Phillips & Sutherland, LLP

DHS to Amazon: time to take responsibility for counterfeits

As most product marketers are aware, Amazon has a serious problem with counterfeits. What’s worse, is that many of the counterfeits are so convincing, consumers are unaware that they purchased inauthentic product. This is especially true when consumers purchase products under the seemingly protective marker of “fulfilled by Amazon.” Although not all consumers may be feeling the effects of the counterfeit pandemic (except that “brand name” products are of poorer quality than expected), product owners and marketers have been paying the price in terms of lost sales and goodwill for years. Fortunately, the current administration has taken up the cause.

On Friday, the Department of Homeland Security (DHS) released a report (Report) pursuant to President Trump’s April 3, 2019, Memorandum on Combatting Trafficking in Counterfeit and Pirated Goods. The Report – the first of its kind – outlines a series of recommendations and actions that should be taken by both the federal government and industry players in order to combat the counterfeit goods epidemic that has swept the US product industry. While Amazon is not directly named, it is clear from the practices and examples detailing how e-commerce sites have made it easy for counterfeit goods to reach the masses, that Amazon was most certainly the basis for much of the Report.

One of the critical determinations of the Report is that the US government needs to “ensure entities with financial interests in imports bear responsibility.” As such, companies such as Amazon will have to take steps to actively prevent counterfeits from reaching consumers, such as working more closely with US Customs and Border Patrol, as well as thoroughly vetting sellers on the platform.

The report provides the following list of “Best Practices” for e-commerce platforms and third-party marketplaces:

1. Comprehensive Terms of Service Agreements
2. Significantly Enhanced Vetting of Third-Party Sellers
3. Limitations on high risk products
4. Efficient Notice and Takedown Procedures
5. Enhanced Post-Discovery Actions
6. Indemnity Requirements for Foreign Sellers
7. Clear Transactions Through Banks that Comply with U.S. Enforcement Requests
8. Pre-Sale Identification of Third-Party Sellers
9. Establish Marketplace Seller IDs
10. Clearly Identifiable Country of Origin Disclosures

Additionally, and quite significantly, the Report recommends that the Department of Commerce consider changing contributory and/or vicarious infringement standards so that e-commerce platforms can be held liable for contributory trademark infringement. This would be a colossal change from the status quo, as numerous intellectual property owners have unsuccessfully sued Amazon for trademark infringement due to its role in counterfeit product distribution.

Moreover, the groundbreaking Report goes on to suggest the development of a national awareness campaign that “should involve platforms, rights holders, and the applicable government agencies to provide education for consumers regarding the risks of counterfeits as well as the various ways consumers can use to spot counterfeit products.”

While we may not see a decrease in counterfeits immediately, the DHS Report and subsequent actions to be taken are a major step in the right direction. For more information on the Report and what it means for intellectual property rights holders, please email us at DLG@DigitalLawGroup.com.

♪ CCPA is coming to town ♪

It certainly was a very happy holiday season kick off for U.S. retailers in November, with Black Friday seeing $7.2 billion in digital sales alone (up 14% from last year). However, increased consumer spending is not the only thing causing so much hustle and bustle for retailers and online businesses; new privacy laws are on their way and companies are dashing to get compliant.

Over the past month, most everyone, whether a California resident or not, has received notices from numerous online companies encouraging users to review updates made to the companies’ terms of use and privacy policies. These seemingly synchronized updates are certainly not a coincidence, but rather last-minute efforts to wrap up compliance with the California Consumer Privacy Act (CCPA), which is set to go in effect on New Year’s Day.

Coming on the heels of Europe’s GDPR, the CCPA is the most comprehensive set of online privacy regulations in the U.S. The new rights granted to consumers under the CCPA include:

• The right to know what personal information is collected, used, shared or sold, both as to the categories and specific pieces of personal information;

• The right to delete personal information held by businesses and by extension, a business’s service provider;

• The right to opt-out of sale of personal information. Children under the age of 16 must provide opt in consent, with a parent or guardian consenting for children under 13.

• The right to non-discrimination in terms of price or service when a consumer exercises a privacy right under CCPA.

Businesses are subject to the CCPA if one or more of the following are true:

• It has gross annual revenues in excess of $25 million;

• Buys, sells or receives the personal information of 50,000 or more consumers, households, or devices; or

• Derives 50 percent or more of annual revenues from selling consumers’ personal information.

The burden imposed by the CCPA is significant, as it not only requires companies to overhaul their websites to ensure that all notices and opt-out links are provided to users, but it also likely requires changes to company internal procedures and employee training in order to maintain compliance.

Violations of the CCPA create private causes of action for consumers, and also empowers the CA Attorney General (AG) to pursue cases against businesses for damages of up to $7,500 per violation for intentional, or willful violations. So, the countdown is on for companies to contact a privacy attorney and, at a minimum, take steps to reduce exposure to private suits. AG enforcement isn’t set to begin until mid-2020, so there is still time to get your reindeer in a row.

Amazon fulfilling orders for hazardous products; possibly contributed to fatal accident

As most product marketers are aware, Amazon has a serious problem with counterfeits. Some of the most innocuous products such as wipes for cleaning eyeglass lenses are being counterfeited and sold on the platform at an alarming rate. What’s worse, is that due to the “flea market” atmosphere of the site, dangerous and potentially fatal products are flooding the market; many under the seemingly protective marker of “fulfilled by Amazon.”

A recent investigation by the Wall Street Journal revealed that over 4000 items for sale on Amazon were mislabeled, declared unsafe by US agencies, or all-out banned by federal regulators. Horrifically, over 2000 of those Amazon listings were medications and children’s toys that lacked proper health and safety warnings. Specifically, the investigators ordered and tested 10 children’s products, many promoted as “Amazon’s Choice.” Four failed tests based on federal safety standards. Moreover, 46% of the 4152 unsafe products were fulfilled by Amazon.

Sadly, a mislabeled product sold on Amazon was involved in the death of one consumer. In 2014, Albert Stokes purchased a motorcycle helmet on Amazon that was listed as certified by the U.S. Department of Transportation (DOT). Subsequently, Mr. Stokes was involved in a fatal accident wherein his helmet came off. His mother sued Amazon claiming the helmet was defective, but ultimately settled for $5,000 with no admission of liability from Amazon. However, in July 2019 the National Highway Traffic Safety Administration stated that the helmet was not DOT compliant and that it had been recalled. At that time, it was still listed as DOT compliant on Amazon. The listing has since been removed (5 years after the accident).

Whether you are selling lens wipes or motorcycle helmets, cheap counterfeits of your product can pose hidden dangers to consumers. Not only does this erode your brand image, but it can also open you up to unwanted liability claims. While Amazon is taking steps to make it easier to monitor and remove counterfeits from the platform, it is far from a perfect system. Product marketers should consult with an experienced attorney who can navigate Amazon’s platform and help ensure that their trademarks, copyrights and brand name do not appear on listings for potentially hazardous counterfeits.

Supreme Court says trademark law is FUCT up; violates First Amendment

In a huge victory for clothing designer Erik Brunetti and free speech, on Monday, June 24, the Supreme Court of the United States (Court) struck down part of the Lanham Act that bans trademarking names and logos that are “immoral, deceptive, or scandalous matter.”

The case involved a dispute over a trademark application filed back in 2011 for the clothing line “FUCT” (pronounced as the individual letters F-U-C-T). The United States Patent and Trademark Office (USPTO) refused to register the trademark for the brand stating that the mark was a vulgar term and was banned from registration under section 2(a) of the Lanham Act. The Act essentially allowed the government (in this case, the USPTO) to impose its views about what is moral and suppress those that it, in its sole discretion, deemed distasteful.

Fortunately, the majority of the Court found that USPTO cannot exercise this discretion. It held that the “immoral or scandalous” ban discriminates on the basis of viewpoint, and therefore runs afoul of the First Amendment. The Court cited many examples of this discrimination, including the USPTO’s refusal to register Bong Hits 4 Jesus while granting trademark protection for a game called “Praise The Lord” and a line of clothing called “Jesus Died For You.”

This ruling comes almost two years after a similar case involving Asian-American rock band, the Slants, wherein the Court held that clause of the Lanham Act that banned “disparaging” marks also violated the First Amendment.

With the recent strike downs in the law, we are likely to see a slew of interesting trademarks being registered with the USPTO. Additionally, it is also almost certain that the next test of the USPTO’s discretion will be on its handling of marks for cannabis products.

Intellectual property, including trademarks, can be incredibly valuable assets and are key to protecting against infringement. If you are launching a new brand or product, be sure to work with an experienced intellectual property attorney to ensure you don’t get FUCT by competitors.

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.