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FIGHTING FAKES

COUNTERFEITED BRANDS ENLIST LANDLORDS IN THEIR FIGHT AGAINST KNOCKOFFS

By Joel Groover

When the world's retail brands went to war against merchandise counterfeiters, they naturally expected to face one pitched battle after another, and one heated skirmish upon another. They never anticipated a game of whack-a-mole; as soon as one seller of fakes got shut down over here, another would pop up over there.

But the major brands are in no mood for fun and games. Global traffickers in knockoff goods are light-footed, rootless and crafty. So retailers are fixing their legal guns on a target with fixed addresses and deep pockets: retail landlords.

This so-called “landlord strategy” is on the rise as the Nikes, North Faces and Pradas of the world come to grips with a crime that costs them an estimated $600 billion a year and has mushroomed during the past two decades, according to Nils Montan, president of the Washington-based International AntiCounterfeiting Coalition.

The strategy works this way: A retailer hires an investigator who finds knockoffs at a store; the trademark owner then sends the landlord a letter threatening a civil suit unless the latter takes action to stop the sale of fakes. “Brand owners are always looking for leverage,” Montan said. “They're trying to work up the chain to find somebody who has a fixed address, assets, a business to protect, a reputation they care about.”

This cease-and-desist phenomenon demands a careful response from property owners, attorneys say. “We're starting to see this, and we're starting to recommend that our landlord clients take certain steps to try to deal with it,” said Richard R. Goldberg, a partner in the Philadelphia office of Ballard Spahr Andrews & Ingersoll.

“The whole intent of the cease-and-desist letters is so that the landlord can't later argue, ‘I did not know it was going on,' ” said Larry Munn, chairman of the privacy law group at Clark Wilson, a Vancouver, British Columbia–based law firm. “They are sort of setting up the battle, taking away a potential defense from landlords. So landlords who have received these letters are going to have to be particularly vigilant.”

Not only are more brands taking legal action against retail property owners, but they now stand a better chance of winning those cases in some countries. In the U.S. a spate of court decisions has reinforced the concept that owners — whether flea market operators, shopping center landlords, even Internet auction sites — can be held liable for their sellers' illegal conduct, says Alison Arden Besunder, a partner at Arent Fox, in New York City. Lawyers working for major brands in China have used legal action against property owners to win greater protection for their clients' trademarks. Similar efforts are under way in Malaysia, the Philippines, Thailand and elsewhere. These efforts prompted Managing Intellectual Property, a trade journal, to dub the strategy “a new front in the war on fakes.”

Trademark owners have gone after landlords in places long notorious for the sale of knockoffs, such as Beijing's Silk Market and New York City's Canal Street. Their private investigators also browse conventional regional malls and shopping centers. “Mostly, it comes from the kiosks, the people that are making the hats or selling the cell phone covers,” said Vaughn Volpi, president of Columbus, Ohio–based PICA Corp., an investigation agency that works with some 50 major brand retailers.

Among those known for selling fakes, intentionally or otherwise, are dollar stores and mom-and-pop stores that cater to shoppers originally from developing countries, observers say.

In today's global marketplace, where counterfeiters have unprecedented access to manufacturing technology and retail distribution networks, knockoffs are by no means limited to knickknacks. “I went into a children's store that has relatively expensive merchandise, and they were still infringing items,” Besunder said. “It doesn't break down in terms of price or even market segment. It can be any tenant. We would assume that … [a] major retailer might not have that problem, but you never know.”

For shopping center owners, this all adds up to greater risk of being sued. Fortunately, landlords can take some simple steps to protect themselves, lawyers say. Under U.S. law a trademark owner must prove that a landlord knew that knockoffs were being sold inside one of its properties and yet took no action against the offending tenants. “It is not just because it sits in your real estate, in somebody's pushcart or store, that you are liable,” said Goldberg. “There has to be some level of knowledge.” This is why a letter from a trademark owner is good reason for a landlord to be demonstrably cooperative, attorneys say. But not everyone chooses to be, according to Volpi. “We've had a lot of situations where flea markets — but also malls — have been uncooperative and have literally shooed us off with security,” he said. “We've had to come back with the police.”

Volpi theorizes that some landlords react defensively in these situations “just because it is bad business for them to have anything negative going on in their mall. At the end of the day, though, it gets worse if you don't cooperate.”

Shopping center owners should draft specific policies against the sale of counterfeit merchandise by their tenants and then make sure their tenants and property managers understand that those policies will be enforced, Munn says. This is a good idea even in countries where the case law related to landlord liability is less clear than in the U.S., such as Australia, Canada, Germany and Italy, Munn says. “The trademark copyright owners are becoming more active,” he said. “You don't want a situation where you suddenly find that landlords are being found liable and even minimal steps weren't taken.”

Landlords could also insert lease clauses giving them the authority to evict tenants that sell fakes, Munn says. Still, the burden of proof that a tenant is guilty of selling fakes lies not with the landlord but with the brand owner levying the charges. “You have to give tenants the benefit of the doubt when you first approach them,” Munn said. “Simple allegations aren't sufficient.”

Montan says the shopping center industry would do well to study the successful anti-counterfeiting system put in place by the Torrance, Calif.–based National Flea Market Association. A 1996 case in which a flea market owner was found guilty of tolerating the sale of pirated music, Fonovisa, Inc. v. Cherry Auction, Inc., helped establish the liability of landlords in these situations. In the wake of that case, the flea market industry developed a “three strikes and you're out” policy, Montan says. Under these guidelines, a vendor shown to have sold or tried to sell counterfeits gets an initial warning. A second offense will lead to a suspension for 30 days. After that, a violation will get the vendor banned from the property.

Enforcement of such a clear policy could insulate property owners from liability, attorneys say. Indeed, the outcome of an infringement lawsuit will hinge in part on “whether the landlord has known about the activity and has taken any steps to prevent it, and whether those steps have been meaningful,” Besunder said. “That is to say, whether the landlord has realistically combated the counterfeiting activity. Have the tenants stopped [selling fakes], been evicted or punished or reprimanded in any respect?”

What could happen to a landlord who chooses to ignore the letters, perhaps because the sale of knockoffs at the property has gotten out of control? Even a hefty liability insurance policy might not cover the cost of legal fees and damages, Munn says. “It is a little bit naïve to simply say, ‘Oh, we have liability insurance, so if we are sued, we are covered,' ” he said. “You have to look at the exclusions under the policies … Insurance policies usually work so that, if it is something you can prevent, they're not going to cover it.”

Theoretically, at least, a landlord who tolerates the sale of counterfeits could also be found liable if a fake product injures or kills someone — a counterfeit prescription drug, say, or children's jewelry made from lead, according to Besunder. Multiple police raids at a center or just negative publicity about the fakes could scare off brand-conscious consumers determined to actually get what they pay for, says Joseph T. Simone, a partner in the Hong Kong office of Baker & McKenzie. “The best advice is to be really tough with those [retail] outlets,” he said. “You don't want brand owners thinking you're not cooperative, or they will just keep coming back. If the outlets think you're tolerant [of the sale of knockoffs], the problem will continue.”

Simone knows all too well how intractable the trade in fakes can become. His firm is pushing for greater trademark protections in China, where the manufacture and sale of counterfeits is, by all accounts, rampant. Entire Chinese cities are synonymous with the production of knockoffs and are flooding markets in Africa, Latin America and elsewhere with the counterfeits, he says. “There are a lot of trading companies set up in Guangzhou and a city called Yiwu, in northern China,” he said. “Both are major wholesale centers, and that is nearly all they do: full-time sourcing of fakes.”

Counterfeits can be found in every type of retail outlet in China, Simone says, though some properties are particularly notorious. In a landmark 2006 case, Baker & McKenzie represented Burberry, Chanel, Gucci, Louis Vuitton and Prada against the landlord of the infamous Silk Market, where, according to Simone, anywhere from 900 to 1,200 of the building's 1,600 or so outlets sell fakes. The case, which went to China's highest court, marked the first time in the country's judicial history that a landlord was held liable for failing to stop tenants from selling fake merchandise. “Now if we send a notice to a landlord and then they don't stop the infringement of that same brand, we've got them,” Simone said. “We think that is worth about $5,000 a case.”

The firm is studying whether to use the landlord strategy to file a huge number of lawsuits at the behest of multiple brands, Simone says. It must, however, take care to balance the interests of its clients with the keen focus of Chinese authorities on public order. By moving against six or seven major Beijing marts where fakes predominate, Simone and his colleagues could force landlords to evict thousands of crooked vendors, but that could spark a backlash in the process. “We might have thousands of vendors and their bosses organizing protests,” Simone said. “For China we have done as well as we possibly can. It is slow, but that is the way they like things.”

Perhaps reflecting that slow progress, 40 percent of the companies surveyed in 2006 by the Quality Brands Protection Committee, a coalition of 164 multinationals operating in China, said the counterfeiting problem had gone unchanged that year, while 30 percent said it had gotten worse. Little wonder, then, that trademark owners are so frustrated — and are looking for new targets in their decidedly real war on fakes.