Phillips & Sutherland, LLP

Made in the USA?

Although we seem to be surrounded by products stamped with “Made in China,” many Americans believe that products made in the United States are of higher quality. Additionally, a 2017 survey by Reuters found that nearly 7 in 10 respondents thought it was important to buy American-made, with over 20% of respondents indicating they would be willing to pay up to 10% more for those products. These figures may be even higher now due to the current administration’s “America First” policy and goal to increase American manufacturing. As such, it is no surprise that companies want to capitalize on the “Made in America” ideal, without paying American manufacturing rates.

Case in point, Georgia-based distributor of water filtration systems, iSpring Water Systems LLC, has been accused by the Federal Trade Commission (FTC) of making false claims that its products are made in the United States, when they are, in fact, made entirely in China. Astoundingly, this is not the first time iSpring has attempted to profit off of the American name, as the current mislabeling is actually a violation of a 2017 FTC order prohibiting iSpring from making unqualified “Made in USA” claims for its products.

As part of the FTC settlement, iSpring has agreed to pay a $110,000 civil penalty, admit that it, along with its company owner and officer Zhuangyong Chen and vice president Pearl Cai, made false claims that the water filtration systems it sells are “designed and crafted in USA,” among other claims, and to notify all impacted consumers.

Some might be surprised to learn that the rules regarding product origin claims are not so black and white, and are governed by both the FTC and the U.S. Customs Service. For example, where an imported product incorporates materials and/or processing from more than one country, Customs considers the country of origin to be the last country in which a “substantial transformation” took place. Thus, a product with parts from say Mexico or Canada, may, under certain circumstances, be marked “Made in USA.” The FTC offers some guidance in this regard; however, product marketers and distributors should speak to a qualified attorney prior to making country of origin claims; especially if that country is the United States.

Battling another kind of “fake news”

When it comes to product reviews on Amazon or other marketplaces, it can be nearly impossible to distinguish legitimate product reviews from those paid for by a product marketer.

Fake reviews have been a pretty standard marketing tool for some time; with product owners paying companies to post rave reviews of its product and poor reviews of competing goods. Fake reviews are so ubiquitous that, according to Saoud Khalifah, founder and CEO of Fakespot, a site that flushes out fake reviews, up to 70% of reviews on Amazon are fake. This staggering figure is perhaps why the Federal Trade Commission (FTC) has finally decided (likely to the dismay of product owners) to take action.

On February 19, the FTC filed a complaint against Cure Encapsulations, Inc. and its owner Naftula Jacobowitz, alleging that the defendants violated the FTC Act by, among other fraudulent actions, paying amazonverifiedreviews.com to create and post approximately 30 Amazon reviews a day of their “weight loss” product, Garcinia Cambogia. The FTC argued that such practices constituted “unfair or deceptive acts or practices in or affecting commerce.” In light of the quick settlement by the defendants, there was no 5-star argument to refute the allegation.

The proposed court order settling the complaint prohibits the defendants from making claims for any dietary supplement, food, or drug unless they have competent and reliable scientific evidence in the form of human clinical testing supporting the claims. The order also requires the defendants to notify Amazon, Inc. that they purchased reviews of their product and to identify to Amazon the fake reviews. Finally, the order imposes a judgment of $12.8 million, to be suspended upon payment of $50,000 to the FTC, in light of the defendant’s current financial status.

While $50,000 may not seem so bad as compared to how much money can be made due to sales generated by fake product reviews, a deeper pocketed company could have been on the hook for the full $12.8 million.

This is the first time the FTC has gone after a company for paid reviews, and more actions should be anticipated now that the foundation has been laid.

In addition to bogus reviews on Amazon, fake review websites such as tvstuffreviews.com and freakinreviews.com, often featuring “as seen on tv” and weight loss products, are quite prevalent. Sites such as these look like a source of legitimate reviews; however, the “reviewers” have likely never actually tested or investigated the products they are allegedly reviewing. As such, it is probably just a matter of time before enough complaints generate an FTC investigation into the financial sources behind those reviews.

Be sure to consult an experienced attorney if you have questions or concerns about your marketing methods or how to spot and remove fake reviews.

Stolen on Kickstarter

Many inventors turn to funding platforms such as Kickstarter and Indiegogo to get backing for their patent-pending products. While hundreds of thousands of innovative products have come to life with the support of crowdfunding sites, making it such an attractive option for cash-strapped inventors, there are those who have become victims of fast-acting counterfeit and knockoff artists.

Steve Suddell, inventor of the “Neck Hammock,” raised just over $200k on Kickstarter. He was on cloud nine – for about a minute. A week later, he began receiving angry emails from backers stating that his product was being sold for 50% less on other websites. After some investigation, he found websites featuring all of his images, videos, and content, advertising the Neck Hammock at half the price. He was concerned that Kickstarter would take his project down (as was the case with another product campaign, C-Rest), because the listings violated their policy of “not being able to sell the product anywhere else as long as the campaign is active.” The problem was, his product was not being sold elsewhere; rather, it had been copied and counterfeited. This has become very common with Kickstarter projects, and while Kickstarter is aware of the problem, it has not taken any steps to help the creators/inventors on its platform.

Yekutiel Sherman also knows all too well what it’s like to become a victim of China’s lightning-speed copycats. After he launched his Kickstarter campaign (but prior to manufacturing his first unit) of the “Stikbox,” a smartphone case that turns into a selfie stick, a cheap knockoff version of the product was being sold on AliExpress at half the price.

Unfortunately, these experiences are not uncommon. Crowdfunding platforms, Amazon and sites like Taobao have become feeders for knock-off artists to source other people’s new gadgets. These companies are deep-pocketed, and can get a product manufactured and sold well before the inventor’s campaign is fully funded. This just goes to show that your brilliant idea – even if it is patented or trademarked – could be on sale through Chinese distributors or other bootleggers even before you’ve gotten your project funded.

If you are an inventor who is considering using a crowdfunding site to fund your new idea, be diligent in protecting your proprietary information. There are strategies you can employ that describe the features, advantages, benefits and objectives of your invention without disclosing key details that would enable someone else to rip you off. Consider scheduling a consultation with an experienced intellectual property attorney who can provide you with some affordable strategies to protect your product, such as working with U.S. Customs and Border Control.

Inventors beware: invention promoters may not be out to “help” you

Unless you are a caveman, you have most likely seen InventHelp’s commercials featuring celebrities such as George Foreman encouraging amateur inventors to call his friends at InventHelp. You know the pitch: “Do you have an idea for a new product or invention? How do I get my idea in front of companies? How do I get a patent?” For answers to these questions, you should call an intellectual property lawyer – not some paid celebrity’s “friends” at an invention promotion company.

Though not all are bad actors, many invention promotion companies (and consultants) have been accused of scamming individual inventors out of thousands of dollars; just ask those involved in a 2018 class action against InventHelp in the Southern District of New York (Zanotti et al v. Invention Submission Corporation et al).

The plaintiffs allege that InventHelp runs a “fraudulent invention promotion scam that has bilked thousands of aspiring inventors and entrepreneurs into paying millions of dollars” for services that were never intended to be provided. Specifically, named plaintiff Sherry Porter claims she paid InventHelp $9700 to market her LED pet collar. According to the lawsuit, InventHelp’s Pittsburgh headquarters contacted Porter and said a company called Abrams Gentile Entertainment was interested in licensing her invention. However, when investigators for Porter’s attorney went to the office of Abrams Gentile, it was vacant. The company didn’t exist.

Unfortunately for inventors, this is not the first promotion company to be accused of engaging in such fraudulent activity. In fact, due to prior lawsuits, the American Inventors Protection Act of 1999 (AIPA) was passed. This act requires that prior to signing an invention submission agreement with a promotion company, the firm must provide the following information:

1. The total number of inventions evaluated by the invention promoter for commercial potential in the past five years, as well as the number of those inventions that received positive evaluations, and the number of those inventions that received negative evaluations.

2. The total number of customers who have contracted with the invention promoter in the past five years, not including customers who have purchased trade show services, research, advertising, or other non-marketing services from the invention promoter, or who have defaulted in their payment to the invention promoter.

3. The total number of customers known by the invention promoter to have received a net financial profit as a direct result of the invention promotion services provided by such invention promoter.

4. The total number of customers known by the invention promoter to have received license agreements for their inventions as a direct result of the invention promotion services provided by such invention promoter.

5. The names and addresses of all previous invention promotion companies with which the invention promoter or its officers have collectively or individually been affiliated in the previous 10 years.

Upon reviewing these statistics from two companies, the numbers do not bode well for inventors. For example, promotion company Davison reported that the “total number of consumers in the last five years who made more money in royalties or sales proceeds than they paid to Davison, in total, under any and all agreements with Davison, is 15. This number includes people who first made a profit more than 5 years ago, if they continued to make additional profit during the past five years.”

InventHelp reported that “from 2015-2017, we signed Submission Agreements with 6,564 clients. As a result of our services, 166 clients have received license agreements for their products, and 49 clients have received more money than they paid us for these services.” For those doing the math, 0.7% of InventHelp clients made more money than they paid to InventHelp. The question also remains, how much more money did these inventors make to justify using such as service at such low odds of success?

There are also a host of consultants that charge monthly fees to participate in their inventing schools or to be coached through the inventing process. Some of these entities do not fit the definition of an invention promoter, and thus they are able to operate in a gray area that is not regulated by the AIPA.

Despite periodic enforcement activities and occasional legislation, the AIPA and the U.S. government do not do enough to protect independent inventors from fraud, misrepresentation and misleading statements about the success rate of so-called invention help companies.

If you are an inventor, do yourself a favor and contact an IP attorney about your invention, and instruct them to run a patent search to determine the novelty of your idea. A reputable IP attorney will not try to sell you monthly subscription fees or con you out of thousands of dollars for an idea that may not be patentable. You will be in a much better position to determine how you should proceed with your idea (and your money).

Please email us if you have any questions or if you would like to receive a copy of the complaint against InventHelp.

What a bunch of turkeys!

Impulse-buying millennials spent approximately $482 million on counterfeit products last year on Black Friday. This year, the trend is set to continue as it is predicted that one-in-four will purchase counterfeit items due to the buyer’s inability to spot counterfeiters and the marketplace’s laissez-faire attitude toward counterfeit sellers online. Considering that this year’s online holiday spending is predicted to exceed $124 billion from November – December (with over $23 billion from Thanksgiving to Cyber Monday alone!), it is imperative that buyers beware, and that product marketers actively police their online listings; lest their sales and reputations get gobbled up by counterfeiters.

Cybersecurity firm, RiskIQ, reported that Black Friday scams have been on the rise significantly since 2016. Not only do consumers and product marketers need to be wary of the usual suspects (i.e. Amazon, Alibaba, eBay), but fake mobile applications are also a serious concern. According to tests run by RiskIQ, a search of popular retail brand names in conjunction with the term “Black Friday,” resulted in over 200 malicious apps. The firm’s full assessment revealed over 6,600 mobile apps were illegitimate; offering holiday shopping deals that were in reality, a scam.

Additionally, last year nearly a quarter of counterfeits purchased by millennials were done via social media sites such as Facebook and Instagram; thus, monitoring these platforms is essential to brand protection and a successful holiday shopping season.

Whether you are a shopper or a seller, here are some keys to identifying counterfeits online:

Deep discounts. A deal that is too good to be true is likely just that. If you can purchase a big    brand product like MAC lipstick or BEATS by DRE at a deep discount, the product is likely a fake.

Shipping from China. Products shipping directly from China can be a red flag, as most (not all) legitimate U.S. products are shipped from U.S. distribution/fulfillment centers.

Unverified third-party sellers. Most reputable online sellers also have their own product websites (e.g. snuggiestore.com). Do a web search prior to purchase to find out whether the seller is the same as the one listed on Amazon, and whether there is a major price difference in the products.

Typically, you won’t know if you purchased a fake until you have received your shipment. Signs to look for are:

Packaging that is flimsy or has misspelled words.

Electronics that do not have the UL (Underwriters Laboratory). This is particularly concerning as counterfeit electronics can be a safety hazard.

No country of origin or manufacturer contact information on either the packaging or the product itself.

Policing the sale of goods online can be a daunting and time-consuming task for product marketers – especially if a product is being heavily counterfeited. It also doesn’t help that each marketplace has a different system (some more user-friendly than others) for reporting and ultimately removing counterfeit goods and storefronts.

Ensure that you can take advantage of this season’s millennial impulse buying extravaganza by making certain consumers are purchasing authentic products from you or your authorized distributors, so that buyers and product owners, not counterfeiters and scammers, can benefit from holiday season spending.

How U.S. subsidies aid Chinese counterfeiters

The Universal Postal Union treaty (UPU) is a United Nations agreement that was established in 1874 and sets shipping rates between 192 member countries. In 1969, in an effort to boost economic growth, the UPU set lower shipping rates for small parcels (4.4lbs and under) mailed from developing countries. While this move by the UPU was clearly well-intentioned, it has not been reassessed in several decades. As a result, despite being the world’s second largest economy, China is still listed as a “developing country” and thus benefits from unreasonably low shipping rates – to the detriment of the United States and U.S. businesses.

Due to China’s classification under the UPU, the U.S. is forced to subsidize shipping costs for Chinese imports – including counterfeit products – to the tune of approximately $300 million annually. As such, it oftentimes costs Chinese manufacturers and counterfeiters less to manufacture and ship products to the U.S. than it does for American companies to ship products within the U.S. This has become an increasingly troubling matter for American businesses over the past few years as consumer shopping has largely moved from brick and mortar stores to e-commerce platforms such as Amazon. Specifically, Chinese counterfeiters are able to severely undercut the price of authentic goods on Amazon (and eBay, etc.); making the counterfeit a significantly more appealing option to the unaware consumer.

This concern was echoed by President Trump’s trade advisor, Peter Navarro, who stated in a recent op-ed that this pricing “inequity puts American small businesses and manufacturers at a severe competitive disadvantage.” Navarro went on to detail how U.S. businesses and manufacturers pay between $19 and $23 to ship a 4.4lb package while China post only pays $5. It does not take an economist to see how such a disproportion is harming U.S. businesses.

As such, and in keeping with his America first policy, President Trump formally moved last week to withdraw from the UPU; an effort that is widely supported by U.S. shipping companies and manufacturers. Withdrawing from the UPU is a yearlong process, and if finalized in 2019, the U.S. will lose access to internationally recognized barcodes that allow parcels to be shipped throughout the UPU member countries. However, because it does take so long to formally withdraw, it gives the Trump administration ample time to renegotiate the rules and rates with the UPU and then rescind its notice of withdrawal. This is the most likely outcome, and one that will benefit U.S. product inventors, owners and distributors considerably.

Until this matter with the UPU is resolved, it is essential for product marketers to monitor third party sales of their products online to ensure counterfeits are not being offered at a lower price (and quality). Federally registering product trademarks and copyrights, as well as utilizing tools such as Amazon’s Brand Registry can help combat these counterfeiters and more effectively remove unauthorized product listings.

The copyright: not just trademark’s sidekick

It’s a bird…it’s a plane….it’s a federally registered copyright? That’s right folks, the copyright has been spotted in numerous counterfeit and infringement lawsuits saving product owners significant losses by activating statutory (automatic and guaranteed) damages. While patents and trademarks get all of the publicity for protecting brands and products, the copyright fights infringement more effectively than its intellectual property (IP) counterparts; making it the unsung hero of IP protection.

The copyright is so overlooked that even product attorneys forget what a powerful member of the IP protection league it is. For example, patent rights enforcement tends to be technical and complex, often requiring long, costly legal battles with Tony Stark caliber experts to prove infringement. However, copyrights, which protect property such as images, illustrations, infomercials, and product packaging, are pretty easy to eyeball, even for an untrained juror.

Copyright is also the most affordable IP protection to secure. Moreover, copyright infringement triggers statutory damage awards that can soar to up to $30,000 per occurrence; plus, recovery of attorney’s fees. As such, trial attorneys are more willing to take on a (properly registered) copyright infringement case on a contingency basis. Of course, statutory damages are merely a fallback, with many product owners seeking actual damages (i.e., lost profits), which is an entirely different hulk of a task.

Additionally, the copyright is the only member of the IP protection league that successfully combats counterfeit sales on platforms such as Amazon; trademark registration alone will not suffice to remove counterfeits on Amazon. To be sure, the counterfeit seller merely has to allege that it is selling a legitimate product, and then there is no infringement thanks to the First Sale Doctrine (you bought it, you own it, you can resell it and call it what it is). In some instances, the infringer changes the name of the product, which effectively shields it from a trademark infringement claim altogether. However, the right to resell a product does not give rise to the right to display copyrighted images for the purpose of that sale. This is another reason why the copyright is so powerful.

While patents and trademarks are formidable tools for many reasons other than defending against knock-offs and counterfeits, with the copyright being such a low-cost titan in the IP universe, it’s a wonder more businesses do not utilize its armor. For maximum protection, copyrights need to be registered in a flash, so be sure to summon an intellectual property attorney prior to your product rollout.

A Counterfeiting Operation Ripped Off 2 Inventors. Then They Fought Back, and Won.

*The following was written by Michael Kaplan and appeared in the July issue of Entrepreneur*

On Valentine’s Day in 2015, Natasha Ruckel and her husband, Fred, were sitting in their living room in Gilboa, N.Y. Natasha was improvising on the piano, and Fred was listening while messing around with the couple’s cat, Yoda. Fred noticed a ripple in the living room rug, forming a half circle on one side. Again and again he tossed toys into the ripple and a delighted Yoda darted in and out. Natasha looked up from her playing. “That’s when we came up with the idea for the Ripple Rug,” she says.

The Ruckels, who had spent around 25 years earning their living in marketing and advertising for brands from PepsiCo to ESPN to Hasbro, were already in the midst of creating their first venture: an app that provided a way for amateur photographers to monetize online images. But they both agreed that the Ripple Rug was a better bet.

A couple of days later, Natasha went to Home Depot and bought some cheap pieces of carpet, and they got to work on a prototype. When they had that, they launched a Kickstarter campaign in May 2015, pricing the American-made product at $39.95, to test the market. Within 30 days, they received $15,000 in backing. They had the products made in Georgia for $15 each, and filled the orders.

The Ruckels were weighing their next step when, that fall, the opportunity of a lifetime hit. QVC, in conjunction with the Today show, hosted an ongoing competition called the “Next Big Thing” for entrepreneurs with new retail products. Participants presented their offerings on the TV program, and the winning products received an order from QVC.

Following an arduous vetting process — including proof of a multi­million-dollar insurance policy, a guarantee of having 1,500 items available for sale and sample videos of the Ruckels in pitch mode — Ripple Rug made the cut. “We drove into New York City, and at every exit, we practiced the pitch,” Fred remembers. “We were there by 5 a.m. and hardly slept the night before.”

They sold a few hundred units immediately. QVC bought 1,500 more and Ripple Rug became a top seller. “It was pretty damned amazing,” says Fred. “We were profitable out of the gate, which is virtually unheard of. It felt like a great moment.”

It was, and it wasn’t. Over the next 14 months, the Ruckels learned that coming up with a truly original innovation attracts not only devoted customers but also the kind of highly organized, deep-­pocketed bootleggers who rip off products and systematically grind their inventors into the ground — both financially and emotionally. “It creates so much discord that you are willing to give up the dream of entrepreneurship and go back to your day job,” says Fred.

In the thick of battle, however, the Ruckels learned critical lessons: the importance of copyrighting assets before launching; the reality that people will steal everything from your marketing pitch to your product to your advertising photos; the need to continually patrol for ripoffs and take action. They also got a darkly fascinating glimpse of how ruthless, well-funded, deeply sophisticated bootlegging operations work — and how, with tenacity, vigilance, a good lawyer and the right strategy, they can be beaten.

Continue reading at Entrepreneur.com

U.S., EU File IP Complaints Against China With the WTO

On March 23, the United States – through the World Trade Organization (WTO) – filed a “Request for Consultations” with the government of China concerning its technology and trade practices that are harming the IP rights of U.S. companies and innovators who enter into joint ventures with Chinese companies. The U.S. claimed that the Chinese measures are inconsistent with multiple articles of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The TRIPS Agreement, of which China is a member, sets out the minimum standards of intellectual property protection to be provided by each member.

In its Request for Consultations, the U.S. alleged that China violates the TRIPS Agreement insofar as it “denies foreign patent holders the ability to enforce their patent rights against a Chinese joint-venture party after a technology transfer contract ends. China also imposes mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology.”

For example, the Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies prohibits a U.S. patent-related technology license contract from restricting a Chinese party from improving the technology or from using the improved technology. Those same regulations go on to say that any improvements in imported technology belong to the party making the improvement. Therefore, a U.S. patent holder cannot stop a Chinese entity with which it is working from modifying or “improving” a patent, even ever so slightly. Then, that improved patent automatically belongs to the Chinese entity, which now has unfettered rights to license and distribute.

In April 2018, the Ukraine, Japan, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU), all formally requested to join the Consultations requested by the United States, generally citing substantial interests in the interpretation of the relevant provisions of the TRIPS Agreement.

In addition to requesting to join the U.S., the EU filed its own Request for Consultations on June 1, echoing and expanding upon the concerns of the United States. The E.U. Request goes on to say that “China’s measures appear to adversely affect exports to China of technology, including intellectual property rights, by European Union undertakings and also appear to nullify or impair the benefits accruing to the European Union and its Member States.” (emphasis added)

China’s Ministry of Commerce responded to the EU’s Request stating, in part, “The Chinese government has always attached great importance to the protection of intellectual property rights and adopted many strong measures to protect the legitimate rights and interests of domestic and foreign intellectual property rights holders.”

So, what happens next? According to the WTO Dispute Settlement System, the request for consultations formally initiates a dispute in the WTO. If the consultations fail to settle a dispute within 60 days after the date of receipt of the request for consultations, the complaining party may request adjudication by a panel. The findings of the panel will be adopted by the Dispute Settlement Body (DSB) of the WTO, unless a party appeals the finding or the DSB decides by consensus to not adopt the panel’s report.

As of June 7, a panel has not been requested as a result of the U.S.’s Request, even though the 60-day benchmark has come and gone, and the status remains “in consultations.” Stay tuned to this space for updates.

That Bites: “Aromaflage” Owner Settles False Advertising Claims

On May 3, 2018, the Federal Trade Commission (FTC) announced that Mikey & Momo, Inc., owner of “Aromaflage” perfumes and scented candles, agreed to settle charges that it used deceptive claims to sell its alleged mosquito-repelling products. According the FTC, the products, marketed as “fragrance with function,” lack any scientific evidence to support their insect-repellant claims.

According to their marketing materials, the elegantly packaged products sold by several retailers including Dillard’s, Overstock.com and Anthropologie, were “tested in the rice paddies of Southeast Asia as well as the finest locations in the Caribbean, Hamptons, and cottage country in the peak of summer,” and effectively repel mosquitoes for 2.5 hours. Further, the company claimed that the sprays and candles repel mosquitoes as effectively as 25% DEET. According the FTC’s complaint, the product website also stated that the sprays and candles were “rigorously tested at one of the world’s leading Universities” and “repels mosquitoes that may carry Zika, Dengue, Chikungunya, and Yellow Fever.” The FTC contends that none of these claims can be substantiated.

In addition to the lack of scientific evidence supporting the veracity of the products’ claims, the FTC was bugged by the fact that many of the purported impartial positive product reviews posted on the company’s Amazon storefront were, in fact, written by the owners of Mikey & Momo, as well as other individuals with a financial interest in the company.

Fortunately for Mikey and Momo, the proposed order settling the FTC’s charges does not include a monetary penalty. It does, however, prohibit the company and its owners from making any of the misrepresentations alleged in the complaint, and requires them to disclose clearly, conspicuously whether there is a connection between an endorser and the product or anyone associated with it.

Avoid the sting of the FTC by consulting with an attorney to make sure your product claims pass the smell test.

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