Executive Summary: Manufacturers, distributors, and electrical contractors build
enduring relationships by supplying quality, dependable
electrical products that they are all prepared to stand
behind. The introduction of counterfeit electrical products
into the marketplace alters that relationship substantially.
It places the distributor or contractor in a risky legal
position that could leave the distributor or contractor solely
responsible for defects or problems with the product.
Furthermore, because a counterfeit product damages the
reputation of those who trade in these products, it can
dissolve the supply relationship with the genuine
manufacturer.
An email from a previously unknown source
traverses the Pacific Ocean to an electrical distributor in
the Americas. "We would be pleased to meet you on your
next visit to our country," the email begins. "We
will present our new products and promote some bargains in
good price." Attached to the email are photos of
electrical products the sender indicates his company can
supply: lighting products, conduit fittings, outlet boxes,
circuit breakers, and receptacles. Some of the photos show
products that look identical to well-known North American and
European branded products, and in a couple of the pictures you
can actually see the registered trademark of a well-known
brand on the product or packaging. The email is enticing with
the offer of "bargains in good price," but it may be
the beginning of a slippery slope for the electrical
distributor not attentive to risks he has not previously
experienced.
Counterfeiting is a growing global problem
in the electrical sector. It is a problem with multiple
dimensions: intellectual property theft, loss of tax revenue
to governments, consumer deception, and threats to the health
and safety of consumers. Electrical products, like
pharmaceuticals, auto parts, and a few other products uniquely
present all four dimensions of the counterfeiting problem,
particularly the threat to consumer health and safety. Over
the past two years, the National Electrical Manufacturers
Association has been collecting both public and private
reports about counterfeit electrical products posing a threat
to public safety. A few illustrative examples include: conduit
fittings installed in a hazardous location, marked with brand
and certification marks bearing the manufacturer’s part
number of a product designed for use in hazardous locations,
but not meeting the design requirements suitable for hazardous
locations; circuit breakers bearing a brand name that do not
provide protection; defective control relays bearing a
counterfeit certification mark that cause a machine to
malfunction; extension cords bearing a brand name and
certification mark for a product designed for 12 gauge wire,
but actually employing a smaller 24 gauge wire that would
catch on fire when the cords are used as intended; infringing
imported dry cell batteries containing mercury, where U.S. law
prohibits the sale of such products containing mercury.
If a defective or substandard counterfeit
component is inside a product, it is not likely to be visible.
For example, hair clippers containing counterfeit fuses with
fake brand name and certification marks were recently seized
in England. A recent Business Week article commented,
"Many fakes are getting so good that even company execs
say it takes a forensic scientist to distinguish them from the
real McCoy." The counterfeiters are getting very good at
making molded products that look just like the genuine branded
product, and on the surface it looks like a product well-known
to the marketplace. One circuit breaker manufacturer has
reported that sometimes one way to detect the fake from the
genuine without opening up the breaker is the weight, because
the inside is not built to standard, or sometimes the color of
the molded plastic acts as a signal that something is not the
same.
Distributors of electrical products and
electrical contractors are at risk with these products, and
more so than they would be with genuine products. Where the
product does not perform as expected or it causes personal
injury or property damage, victims typically file breach of
warranty or product liability claims. These legal claims are
actionable against everyone in the chain of distribution of
the product including retailers, wholesalers, distributors,
contractors, and manufacturers. If a manufacturer can show, in
the case of the counterfeit product, that it is not the
supplier of the defective product, the manufacturer has no
liability. That is because these legal claims are recognized
only against the actual supplier of the product.
The "black letter" law is that
"one who is engaged in the business of selling or
otherwise distributing products who sells or distributes a
defective product is subject to liability for harm to persons
or property caused by the defect." In 1977, a federal
court of appeals in St. Louis affirmed a defense jury verdict
for a manufacturer of swimming pool slides, whose defense was
that the slide that caused the plaintiff’s injury was
counterfeit and not made or sold by the defendant. Mere
exploitation of another’s intellectual property does not
make the owner of the intellectual property liable for
personal injuries caused by products made by others. In 1996,
the Texas Supreme Court was faced with a claim against
Firestone Tire arising out of a defective automobile wheel
claim. Firestone did not make or sell the wheel; however,
Firestone did patent and license a specific design feature for
wheels that was used in the supplier’s wheel. While the
evidence showed that the supplier modified Firestone’s
original design, the Texas Supreme Court held that Firestone
would have to be an integral part, not just an incidental part
of the overall marketing of the product. Firestone would not
be liable to the claimant merely because its intellectual
property was used by the product seller and the claim was
dismissed.
A July 2004 ruling by a federal court judge
in New York illustrates the potential liabilities for a
distributor and retailer who purchase goods in the so-called
gray market. This case is groundbreaking in its attempt to
hold a distributor liable for purchasing medicine from sources
other than a drug manufacturer. The plaintiff had a liver
transplant and was prescribed Epogen in connection with
post-operative recovery. Epogen is made by Amgen. The
plaintiff purchased counterfeit Epogen from ProCare Pharmacy,
a subsidiary of CVS, which sells and delivers prescription
drugs to customers by mail. AmerisourceBergen (ABC), one of
the largest prescription drug wholesaler distributors, is an
authorized distributor of Epogen. According to the complaint,
ABC purchased counterfeit Epogen from "secondary
sources" in the "gray market," and sold it to
the pharmacy. The pharmacy in turn sold it to the plaintiff.
It turns out that the counterfeit product contained 1/20th of the active ingredient that Amgen normally includes. Even
though Amgen was the initial source of the active ingredient,
Amgen did not sell the product that the plaintiff purchased.
The federal court dismissed the manufacturer, Amgen, from the
proceeding. Even though it is unknown who introduced the
counterfeit drug into the distribution channel, the court
upheld certain claims against the wholesaler, ABC, and the
retailer CVS. One of the factors the court considered in
deciding to allow the claim against the wholesaler to proceed
was the allegation that ABC had distributed drugs in a way as
to proliferate a "gray market" that permitted trade
in diverted and counterfeit drugs thereby contributing to the
problem. Also, ABC was probably in the best position in the
distribution chain to protect against counterfeit drugs by
simply purchasing directly from the drug manufacturer instead
of purchasing deeply discounted and suspicious drugs in the
gray market.
This leaves the distributor and possibly
the electrical contractor or a retailer as the only parties to
whom the claimant can look to seek compensation, and seeking
indemnity from the manufacturer of the counterfeit product is
highly problematic. For example, the email communication cited
at the beginning of this article came not from a product
manufacturer but a trading house, one of many that are
competing for orders across Asia. The trading house does not
always reveal its supply sources and therefore the identity of
the manufacturer may never be known. Even if the foreign
manufacturer is known, getting jurisdiction over the foreign
manufacturer in an American court is problematic, litigating
overseas brings its own set of problems, and even if an
indemnity judgment is obtained from the overseas source,
enforcing and collecting on the judgment is not easy.
Product liability and warranty law does not
present the only legal risk for distributors in these
circumstances. Intellectual property law also imposes a
different layer of liability and provides remedies to a
different category of claimant: the owner of the intellectual
property. In general, goods that infringe the rights of United
States trademark owners are not permitted importation;
infringing goods are subject to seizure and forfeiture by the
Customs Service. Under Customs’ laws and regulations,
goods that infringe upon rights of trademark owners are
classified into two categories. The first category consists of
counterfeit merchandise that bears "a spurious mark which
is identical with, or substantially indistinguishable from, a
registered mark." Usually, "counterfeit merchandise
is made so as to imitate a well-known product in all details
of construction and appearance so as to deceive customers into
thinking that they are getting genuine merchandise." The
second category consists of "merely infringing"
goods which are not counterfeits but bear marks likely to
cause public confusion. This category includes merchandise
which bears a mark that "copies or simulates" a
registered mark so as to be likely to cause the public to
associate the copying or simulating mark with the registered
mark. The significance of the distinction between counterfeits
and merely infringing goods lies in the consequences attached
to the two categories. Counterfeits must be seized, and in the
absence of the written consent of the trademark owner,
forfeited. Merely infringing goods, on the other hand, may be seized and forfeited for violating. Under Customs
regulations, merely infringing goods may be imported if the
"objectionable mark is removed or obliterated prior to
importation in such a manner as to be illegible and incapable
of being reconstituted." The line between counterfeit and
"merely infringing" is not a bright line. While a
counterfeit trademark will always include identical
trademarks, they may include very close simulations. Recently
when enforcing Callaway Golf’s Big Bertha trademark for
drivers, U.S. Customs treated imported "Big Boomer"
drivers as counterfeit, rather than merely infringing and
seized and destroyed the product. The importing distributor
lost his entire investment in the illegal product.
A foreign manufacturer could be held liable
for direct infringement of a United States patent for selling
an infringing product abroad that later gets imported in the
United States. Active inducement of infringement occurs when a
foreign manufacturer does not itself import and sell the
infringing products, but has a distribution agreement with an
importer. Such a distribution agreement may show the necessary
intent by a foreign manufacturer "to invade the United
States market at a time when [the manufacturer] was fully
aware of [the patentee’s] United States patents." U.S.
patent law also imposes liability on a distributor who has
aided or abetted another’s direct infringement. This is
based on a theory of joint tortfeasance, where one who
intentionally causes another to commit a tort is jointly and
severally liable with the primary tortfeasor.
Even where the product sourced bears no
counterfeit trademark or certification mark, there is the
potential risk that a foreign supplier who makes a "look
alike" product has copied patented technology and
incorporated it inside the product. Patent holders are not
without their remedies in these circumstances, although the
nature of a distributor’s liability can be affected by
whether they knowingly infringed. Distributors frequently
endeavor to limit their liability in such cases by asking
suppliers to provide a warranty of title and indemnity against
non-infringement; however, in the case of foreign-sourced
products the distributor faces the problem of legal
enforcement discussed above.
For example, in China, there are few
difficulties in taking IP enforcement actions against
infringers so long as it is registered in China and the IP
owner procures the action. Although such actions, which
typically take as long as a year in the Chinese courts, will
eventually shut down the counterfeiter, it is not a sufficient
deterrent due to the lack of criminal penalties. A less
expensive alternative to the Chinese courts is an
administrative action in China; however such actions usually
result in seizure and destruction of the product and lack
sufficient deterrent penalties.
What can distributors and contractors do to
avoid these risks? Recommendations made by Consumer Reports in their November 2004 issue for consumers are equally
applicable to the electrical distribution channel:
• Be cautious of extraordinary bargains.
Products may be cheap because they are counterfeit or
defective.
• Beware of products sold outside the
normal distribution channel. It is difficult to collect from
fly-by-night vendors.
• Check the warning label. Be cautious
where the label conflicts with information elsewhere on the
package or is written in ungrammatical English.
• Avoid purchasing no-name products.
Knowing the name of the manufacturer allows authorities to
track down a legitimate corporation to remedy problems.
• If you have concerns about the
authenticity of a certification mark, call the certifier.
Additionally, the distributor or electrical
contractor might notice differences in packaging, product
coloration, weight, and other product characteristics that
they are not familiar with, and they should contact the
manufacturer to determine if the differences represent product
design changes. Distributors and contractors should be alert
to old dates on packaging that might signal that a previous
version of the packaging no longer used by the genuine
manufacturer was copied by the counterfeiter. Other business
strategies include doing business with a trading partner that
has been around for awhile, calling manufacturers directly
about suspect parts or independently testing products, and
purchasing from distributors who carefully screen, certify
suppliers and guarantee a refund if the part turns out to be
counterfeit.
Trade secrets and advanced monitoring
technology in the distribution channels may decrease the
counterfeits. For example, pharmaceutical drugs such as Viagra
and OxyCotin will be electronically tagged with
radio-frequency identification technology within the next
year. This will make it more difficult to introduce
counterfeit medicines in the supply chain from the
manufacturer to the check out counter. Another example is
Nokia, who recently faced scrutiny for purchasing counterfeit
batteries that resulted in exploding batteries. In response,
Nokia decided to label its original batteries with a special
holographic image and authentication code to stem the sale of
unsafe, low quality products.
Finally, the difficulties of seeking legal
redress from foreign suppliers who have no domestic presence
are an issue that applies to both counterfeit or infringing
products and genuine products. Manufacturers who establish
joint ventures and supply relationships with overseas vendors
typically engage in an extensive due diligence analysis of
their prospective partner or supplier, including whether there
is a history of intellectual property infringement and whether
the partner or supplier will also shoulder a product
manufacturing risk. Distributors, electrical contractors and
retailers should not overlook the normal due diligence that
attends to any business transaction in deciding whether to
choose between a familiar source of supply or a new overseas
vendor.
Counterfeit products injure the reputation
of manufacturers, distributors and contractors. Selling items
bearing counterfeit marks defrauds contractors and
distributors who pay for brand-name merchandise but bring home
low quality fakes. It cheats manufacturers out of legitimate
sales and tarnishes their reputation when they are blamed for
the poor quality of the counterfeit merchandise. Even high
quality counterfeits hurt legitimate manufacturers by
artificially inflating market supply and lowering demand and
sales. It also injures legitimate distributors and contractors
who must provide refunds to customers who discover that their
brand-name goods are, in fact, counterfeit.
Clark R. Silcox is general counsel,
National Electrical Manufacturers Association.
Philmore H. Colburn, II, is partner, Cantor
Colburn, LLP Bloomfield, CT. |
