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Phillips & Sutherland, LLP

How U.S. subsidies aid Chinese counterfeiters

The Universal Postal Union treaty (UPU) is a United Nations agreement that was established in 1874 and sets shipping rates between 192 member countries. In 1969, in an effort to boost economic growth, the UPU set lower shipping rates for small parcels (4.4lbs and under) mailed from developing countries. While this move by the UPU was clearly well-intentioned, it has not been reassessed in several decades. As a result, despite being the world’s second largest economy, China is still listed as a “developing country” and thus benefits from unreasonably low shipping rates – to the detriment of the United States and U.S. businesses.

Due to China’s classification under the UPU, the U.S. is forced to subsidize shipping costs for Chinese imports – including counterfeit products – to the tune of approximately $300 million annually. As such, it oftentimes costs Chinese manufacturers and counterfeiters less to manufacture and ship products to the U.S. than it does for American companies to ship products within the U.S. This has become an increasingly troubling matter for American businesses over the past few years as consumer shopping has largely moved from brick and mortar stores to e-commerce platforms such as Amazon. Specifically, Chinese counterfeiters are able to severely undercut the price of authentic goods on Amazon (and eBay, etc.); making the counterfeit a significantly more appealing option to the unaware consumer.

This concern was echoed by President Trump’s trade advisor, Peter Navarro, who stated in a recent op-ed that this pricing “inequity puts American small businesses and manufacturers at a severe competitive disadvantage.” Navarro went on to detail how U.S. businesses and manufacturers pay between $19 and $23 to ship a 4.4lb package while China post only pays $5. It does not take an economist to see how such a disproportion is harming U.S. businesses.

As such, and in keeping with his America first policy, President Trump formally moved last week to withdraw from the UPU; an effort that is widely supported by U.S. shipping companies and manufacturers. Withdrawing from the UPU is a yearlong process, and if finalized in 2019, the U.S. will lose access to internationally recognized barcodes that allow parcels to be shipped throughout the UPU member countries. However, because it does take so long to formally withdraw, it gives the Trump administration ample time to renegotiate the rules and rates with the UPU and then rescind its notice of withdrawal. This is the most likely outcome, and one that will benefit U.S. product inventors, owners and distributors considerably.

Until this matter with the UPU is resolved, it is essential for product marketers to monitor third party sales of their products online to ensure counterfeits are not being offered at a lower price (and quality). Federally registering product trademarks and copyrights, as well as utilizing tools such as Amazon’s Brand Registry can help combat these counterfeiters and more effectively remove unauthorized product listings.

The copyright: not just trademark’s sidekick

It’s a bird…it’s a plane….it’s a federally registered copyright? That’s right folks, the copyright has been spotted in numerous counterfeit and infringement lawsuits saving product owners significant losses by activating statutory (automatic and guaranteed) damages. While patents and trademarks get all of the publicity for protecting brands and products, the copyright fights infringement more effectively than its intellectual property (IP) counterparts; making it the unsung hero of IP protection.

The copyright is so overlooked that even product attorneys forget what a powerful member of the IP protection league it is. For example, patent rights enforcement tends to be technical and complex, often requiring long, costly legal battles with Tony Stark caliber experts to prove infringement. However, copyrights, which protect property such as images, illustrations, infomercials, and product packaging, are pretty easy to eyeball, even for an untrained juror.

Copyright is also the most affordable IP protection to secure. Moreover, copyright infringement triggers statutory damage awards that can soar to up to $30,000 per occurrence; plus, recovery of attorney’s fees. As such, trial attorneys are more willing to take on a (properly registered) copyright infringement case on a contingency basis. Of course, statutory damages are merely a fallback, with many product owners seeking actual damages (i.e., lost profits), which is an entirely different hulk of a task.

Additionally, the copyright is the only member of the IP protection league that successfully combats counterfeit sales on platforms such as Amazon; trademark registration alone will not suffice to remove counterfeits on Amazon. To be sure, the counterfeit seller merely has to allege that it is selling a legitimate product, and then there is no infringement thanks to the First Sale Doctrine (you bought it, you own it, you can resell it and call it what it is). In some instances, the infringer changes the name of the product, which effectively shields it from a trademark infringement claim altogether. However, the right to resell a product does not give rise to the right to display copyrighted images for the purpose of that sale. This is another reason why the copyright is so powerful.

While patents and trademarks are formidable tools for many reasons other than defending against knock-offs and counterfeits, with the copyright being such a low-cost titan in the IP universe, it’s a wonder more businesses do not utilize its armor. For maximum protection, copyrights need to be registered in a flash, so be sure to summon an intellectual property attorney prior to your product rollout.

A Counterfeiting Operation Ripped Off 2 Inventors. Then They Fought Back, and Won.

*The following was written by Michael Kaplan and appeared in the July issue of Entrepreneur*

On Valentine’s Day in 2015, Natasha Ruckel and her husband, Fred, were sitting in their living room in Gilboa, N.Y. Natasha was improvising on the piano, and Fred was listening while messing around with the couple’s cat, Yoda. Fred noticed a ripple in the living room rug, forming a half circle on one side. Again and again he tossed toys into the ripple and a delighted Yoda darted in and out. Natasha looked up from her playing. “That’s when we came up with the idea for the Ripple Rug,” she says.

The Ruckels, who had spent around 25 years earning their living in marketing and advertising for brands from PepsiCo to ESPN to Hasbro, were already in the midst of creating their first venture: an app that provided a way for amateur photographers to monetize online images. But they both agreed that the Ripple Rug was a better bet.

A couple of days later, Natasha went to Home Depot and bought some cheap pieces of carpet, and they got to work on a prototype. When they had that, they launched a Kickstarter campaign in May 2015, pricing the American-made product at $39.95, to test the market. Within 30 days, they received $15,000 in backing. They had the products made in Georgia for $15 each, and filled the orders.

The Ruckels were weighing their next step when, that fall, the opportunity of a lifetime hit. QVC, in conjunction with the Today show, hosted an ongoing competition called the “Next Big Thing” for entrepreneurs with new retail products. Participants presented their offerings on the TV program, and the winning products received an order from QVC.

Following an arduous vetting process — including proof of a multi­million-dollar insurance policy, a guarantee of having 1,500 items available for sale and sample videos of the Ruckels in pitch mode — Ripple Rug made the cut. “We drove into New York City, and at every exit, we practiced the pitch,” Fred remembers. “We were there by 5 a.m. and hardly slept the night before.”

They sold a few hundred units immediately. QVC bought 1,500 more and Ripple Rug became a top seller. “It was pretty damned amazing,” says Fred. “We were profitable out of the gate, which is virtually unheard of. It felt like a great moment.”

It was, and it wasn’t. Over the next 14 months, the Ruckels learned that coming up with a truly original innovation attracts not only devoted customers but also the kind of highly organized, deep-­pocketed bootleggers who rip off products and systematically grind their inventors into the ground — both financially and emotionally. “It creates so much discord that you are willing to give up the dream of entrepreneurship and go back to your day job,” says Fred.

In the thick of battle, however, the Ruckels learned critical lessons: the importance of copyrighting assets before launching; the reality that people will steal everything from your marketing pitch to your product to your advertising photos; the need to continually patrol for ripoffs and take action. They also got a darkly fascinating glimpse of how ruthless, well-funded, deeply sophisticated bootlegging operations work — and how, with tenacity, vigilance, a good lawyer and the right strategy, they can be beaten.

Continue reading at Entrepreneur.com

U.S., EU File IP Complaints Against China With the WTO

On March 23, the United States – through the World Trade Organization (WTO) – filed a “Request for Consultations” with the government of China concerning its technology and trade practices that are harming the IP rights of U.S. companies and innovators who enter into joint ventures with Chinese companies. The U.S. claimed that the Chinese measures are inconsistent with multiple articles of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The TRIPS Agreement, of which China is a member, sets out the minimum standards of intellectual property protection to be provided by each member.

In its Request for Consultations, the U.S. alleged that China violates the TRIPS Agreement insofar as it “denies foreign patent holders the ability to enforce their patent rights against a Chinese joint-venture party after a technology transfer contract ends. China also imposes mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology.”

For example, the Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies prohibits a U.S. patent-related technology license contract from restricting a Chinese party from improving the technology or from using the improved technology. Those same regulations go on to say that any improvements in imported technology belong to the party making the improvement. Therefore, a U.S. patent holder cannot stop a Chinese entity with which it is working from modifying or “improving” a patent, even ever so slightly. Then, that improved patent automatically belongs to the Chinese entity, which now has unfettered rights to license and distribute.

In April 2018, the Ukraine, Japan, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU), all formally requested to join the Consultations requested by the United States, generally citing substantial interests in the interpretation of the relevant provisions of the TRIPS Agreement.

In addition to requesting to join the U.S., the EU filed its own Request for Consultations on June 1, echoing and expanding upon the concerns of the United States. The E.U. Request goes on to say that “China’s measures appear to adversely affect exports to China of technology, including intellectual property rights, by European Union undertakings and also appear to nullify or impair the benefits accruing to the European Union and its Member States.” (emphasis added)

China’s Ministry of Commerce responded to the EU’s Request stating, in part, “The Chinese government has always attached great importance to the protection of intellectual property rights and adopted many strong measures to protect the legitimate rights and interests of domestic and foreign intellectual property rights holders.”

So, what happens next? According to the WTO Dispute Settlement System, the request for consultations formally initiates a dispute in the WTO. If the consultations fail to settle a dispute within 60 days after the date of receipt of the request for consultations, the complaining party may request adjudication by a panel. The findings of the panel will be adopted by the Dispute Settlement Body (DSB) of the WTO, unless a party appeals the finding or the DSB decides by consensus to not adopt the panel’s report.

As of June 7, a panel has not been requested as a result of the U.S.’s Request, even though the 60-day benchmark has come and gone, and the status remains “in consultations.” Stay tuned to this space for updates.

That Bites: “Aromaflage” Owner Settles False Advertising Claims

On May 3, 2018, the Federal Trade Commission (FTC) announced that Mikey & Momo, Inc., owner of “Aromaflage” perfumes and scented candles, agreed to settle charges that it used deceptive claims to sell its alleged mosquito-repelling products. According the FTC, the products, marketed as “fragrance with function,” lack any scientific evidence to support their insect-repellant claims.

According to their marketing materials, the elegantly packaged products sold by several retailers including Dillard’s, Overstock.com and Anthropologie, were “tested in the rice paddies of Southeast Asia as well as the finest locations in the Caribbean, Hamptons, and cottage country in the peak of summer,” and effectively repel mosquitoes for 2.5 hours. Further, the company claimed that the sprays and candles repel mosquitoes as effectively as 25% DEET. According the FTC’s complaint, the product website also stated that the sprays and candles were “rigorously tested at one of the world’s leading Universities” and “repels mosquitoes that may carry Zika, Dengue, Chikungunya, and Yellow Fever.” The FTC contends that none of these claims can be substantiated.

In addition to the lack of scientific evidence supporting the veracity of the products’ claims, the FTC was bugged by the fact that many of the purported impartial positive product reviews posted on the company’s Amazon storefront were, in fact, written by the owners of Mikey & Momo, as well as other individuals with a financial interest in the company.

Fortunately for Mikey and Momo, the proposed order settling the FTC’s charges does not include a monetary penalty. It does, however, prohibit the company and its owners from making any of the misrepresentations alleged in the complaint, and requires them to disclose clearly, conspicuously whether there is a connection between an endorser and the product or anyone associated with it.

Avoid the sting of the FTC by consulting with an attorney to make sure your product claims pass the smell test.

Please email us if you have any questions or if you would like more information regarding the content above.

‘BOGO’ Refunds Commence in Allstar’s Snuggie Settlement

On March 12, the Federal Trade Commission (FTC) began mailing refund checks totaling some $7.2 million to more than 218,000 consumers who purchased products from Allstar Marketing Group LLC that included an offer for a free product in connection with those purchases. The refunds, averaging $33 per consumer, are a result of an investigation by the New York State Office of the Attorney General and a subsequent 2015 settlement with the FTC.

Allstar is alleged to have violated multiple consumer protection laws by its deceptive advertising practices involving products including, among others: Snuggie, Perfect Bacon Bowl, Magic Mesh Door, Perfect Brownie Pan, and Cat’s Meow. According to the FTC complaint, consumers who purchased Allstar’ s products thought, for example, that they were getting two Snuggies for the low price of $19.95, but in reality, were charged processing-and-handling (P&H) fees for both items, bringing the total purchase price to $35.85. Further, customers were not given the option to decline the promotional buy-one-get-one-free (BOGO) offer.

With the multimillion dollar settlement and refund checks making national news, consumers and regulatory bodies may be on the lookout for similar marketing strategies by other leading marketers. To be sure, FTC law enforcement actions led to more than $6.4 billion in refunds for consumers during the one-year period from July 2016-June 2017. As such, marketers should be cognizant of what product offerings may raise red flags, particularly since consumer protection laws are typically broad generalizations rather than prohibitions on specific marketing strategies.

Accordingly, while some disclosures need to be more conspicuous than they once were, BOGO offers still generally have the green light. That being said, there are three main areas of concern: the use of the word “free” (especially with a modifier such as “absolutely”); P&H disclosures; and the ability to opt out of the free offer.

First, use of the word “free” could garner some unwanted attention and scrutiny from regulatory agencies. Even when the only cost for the additional item may be processing and handling, and the additional item is technically free, if the charges for P&H are as costly as the product itself, and nonrefundable if the product is returned, that offer would likely constitute deceptive advertising tactics. It is therefore recommended that distributors avoid BOGO offers with costly P&H charges. However, those who insist on a BOGO offer while still charging significant P&H fees should use alternative language to convey that the second item is “free.” Not so creatively, for example, “As a bonus, we will also send you this second [product]. Just pay an additional [amount] for processing and handling.”

To further steer clear of FTC scrutiny, P&H fees should be shown on the screenshot in the commercial (preferably stated in the script as well), on the website’s order page, and in a confirmation email to the consumer. According to compliance guidance provided by the New York Attorney General, the amount of any processing and handling or other fees (excluding taxes) is a material term that must be disclosed in an advertisement if the total amount of such fees exceeds the amount consumers would reasonably expect to pay for processing and handling. Expectations take into account the applicable shipping method for a product of similar price, size, and weight. Finally, a consumer should be provided with the option to opt out of the BOGO offer and be allowed to purchase a single item.

As laws can vary from state to state, be sure to consult with an attorney experienced in consumer protection regulations prior to launching a marketing campaign for a new product.

Cryptocurrency: Too Risky – or a Strategy for DR Survival?

Cryptocurrency – such as Bitcoin – is volatile, easily hacked, plagued with fraud issues, and has even been compared to Ponzi schemes. Sounds great, right? Well, regardless of the risks and challenges involved, it continues to take the world by storm, with major companies – possibly including Amazon – getting involved in the exchange. With so many companies trending toward accepting cryptocurrency, it may be necessary for direct response and other performance-based marketers to get in the game.

Many heavy hitters believe that cryptocurrency is the cash of the future, including Shark Tank’s Mark Cuban and Robert Herjavec. While Herjavec is a bit more cautious and won’t be diving in just yet, Cuban recently announced that fans would be able to use Bitcoin and Ether to purchase season tickets to Dallas Mavericks games for the 2018-2019 season. This will make the Mavs the second NBA team (after the Sacramento Kings) to delve into the cryptocurrency market.

More notably, retailers such as Overstock.com, Expedia, Newegg, Shopify stores, Etsy sellers, Subway, and Dish Network are among companies currently accepting cryptocurrency as payment for some or all of their products/services. Though these companies are not in direct competition with DR players, there is some overlap, which could make shopping at these retailers more appealing to consumers than those that do not accept cryptocurrency.

Still not convinced? Rumor has it that the big kahuna, Amazon, may be all in. In November, Amazon purchased the domains amazonethereum.com, amazoncryptocurrency.com, and amazoncryptocurrencies.com. Such purchases suggest that not only might Amazon be accepting cryptocurrency soon, but it may also be setting up its own exchanges. While the domains could mean nothing at all (three years ago, Amazon purchased amazonbitcoin.com, which merely redirects to amazon.com), with so much activity in the cryptocurrency market right now, it would be foolish to think that such a forward-thinking and progressive company that doesn’t shy away from new ventures wouldn’t have cryptocurrency in its game plan.

If Amazon does get in the market, it will put direct response companies at an even bigger disadvantage. Currently, Amazon is perhaps the biggest distributor of counterfeit and knockoff goods, and now it is even in the market of manufacturing its own competing products. Add a new purchase payment option, such as Bitcoin or Dash (commonly used to purchase consumer products), and it could be game over for the direct response industry.

Think about it. If a consumer has a choice between going to a product website and paying $19.99 plus processing and handling and (P&H) waiting possibly weeks for delivery … or going to Amazon and paying $19.99 or less in cryptocurrency and receiving the product in two days with Prime shipping, the choice is obvious. While many distributors do sell their products on Amazon, as well, the return is certainly not as high as the online and phone sales that allow for upsells and marked up P&H charges. Of course, distributors can always add Amazon Pay as a payment option on their sites (assuming cryptocurrency becomes an Amazon Pay option), but this may not be enough to keep sales on product websites. If product distributors and their merchants begin accepting cryptocurrency, it may help keep those sales competitive.

Despite the volatility of cryptocurrency right now, demand for it appears to be there. With kinks needing to be worked out, the house is not on fire just yet, but it is certainly the time for performance-based marketers to at least start doing their homework. There are whispers that some companies may be doing just that.

Feeling Frosty?

For much of the country, the new year brought in winter storm warnings and bitter cold temperatures.  However, the arctic blast has nothing on the seemingly chilly relationship between a couple of cereal giants; bestowing one last holiday surprise upon consumers.

After speculation that it may be a ruse, on December 29th, General Mills officially announced the launch of its latest cereal, Lucky Charms Frosted Flakes.  Sugary cereal lovers everywhere rejoiced on social media as the news spread and the cereal began appearing on supermarket shelves.  Two classic childhood cereals combined…what’s not to love?  Well, we suspect Kellogg, Corp., the distributor of Frosted Flakes, is not feeling so GR-R-REAT about the latest breakfast sensation that is taking the internet by storm.

Frosted Flakes is probably one of the most iconic cereal brands in the US.  Most everyone can recognize the product from just a glance of the blue box baring the lovable Tony the Tiger, who first debuted back in 1952.  So, with such an established brand, how is it that General Mills can so blatantly use the name of a Kellogg product?  As it turns out, unlike “Kellogg’s Frosted Flakes,” “Frosted Flakes” is not a registered trademark in the cereal or breakfast food categories.  This is likely because the term “frosted flakes” is merely descriptive; that is to say, the words themselves describe exactly what the product is.  Descriptive names are generally not granted federal trademark protection.

Fortunately for Kellogg, it is not without some recourse should it wish to pursue legal action against General Mills.  Trade dress protects the appearance of a product or its packaging under federal and state unfair competition laws, even without formal registration (though registration is recommended).  In this case, rather than the traditional red Lucky Charms box, General Mills’ newest member of its cereal line is blue – strikingly similar to Kellogg’s Frosted Flakes box.   Kellogg therefore may have a good argument that consumers, seeing the words “frosted flakes” combined with the blue box, would be confused by the source of the product.

This is the second time in just a matter of months that Kellogg has been involved in some sort of cereal box controversy, and it will be interesting to see if and how it responds to General Mills’ actions.

If your company is launching a product or creating new ad content, be sure to hire counsel with experience with intellectual property protection laws.  Please email us if you have any questions or if you would like more information regarding the content above.

Advertising in a World of PC Police

It seems like every time you turn on the news these days, another company is being accused of racist or sexist advertising material.  Are companies and ad agencies really being that insensitive, or have we, as a society, become a bit thin-skinned; looking to make anything, no matter how trivial, a matter of discrimination?  Either way, in addition to the numerous governmental regulations that product distributors and marketers have to abide by when advertising and labeling a product, the feelings of eggshell consumers are now likely another box that needs to be checked.

The Kellogg Company was the latest brand to be roasted by consumers for allegedly promoting racist stereotypes in a cereal box cartoon that displayed a lone brown janitor corn pop cleaning the floor of a shopping mall full of yellow corn pops who appeared to be enjoying themselves.  Consumers were quick to smear Kellogg for this supposed portrayal of race and status, but was it really warranted?  If you just glance at the cartoon, the yellow pops appear to be a bunch of ill-behaved, nude delinquents, with dilated pupils that lead us to question whether they were enjoying a different kind of “puff.” On the other hand, the brown corn pop is the only one who is being productive and wearing clothes.  He (she?) is also the only one actually smiling.  We liked the brown corn pop.  Obviously, not everyone felt the same, and we certainly understand how this cartoon could be considered offensive.

Similarly, Unilever came under attack for its ad that portrayed a black woman’s skin undergoing a transformation to a white woman following the use of Dove soap.  For many, this evoked a long-running racist allegory in soap advertising: a “dirty” black person cleansed into whiteness; so much so that Unilever removed the ad and issued extensive apologies.  However, the African American actress who appeared in the commercial supported it by saying that it was not racist, but rather, celebrated ethnic diversity.

While avoiding the use of imagery or notions generally known to be discriminatory is advisable, interpretation of an advertisement is subjective and thus, it is hard to please everyone.  Likewise, when it comes to marketing and labeling guidelines as defined by entities such as the FDA and FTC, there are black and white do’s and don’ts, as well as gray areas as to what can and cannot be said.

Product marketers and distributors may not be able to anticipate what may or may not be offensive in every scenario, nor can they please every consumer, but with the help of a knowledgeable attorney, they can ensure compliance with federal and state regulations.  If your company is launching a product or creating new ad content, be sure to hire counsel with experience in federal advertisement and consumer protection laws.

Please email us if you have any questions or if you would like more information regarding the content above.

Patent Assignments to Native American Tribes: Brilliant or Bad Business?

The recent trend of companies transferring patents to Native American tribes has raised some concerns about anticompetitive business practices.  Lawsuits brought by patent-holding tribes as a result of these assignments have been popping up a lot lately, and major companies are fit to be tied.

Essentially, companies are assigning their patents to tribes in order to take advantage of the tribes’ sovereign immunity, thus shielding them from the patent review process and potential patent invalidation.  The most recent targets of these lawsuits in the tech industry have been Apple, Amazon and Microsoft.

The method works something like this.  A company files for and is granted a patent.  That patent is assigned by the company to a Native American tribe, meaning the tribe is now the owner of the patent. The tribe then licenses the patent back to the company in exchange for a substantial royalty (last month pharmaceutical company Allergan agreed to pay the St Regis Mohawk Tribe $13.5 million up front and a royalty of $15 million annually for its now defunct Restasis patent).  Then, when instructed by the company, the tribe files a lawsuit against a third party (i.e. Apple) for patent infringement.

Normally at this stage (as previously discussed in our Battle of the Copper Pans article), the best course of action for the company being sued would be to attempt to invalidate the patent it is allegedly infringing upon through the USPTO’s inter partes review process (“IPR”).  The IPR occurs before the Patent Trial and Appeals Board (“PTAB”) rather than in the courts, and is therefore a much more time and cost-effective way to invalidate improperly issued patents.  However, if the owner of the patent is a Native American entity, it has sovereign immunity, and is not subject to the jurisdiction of the PTAB.  The company is therefore forced to litigate the infringement claims, which typically lasts over a year, and can result in the defendant companies being enjoined from selling their “infringing products” during such time.

Although defendants are crying foul at this tactic, it seems brilliant for owners who want to ensure their patents are not subject to invalidation proceedings.  However, this trend may not continue for long as we certainly expect to see the defendants of the lawsuits challenge these so-called “sham” transactions and the sovereign status of the tribes.

It is best to have a knowledgeable attorney during all stages of the patent process.  Please email us if you have any questions or if you would like more information regarding the content above.