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A deposit requirement would be a more robust check on malicious claims and constitute an effective deterrent against those claims without overly disincentivizing genuine claims. A deposit system is consistent; parties know how the deposit will be calculated and take that deposit cost into account when determining whether to file a claim.187 That consistency will reduce incentives to file frivolous claims with an expectation of evading liability.188 Another benefit of a deposit is that it is easy to apply. The deposit calculation is simple and having that payment be a deposit that is paid upfront will reduce any concerns with unruly trademark owners not paying upon a finding of no infringement.

The payment going to the injured party is a further benefit of this deposit system. As discussed above, frivolous claims can have strong adverse economic effects.189 Abusers of a takedown system, especially abusers with large pockets, could choose to cause harm to competitors and swallow any monetary penalties they may face.190 Abusers may do this because the long-term economic benefit from pushing competitors out of the marketplace could outweigh the economic harm of paying any penalties. A deposit system will remedy that issue because any money paid by a false claimant will go directly to the accused party. Making the accused party (close to) whole again will dramatically reduce any incentive to bully competitors. While not a guarantee, the risk of directly paying one of your competitors might also incentivize mark businesses to only file claims when they have a genuine belief that the other party is infringing their mark.

The size of the deposit is paramount to the success of the program. If it is too large, it can be used to assert rights by larger companies more easily—because the amount is less burdensome to them—putting smaller companies at a disadvantage. This disadvantage is even more harmful because a large benefit of Online Marketplaces is the access they provide to smaller businesses.169 Having a deposit that is too small also can damage competition because companies, especially larger ones, can file many claims against competitors that they know will not succeed simply to deprive market access for a short time. While the smaller companies may get that money back afterwards, constant harassment of this type could still have sizable anticompetitive effects.170 Considering these issues with deposit size (and the asymmetric effects on different types of entities), a fixed deposit amount is ill-suited. Therefore, a better solution is a deposit that is more tailored to each situation.

There will be two deposit calculations made during each instance of claimed counterfeiting. The deposit that will ultimately be required is the lower of the two options. The first method of calculation consults the Online Marketplaces’ average weekly sales that the accused infringer would be expected to lose if the listing were removed from the platform. Three weeks’ worth of that quantity would serve as option one for the deposit. This period gives enough time for some review of the listing to make a preliminary determination of the quality of the claim. If the claim were to go to direct litigation, resulting damages (if any) would make up for the period starting after the three weeks and ending upon the final resolution of the dispute. The second way to calculate the deposit will be to determine 50% of the accuser’s weekly revenue from the good they claim is being infringed. The deposit total would be that amount for three weeks. If specific data for the goods in question is indeterminate (either because of lack of sales data or by counterfeiters creating many small accounts), Online Marketplaces would utilize internal data to approximate the sales numbers for use in calculating deposits.171 The longer this scheme is in place, the more additional data Online Marketplaces will have to make more accurate approximations when circumstances require.172 The deposit amounts are chosen to serve as a meaningful deterrent from frivolous claims without being prohibitively large. Another benefit of the deposit system is that the deposit totals can be modified in practice to maximize the efficacy of the program.173

III. REDUCING ONLINE COUNTERFEITING WITH A DEPOSIT-BASED SOLUTION

A. How a Deposit System Would Operate

o Stronger repeat infringer policies are a must. For example, as we shared in our 2023 NML comments, “…one seller recreated an Instagram account 11 times using the following [username], [same username]2, [same username] 3, etc. This was the same seller, with the same pictures promoting the same counterfeit goods that the brand needed to continue to report in all the ways required by Meta across all channels and all infringements. After seven rounds of enforcing, the seller made his account private, and the team had to privately follow the seller to collect evidence before submitting.” More can be done with existing reports and all the information, data, and learnings that platforms hold from brands right now. A seller should not be allowed to use the same username 11 times and it is on the brand to devote large resources to find, flag, and plea for enforcement.

The foundation of our trademark system predates global, nearly instantaneous e-commerce and is not equipped to address the online counterfeiting issues experienced today. Under the current legal framework, online intermediaries are generally not liable for the products sold on their platforms by third parties. This often creates a disincentive for those intermediaries to proactively stop the sale of counterfeits and other harmful products. Instead, many online marketplaces have a huge financial incentive to allow these sales, while enjoying extremely low risk of legal liability- they make a profit off each sale and they benefit from the "network effect" of scale that discourages robust seller vetting. It is readily apparent that there is a need for legislation to address the issue of counterfeit goods sold on e-commerce platforms. Online counterfeiting continues to be a growing issue for AAFA members, and the COVID-19 pandemic has only exacerbated this problem. The pandemic has disrupted supply chains worldwide and forced physical stores and markets to close repeatedly or for long periods of time, drastically driving consumer traffic to online channels. While we embrace the growth of e-commerce, unfortunately, counterfeiters have as well, taking advantage of these circumstances globally and flocking to sell their fake goods online.

The SHOP SAFE Act is a step in the right direction to level the online playing field and finally address the growing problem of counterfeits sold by third-party sellers on online marketplaces. Today, the burden of online enforcement disproportionately rests on trademark owners, who have to incur great cost to police a growing range of e-commerce sites. This creates a burden - felt particularly hard by small businesses - that does not exist in the brick-and-mortar retail environment. The SHOP SAFE Act would obligate online platforms to take greater responsibility for the products they sell by creating a set of best practices, including provisions on seller and individual product vetting, ensuring expeditious removal of counterfeit listings, and requiring termination of seller accounts repeatedly found to be selling counterfeit goods. Ultimately, these best practices would establish a floor that all e-commerce platforms would have in place to address the sale, offering for sale, distribution, and advertising of counterfeit goods online. Not only would this reduce burdens on small businesses, but it would establish parity of liabilities between brick- and-mortar and the online retail space.

First, The USPTO Should Explore Whether the SHOP SAFE Act Should Expand to All Products and Goods

As described in the Section’s letter to Congress supporting the SHOP SAFE Act, the Section strongly supports the implementation of the Act and believes that it would incentivize platforms to take proactive measures that help prevent sale of counterfeit goods. For the products it covers, the SHOP SAFE Act both addresses the primary goal of the DHS and the potential shortcomings of current legal doctrine as applied by the courts. In particular, the Act’s requirements that platforms address potential sale of counterfeit goods on a “reasonable” standard under Sections 1114(4)(A)(ii) (VII), (VIII) and (X) 7—rather than a particularized knowledge standard—and that platforms use available technology to screen goods under Sections 1114(4)(A)(ii)(VI) and (IX) may help shift to a more equitable shared burden between trademark holders, consumers, and e-commerce platforms. The Section looks forward to a chance to comment further on the “reasonable” standard and technological requirements set out in the SHOP SAFE Act once clarified by Congress.8

//DH

2. The Current Doctrine of Secondary Infringement Liability is Ineffective in Combatting the Sale of Counterfeit Goods in the E-Commerce Setting

The SHOP SAFE Act Requirements Are Likely to Facilitate Robust E-Commerce Platforms

The Section supports Congress’s intention to hold e-commerce platforms liable for contributory liability for the sale of counterfeit goods impacting health and safety unless the platforms adopt a series of steps that have been deemed “best practices.” These “best practices” fall broadly into four categories. The Section offers comments on each below:

In response to these trends, Congress proposed the Stopping Harmful Offers on Platforms by Screening Against Fakes in Ecommerce Act (“SHOP SAFE Act”) of 2023 on September 26, 2023 to combat counterfeits that posed a risk to consumer health and safety. This bill, if passed, would build upon the first federal law ever passed to regulate e-commerce platforms: the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (“INFORM Consumers Act”), which became effective on June 27, 2023.

One of the principal goals of these legislative efforts is to protect consumers shopping online. Although such legislation is a good first step, more work must be done for such legislation to achieve the ultimate goal of protecting consumers from counterfeit goods.

In order to address the shortcomings of the current secondary infringement liability regime, Congress should codify contributory trademark infringement and counterfeiting liability as part of the Trademark Act. In addition, Congress should enact new laws that impose heightened anti-counterfeiting and anti-infringement obligations on e-commerce platforms. The USPTO should expressly support these legislative initiatives. The 116th Congress was previously considering proposed legislation aimed at imposing additional obligations for addressing certain counterfeit goods, through the SHOP SAFE Act. We support this type of legislation, although we believe the SHOP SAFE Act or future similar legislation should be revised to: (1) expand its scope to all goods and not just those that “implicate health and safety,” which is a vague and subjective standard; (2) establish a cause of action against an e-commerce platform that promotes listings for counterfeit goods through advertising or other means of elevating their visibility to consumers; (3) impose a three-strikes requirement for platforms to permanently disable a particular seller upon three actionable instances of infringement are notified or independently discovered; (4) impose additional seller vetting obligations such as confirming authentic identity, contact information, licensing documents, etc.; and (5) a requirement to provide legal rationale for any rejection of a brand owner notice to disable a listing identified as infringing.

These steps are necessary to ensure e-commerce platforms do their fair share in stymying counterfeiting and infringement online, and can be held accountable to brand owners and consumers for continuing to profit from illicit activity on their platforms.

//DH

The data suggests that in-house legal teams work closely with law enforcement and government/legislative bodies. However, collaboration with brand owners in their same industry, brand owners in other industries, logistics/freight organisations, and payment and search engines is lacking. Just over half of all respondents said their organisation collaborates with other brand owners in anti-counterfeiting matters either frequently or very frequently, while a further two-fifths collaborate less often. In addition, more than one third of respondents reported no collaboration with brand owners in other industries.

Courts recently grappled with the issue of contributory trademark liability for e-retailers in Tiffany (NJ) Inc. v. eBay Inc.41 In Tiffany, luxury jewelry brand Tiffany sued eBay for not doing enough to keep fake Tiffany goods from being sold on its platform (Tiffany did not list any of its goods on eBay’s platform).42 eBay did establish anticounterfeiting measures, including an antifraud program and its Verified Rights Owner Program, to allow potentially infringing items to be removed by eBay.43 Despite the measures taken by eBay, Tiffany alleged contributory trademark infringement because eBay was unable to catch all instances of counterfeit Tiffany articles and argued that eBay’s general knowledge of counterfeit Tiffany goods on its site was sufficient to attach liability to eBay.44

Ultimately, the Second Circuit rejected Tiffany’s general knowledge argument and found that contributory trademark infringement requires a higher quantum of knowledge.45 In other words, a platform’s general knowledge that third parties are selling counterfeit goods is not enough to attach liability; the platform must have knowledge of specific infringing listings or listings that will infringe in the future.46 The court in Tiffany looked at the actions eBay took to reduce infringement and the takedown of known infringing articles as the basis for its determination that there was no specific knowledge.47 This knowledge requirement is similar to the standard for contributory copyright liability under the Digital Millennium Copyright Act (“DMCA”).48 Therefore, Tiffany effectively created a safe harbor for e-retail platforms that is similar to the storage safe harbor under the DMCA in the copyright sphere.

STEPHEN LAMAR: I think if -- if SHOP SAFE were to become law, I think you would still have very, very robust brand platform collaboration and cooperation. That's been going on for a number of years. That will continue to go on regardless of the shifting of the liabilities. Because it's in the brand's own interest to continue to make sure that their platform partners are educated.

At the same time, the platforms need to avail themselves of the public information that's out there. For example, trademarks are filed with the Patent and Trademark Office, which is what the legislation talks about. So, you know, relying on a US government body that is the central repository of trademarks in the United States, I don't think it's a difficult ask.

Q: WOULD BRANDS CONTINUE TO HAVE LEGAL OBLIGATIONS OR OTHER INCENTIVES TO PARTNER WITH PLATFORMS AND SHARE INFORMATION IF SHOP SAFE WERE ENACTED?

• It is in a brand's interest to continue to make sure that platform partners are educated. Brands have and will continue to have a duty to police marks;11 anything else is costly and harmful to a brand.12

Footnote 7. The Act calls for expeditious removal of listings and sellers where counterfeiting can “reasonably” be determined. While “reasonable” standard remains undefined in the Act, see infra, given Congress’s stated desire to overturn Tiffany, the Section believes such a standard would be broader than the narrow definition in Tiffany, such that it would account for what a reasonable person would know under particular circumstances, and what reasonable actions would be required given that knowledge.

The model, while very simple, underscores several key insights. First, if firms have sufficiently deep pockets, and are held fully accountable for the harms they cause, then platform liability is unwarranted. Holding the firms (and only the firms) liable deters the harmful firms from joining the platform and interacting with users. If firms are judgment proof and immune from liability, however, then platform liability is socially desirable. With platform liability, the platform has an incentive to (1) raise the interaction price to deter the harmful firms and (2) invest resources to detect and remove the harmful firms from the platform. Moreover, platform liability can stimulate user participation when users are heterogeneous. To prevent overinvestment in detection and removal, the residual liability assigned to the platform may be partial instead of full. The optimal level of platform liability also depends on the intensity of platform competition, and whether users are involuntary bystanders or voluntary consumers of the firms. With appropriate incentives, platforms can play an important role in reducing social costs.110

Although internet platforms provided the motivation for this paper, our insights apply more broadly. Our analysis provides a strong economic rationale for holding traditional newspapers liable for harmful advertising content111 and for holding bricks-and-mortar retailers liable for the harm caused by defective products.112 However, we believe that the insights are particularly salient for online platforms including Facebook, Google, and Amazon. First, the harmful participants on platforms are frequently small and judgment proof with insufficient incentives to curtail their harmful activities. Second, the big tech giants have the data and technologies to detect and block participants that are more likely to harm others.

d. Online Marketplaces: Disrupting Counterfeiting Opportunity

Revisiting the opportunity structure for trademark counterfeiting in brick-and-mortar marketplaces and how it applies to e-commerce platforms, using online counterfeit sellers in the role of motivated infringers, online consumers in the role of suitable targets/potential victims, and the e-commerce platform itself as the place wherein infringer and target meet and interact.39 The motivated counterfeit seller operates as an “unseen competitor” to legitimate companies, using the e-commerce platform as a place to hide from detection and fool consumers, while reaping illicit economic benefits.

An alternative to such a broad approach would be to create a statute to overturn Tiffany, requiring the high standard of specific knowledge of particular online infringements.279 In particular, the knowledge standard for contributory liability must be modified so brand owners can recover. Rather than saying there must be more than “general knowledge” of infringement for a company to be liable, Congress could draft a statute to establish clear factors for willful blindness. It could clarify that once an online marketplace has been notified of a certain amount of infringements for a particular brand, they have been put on notice to address subsequent listings from the same brand. Willful blindness has been established as constructive knowledge in contributory trademark infringement cases for brick-and-mortar stores, but courts have yet to apply the same standard through online marketplace infringements.280 A statute to create such a cause of action may read:

An online retailer may be held contributorily liable for trademark infringement if: the online retailer suspects wrongdoing, and fails to investigate and rectify such wrongdoing, or fails to actively police for particular infringements after suspecting such wrongdoing. In order to evaluate whether the online retailer ‘suspects wrongdoing,’ courts shall evaluate the following factors, including but not limited to: (1) whether a party outside of the online retailer notified the online retailer of the particular alleged infringements of particular products; (2) whether a party outside of the online retailer notified the online retailer of general alleged infringements of particular products; (3) the amount of infringements; and (4) whether there is information publicly available indicating alleged infringement.281

Accordingly, even though it may be difficult to craft rules that would fully satisfy the need for certainty, the courts should at least clarify the interpretation of the existing standards for contributory trademark liability, or explicitly adopt and elaborate on a new ad hoc standard in this area. At a minimum, courts could clarify and give specific instructions as to what measures intermediaries could take to avoid liability, and to what extent intermediaries should police the marketplaces.154 Perhaps the Supreme Court could again grant certiorari in a case related to contributory trademark infringement and further clarify its previous ruling in Inwood.

While the flexibility of a common law approach leaves the courts greater discretion in adapting the judicial precedents to the facts at issue, the uncertainty in this area could perhaps be best resolved by adopting a legislative amendment. This amendment would introduce contributory trademark infringement as a statutory action for infringement in the Lanham Act, but it would also elaborate on the definition of the relevant elements necessary to assess this type of liability. Notably, this amendment should include detailed definitions of “knowledge,” “control,” “willful blindness,” and any related concepts that could be relevant to assess a claim for contributory infringement. Such an amendment should also include a provision detailing the exceptions and limitations to contributory infringement.161 Finally, as part of this amendment, Congress should also consider introducing a “safe harbor” provision for intermediaries as part the Lanham Act. This provision could be modelled after the safe harbor provision that was adopted as part of the Digital Millennium Copyright Act (“DMCA”).162 In particular, it should detail the measures that intermediaries should observe, or create a system of “notice-and-takedown” that intermediaries could implement to avoid claims of contributory trademark infringement. Even though the DMCA, and the safe harbor provision, have been criticized, the safe harbor provision represents an important mechanism for intermediaries to prove compliance with the DMCA and thus likely exclude copyright infringement.163 Introducing a similar provision into the Lanham Act could offer intermediaries a greater level of certainty in conducting their activities from a contributory trademark liability perspective.