March  28, 2019

Landlords’ Liability Against Counterfeit and Pirated Goods

 

As per International Trademark Association “Counterfeiting” is a practice of manufacturing, importing/exporting, distributing, selling or otherwise dealing in goods, often of inferior quality, under a trademark that is identical to or substantially indistinguishable from a registered trademark, without the approval or oversight of the registered trademark owner.[1]

Counterfeiting and piracy is a global problem, impacting virtually every industry sector around the world. India is no exception, suffering significant economic and health and safety consequences as a result of widespread counterfeiting, piracy and smuggling in the country .[2] Counterfeiting rob the innovators in an economy of their intellectual property rights, and this creates significant harm, not only to the innovators, but also to consumers and the economy in general. The advent of technology has helped erode geographical borders, aiding criminal networks operating e-Commerce websites to remain anonymous while reaching global audiences.

Market Size of Counterfeit products

In India, the market for counterfeiting is spread across industries. While e-Commerce websites are hailed for the range and discounts they offer, the medium has come under scrutiny for encouraging sales of counterfeit products.

As per the FICCI report, on the retail side, counterfeiting is confined to identified marketplaces and locations in specific cities in India. Whereas on the wholesale side, some industries such as pharmaceuticals, fast-moving consumer goods and electronics continue to face challenges from infringing activities emerging via various demarcated ‘industrial zones’ across India. The USTR (United States Trade Representative) Report in 2015 issued a list of notorious market all over the world and India’s Tank Road and Sadar Bazar in New Delhi were recognized as notorious markets. It can be averred that with the continuous increase in technology as well as with every passing year, the size of the market for the Counterfeit products are also snowballing. Advancement in technology and vast online marketplace has taken the entire county within the garb of counterfeit products where the replicas of the original products are sold by reaching the consumers across the world at the click of a mouse.

But various questions which draws our attention at this juncture are that what about those real life marketplaces selling counterfeit products; what about those physical places used by tenants to sell counterfeit products and whether the landlords letting out such places would be vicariously liable for the act of such tenants selling counterfeit products through their premises. What is the liability of a person who let or sub-let the premises to another person through which the third parties have access to that marketplace and offer counterfeit products for sale in the marketplace. Currently in India, we have no settled law which holds landlord liable for the act of the tenant.

It is pertinent to analyze the landlord’s liability as recognized by various laws in force in different countries across the globe.

Position in China

In China, the landlords and the property managers are vulnerable to two types of liability: Landlord indirect liability and Administrative direct liability.

  • [3]Indirect liability is incurred by the landlord of a commercial retail establishment (CRE) who intentionally facilitates or assists in IPR infringement activities carried out by its tenants. The landlord will be jointly and severally liable with its tenant if the landlord knowingly allows the tenant to use the landlord's premises to sell a product that infringes IPR.

  • As per China Law, in order to establish landlord indirect liability for trade mark infringement the IPR holder must show that the landlord intentionally assisted the infringement.

  • Case analysis:- In 2005, test cases were filed by five luxury brand owners against the landlord of the Silk Market in Beijing. The cases were preferred after the landlord of the place had repeatedly ignored the written warnings sent to it to stop the sale of infringed goods of the brand owners at the Silk market. Beijing Intermediate People's Court held that the landlord was jointly and severally liable with the vendors to compensate the brand owners for their losses and enforcement costs as the landlord was notified about the infringements and should have taken immediate action to stop them. Even the appeal against the said judgment was dismissed by the Beijing High People's Court.

  • After the findings given by the Beijing no. 2 High People’s Court that the landlords had an obligation to act in a ‘timely and effectively’ manner in order to prevent continuation of such infringement, the landlord liability was codified by China. Under the legislation, a landlord may be held: (i) jointly and severely liable for aiding and abetting a third party in the commission of an infringement of the exclusive right to use a registered trademark; (ii) contributorily liable for trademark infringement if the landlord intentionally facilitates or assists a third party in committing an infringement by providing business premises to the third party.

Position in USA

  •  Depending on the nature of the products and subsequent sale of counterfeit goods, such an act can attract infringement of different intellectual property rights including copyright, patent and trademarks. Liability of the landlord can be divided into vicarious liability and contributory liability. U.S. copyrights matters.[1]

  • There are two types of infringement under the Copyright consisting of Primary Infringement and Secondary Infringement. Primary Infringement means the person who is concerned with the direct sale of counterfeit products to the customers. Secondary infringement arises when the person/ the secondary infringing party (landlord herein) has a special relation with primary infringing party (tenant). Secondary liability in landlord-tenant relations can be divided into (a) vicarious liability; (b) contributory liability.

  • The criteria to be kept in mind to be held liable for vicarious liability are:-

    • The primary infringing party must have committed direct copyright infringement;

    • The secondary infringing party must have received the direct financial benefit;

    • The secondary infringing party must have the right and power to control and supervise the acts of the tenants

  • This would mean that even though the landlord was completely unaware that the counterfeit products are being sold on its premises, it can nonetheless be found liable.

  • Case analysis:- In the case of Fonovisa Inc v Cherry Auction INC., 76 F.3d 259 (9th Cir. 1996), Cherry Auction which was a flea market operator was held by the United States Court of appeals for the Ninth Circuit to be vicariously liable for the copyright infringement committed by one of its stall vendors that had been selling counterfeit music recordings. It was observed by the Court concerned that Cherry auction controlled and monitored the booths of vendors and also, obtained financial benefit from the vendors through the payment of rental fees and also from customers through entrance fees, parking fees and concession sales. Cherry Auction was held liable as the landlord received a direct financial benefit.

  • In 1982, The United States Supreme Court established a cause of action for contributory trademark infringement. In the case of Inwood labs., Inc. v. Ives Lab 456 U.S. 844 (1982), the Court had defined contributory infringement as “a manufacturer or distributor intentionally induces another to infringe on a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement.” In the case it was held that a trademark owner can recover damages from one who knowingly induces another to infringe a trademark, or otherwise facilitates the infringement of a trademark, either with knowledge or with reason to know of the infringement occurring. Thus, flea markets, auction houses or online auction services, such as eBay, cannot turn a blind eye when vendors using their services are selling counterfeit goods. Even if the flea markets and the online services are not directly selling or profiting from the sale of counterfeit goods, their failure to take reasonable measures to stop trademark infringement exposes them to significant liability.

  • Under the U.S, doctrine in contributory liability, the criteria to be kept in mind to be held liable for (a) the primary infringing party has committed a direct infringement;(b) the secondary infringing party has knowledge of the infringement;(c) the secondary infringing party has made a material contribution to the infringement.

  • [5]In the case of Hard Rock Licensing Corp. v. Concession Services, Inc. 955 F.2d 1143 (7th Cir. 1992), it was held by the Seventh United States Circuit Court of Appeals, that the Plaintiff must show the existence of principal-agent relationship by showing that “the defendant and the direct infringer have an apparent or actual partnership, have authority to bind one another in transactions with third parties, or exercise joint ownership or control over the infringing product.”

  • In the above-mentioned case, a flea market operator was not found to be vicariously liable because the operator was not found to be engaged in profit-sharing with the primary infringing party. The finding given in the case suggested that the landlords may be at less risk for vicarious liability in the realm of trademark infringement than in the matters concerning copyright.

  • In another case in the year 2012, the United States District Court for the Western District of Texas, in Louis Vuitton Malletier v. Eisenhauer Road Flea Market, Inc., found a landlord liable for $3.6 million to the designer brand Louis Vuitton for allowing tenants to sell knock-offs of its Louis Vuitton products. [6]

[7]On June 27, 2005, in the case Louis Vuitton Malletier v. Carroll, Louis Vuitton, an injunction was granted by the District Court for the Southern District of New York against the landlords whose tenants were selling counterfeit LOUIS VUITTON products on the infamous Canal Street. As per the injunction order, the landlords were required to evict any tenants who were selling counterfeit LOUIS VUITTON products, had to submit to random inspections and searches of the stores and affix signs on the inside and outside of the stores to notify customers that the sale and purchase of counterfeit LOUIS VUITTON products at that location was prohibited.

Europe

  • The European Court of Justice (ECJ) has clarified in a case that whether the operator of the physical marketplace was liable for infringement of IP rights by the tenants of the retail space. In the case, the ECJ had equated such landlords to the operators of online marketplace in terms of liability. Various trademark owners such as Tommy Hilfiger, Lacoste and Burberry found that the fake versions of their products were being sold in the Prague Market halls and they brought the case before the Czech Courts.

  • The trademark owners based their contention on the Czech standards transposing the implementing EU Directives under which claims on account of trade mark infringements can be enforced not only against the infringer, but also against intermediaries whose services are being used by a third party to infringe trade mark rights.

  • In its decision, the ECJ followed the opinion held by the rights holders and found that a company letting and subletting space to third parties, thereby allowed the traders by leasing the space to offer counterfeit goods, was to be regarded as an intermediary for the purposes of European law. As per ECJ it was not relevant whether the counterfeit products were sold on an online marketplace or a physical marketplace in a market hall.

  • The ECJ justified its standpoint by explaining that intermediaries of physical sales areas therefore have the same obligations as operators of online marketplaces.

  • Article 11 of the Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of IPRs (Enforcement Directive) requires EU Member states to ensure that IPR holders are in a position to apply for an injunction against intermediaries, online or physical marketplaces, whose services are used by a third party to infringe those rights. [8]

Canada

  • In Canada, the Canadian Courts have still to consider and frame laws with regard to landlord liability action for intellectual property infringements by its tenants. However, in a case Louis Vuitton Malletier S.A. v. Zekria Wakilzada 2017 ONSC 2409, Louis Vuitton had preferred a case against the operators of Dr. Flea’s Flea Market in Toronto whereby it was claimed that the landlords of the flea markets are directly liable, vicariously liable and/or contributorily liable for vendors’ sales of counterfeit Louis Vuitton merchandise at the market, alleging the landlords are aware that counterfeit merchandise was being offered for sale and sold at the flea markets. The Court agreed with the submissions made by Louis Vuitton that the necessary elements for a cause of action for vicarious liability of a landlord are unsettled, but that knowledge is an important element of the cause of action. [9]

[10]A paper was published by the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP). In March 2015, BASCAP published a study to identify and eliminate vulnerabilities in the supply chain that enable the infiltration of counterfeit goods and copyright piracy. It was stated in the research paper that landlords and property owners can become intermediaries in the illicit trade supply chain if they rent out knowingly or unknowingly their property to those involved in counterfeiting and other IPR infringing activities, whether for production, storage, distribution or retail use. The report laid down the steps to be undertaken by the landlords to perform due diligence checks on tenants for immigration violations or money laundering activities. The landlords should amend or update the terms and condition of lease agreement entered into so as to prohibit activities related to counterfeit and pirated goods to take place on the premises leased. The landlord to maintain a publicly visible “No Counterfeit and Pirated Products Policy” as part of the steps to stop the sale of counterfeit and pirated goods in markets. Periodic inspection of tenants’ shops and stalls for obvious counterfeit and pirated goods to be undertaken by the landlords. The landlord should maintain cooperative working relationships with brand owners to facilitate the detection of counterfeits, removal of infringing goods and sanctioning of those engaging in the illegal activity. In 2009, a Real Deal Campaign was started by the National Markets Group for IP Protection in the United Kingdom. The campaign was an initiative taken to bring together local authority Trading Standards services, market operators and traders, industry groups and brand owners to prevent the sale of counterfeits.

In India, the market selling the fake and counterfeit products are wide spread. The market for such fake products are available in almost every metropolitan cities and with each passing day these markets are spreading like a spider web. A report by the United States Trade Representative (USTR) has named Nehru Place and Palika Bazaar in New Delhi, Richie Street and Burma Bazaar in Chennai, Manish Market, Heera Panna, Lamington Road and Fort District in Mumbai, and Chandni Chowk in Kolkata as markets that need to be watched out for this high-volume trade. As per the Worlds News Report, nearly 30% of the automobile components in the market in India are counterfeit, about 21% of mobile phone sales in India are unauthorized or counterfeit, more than 10% of IT products in the market are counterfeit, fake luxury goods in India are likely to command a market of Rs6,000 crore in 2016.[1] The counterfeit products are sold in India both on online platforms as well as non-online market places. Recently, the government has introduced The Information Technology [Intermediaries Guidelines (Amendment) Rules] 2018 in order to monitor online platforms. However, it is apparent that there are no defined rules in India which can hold landlord liable who has the requisite knowledge about the fact that the premises let out to the tenant is being used for the sale of counterfeit and fake products. In view of the entire scenario regarding sale of counterfeit products and enormously gigantic market widespread across the whole of India selling those products, it is high time that India should come out with a proposition of law laying down the liability of the landlords in case of adequate knowledge of sale of such fake products through their premises.

Perusal of various laws governing the same in various countries and settled proposition of law across the globe, it is ostensible that necessary steps have been taken time and again to fight counterfeiting. Even Country like Canada which has no settled law on the subject, recently in a case has recognized the landlord’s liability in case of infringement done by its tenants wherein the landlord was found to be an active participant in the tenant’s business and had sufficient control over them.

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[1]https://www.ficcicascade.in/wp-content/uploads/2018/07/FICCI-CASCADE-GT-ReportEmerging_Challenges_Report_-illicit-trade-1-1.pdf 
[2]https://cdn.iccwbo.org/content/uploads/sites/3/2016/11/Counterfeiting-piracy-and-smuggling-in-India-Value-of-IP-in-india.pdf 
[3]http://www.lawjay.com.cn/Public/uploads/admin/20160908/57d069305426c.pdf 
[4]https://www.icsc.org/newsletters/article/liability-of-landlords-for-the-sale-of-counterfeit-goods-by-tenants-in-the 
[5]https://www.icsc.org/newsletters/article/liability-of-landlords-for-the-sale-of-counterfeit-goods-by-tenants-in-the 
[6]https://www.boyarmiller.com/news-and-publications/legal-alerts/see-no-evil-hear-no-evil-see-no-evil-louis-vuitton-hits-3-6m-judgment-against-its-landlord-for-contributory-trademark-infringement/ 
[7]https://www.inta.org/INTABulletin/Pages/UNITEDSTATESLouisVuittonClosestheDooronLandlords.aspx 
[8]https://cdn.iccwbo.org/content/uploads/sites/3/2017/09/ICC-BASCAP-Landlords-Paper.pdf 
[9]https://www.thebrandprotectionblog.com/louis-vuittons-argument-for-landlord-liability-gaining-traction-in-canada/ 
[10]https://cdn.iccwbo.org/content/uploads/sites/3/2017/09/ICC-BASCAP-Landlords-Paper.pdf 
[11]https://www.worldtrademarkreview.com/enforcement-and-litigation/liability-intermediaries-effective-anti-counterfeiting-tool 

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