Image: Gucci

In early March, a bipartisan group of representatives in the U.S. House of Representatives introduced a new bill. Called the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce Act – or the Shop Safe Act 2020, for short, the new legislation, which is currently pending before the House, aims to help stem growing concerns over the wide array of counterfeit products being offered for sale on key third-party marketplace platforms.

Although e-commerce is a relatively new retail platform (both Amazon and eBay, for instance, are less than 30 years old), it has been increasingly capturing larger percentages of sales in the U.S. retail industry. The COVID-19 pandemic has notably served to escalate existing trends towards online shopping, with sales in the e-commerce space surging by 77 percent in May, alone, with total online spending hitting $82.5 billion, which is 77 percent greater than the same month last year. 

Unfortunately, as retail transactions have increased online (both before, and certainly, during COVID), so have counterfeit sales. The reasons for increased counterfeiting online are multifaceted, but the Department of Homeland Security has discovered that counterfeiting via third-party marketplace e-commerce platforms, such those owned/operated by Amazon, Walmart, and Alibaba, etc., has likely proliferated because of the role of third-party marketplaces adding legitimacy to counterfeit listings. Add to this the relatively low barriers to entry to online selling (e.g., lower start-up, production, marketing, and distribution costs), and consumer attitudes and perceptions concerning third-party marketplace platforms, and in some cases, attitudes towards counterfeits in general

The rise in online counterfeiting has forced the government, brand owners and online third-party marketplaces to increase efforts to police these counterfeit sales. However, finding sellers of counterfeit goods and holding them accountable can be futile, given the reality of counterfeiting on third-party e-commerce marketplace platforms. 

For one thing, supply chains for counterfeit goods are typically complex, with sellers often located outside the U.S. and thus “largely outside the jurisdiction for criminal prosecution or civil liability from U.S. law enforcement and private parties.” Beyond that, criminal or civil efforts by brand owners to hold third-party marketplace counterfeiters accountable are often hampered by strategic actions taken by counterfeiters to shield themselves from liability. For example, counterfeiters often use multiple merchant accounts and provide no personal identifying information (e.g., names or addresses) to consumers or provide false information.

Even where enforcement action is taken against online seller accounts and such accounts are shut down, counterfeiters regularly pop right back up – either on the same third-party marketplace platform or another – through the creation of a new merchant account.

Still yet, counterfeiters often ignore enforcement actions, and readily abandon their merchant accounts when flagged by marketplace operators, leaving brand owners with little recourse against them or third-party marketplace platforms, even if favorable court judgments are obtained.

Currently, brand owners can attempt to take civil action against counterfeiters. Most actions against counterfeiters are typically based on theories of direct trademark infringement – that is, trademark infringement deriving from the defendant being the one actually using the unauthorized counterfeit trademark on or in connection with goods or services. On the other hand, actions taken against third-party marketplace platform operators typically involve a different basis – contributory infringement, as the operators, themselves, are not necessarily the ones most directly responsible for the infringing goods. 

Given the initial seller versus marketplace operator distinction, and the difference between direct and contributory infringement liability, in order for the marketplace operator to be held liable, the standard trademark infringement test does not apply. Instead, it must be established that the third-party operator “intentionally induced [a marketplace seller] to infringe a trademark, or… continued to [allow a marketplace seller to use its online third-party marketplace services when] it knows or has reason to know [the marketplace seller] is engaging in trademark infringement.”

This liability standard has historically been hard for plaintiff brand owners to establish, given that it is difficult to prove when and if third-party online marketplaces had knowledge of a particular merchant’s sales of counterfeit items. Accordingly, brand owners have been forced to largely self-police online third-party marketplaces for counterfeit goods using a patchwork of means imposed by third-party marketplaces. 

While the measures implemented by online marketplaces can be effective for removing counterfeit listings from the online platforms, counterfeits are still prevalent on the platforms.

Shop Safe Act 2020

Against this background, Rep. Jerrold Nadler (D-NY) introduced the Shop Safe Act 2020 in March in order to provide a possible avenue by which brand owners can successfully take action against third-party e-commerce market platforms.

The Act has been introduced in an attempt to: establish trademark liability for online marketplace platforms when a third-party sells a counterfeit product that poses a risk to consumer health or safety and that platform does not follow certain best practices. More than that, it aims to incentivize online platforms to establish best practices (such as vetting sellers to ensure their legitimacy, removing counterfeit listings, and removing sellers who repeatedly sell counterfeits), andcalls on them to take steps necessary to prevent the continued sale of counterfeits by the third-party seller or face contributory liability for their actions.

If enacted, it would amend the Trademark Act 1946 to hold online third-party marketplaces liable for contributory infringement of a counterfeit mark in “connection with the sale, offering for sale, distribution, or advertising of goods that implicate health and safety” – that is, unless they can show that they have taken certain steps to prevent infringing uses on the platform articulated in the proposed bill. 

To avoid liability, marketplaces would need to demonstrate that they took a number of certain measures. These range from conspicuously displaying the verified principal place of business, contact information, and identity of third-party sellers and requiring sellers to verify the authenticity of their goods to implementing proactive technological measures – to screening goods before displaying them to the public to prevent the advertising/sale of counterfeits on the platform, and terminating sellers that have engaged in more than three instances of use of a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform.

Depending on the third-party marketplace, some of these requirements may already be in place. Some marketplace platforms, for example, already proactively screen product listings to curb the presence of counterfeit listings on their platforms, and have policies around when a seller may be removed from the platform due to the offering/sale of counterfeits.

Health and Safety and Fashion?

One of the most significant considerations in connection with the bill is what goods constitute goods that implicate health and safety. This is a critical issue, as the bill is specifically tailored, according to the House Judiciary, to crack down on “goods that have a health or safety impact, thereby, targeting counterfeit goods that have the most serious consequences for consumers.” As such, third-party marketplace operators will only be liable under the Shop Safe Act for counterfeits that pose health or safety risks. 

This gives rise to some trickier determinations, among them exactly being which goods constitute goods that implicate health and safety. The proposed bill defines the term ‘goods that implicate health and safety’ as: “goods the use of which can lead to illness, disease, injury, serious adverse event, allergic reaction, or death if produced without compliance with all applicable Federal, State, and local health and safety regulations and industry-designated testing, safety, quality, certification, manufacturing, packaging, and labeling standards.”

In most cases, brand owners are unaware of the exact conditions in which counterfeit versions of their products are manufactured; they just know that they are not manufactured in accordance with own processes. This raises the question as to what sort of showing brand owners will have to make, if any, to establish this proposed requirement. Likewise, if a marketplace involves third-party sales of consumer goods, such as clothing and accessories, is it largely immune to the proposed contributory infringement liability, as fashion can be deemed outside “goods that implicate health and safety”?

Going forward, both brand owners and e-commerce third-party marketplaces will need to keep apprised of developments concerning the proposed Shop Safe Act 2020, so that they are in the best position to police their trademark rights and/or implement necessary steps to avoid contributory liability should the proposed bill be enacted.

Marcella Ballard is a partner and a seasoned first-chair Lanham Act and copyright litigator at Venable. Maria R. Sinatra is an associate at Venable, who focuses her practice on offensive and defensive Lanham Act and Copyright Act litigation. (Edits/additions courtesy of TFL)