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The Evolving Battle Against Counterfeits image

The Evolving Battle Against Counterfeits

Brands are filing hundreds of lawsuits annually as part of a growing strategy in the battle against counterfeit goods.

This strategy involves filing a single Schedule A (Lanham Act) IP complaint against online merchants of counterfeit goods. The law firm ArentFox Schiff, which has a substantial intellectual property practice, for example, targeted 175 largely China-based merchants in a trademark infringement suit last fall filed on behalf of The Texas Chainsaw Massacre rights owner Vortex Inc.

Schedule A complaints are being more closely examined by the licensing community because of cost savings and the speed at which claims can be litigated —as little as three to four months for a judgment.

“More brand owners have become aware of the [Schedule A] process and are finding that the judgments against counterfeiters are effectively serving to reduce sales of illegal merchandise,” said Pamela Deese, a partner at ArentFox Schiff. “After brand owners file one to three cases, they start seeing a reduction in the counterfeiting of their goods. It is certainly possible that professional counterfeiters redirect their efforts to another brand. Counterfeiting is big business of an illegitimate nature. Until the counterfeiters are sufficiently disincentivized, they will keep going.”

A Schedule A suit starts with a complaint and motion for a Temporary Restraining Order (TRO) and is typically filed under a seal (i.e. confidential), meaning that, initially, the defendants are not publicly identified or served with a complaint to avoid alerting them of the pending request for a TRO. This is a common process under U.S. law, which prevents defendents from moving assets or further evading the law, IP attorneys said. The TROs in Schedule A cases are generally granted based on evidence of counterfeiting presented to the judge, who may direct defendants’ websites selling counterfeit goods be shut down temporarily and assets at payment processors like Alipay in China and PayPal in the U.S. be frozen.

These Schedule A filings are one more arrow in the quiver of brand owners that is necessary, IP attorneys say, to combat a spike in counterfeit goods flowing into the U.S. A report from the Library of Congress estimated illegal U.S. and international sales of counterfeits at $1.7 trillion to $4.5 trillion annually. Consumers are directly affected by counterfeit products due to a lack of safety testing, and legitimate businesses are affected by significant loss of revenue, good will, and product liability claims.

Since 2013, more than 3,000 Schedule A complaints have been filed in the Northern District Court of Illinois in Chicago, including 913 cases last year (up from 733 in 2021). So far this year, 250 cases have been filed in that federal court. Of those 3,220 cases, 70% were listed as “default judgments” and 28% were “voluntary/joint dismissal,” with the remaining 2% reaching some other resolution.

Default judgments are rendered by a court when defendants are served with complaints but do not appear in the proceedings or respond in any way to a complaint. Counterfeiters generally do not defend themselves in any manner in Schedule A cases, notwithstanding the fact that they are served with the complaints and all filings in each case.

“This system works when you are banking on [a] default [judgement] and many times you are suing a company where there is no real expectation of them having U.S. assets, but you hope they do,” said Jed Ferdinand, Senior Managing Partner at Ferdinand IP Law Group. “That is something you can’t know until you start the suit. These aren’t really cluttering the court’s docket because most don’t go beyond the default stage.”

While many brand owners and their counsel hail the Lanham Act Schedule A as an effective means for cracking down on counterfeiters, one critic of this legal tool is Eric Goldman, a law professor and the Associate Dean for Research at Santa Clara University College of Law.

“Each step in the scheme nominally follows the rules, but the unique combination of steps nevertheless leads to outcomes that do not comport with due process and the rule of law,” Goldman said. He argues that the Schedule A process could be abused, potentially going beyond legitimate policing of online infringement, and causing harm to marketplace operators, innocent vendors, and marketplace consumers.

As the tools bad actors use become more sophisticated, the strategies (legal and otherwise) employed by the licensing industry must also evolve. It’s crucial these strategies not only keep pace with sales of counterfeit products, but also ensure the protection of brand owners, legitimate vendors, and consumers.

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