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June 27, 2023 Feature

Counterfeits, Customs, and International Marketplaces: The European Counterfeit Problem

Benjamin Scarfield

©2023. Published in Landslide, Vol. 15, No. 4, June/July 2023, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

While cross-border movement of people may have been drastically affected by the unprecedented lockdowns of mid-2020 onward, the movement of goods across various borders has continued to grow. The age of the internet has spawned a global marketplace, one that is accessible across borders, currencies, time zones, and continents. Recent changes to law and policy in the United Kingdom (UK) and European Union (EU), including the Brexit withdrawal agreement, have changed how brands must enforce their rights in Europe.

Intellectual property (IP) rights have always been territorial in nature. In some cases, the global market can be divided up between identical brands jostling for position with one another. Major brands sharing the same name are few and far between, with the decades-long Anheuser-Busch InBev versus Budweiser Budvar disputes over the BUDWEISER trademark springing to mind. However, in the day-to-day commercialization of a brand, often the more telling issue is not legitimate competition, but counterfeits.

Costs of Counterfeits

Counterfeits, copies, fakes, knockoffs—whatever the term, the principle is the same. The unauthorized application of a trademark to goods in a manner deemed to infringe a registered trademark, and deceiving consumers, is liable to be prevented by the rights holder. Recent UK government figures show that the annual loss to the UK economy through counterfeiting and piracy is at least £9 billion, as well as 80,500 job losses.

The European Union Intellectual Property Office (EUIPO), the registry responsible for the pan-EU European Union trade mark (EUTM) registration and registered Community design (RCD) systems, estimated in 2018 that counterfeits such as bags, clothing, and electrical goods cost the EU upwards of €60 billion, as well as 434,000 job losses each year.

Lower sales due to counterfeits on the UK market means lower revenues for the UK government from value-added tax (VAT), corporate income tax, personal income tax, and social security contributions. In 2016, forgone tax revenues from the retail and wholesale sector amounted to £3.1 billion.

Legitimate companies face competition from counterfeiters who steal their IP and don’t pay taxes or comply with quality standards. This damages the brand’s reputation, profit, and workforce.

Anti-Counterfeiting Burden on Rights Holder

As with most IP enforcement programs, anti-counterfeiting operations must be primarily funded and driven by the rights holders. Such operations are often considered a cost of doing business, and it is prudent to budget for taking action against unauthorized use. While the high nuisance value attributed to the day-to-day “whack-a-mole” approaches required are frustrating, the frequency of such operations could ironically be perceived as a testament to a brand’s success.

The free movement principles of the EU can be both beneficial and challenging to rights holders in their endeavors. EU policies aim to allow free movement of people, goods, services, and capital within the internal EU market, across multiple territorial borders. Pan-EU trademark and design rights can be granted with a single application process. However, once goods are in one territory, these free movement principles allow them to cross from country to country without any border controls.

There is help available for rights holders. The EU allows for an application for action (AFA) to be filed at any of the customs authorities within an EU member state. An AFA is a formal request to the customs authorities to detain goods suspected of infringing a range of rights, including trademarks, designs, copyrights, and patents. Trademarks are understandably the most common rights invoked, often offering the broadest protection and being the most easily recognizable rights to customs authorities.

The granting of an EU-wide AFA allows customs authorities of any of the EU member states to seize goods suspected of infringing rights and report to a designated representative. Those confirmed as counterfeit can be held for destruction without ever reaching the consignee.

Brexit and Customs Practices

UK-EU relations have been spoken about at length over the last seven or so years. The UK officially left the EU effective February 1, 2020. Until the end of the Brexit transition period on December 31, 2020, the UK remained a part of the single market while a long-term relationship was agreed upon.

The eventual Brexit free trade agreement (EU-UK Trade and Cooperation Agreement (TCA)) provides for free trade in goods and limited mutual market access in services, as well as cooperation mechanisms in a range of policy areas. The practical result for import and export questions is a deal whereby trade in goods between the EU and UK is not subject to tariffs or quotas, but where customs formalities and import taxes now apply.

The UK has since mirrored the EU’s AFA system, of which it was formerly a part. This means that separate AFAs are now required for UK and EU rights holders, filed at UK and EU customs authorities, respectively.

The UK is one of the world’s major economies and major consumers of luxury goods, and the EU is still the UK’s major trading partner. It is therefore vital that rights holders engage with both the UK and EU customs regimes. Further, the EU shares land borders with non-EU territories, including manufacturing and agricultural powerhouses like Russia, Ukraine, and Turkey.

Eurasian land corridors have been exploited for trade for thousands of years; what was traditionally the Roman-era Silk Road has since been updated with a 5875-mile train route from Germany to China and a journey time of 10–12 days. Today, Asia is home to the world’s legitimate and illegitimate manufacturing hubs. Trade across Eurasia to the EU and the UK is here to stay, and with that, the issue of counterfeits.

Civil and Criminal Enforcement and UK Sentencing Guidelines

In addition to the customs regime changes, other developments in UK law and practice have benefited holders of UK rights. The mechanism of enforcing rights against counterfeits has always trodden a thin line in a blend of civil litigation and criminal enforcement. Government agencies like Border Force, the UK agency responsible for frontline border control operations at air, sea, and rail ports; Trading Standards, the local authorities responsible for consumer protection; and the Police Intellectual Property Crime Unit (PIPCU), responsible for investigating and deterring serious and organized IP crime in the UK, can all work alongside traditional civil enforcement, including cease and desist letters, infringement actions, and online takedowns.

The Trade Marks Act 1994 (as amended) is the UK legislation governing the unauthorized use of a registered trademark. Typically, trademark infringements are enforced under a civil infringement action by the rights holder. However, if there is sufficient evidence to suggest illicit activity, there is also scope for criminal prosecution by the authorities under the act for a range of trademark offenses. Often these offenses occur where the unauthorized use of a trademark is with a view to gain for the offender, or with intent to cause loss to another party.

The offenses sections of the Trade Marks Act require criminal investigation by those authorities noted. If sufficient, offenders can be referred for prosecution by the Crown Prosecution Service before the judiciary. The Sentencing Council is the public body responsible for producing guidelines for sentencing to be used by the judiciary and criminal justice professionals, while simultaneously aiming to increase public understanding of sentencing. However, until recently, guidance for criminal trademark offenses was notably scant.

In October 2021, shortly after the heightened focus of the UK’s new customs approaches, the Sentencing Council published detailed guidelines for sentencing criminal trademark offenses under the act. These guidelines should be welcomed by rights holders, particularly those having to deal with black market and counterfeit goods, and where UK law enforcement authorities are involved.

The new guidelines are more comprehensive than the former brief guidelines, with significant changes in the way in which harm caused by the offender, or counterfeiter, is assessed. The new guidelines refer explicitly to the retail value of equivalent genuine goods sold and consider the harm caused by selling the counterfeit goods. This harm can apply to both the trademark owner as well as the purchasers and end users of the goods in question.

The intention is to allow for harsher sentences where consumer safety is a concern, which effectively codifies the way in which the criminal justice system already focuses its investigations. There is a distinct focus on high economic impact crimes, in a banding system that is now recognizable to criminal prosecutors as comparable to existing guidelines for other economic crimes like fraud or tax evasion.

Guidelines are available for assessing both individuals and organizations found to have committed offenses. On an individual level, an assessment of the culpability of the individual is undertaken to weigh up and determine the offender’s role and the extent to which the offending was planned and the sophistication of such planning. Considerations are then given to the monetary value of the offense and the potential for harm caused (for example, if the consumer is more likely to be harmed by a dangerous counterfeit product). Various other statutory considerations are taken into account in line with the UK Sentencing Code, such as guilty pleas or aggravating factors. The offense range is anywhere from discharge to seven years’ custody as a starting point, with aggravating factors pushing maximum sentences to 10 years. Organizations face a similar assessment, albeit with a focus on punitive fines for the organization in question, and with no upper financial limit given.

This is excellent news for UK rights holders and those brands whose products are vulnerable to counterfeiting in the UK. The Sentencing Council has finally provided clear guidance, for both magistrates and Crown Courts, for a criminal offense that is often unfamiliar to those handing down sentences, and which is often incorrectly perceived by the public as a victimless crime. The scope now available under the guidelines further reflects the large commercial scale and nature of counterfeiting, which is now recognized as a potentially widespread and highly organized activity. It adds more weight to the criminal acts of trademark infringement, and another weapon for rights holders.

The first port of call for a rights holder will likely always be a civil action, but there is now clearly defined scope for the criminal justice system to address those activities that stray into criminal territory. Decisions should soon start to trickle through to indicate the willingness of the judiciary to punish trademark offenses.

Counterfeit Investigations in Practice

As with any public body, the authorities are stretched. There is a strong onus on rights holders to investigate and enforce counterfeits and build a case the authorities can take forward. The benefit of the authorities’ involvement is the scope and powers available to investigate activity, which can go far beyond the initial complaint. Criminal IP activity can often be intertwined with public safety issues, and other economic or fraudulent activity, all of which can help build a case against counterfeiting operations.

A prime example is the case against Norman Gill and John Burns decided by the Swansea Crown Court in May 2022, one of the first judiciary decisions under the new Sentencing Guidelines for trademark infringement, which started with initial investigations into potential counterfeit items sold via online platforms. The case related to the sale of counterfeit cosmetic goods often used by pregnant women and young children. The rights holder was alerted to the problem listing by a disgruntled customer returning the goods, and noting an unusual aroma when compared to the genuine product.

Following the usual investigative paths—further test purchases, infrared spectroscopy lab testing by the rights holders to verify authenticity, and cease and desist letters—voluntary undertakings from the infringer were obtained.

However, after securing the undertakings from the first infringer, a seemingly unrelated listing of the same goods in a close geographic proximity enjoyed an uncanny chemical composition. The lab testing had confirmed the first test purchase as a 46.58% match to genuine product composition, against a standardized 99.5% or higher threshold for genuine product leaving authorized manufacturing facilities. The new product was a 47.98% match to genuine product composition. Despite the written undertakings from the seller, the issue appeared to be ongoing.

Investigation into the new sellers revealed that the original infringer was operating under multiple pseudonyms online, using the accounts of a loosely organized network of friends and acquaintances in order to continue to sell counterfeit goods. The activities had continued for a number of months and were clearly in breach of the obligations in the original undertakings.

The reason for the pseudonyms was clear: the individual who operated the sale of goods was known to authorities (and the public) for benefits fraud and other minor economic crimes. Counterfeit goods gave a steady and reliable income to this individual, and access to friends’ profiles on online marketplaces gave the requisite anonymity.

The civil investigations then focused on two acquaintances and their online accounts. The new accounts had to go through the same procedures in order to purchase and verify the goods being sold as counterfeits. However this time, and in light of possible civil litigation, these friends professed their innocence. In doing so, one provided a series of financial records indicating how sales were made and the revenues changed hands. These records indicated a scale of business in the tens of thousands of pounds sterling, all of which appeared to be deliberately concealed.

At this stage, the case was primed and ready for investigation by PIPCU. The combination of lab-tested proof of infringement, breached undertakings, pseudonyms, financial data, and continuing sales was sufficient for a police warrant to be issued. The three individuals implicated were arrested and bailed within 48 hours.

The process to court coincided with the pandemic and was delayed several times, but eventually the case was heard under the new Sentencing Guidelines for criminal trademark infringement. In this case, the financial data secured was key to establishing the level of severity. The ringleader (and, ironically, former customs officer given lenience due to poor health) received a 13-month suspended sentence.

What Next for Rights Holders in the UK?

The issue of online retail of counterfeit goods is growing. As ever, legislation tracks several years behind commercial reality, and the law around counterfeit goods and online trade is no different. Existing cases such as L’Oréal SA v. eBay International AG and Google France SARL v. Louis Vuitton Malletier SA have historically meant that the operators of online marketplaces and search engines are not liable for counterfeits sold on, or marketed via, their platforms.

However, looking forward, the EU’s recent Digital Services Act has come into force, with service providers having until January 1, 2024, to comply. The UK is attempting to approve equivalent legislation, the Online Safety Bill, but the breadth of powers and its apparent effect on all corners of the internet is causing issues in finalizing the legislation. Nevertheless, brand owners hope that the application of these new laws to “service providers” will increase the responsibilities and therefore cooperation with online marketplaces, fulfillment centers, and other commercial infrastructure implicated in the sale of counterfeit goods, even if they are not directly responsible. The final wording of the UK legislation and its effect is still pending, as well as the final implementation of the EU-wide law, but rights holders will be hoping that both support their anti-counterfeiting efforts.

Rights holders will continue to rely on both civil and criminal proceedings, but the ever-changing landscape gives opportunities for an ever more effective anti-counterfeiting operation.

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    Benjamin Scarfield

    Kilburn & Strode LLP

    Benjamin Scarfield is a partner at Kilburn & Strode LLP in London, where he advises on a broad range of trademark matters, including coordinating multinational filing and management of trademark portfolios.