COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
CALCE/SMTA SYMPOSIUM ON AVOIDING, DETECTING, AND
PREVENTING COUNTERFEIT ELECTRONIC PARTS
September 9th 2008
Laurence E. Pappas
Vice President/General Counsel
Channel One Group
9001 131st Place North
Largo, Fl 33773
Tel: 727-586-6288
Fax: 727-559-0290
larry.pappas@ch1group.com
© Channel One Group 2008
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
I.
Contracts
Comparison of Rejection Of The Goods And Revocation Of Acceptance
Of The Goods
Rejection
Revocation
1.
Timing
Early, before acceptance
Later, after acceptance
2.
Standard
Generally, perfect tender
Substantial impairment
3.
Other
requirements
1. Seasonably notify seller
2. Hold the goods for seller
3. Follow reasonable seller instructions
4.
Consequences
1. Goods back to seller
2. No buyer payment obligation
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
I.
Contracts
Acceptance, Rejection, and Revocation
1.
Buyer can reject if not accepted.
2.
If buyer accepts, buyer cannot reject.
3.
If buyer accepts, buyer can in certain situations revoke acceptance.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
I.
Contracts
ACCEPTANCE WITH ADDITIONAL TERMS
If the response to an offer is an
acceptance or confirmation, does it
propose additional terms?
No
Offer accepted
Yes
Did the offer limit acceptance to its
terms?
Yes
No
Do the terms materially alter the
contract?
Yes
No
Did the offeror object to the new terms
in a reasonable time?
No
Contract formed
including the
additional terms
Yes
Contract formed but the additional
terms not included
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
II.
Application of Uniform Commercial Code to Counterfeit Sales
Transactions
Article 2 of the UCC may apply to the sales transaction.
A. Section 2-711: Buyer may recover damages
for bad tender, breach of warranty and “in a
proper case” incidental and consequential
damages.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
II.
Application of Uniform Commercial Code to Counterfeit Sales
Transactions
B. Section 2-721: Seller may also be liable
for fraud or misrepresentation. This would
be in addition to the breach of contract
claim.
1. Therefore, if the buyer revokes
acceptance of goods, the recovery of
incidental and consequential damages
is permitted.
2. Recovery is permitted in some
jurisdictions, not all.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
II.
Application of Uniform Commercial Code to Counterfeit Sales
Transactions
C. What if contract limits right of recovery as
to incidental and consequential damages?
1. In cases involving fraud, UCC 2-721
may permit recovery of incidental
and consequential damages even if
contract precludes recovery.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
II.
Application of Uniform Commercial Code to Counterfeit Sales
Transactions
D. Section 2-314; 2-315 Breach of warranty
Cases.
1. Breach of warranty of
merchantability and fitness for a
particular purpose.
2. Fraud claim may be attached.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
III. Terms in Purchase Contract Affecting Disposition of
Counterfeit Materials
A. May a buyer insert terms and conditions
into the purchase contract which permit the
buyer to:
1. Disable Parts?
2. Destroy Parts?
3. Return without payment?
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
III. Terms in Purchase Contract Affecting Disposition of
Counterfeit Materials
B. Buyer may add any term which is not
contrary to statute (including regulations)
or common law.
1. For example: Any counterfeit parts
supplied to buyer by seller may be
disabled, destroyed or retained by
buyer.
2. Definition of Counterfeit:
In contract?
Industry definition?
Legal definition?
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
III. Terms in Purchase Contract Affecting Disposition of
Counterfeit Materials
C. Risks associated with taking unilateral
action.
1. Breach of contract if wrong.
2. Destruction of evidence.
3. Inability to conduct business due to
harsh contract terms.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
IV. Legal Constraints on Returning Counterfeit Components to
Supplier
A. Party may not engage in trafficking/selling
of counterfeit goods.
1. Is return of goods to vendor trafficking/selling of
counterfeit goods?
2. Is return of counterfeit goods permissible?
a. May be considered irresponsible but not
illegal.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
IV. Legal Constraints on Returning Counterfeit Components to
Supplier
B. Buyer is not required to return counterfeit goods
1. Seller does not automatically win lawsuit if buyer refuses
to return counterfeit goods to the seller.
a. Buyer may hold goods to prevent return of goods
into stream of commerce.
b. Buyer must act reasonably in retention of goods.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
A. Definitions of Counterfeit.
1. 15 United States Code 1127: A “counterfeit” is a spurious mark
which is identical with or substantially indistinguishable from a
registered mark.
a. ”Registered mark” is a mark registered with the U.S. Patent
and Trademark Office.
b. ”Mark” includes any trademark, service mark, collective mark
or certification mark.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
A. Definitions of Counterfeit
1. Title 19 U.S.C. §1526(e): Subjects to seizure and forfeiture any
merchandise bearing a counterfeit mark (applies definitions in 15
U.S.C. 1127).
2. Trademark Counterfeiting Act of 1984: “Counterfeit” is defined in this
criminal provision as the confusing use of a spurious mark that is
identical with or substantially indistinguishable from a mark which is in
use and is registered on the Principal Register of the Lanham Act for
the goods or services which are the subject of counterfeiting.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
B. The definition of counterfeit is the same for
customs seizures and civil cases (Lanham Act).
C. Re-marked / Refurbished components may be
classified as “counterfeit”.
1. Definition of “counterfeit” interpreted by courts to
include situations other than strictly “trademark”
abuses.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
a. Examples of counterfeit goods or services:
i.
Filling genuine Coke bottles with a carbonated beverage
that is not Coke and representing them as Coke.
ii. Selling genuine but reconditioned valves sold under
plaintiff trademark as plaintiff new product.
iii. Selling genuine Intel processors marked with a speed
designation that Intel would not have given it.
iv. Selling perfume after removing batch code markings
from new perfume bottles.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
b. Example of goods that are not considered counterfeit.
i.
The removal of paint and trademark from golf balls,
then reapplying paint and trademark and selling them
as used and subject to performance variations.
ii. Spark plugs repaired, reconditioned and sold as
“renewed”.
c. The Supreme Court has stated that “cases may be
imagined where the reconditioning or repair would be so
extensive or so basic that it would be a misnomer to call
the article by its original name, even though the words
‘used’ or ‘repaired’ were added”.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
V. Counterfeit -vs- Substandard
D. New Products -vs- Used Products.
1. New: Alteration is not permitted.
2. Used: Moderate alteration permitted.
3. Will user be confused?
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VI. Ownership Risks in Counterfeit Parts
Transactions - Allocation of Interest and
Risk of Loss
A.
In general → Title to goods is not controlling.
Title does not determine risk of loss, Seller’s
right to the sales price, or Buyers right to the
goods.
1. What is important?
a. identification
b. insurable interest
c. risk of loss
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VI. Ownership Risks in Counterfeit Parts
Transactions - Allocation of Interest and
Risk of Loss
B.
Risk of Loss → Concept that denotes which party
will pay for goods that are lost, stolen, damaged
or destroyed. Risk of loss starts with Seller but
shifts to Buyer at some point during transaction.
Risk of loss may shift even before Buyer takes
possession of goods.
1. Risk in Absence of Breach
a. Carrier cases
1. Contracts not requiring delivery at
particular destination → Risk of loss
passes to Buyer when goods are
delivered to carrier.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VI. Ownership Risks in Counterfeit Parts
Transactions - Allocation of Interest and
Risk of Loss
2. Destination Contracts → Risk of loss
passes to Buyer when goods are
tendered to Buyer at destination.
b. Non-carrier cases; goods held by bailee to
be delivered without being moved.
2. Effect of Breach on Risk of Loss
a. Defective goods → If defect entitles Buyer
to reject, risk of loss does not pass until
cure or acceptance in spite of defects.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VI. Ownership Risks in Counterfeit Parts
Transactions - Allocation of Interest and
Risk of Loss
b. Revocation of Acceptance → Where Buyer
revokes acceptance, risk of loss is treated as
having rested on Seller from the beginning to
extent of any deficiency in Buyer’s insurance
coverage, the risk of loss at issue being that
between time of acceptance and time of
revocation of acceptance. Revocation
must occur before damage to goods.
c. Breach by Buyer → Where goods are
conforming and Buyer breaches before risk
of loss passes, any loss occurring after
Seller learns of breach falls on Buyer to
extent of deficiency in Seller’s insurance.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VI. Ownership Risks in Counterfeit Parts
Transactions - Allocation of Interest and
Risk of Loss
C. Rules for Passage of Title
1. Agreement by parties.
2. If no agreement, title passes when Seller
completes his performance with respect to
delivery of goods.
a. Carrier cases
1. Non-destination contracts → Title
passes at time and place of shipment.
2. Destination contracts → Title passes
when goods are tendered at destination.
b. Non-carrier cases
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VII. Ownership Risks in Counterfeit Parts
Transactions - Risk of Loss In Transit
A. Cargo Insurance →Coverage from direct physical
loss or damage to merchandise in transit.
Phrase “lawful merchandise” used often.
1. Lawful Merchandise → Defined as “property
which may be legally held, sold or exported; non
contraband property”.
2. Contraband → Defined as “property which is
unlawful to produce or possess. Goods
exported from or imported into a country against
its laws”.
3. Merchandise in Transit: Defined as not including
contraband or other personal property in the
course of illegal transportation or trade”.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
VIII.Ownership Risks in Counterfeit Parts
Transactions - Risk of Loss in Specific
Transactions
Customer
Vendor
Buyer
Scenario 1: Buyer buys chips from Vendor and sells to Customer. Chips damaged in transit
to customer.
Scenario 2: Same, but chips are found to be counterfeit.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
IX. Internet Sales and Trademark Violations
A. Trademark owners cannot prevent others from making a
descriptive use of their trademark. Resale of authentic noncounterfeit goods is protected even though resale is not
authorized.
B. Nominative fair use proven when product or service is not
easily identifiable without trademark, only so much of mark is
used that is necessary to identify goods or services, and user
does not suggest sponsorship or endorsement by holder of
mark.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
IX. Internet Sales and Trademark Violations
EXAMPLES:
“Tiffany” used to describe Tiffany jewelry. Without using
word “Tiffany”, reseller might have to say “Silver jewelry
from prestigious N.Y. company where Audrey Hepburn once
liked to eat breakfast” or “Jewelry bearing same name as
1980s pop star”.
“Playboy” used to resell goods without special font or
symbols - e.g., the famous Playboy bunny associated with
the mark.
COUNTERFEIT COMPONENTS AND RELATED
LEGAL ISSUES
IX. Internet Sales and Trademark Violations
EXAMPLES: continued
“Playboy Playmate of the Year in 1981” phrase used by
woman (woman had disclaimer of endorsement on
website). Disclaimer not required but safer.