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.

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.

Copper pots and pans (or at least copper in color) are the latest sensation in cookware. Big sellers such as Copper Chef (Tristar Products, Inc.), Red Copper (Telebrands Corp.) and Gotham Steel (E Mishan & Sons, Inc (“Emson”)) have spent thousands in marketing dollars to promote these competing products. However, with so many cooks in the kitchen, someone is bound to get burned; and if Keith Mirchandani has it his way, it won’t be Tristar.

On February 21, 2017 Tristar filed lawsuits against Telebrands (and Bulbhead.com LLC) and Emson for patent infringement, trade dress infringement and unfair competition. According to the complaints, Tristar has been marketing its Copper Chef product line since as early as June 2016 and holds three patents for its Copper Chef line, two of which were just issued this month. Tristar has also filed for injunctions to prevent Telebrands and Emson from “making, using, selling [and] offering for sale” the products allegedly infringing on the Copper Chef line. As of today, February 28, 2017, the orders have yet to be granted.

This isn’t the first time these companies have faced off in court, and at least Telebrands has proven time and time again that it has the recipe for stalling litigation so it can continue to sell a product. Telebrands’ secret sauce: the United States Patent Trial and Appeal Board (“PTAB”).

When an action is filed with the PTAB, courts halt litigation until such time that the PTAB makes a ruling on whether the patent in question is valid. In at least two separate lawsuits brought against Telebrands for patent infringement (for its Pocket Hose & Balloon Bonanza products), the company has filed invalidation proceedings with the PTAB challenging the validity of the patents it was accused of infringing. The strategy for invalidation is that if the patent is determined to have been improperly issued then, no infringement could have occurred. Telebrands successfully invalidated some of the patent claims with regard to the balloon product, but the PTAB declined to review the hose patent on the basis that it was determined to be valid. The action is now proceeding in court and could still take years to reach an outcome.

A successful product invites copycats, and Tristar will likely have a long battle on its hands for this one. It will be interesting to see if Telebrands stays true to its methods and attempts to invalidate Tristar’s patents.

It is imperative to have seasoned intellectual property attorneys filing patents and trademarks and diligently monitoring infringing activity as well as advising you on the risks of infringing third party patents. In some instances, it is more cost effective to license a product than to knock it off and face the consequences. A well-planned IP strategy will help product owners to better survive or avoid the messy and lengthy proceedings of IP litigation. Remember, if you can’t stand the heat, get out of the kitchen.

Please email Jessica@DigitalLawGroup.com if you have any questions or would like more information regarding the content above.

The World Trade Organization stipulates that tariffs can only be imposed when there is material injury to the domestic industry, such as the detrimental effects of currency manipulation. However, in the U.S. Treasury’s most recent semi-annual report, China was not found to be maintaining an artificially low Yuan. However, if the Treasury Department did designate China a currency manipulator, a one-year mandatory negotiation period would be required to attempt to resolve the problem. If unresolved, the U.S. could then retaliate by, among other actions, implementing the 45-percent tariff proposed by the Trump administration. However, given the current administration’s unconventional approach, tariffs could be levied – theoretically – without congressional approval.

The news media has been bombarding us with information on how this tariff will affect the auto industry, in particular, but what do increased tariffs mean for others – such as the consumer product industry? As it is commonplace for such products to be manufactured in China, if a product marketer chose to continue to manufacture in China after the implementation of a tariff, that $19.99 retail price could be pushed up to $28.99. Alternatively, rather than continuing to manufacture in China (and be subject to the threat of higher tariffs), the product marketer can choose to move its manufacturing to the U.S. or elsewhere.

There is no dispute that manufacturing is costlier in the U.S. than in China; that is why most manufacturing occurs overseas. However, in addition to current (underutilized) incentives, such as the Domestic Productions Activities Deduction, and export incentives including the Interest Charge Domestic Sales Corporation (IC-DISC), President Trump is promising to cut regulations and lower corporate taxes. This could, theoretically, make U.S. manufacturing a viable option. Further, should this tariff become a reality and manufacturing jobs do come home, it could significantly reduce the number of counterfeit products entering the country. This, perhaps, may be the biggest advantage to manufacturing in the U.S. or other countries that are not on the counterfeit watch list, such as Bangladesh or Vietnam.

As the product industry is fully aware, China is severely lagging in intellectual property protections. Product leaks (sometimes by the manufacturer or its employees) and subsequent infringement are rampant. A winning product is likely to be knocked off and/or counterfeited and selling on Alibaba and Amazon before it even hits the shelves.

The Commission on the Theft of American Intellectual Property reported that China is responsible for as much as 80 percent of counterfeit goods globally. It is unquestionably the largest source of counterfeits in the United States. Global imports of counterfeit and pirated goods are worth nearly half a trillion dollars per year, with 20 percent of that affecting U.S. intellectual property and product owners. In 2013 alone, U.S. Customs and Border Patrol (USCBP) seized $1.3 billion in counterfeit goods – and that’s just what was detected. Pulling manufacturing out of China would significantly reduce the ever-growing influx of counterfeit items into the country and around the world.

An organization’s ability to change and innovate quickly is a key competitive advantage. Similarly, its ability to anticipate and deal with change in a challenging environment is tantamount to survival. Any prudent business owner will need to do an analysis of alternative sources of supply, or renegotiate with suppliers for better pricing to offset increased tariffs and then decide the best course of action. Contact a knowledgeable attorney and seek professional accounting advice to conduct due diligence on the best options for your business.

Thanks to the attention the product has received, Murray has decided that rather than sell directly in the U.S., he is auctioning the U.S. patent and trademark to the highest bidder, transferring global rights (not including Australia). The auction commenced on Sept. 30, and Murray has suggested the Hamdog patent and trademark is worth – wait for it – $100 million! Although many experts have advised that this estimate is unrealistic, Murray pointed out that if the Hamdog picked up just 1-percent of the U.S. burger market, it would equate to approximately $2.5 billion in sales annually.

Assuming Murray is correct and the Hamdog is successful in the U.S., perhaps selling the patent is not the most lucrative option for him. In some cases, licensing the patent or distributing the product yourself can lead to a bigger payday. For example, if Murray licensed the Hamdog patent and trademark in the U.S. for just a 1-percent royalty, using his figures, he could earn up to $25 million annually. At 2 percent, he’s looking at $50 million annually.

Of course, these numbers are based on sales, rather than adjusted gross revenues, but you get the idea. By licensing the intellectual property, in just a few short years, Murray could make more money than he would by just selling it. Keep in mind, this is based solely on U.S. sales; throw in a few licensing deals in other countries, and he’s looking at several huge royalty checks.

On the other hand, Murray could have opened Hamdog restaurants in the U.S. and franchised the business. Although this could have also been a great option, it requires startup capital along with all of the responsibilities and expenses that come with running a business.

Compared to a $100 million sale and walking away from any potential liabilities, or licensing the intellectual property for millions of dollars a year, franchising is probably the least profitable option – in the short term, that is. However, there is no way to know for sure until the results of the auction are made public and the product is rolled out in the states.

Like Murray, inventors have a lot to consider when deciding what to do with their intellectual property. In addition to the financial side of things (i.e., out-of-pocket expenses and potential profits), there are pros and cons to both licensing a product and manufacturing/distributing the product. See below for some examples.

Licensing

Distributing/Manufacturing

Selling/Auctioning

When an invention has a high probability of success, having to weigh the pros and cons of how to proceed should be a great problem to have. On the other hand, when the financial benefits are largely unpredictable, choosing whether to license, sell, or distribute the product can be quite challenging and risky, and should also factor in personal and professional goals. Either way, inventors should always consult with trusted industry professionals to determine how best to proceed with a product.