Marcella Ballard Maria R. Sinatra July 6 2020 Shop Safe Act 2020: new tool for brand owners in fight against online counterfeits? Venable LLP | Intellectual Property - USA Marcella Ballard, Maria R. Sinatra Intellectual Property IntroductionShop Safe Act 2020IntroductionOn 2 March 2020 a bipartisan group of representatives in the US House of Representatives introduced the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce Act (the Shop Safe Act 2020) to help stem the growing concern over counterfeit products being offered for sale on online third-party marketplace e-commerce platforms.Although e-commerce is a relatively new retail platform, it has been capturing larger percentages of sales in the US retail industry. Unfortunately, as retail transactions have increased online, so have counterfeit sales. The reasons for increased counterfeiting online are multifaceted, but the Department of Homeland Security has discovered that counterfeiting via third-party marketplace e-commerce platforms has likely proliferated because of:the role of third-party marketplaces adding legitimacy to counterfeit listings;the relatively low barriers to entry to online selling (eg, lower start-up, production, marketing, and distribution costs); andconsumer attitudes and perceptions concerning third-party marketplace platforms.(1)The rise in online counterfeiting has forced the government, brand owners and online third-party marketplaces to increase efforts to police these counterfeit sales. For example, the US Customs and Border Patrol (CBP) initiated Operation Mega Flex "to identify high-risk violators that are shipping and receiving illicit contraband through international mail facilities and express consignment hubs".(2) By cataloguing a sample of approximately 20,000 inspections of goods, the CBP identified over 1,000 instances of counterfeit goods – a roughly 5% counterfeit rate.(3)However, finding sellers of counterfeit goods and holding them accountable can be futile, given the reality of counterfeiting on third-party e-commerce marketplace platforms:Supply chains for counterfeit goods are typically complex, with sellers often located outside the United States and thus "largely outside the jurisdiction for criminal prosecution or civil liability from U.S. law enforcement and private parties".(4)Criminal or civil efforts by brand owners to hold third-party marketplace counterfeiters accountable are often hampered by strategic actions taken by counterfeiters to shield themselves from liability. For example, counterfeiters often use multiple merchant accounts and provide no personal identifying information (eg, names or addresses) to consumers or provide false personal identifying information.Even where enforcement action is taken against online seller accounts and such accounts are shut down, counterfeiters regularly pop right back up – either on the same third-party marketplace platform or another – through the creation of a new merchant account.Counterfeiters often ignore enforcement actions (eg, lawsuits) and abandon the associated merchant account, leaving brand owners with little recourse against them or third-party marketplace platforms, even if favourable court judgments against the counterfeiters are obtained.Shop Safe Act 2020The Shop Safe Act 2020 seeks to provide a possible avenue by which brand owners can successfully take action against third-party e-commerce market platforms.Currently, brand owners can attempt to take civil action against counterfeiters through three theories of trademark infringement:direct infringement;vicarious infringement; andcontributory infringement.The statutory framework for federal trademark law is codified in the Trademark Act 1946. Most actions against counterfeiters involve theories of direct trademark infringement – that is, trademark infringement deriving from the defendant being the one actually using the unauthorised counterfeit trademark on or in connection with goods or services.(5)However, actions taken against third-party marketplace platforms typically involve contributory infringement theories – a legal theory that has evolved from the common law of torts.(6) Applied to operators of third-party online marketplaces, in order to be held liable for contributory trademark infringement, the third-party online marketplace must have:intentionally induced [a marketplace seller] to infringe a trademark, or… continued to [allow a marketplace seller to use its online third-party marketplace services when] it knows or has reason to know [the marketplace seller] is engaging in trademark infringement.(7)This liability standard has historically been hard for plaintiff brand owners to establish, given that it is difficult to prove when and if third-party online marketplaces had knowledge of a particular merchant's sales of counterfeit items. Accordingly, brand owners have been forced to largely self-police online third-party marketplaces for counterfeit goods using a patchwork of means imposed by third-party marketplaces. While the measures implemented by online marketplaces can be effective for removing counterfeit listings from the online platforms, counterfeits are still prevalent on the platforms.Accordingly, the Shop Safe Act 2020 has been introduced in an attempt to:[e]stablish trademark liability for online marketplace platforms when a third-party sells a counterfeit product that poses a risk to consumer health or safety and that platform does not follow certain best practices;[i]ncentivize online platforms to establish best practice such as vetting sellers to ensure their legitimacy, removing counterfeit listings, and removing sellers who repeatedly sell counterfeits; and[c]all for online marketplaces to take steps necessary to prevent the continued sale of counterfeits by the third-party seller or face contributory liability for their actions.(8)If enacted, the bill would amend the Trademark Act 1946 (specifically, Section 1114 of Title 15 of the US Code) to hold online third-party marketplaces liable for contributory infringement of a counterfeit mark in "connection with the sale, offering for sale, distribution, or advertising of goods that implicate health and safety"(9) unless they are subject to service of process in the United States and take certain steps to prevent infringing uses on the platform articulated in the proposed bill. The proposed bill defines a 'counterfeit mark' to have the same meaning as given to the term in Section 34(d)(1)(B) of the Trademark Act.(10) To avoid liability, the proposed bill would require marketplaces to demonstrate that they took the following 10 measures:(I) Verified through governmental identification and other reliable documentation the identity, principal place of business, and contact information of the third-party seller.(II) Required the third-party seller to verify and attest to the authenticity of goods on or in connection with which a registered mark is used.(III) Imposed on the third-party seller as a condition of participating on the platform contractual requirements that – (aa) the third-party seller agrees not to use a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platforms; and (bb) the third-party seller consents to the jurisdiction of United States courts with respect to claims related to the third-party seller's participation on the platform.(IV) Displayed conspicuously on the platform the verified principal place of business, contact information, and identity of the third-party seller, the country of origin and manufacture of the goods, and the location from which the goods will be shipped.(V) Required each third-party seller to use images that the seller owns or has permission to use and that accurately depict the actual goods offered for sale on the platform.(VI) Implemented at no cost to the registrant proactive technological measures for screening goods before displaying the goods to the public to prevent any third-party seller's use of a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform.(VII) Implemented at no cost to the registrant a program to expeditiously disable or remove from the platform a listing by any third-party seller that reasonably could be determined to have used a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods.(VIII) Terminated use of the platform by any third-party seller that has engaged in more than three instances of use of a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform.(IX) Implemented at no cost to the registrant technological measures for screening third-party sellers to ensure that sellers who have been terminated do not rejoin or remain on the platform under a different seller identity or alias.(X) Provided the information verified under clause (I) of each third-party seller that used a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform to relevant law enforcement and, upon request, the registrant.(11)Depending on the third-party marketplace, some of the above requirements to avoid contributory liability may have already been implemented – as mentioned above, some marketplace platforms already proactively screen product listings to curb the presence of counterfeit listings on their platforms. Likewise, some of the above-proposed requirements can likely be met by revisions or amendments to the marketplace's terms and conditions.Some of the proposed requirements (including measures I, IV, VIII, IX, and X) appear to attempt to address the problem of merchant counterfeiter anonymity that brand owners face. The proposed requirements seem designed to reduce the futility of enforcement currently occurring when the same bad actors continuously appear on marketplaces using different merchant accounts and different sales listings.Other provisions of the proposed bill are likely to involve trickier determinations, among them exactly which goods constitute goods that implicate health and safety. The proposed bill defines the term 'goods that implicate health and safety' as:goods the use of which can lead to illness, disease, injury, serious adverse event, allergic reaction, or death if produced without compliance with all applicable Federal, State, and local health and safety regulations and industry-designated testing, safety, quality, certification, manufacturing, packaging, and labeling standards.(12)In most cases, brand owners are unaware of the conditions in which counterfeit versions of their products are manufactured; they just know that they are not manufactured per the brand owner's manufacturing process. This raises the question as to what sort of showing brand owners will have to make, if any, to establish this proposed requirement? Likewise, if a marketplace involves third-party sales of consumer goods such as clothing, is the marketplace largely immune to the proposed contributory infringement liability, as the clothing can be deemed outside "goods that implicate health and safety"?Going forward, both brand owners and e-commerce third-party marketplaces should keep apprised of developments concerning the proposed Shop Safe Act 2020, so that they are in the best position to police their trademark rights or implement necessary steps to avoid contributory liability should the proposed bill be enacted.For further information on this topic please contact Marcella Ballard or Maria Sinatra at Venable LLP by telephone (+1 410 244 7400) or email ([email protected] or [email protected]). The Venable LLP website can be accessed at www.venable.com.Endnotes(1) US Department of Homeland Security, "Combating Trafficking in Counterfeit and Pirated Goods" (24 January 2020). Available here.(2) Id.(3) Id.(4) Id.(5) See J Thomas McCarthy, McCarthy on Trademarks and Unfair Competition (5th ed), Section 23(76).(6) Id, Section 25(17).(7) Inwood Laboratories, Inc v Ives Laboratories, Inc, 456 US 844, 854 (1982).(8) Press Release, US House Committee on the Judiciary, Nadler, Collins, Johnson & Roby Introduce Bipartisan SHOP SAFE Act to Protect Consumers and Businesses from the Sale of Dangerous Counterfeit Products Online (2 March 2020). Available here.(9) For further details, please see here.(10) For further details, please see here.(11) The Shop Safe Act 2020. Available here.(12) Id. Available here.