial documentation contains any needed details and includes commitments from your suppliers to provide supporting documentation in a timely manner, properly completed, and correctly executed.

The Korea – U.S. Free Trade Agreement was implemented two months earlier, on March 15, 2012. This leaves the U.S. – Panama Free Trade Agreement pending. It was approved by Panama on June 28, 2007, and signed into law in the U.S. on October 21, 2011. Information about this agreement can also be found on the U.S. Trade Representative website at USTR re Panama Trade Agreement. Two down, one to go!