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Disrupting Illegal Business of Vendors Who Sell Counterfeit Goods Through Rented or Leased Premises





November 7, 2007

Sponsoring Committee: Anti-Counterfeiting & Enforcement Committee (ACEC)


Resolution 

WHEREAS, INTA has taken consistent positions against trademark counterfeiting throughout the world;

WHEREAS, best practices need to be identified to disrupt trade in counterfeit goods, particularly through legitimate supply channels;

WHEREAS, landlords that have knowledge that their tenants, other temporary occupants or stall holders deal in counterfeits and take insufficient action in response should be held contributorily or vicariously liable in order to meaningfully disrupt the illegal business in counterfeits; and

WHEREAS, the laws of most countries do not clarify the conditions under which a landlord may be held liable, but courts in various countries, including the U.S. and China, have done so;

BE IT RESOLVED, that the International Trademark Association urges governments, judicial authorities and other concerned parties to consider the following measures to meaningfully disrupt the illegal business of vendors who sell counterfeit goods through leased premises:

1. Ensure through new laws, regulations, administrative guidelines and judicial determinations, as appropriate, that landlords are held liable where, after being put on notice of counterfeiting or other trademark violations occurring on their premises, such landlords fail to proactively investigate the matter and, upon confirming the facts, take appropriate action to deter the tenants engaged in such activities which may include terminating the leases of such tenants or otherwise removing them from the premises;

2. Require landlords of tenants that have previously been found liable for counterfeiting or other trademark violations to take reasonable steps to prevent or otherwise control future violations on their premises, e.g., through regular searches of leased premises/stalls, the adoption of new lease contracts explicitly banning dealings in offending goods, and the imposition of bans on tenant dealings in particular brands;

3. Clarify the conditions under which a landlord may be held criminally and civilly liable under the theories of contributory liability, aiding and abetting and vicarious liability;

4. Treat as proceeds of crime (i.e., money laundering), the income derived by landlords who knowingly rent or lease premises to tenants that deal in counterfeit goods from such leased premises; and

5. Establish rules requiring that all those who rent their premises/property to others, whether as landlords or licensors, so that those tenants/licensees may sell goods to the public, obtain from their tenants/licensees and retain records as to their identities and addresses, including vehicle identification if vehicles are brought onto the premises, with failure to do the same leading to possible criminal sanctions and/or financial penalties. 


Background

The ACEC is of the view that civil, and in extreme cases, criminal liability should be imposed on landlords that lease premises to parties that deal in counterfeit goods. Such liability is necessary to address rampant counterfeiting in many developed and developing countries. Practically speaking, police and brand owners in many countries have insufficient resources to cost-effectively address counterfeiting. There have been a number of circumstances around the world where such liability has been confirmed based on broad provisions in intellectual property legislation. A few such instances are also discussed in the paragraphs below. The ACEC considers these instances as “best practices” in this area. And in regions where landlord liability theories have been established, brand owners have found it easier to cooperate with landlords in dealing with counterfeiting (as well as copyright violations) on a much more cost-effective basis, and without the need to draw on government resources.

Supplying Convenience to Infringers
ACEC has noted the developments in landlord liability litigation in China, in particular the “Silk Street Market” case, decided in 2006 in Beijing. The Silk Street Market is one of the most well known markets offering counterfeits in China, and managed by a company called Beijing Xiushui Street Garment Market Company Limited (“Xiushui”). Louis Vuitton Malletier, Burberry, Prada, Gucci and Chanel separately sued individual vendors and Xiushui in joint proceedings for trademark infringement on almost identical facts and grounds. Prior to filing suit, the warning letters had been sent to Xiushui requesting that it take measures to stop the infringing activities. Notwithstanding this notice, the landlord took no action to stop the vendors from continuing to sell counterfeits and legal actions were then taken against the vendors and the landlord. Evidence was also submitted during the proceedings regarding the overall lax efforts of the landlord to control counterfeiting. A decision in the first instance was issued in December 2005 by the No. 2 Intermediate People’s Court, followed by an appeal decision issued in April 2006 by the Beijing Higher People’s Court, both of which found that Xiushui, as manager of the market, had a duty to take timely and effective measures to stop infringements, thereby constituting contributory liability under the PRC Trademark Law (or more specifically “providing facilitating conditions” to infringement). The Defendants were ordered to stop the infringement and pay a relatively small amount of compensation for damages and legal expenses.

In deciding that there was landlord liability, the People’s High Court of Beijing considered four main legal issues, namely (1) whether the individual infringed the trademark owners’ rights; (2) whether the landlord bore a duty to take timely and effective measures to stop the infringements within the marketplace it managed and controlled; (3) whether the landlord had the requisite knowledge; and (4) whether the landlord furnished the conditions that facilitated the vendors’ infringements.

The Court found in favor of the trademark owners on all four issues, on the basis that: the individual vendor was clearly infringing the trademark owners’ registered trademark rights; the lease contracts with the individual vendors provided that Xiushui furnished premises for the individual businesses upon receipt of rentals and a deposit; the plaintiffs had sent warning letters putting the landlord on notice of the infringements but failed to respond or investigate the allegations in the notice; and that the landlord had the power to determine the business scope and types of goods sold by the vendors.

The Supreme People’s Court published a notice in April 2007 recognizing the appeal court decision a “Top 10” case of 2006, thereby increasing its persuasive influence on courts nationwide. That same month, the national government included landlord liability as a new plank in the country’s 2007 IP enforcement “Action Plan.”

Building on the above, brand owners have recently been able to establish cooperative arrangements with landlords in major cities in China, which has led to more cost-effective enforcement. Local Administrations for Industry and Commerce in certain cities have also imposed fines on a number of landlords (including Xiushui) as a means of encouraging them to take more proactive measures to prevent and stop counterfeiting.

The ACEC consequently recommends that INTA urge governments to ensure through new laws, regulations, administrative guidelines and judicial determinations, as appropriate, that landlords are held liable where, after being put on notice of counterfeiting or other trademark violations occurring on their premises, such landlords fail to proactively investigate the matter and, upon confirming the facts, take appropriate action to deter the tenants engaged in such activities which may include terminating the leases of such tenants or otherwise removing them from the premises.

Frequent Searches and Immediate Eviction
ACEC notes that in June 2004 the Thai Ministry of Commerce, along with a number of private sector representatives and law enforcement agencies, signed a Memorandum of Understanding (MOU), which primarily dealt with copyright piracy at the retail level. In the summer of 2006, the same parties entered into a new Memorandum of Understanding or MOU to coordinate efforts and cooperation among the private sector, police agencies and law enforcement to provide a more effective regime to deal with the infringement of intellectual property rights, and particularly counterfeit and pirated goods. In specific geographic areas known as “special restricted areas” or “restricted areas,” there was an agreement that the government would conduct IP enforcement against counterfeit products in special restricted areas, whereas the private sector would be responsible for enforcement in restricted areas.

Under Thai law, there are no explicit provisions to deal with vicarious or contributory liability for infringement. Rather than reform Thai law to enable IPR owners to take legal action against landlords, the Thai IP enforcement and policy officials have used the MOU mechanism to seek landlord cooperation. A key element of the new MOU is the obligation of department stores and landlords to immediately terminate leases of tenants where the Department of Intellectual Property informs the store that the tenant has been prosecuted for IP infringement.

ACEC also notes that many of its member companies have been pursuing theories of third party liability against landlords or other property owners at locations where counterfeit goods are sold. This approach is particularly popular in New York City where in addition to the body of Federal case law on the subject, there is a section of the New York Real Property law (NY RPL 231) that specifically supports a finding of liability against a landlord for illegal acts committed by a tenant on the premises if the landlord had notice of these illegal acts and failed to respond appropriately. The New York State Courts have concluded that trademark counterfeiting is an illegal activity under this statute and it is therefore applicable to situations where counterfeit goods are sold from the premises. In addition, New York City government agencies (NYPD, District Attorney's Offices, Mayor's Office) have also followed this same approach and have relied heavily on the New York City Administrative Code, specifically Section 7-703, which enables the City to padlock any “building, erection or place” and levy fines on its owner when such building or place is found to be used for commission of an ongoing nuisance like trademark counterfeiting.

Trademark owners have also entered into binding agreements with property owners which can provide for the entry of Permanent Injunctions on Consent, inclusion of terms in future leases with tenants that specifically prohibit the sale of counterfeit goods on the premises, immediate eviction of tenants found to be in violation of these lease terms, posting signs indicating that counterfeit goods are prohibited from sale at locations and frequent monitoring of the locations at the property owners expense to prevent the ongoing trafficking in counterfeit goods from their premises.

Therefore, ACEC recommends that INTA urge governments to require landlords of tenants that have previously been found liable for counterfeiting or other trademark violations to take reasonable steps to prevent or otherwise control future violations on their premises, e.g., through regular searches of leased premises/stalls, the adoption of new lease contracts explicitly banning dealings in offending goods, and the imposition of bans on tenant dealings in particular brands.

Aiding and Abetting
ACEC has also noted the case of Redcar & Cleveland Borough Council v Bank in the UK, which was the pioneering case in 2003 of successful criminal prosecution against a landlord in connection with counterfeits sold on premises it owned or controlled. The case involved several sellers at local fairs who were prosecuted for selling counterfeit goods. In addition, the operator of the sales at Redcar Racecourse, Mr Banks, was charged with aiding and abetting the sale of counterfeits. Mr. Banks argued that he should escape liability on the grounds that he was not an expert in counterfeit goods, that he had not been there at the time when most of the sales took place and, finally, that the traders hid their counterfeit products from him when he was in their vicinity. These arguments did not succeed. The Court held that although there was no evidence that Mr. Banks was involved in selling the goods himself, the counterfeit nature of the goods was self-evident. His failure to prevent the crime amounted to aiding and abetting offenses under the Copyright Designs and Patents Act 1988 and the Trade Marks Act 1994. Mr. Banks was found guilty of 24 counts of copyright and trademark offenses and fined £6,000 plus £2,000 costs.

Therefore, ACEC recommends that INTA urge governments to establish liability regimes whereby landlords are liable for trademark infringement or counterfeiting offenses when they fail to prevent trademark counterfeiting offenses on the premises that have been rented or leased by such landlords and in those situations where the counterfeit nature of the goods was self-evident to the landlord who failed to prevent/stop the crime, thereby aiding and abetting to the trademark counterfeiting offenses.

Money Laundering Prosecution
ACEC has noted that the Hertfordshire Trading Standards in UK recently succeeded with an innovative prosecution against the owners and directors of Wendy Fair Markets where counterfeit goods were regularly found. The owners were prosecuted and found guilty of a series of money laundering offenses under the UK’s Proceeds of Crime Act, 2002, section 328(1) which makes it an offense to become concerned in "an arrangement" which one knows or suspects facilitates the acquisition, retention, use or control of "criminal property." The criminal property in this case was the money, in the form of rent, derived from those stallholders selling counterfeits, which is a criminal offense. It was enough that the market owners knew, or suspected, that the money had been generated through a trade in counterfeit goods and this was established by the number of warnings given to the owners before the prosecution.

ACEC notes that this approach is likely to have a real impact on the trade in counterfeits, particularly if there is a greater move to confiscating the assets of those dealing in or otherwise benefiting from counterfeits. Through a previous Board resolution, INTA recommends criminalization of the laundering of proceeds from counterfeiting to ensure that counterfeiters are not profiting from their crimes and strengthening confiscation regimes that provide for the identification, freezing, seizure and confiscation of funds and property acquired through counterfeiting. In the light of the aforesaid, ACEC further recommends that INTA urge governments to treat as proceeds of crime, the rent income derived by landlords who knowingly rent or lease premises to the tenants that sell counterfeit goods from such rented or leased premises.

Keeping Records
ACEC has noted the utility of the Kent County Council Act and the Medway Council Act 2001 (the "Kent Act”), which was the first clear foray into enforcing landlord liability in the UK. It was designed to regulate the trade in second hand goods and, in particular, to hamper the disposal of stolen property. The Kent Act requires dealers in second hand goods to be registered and for landlords hosting such sales to keep certain records relating to the sellers. A failure to observe the obligations could lead to criminal sanctions and/or financial penalties. It is widely acknowledged that these measures have been effective in reducing the trade of counterfeit goods in the county of Kent. However, this legislation only relates to one relatively small region in the southeastern UK.

Therefore, ACEC recommends that INTA urge governments to establish rules requiring all those who rent their premises/property to others, whether as landlords or licensors, so that those tenants/licensees may sell goods to the public, shall obtain from their tenants/licensees and retain records as to their identities and addresses, including vehicle identification if vehicles are brought onto the premises, with failure to do the same leading to possible criminal sanctions and/or financial penalties.