© channel one group 2008 counterfeit components and related legal issues calce/smta symposium on...

© Channel One Group 2008

COUNTERFEIT COMPONENTS AND RELATED LEGAL ISSUES

CALCE/SMTA SYMPOSIUM ON AVOIDING, DETECTING, AND PREVENTING COUNTERFEIT ELECTRONIC PARTS

September 9th 2008

Laurence E. PappasVice President/General Counsel

Channel One Group9001 131st Place North

Largo, Fl 33773Tel: 727-586-6288Fax: 727-559-0290

[email protected]

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


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.

I. Contracts


If the response to an offer is anacceptance or confirmation, does it

propose additional terms?Offer accepted

Contract formed but the additionalterms not included

Did the offer limit acceptance to itsterms?

Do the terms materially alter thecontract?

Did the offeror object to the new termsin a reasonable time?

Contract formedincluding the

additional terms

Yes

Yes

Yes

No

No

No

ACCEPTANCE WITH ADDITIONAL TERMS

Yes

No


I. Contracts

Article 2 of the UCC may apply to the sales transaction.


II. Application of Uniform Commercial Code to Counterfeit Sales Transactions

A. Section 2-711: Buyer may recover damages for bad tender, breach of warranty and “in a proper case” incidental and consequential damages.



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.



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.



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.


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?



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?



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.


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.


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.


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.



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.



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.



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.



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”.



D. New Products -vs- Used Products.

1. New: Alteration is not permitted.

2. Used: Moderate alteration permitted.

3. Will user be confused?

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



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.



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.



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.



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



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”.

Vendor

Buyer

Customer

VIII.Ownership Risks in Counterfeit Parts Transactions - Risk of Loss in Specific Transactions

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.


IX. Internet Sales and Trademark Violations

A. Trademark owners cannot prevent others from making a descriptive use of their trademark. Resale of authentic non-counterfeit 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.



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.



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.


© channel one group 2008 counterfeit components and related legal issues calce/smta symposium on...

Documents

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