Background
As we all know by now, the COVID-19 pandemic significantly increased online commerce, underscoring the pre-existing need for legislative action to address the growing problem of online counterfeits. Although ecommerce industry leaders have taken a number of laudable steps to try and combat this issue, these voluntary measures are often non-transparent, and are not universal across different marketplaces. Many such measures are also reactive, whereas the growing problem demonstrates the need for proactive screening measures to keep dangerous counterfeits off of the platform from the start to prevent them from ever reaching consumers. In addition, most of these platform tools continue to place the vast majority of the burden of identifying and reporting counterfeits on the relevant brand owner. Under current US law, platforms are immunized from liability for facilitating the sale of counterfeits on their marketplaces so long as they take action upon specific notice of such listings. Thus, without continued vigilant intervention from brand owners, marketplaces continue to reap the benefits of counterfeits sold through their platforms and specifically avoid taking on additional proactive measures that could open them up to additional liability.
To address this gap between current US legal requirements for ecommerce platforms and the disproportionate burden to brand owners and harms to consumers, last year members of Congress introduced the SHOP SAFE Act. The bill was not advanced before the end of the prior 116th Congress, and was recently re-introduced in the current 117th Congress by co-sponsors House Judiciary Committee Chairman Jerrold Nadler (D-NY), Subcommittee on Courts, Intellectual Property, and the Internet Chairman Henry C. "Hank" Johnson, Jr. (D-GA), Subcommittee on Courts, Intellectual Property, and the Internet Ranking Member Darrell Issa (R-CA), and Representative Ben Cline (R-VA).
May 27 Subcommittee Hearing
Following its re-introduction, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet held a public hearing on May 27, 2021 to collect witness testimony regarding the bill. We summarize below the key takeaways from this hearing.
In its current form, the bi-partisan bill is quite narrow – it only deals with counterfeit products implicating consumer health and safety, and does not apply across the board to all counterfeit goods. This is one of the key shortcomings that was a primary focus of prior comments on the bill when initially introduced in 2020 and of the recent hearing. Several of the Subcommittee members agreed that the narrow scope was potentially problematic, not only because it would create disparate classes of counterfeits but also would require an evaluation by platforms of whether or not a particular counterfeit product implicated consumer health or safety, which could be a difficult undertaking even for highly trained personnel.
Beyond this limitation, most brand owner representatives agree that the proposed obligations of ecommerce platforms in the bill would be helpful in reducing listings of counterfeit goods, including proactive screening measures of sellers by platforms (most notably performing identity verification), and requiring conspicuous display of Country of Origin (COO) and Location of Seller in each listing. As witnesses noted, many brand owners may spend millions annually to address counterfeits of their products on ecommerce platforms and smaller companies generally lack the resources to address the scale of the problem. Placing obligations on the platforms who benefit from counterfeit listings to proactively prevent such listings from being published should help reduce the costs by brand owners to take reactive takedown measures.
In addition, measures proposed in the bill would help reduce the incidence of anonymity and false contact information used by counterfeit sellers to avoid detection and prosecution. The bill’s requirement for sellers listing goods for sale in the US to provide a US address or agent for service of legal process would also significantly undercut counterfeiters’ ability to evade lawsuits by US brand owners or law enforcement agencies, which is currently often the case where most sellers of counterfeits are physically located outside the US. All of the measures requiring agreement to US jurisdiction and verification of identity, country of origin, and location of seller would likely have a strong deterrent effect against counterfeiters even seeking to list in the first place on marketplaces where these requirements would apply (i.e. all US-based marketplaces or marketplaces otherwise subject to US law).
Another key improvement to the bill supported by brand owners would be to include an exemption from anti-trust scrutiny for marketplaces that cooperate to address counterfeiting across their platforms.
Some members of the Subcommittee and at least one industry association representing ecommerce platforms are, unsurprisingly, critical of the bill. The primary criticism levied against the bill include that it tries to solve a problem before it happens by placing substantial hurdles on potential sellers who may be legitimate, thus potentially driving away legitimate commerce. Critics also suggest that bad actors will not provide legitimate credentials or other information to platforms so verification will be effectively meaningless. They also note that defining what constitutes a health or safety product is too difficult (which is a criticism shared by brand owners, who instead want the bill to apply to all counterfeits). The bill also contains an exemption for small businesses acting as ecommerce platforms, but essentially requires an unprofitable revenue level to meet, making it unrealistic for any business to use. Further, the exemption goes away if the platform received notice of counterfeits 10 times and failed to address, which would already makes them liable under current law for contributory counterfeiting and is therefore an effectively meaningless penalty.
Critics of the bill continue to assert that the current reactive notice and takedown regime is the proper approach and that existing trademark doctrine strikes the right balance in protecting consumers and rights owners while allowing online commerce to thrive. Opponents of the bill note that Internet businesses rely on consumer trust, and already therefore have every incentive to address counterfeit goods on their platforms without the need for further regulation. They note that ecommerce leaders have already invested millions of dollars to combat counterfeits, well beyond what the law presently requires. They also note that ecommerce platforms do not generally handle credential verification, and question whether they would be well-equipped to verify seller credentials let alone from professional counterfeiters who could very well counterfeit the credentials themselves. They also point to the role of law enforcement agencies like the Department of Justice in prosecuting cross-border IP crimes, and recommend that Congress increase resources to these programs instead of pursuing this bill.
Members of the Subcommittee pushed back on some of these assertions, in particular noting that if platforms can verify that they will get paid for providing their service to sellers, they should be able to adequately verify the seller’s legitimate identity, particularly through financial institution partners who would likely hold legitimate “Know Your Customer” information. Ultimately, Congress must decide whether contributory liability for platforms in the area of counterfeits is desirable and whether it can be best achieved through legislation or continued industry self-regulation.
Next Steps
In general, the members of the Subcommittee appeared sympathetic to brand owners and interested in advancing the SHOP SAFE Act, subject to potential amendments. We are optimistic that the Subcommittee will release an improved version of the bill in coming months and continue to hold hearings to ensure the bill best meets the needs of brand owners and consumers and is well-suited to combating the proliferation of counterfeit goods sold through online marketplaces without unduly impinging upon legitimate ecommerce.
We will continue to track the status of this important bill and encourage brand owners and industry associations representing them to continue to engage with US lawmakers to improve and advance the proposed legislation.
A copy of the full bill text can be found here.
A one-pager on the bill can be found here.
A section by section analysis of the bill can be found here.
If you have any questions regarding this alert or wish to discuss these matters in more detail, please contact any of the following Winterfeldt IP Group team members:
Brian Winterfeldt, brian@winterfeldt.law, +1 202 903 4422
Griffin Barnett, griffin@winterfeldt.law, +1 202 759 5836
