New DHS Report on Combating Counterfeit Goods Echoes Discussion at Kelley Drye’s IN FASHION Summit

Kelley Drye Client Advisory

At Kelley Drye’s IN FASHION Law Summit in January, one panel deliberated the current challenges of the digital marketplace. The panel discussed an executive memorandum issued by the Trump Administration that solicited comments from various stakeholders in the private industry about how to limit the proliferation of counterfeit goods sold online. Just this past Friday, the Department of Homeland Security (“DHS”) released its long-awaited report to the president on Combating Trafficking in Counterfeit and Pirated Goods (the Report”). The full DHS Report sets forth an 11-point plan to step up the government’s anti-counterfeiting measures, a number of which address issues raised by our panelists. 

The Report reiterates many of the observations made by our panelists about the impact that e-commerce platforms have had on the counterfeit market. It notes that these platforms not only dramatically increase a counterfeiter’s access to potential customers, but the association with trusted brand names like Amazon” gives third-party vendors selling counterfeit goods an air of legitimacy. E-commerce platforms have grown in size and numbers since the early days of online shopping. Amazon, for example, reports third-party sales on its marketplace grew from $100 million in 1999 to $160 billion in 2016. However, the Report recognizes that the legal framework has remained the same and largely out of date.”

Like our panelists, the Report acknowledges the challenge of holding e-commerce platforms contributorily or vicariously liable for trademark infringement. It recommends a wholesale reassessment of theories of contributory and vicarious liability as applied to digital marketplaces. While the Report does not specify exactly how changes to the application of such legal theories might be accomplished, it shines a light on the question and possibly opens the door to a different application of traditional secondary infringement standards to digital spaces in the future.

The Report also contemplates increased civil and criminal enforcement against e-commerce platforms operating fulfillment centers and warehouses. Among other things, it recommends that Customs and Border Patrol (“CBP”) begin to treat these facilities as the ultimate consignees” for goods that have not been sold to a specific consumer at the time of their importation into the U.S. As discussed by our panelists, a platform’s level of control over the products sold and/or the sales process is a factor courts have considered in assessing whether it may be held liable for claims related to the sale of products on its platform. CBP’s treatment of an online platform as the ultimate consignee” might therefore be significant in the way courts consider liability in some future cases.

The Report further emphasizes the role that third-party marketplaces and rights’ owners must play in combating counterfeiting. To this end, it lists many of the same best practices” highlighted by our panelists at the IN FASHION summit. The looming threat of increased enforcement might encourage the implementation of such best practices in the near future.

What will come of these recommendations remains to be seen. The Report anticipates the creation of an anti-counterfeiting consortium and the expansion of certain agencies’ anti-counterfeiting powers through rule-making and statutory amendments. We will continue to monitor developments in this area and keep you updated.