June 15, 2013

REMARKS FOR INTERNATIONAL FASHION CODE EVENT ZUZENBIDEA ETA MODARI BURUZKO HARDUNALDIA/EVENTO SOBRE DERECHO Y MODA CRISTOBOL BALENCIAGA MUSEOA

Written By: David Jacoby

Schiff Hardin LLP, New York djacoby@schiffhardin.com

June 15, 2013

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INTRODUCTION

I feel very privileged to have been invited to participate in this program. A close friend of mine from

college lives in Dallas, Texas and his spouse, Professor Myra Walker, teaches fashion at the University

of North Texas. A major focus of her academic work has been the namesake of the museum where

this event is taking place, Cristobal Balenciaga. About half a dozen years ago, she curated a

wonderful exhibition at the Meadows Museum in Dallas of some of Balenciaga’s dresses from the

archives of the University’s Texas Fashion Collection, drawn in part from the closets of Texas

customers of the Neiman Marcus department store through the years. She also put together a book,

entitled Balenciaga and His Legacy, published by Yale University Press in the U.S. in 2006 (“Walker”),

and just this April delivered a talk on Balenciaga at SMU Fashion Week. So I feel more than a merely

casual connection here.

I have been asked to cover four topics relating to fashion and law with specific reference to the United

States. Although the topics are distinct, they complement one another and, as you’ll see, it is hard to

discuss any one in pure isolation from the others. But, with luck, the whole will be greater than the

parts. I won’t pretend the treatment can be comprehensive and I will draw often on cases we’ve

highlighted in Schiff Hardin’s quarterly newsletter InFashion (index and all issues available at

http://www.schiffhardin.com/services/industries/fashion-and-luxury-goods).

I’m going to begin with a necessarily abbreviated overview of what legal mechanisms are commonly

used to protect fashion in the U.S. and why some offer roads to protection that are smoother and

faster and others are very nearly dead ends. None is perfect. I suspect those of you from Europe will

find some sharp contrasts. Then I will tell you about a long-running and still-continuing legislative

effort to address one of the gaps in U.S. protection for fashion, which in its current incarnation is

called the proposed Innovative Design Protection Act. It may remind many of you of the EU

unregistered design right which is the subject of the Karen Millen decision1 now on appeal in Ireland.

I’ll then spend a few minutes on counterfeiting in the American market, with particular reference to

developments affecting and prompted by technological change. Then, finally, a dessert, but no light

sorbet; this is the most nearly philosophical of the four subjects: the legal and economic debate over

the so-called “Piracy Paradox,” which argues that the low-protection intellectual property environment

for fashion in the U.S. actually has been good for innovation in fashion. This has become a focal point

of the legislative debates over IDPA. I, and more importantly, others don’t agree, and I’ll tell you

why. I’ve promised to do all this in 30 minutes or less, and to do so without falling into my habitual,

New York-paced manic speaking tempo.

1 Karen Millen Ltd v. Dunnes Stores [2007] IEHC 449 (21 December 2007) (Finlay Geoghegan, J).

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I. AVENUES OF PROTECTION FOR FASHION IN THE UNITED STATES

At the outset, let me say what may be a redundant word about the U.S. legal and governmental

system. It is a federal system, with the national and state governments having different and

sometimes overlapping powers. The U.S. Constitution specifically vests the federal Congress with

power to make laws about copyrights and patents.2 The exercise of federal power in these areas pre-

empts state power. Because Congress also has legislative power over interstate commerce, federal

law also addresses, although it does not necessarily pre-empt, state power in other relevant areas,

including the protection of trademarks and trade dress and prohibitions against false advertising. Still,

most of the law bearing on protection of fashion items is federal, with some complementary state and

even local law.

A. Copyright

Let’s start with what you may think ought to be the obvious mechanism for protection: copyright.

Copyright registration in the United States is fairly straightforward and not very expensive. A

copyright obtained by an individual today continues for the individual’s life plus 70 years.

Surprise: U.S. copyright law offers very little protection to a contemporary Balenciaga who designs

couture. The primary reason is because U.S. copyright law excludes protection for works which are

functional, and clothing, however exquisite, usually is deemed to be functional. There are some

limited ways in which copyright can protect aspects of fashion designs. I have in mind a beautiful

Balenciaga silk taffeta dress with a floral print (Walker, Fig. 4). If I painted that floral design, I can

copyright that original work of visual art. If I then incorporate that image into a dress, and someone

copies the dress and the image on it, I can pursue the person for copyright infringement.3 By the

same token, a sculptural belt buckle could be protected by copyright.4 Lace designs can enjoy

copyright protection. The design of a piece of jewelry incorporated into a hat also can be protected by

copyright. But those are the exceptions that prove the rule. It is precisely this very limited

availability of copyright protection which motivated the introduction of the IDPA, but more about that

later.

A recent case5 which illustrates the very limited copyright protection available for fashion items

involved prom dresses. The District Court (first-instance tribunal) held that the design features of the

2 U.S. CONST., Art. I, Sec. 8, cl. 8.

3 See, e.g., LA Printex Industries, Inc., v Aeropostale, Inc., Dkt. No. 2:09CV02449 (C. D. Cal) (2013 jury verdict finding liability for copyright infringement of textile designs of a rose and of a snowflake used on defendants’ shirts; case subsequently settled).

4 Kieselstein-Cord v. Accessories by Pearl, Inc., 632 F.2d 989 (2d Cir. 1980).

5 Jovani Fashion, Ltd. v. Cinderella Divine, Inc., 808 F.Supp.2d 542 (S.D.N.Y.), aff’d, 500 Fed.Appx. 42 (2d Cir. 2012)(summary order).

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short, sequined prom dress in issue were not copyrightable because they were not physically or

conceptually separable from the dress as a whole.

Prom dress maker Jovani Fashion, Ltd. had a visual arts copyright registration for two-dimensional

artwork incorporated in the dress, including the selection and arrangement of sequins and beads on its

bodice and the tulle used on the bottom of its short skirt. Jovani claimed that a competitor’s prom

dress infringed these design features. Despite the evident similarities, the District Court dismissed

Jovani’s copyright claim. The court noted that the Copyright Act of 1976 does not provide copyright

protection for useful articles, including clothing items, as such. Copyright protection can extend only to

“pictorial, graphic or sculptural features that can be identified separately from and are capable of

existing independently of the utilitarian aspects of the article.”6

The court next reviewed court decisions identifying factors to be considered in determining whether

the “pictorial, graphic or sculptural features” of a useful article are physically or conceptually

separable. Applying those criteria, the court held that the aesthetic aspects of the Jovani dress were

not conceptually separable. It concluded that the sequin and tulle design features of the dress did not

invoke a concept separate from the design’s clothing function nor did they show artistic judgment

independent of the functional requirements of the dress. Because a primary function of a prom dress

is to have aesthetic appeal, the functional aspects of the dress were not secondary, and the design

elements did not have independent worth as an artistic work that could be separately marketable.

The Second Circuit had stated previously that the decorative elements of articles of clothing are

“particularly unlikely” to pass the conceptual separability test.7 Many of Balenciaga’s most striking

creations and their use of fabric, embroidery and ruching, among other characteristics, also would not

pass this text.

B. Patents

What about patents? Here, we need to differentiate between two kinds of patents, utility patents and

design patents. A utility patent, as the name suggests, protects a process or invention which does

something. It is, in effect, functional. As with copyright, that means utility patents usually can’t help

to protect fashion design.

A design patent, on the other hand, can come into play to protect fashion. As a general proposition, a

design patent protects original ornamental design elements of an otherwise functional or useful item.

So it might be the styling of a strap on a high heel, the ornamentation hardware on a handbag or the

6 17 U.S.C. § 101. 7 Whimsicality Inc. v. Rubie’s Costume Co., 891 F.2d 452, 455 (2d Cir. 1989).

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appearance of a set of sunglasses, among many other things. A U.S. design patent lasts for 14 years;

that will become 15 years in December, thanks to a recent change in the statute.

Patents, even design patents, are more difficult to obtain than copyrights. The application process is

more complex, costlier and takes longer. Consequently, many American practitioners have dismissed

them as unhelpful in trying to protect this season’s fashion designs. Others argue that they have been

underutilized. One fashion segment where they have been used in particular is footwear.

A recent development in the design patent area was President Obama’s signature into law on

December 18, 2012 of the Patent Law Treaties Implementation Act.8 Among other things, it adds the

United States to the roster of more than 75 countries, including the members of the European Union

and the African Intellectual Property Organization, that are signatory to the Hague Agreement

Concerning International Registration of Industrial Designs. When the new American law takes effect

in December 2013, it will let someone in the U.S. seeking a design patent apply for protection in all

participating nations with a single filing. Of possibly greater moment to the use of design patents in

fashion, however, will be the extension to design patents of what are called “provisional rights”. For

utility patents, the U.S. Patent and Trademark Office publishes the applications long before a patent is

granted. To protect applicants in the meantime, U.S. law has allowed them to sue someone who

copies their claimed inventions while the patent application is pending and recover a reasonable

royalty. These are the “provisional rights.”

Under the new law, applications for design patents also will be published, and provisional rights will be

available for them, too. The standard for relief is whether the drawings for the ultimately issued

patent are “substantially identical” to those submitted for the application. Utility patent applications

often are revised. This is less true of design patents. Moreover, design patent applications probably

will get published faster than utility patent applications, so provisional rights likely will be available for

an even longer time.

C. Trademarks

Given the actual or perceived limitations of copyright and patent law to protect fashion design, great

reliance is usually placed on trademark law for fashion design protection in the U.S. A recent high-

profile example was the litigation between Christian Louboutin and Yves Saint Laurent over red-

lacquered insoles on women’s high-heeled shoes.9 The District Court initially threw out the claim,

refusing to allow the pre-emption of the use of a color, and questioning the validity of the trademark.

It found that color is inherently functional for fashion items and prohibited claiming it as a trademark,

8 35 U.S.C.§ 381 et seq.

9 Christian Louboutin S.A. v. Yves Saint Laurent Holding, Inc., 778 F. Supp.2d 445 (S.D.N.Y. 2011), aff’d in part, rev’d in part, 696 F.3d 206 (2d Cir. 2012).

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no matter how widely associated with the product. On appeal, the trademark was pared back to

instances where the red sole contrasted in color with the rest of the shoe (which took the accused

shoe, which was red all over, out of trouble). The district court had reasoned that the choice of color

enhances the appearance, and therefore the commercial appeal, of the fashion design, making the

hue “aesthetically functional.”

The Second Circuit opinion rejects this special rule for fashion. It finds that a single color trademark is

not off limits to a fashion designer just because using a particular color may enhance the design,

provided that it does not significantly restrict the ability of others to compete. This stops short of

the monopoly which a patent or copyright confers, but also avoids “jumping to the conclusion that an

aesthetic feature is functional merely because it denotes the product’s desirable source.”

Trademarks can include trade dress, which can be just about anything — the stitching on the back

pocket of jeans, the Louis Vuitton “LV” pattern, Daft Punk’s headgear — provided it is recognized as

an indicator of the product’s source. For instance, in Levi Strauss & Co. v. Abercrombie & Fitch

Trading Co., 633 F.3d 1158 (9th Cir. 2011), jeans and, more particularly, the stitching on the back

pockets of those jeans, were at issue. Since 1873, Levi Strauss has stitched the “Arcuate” design onto

the vast majority of its jeans’ back pockets. It consists of two arches of equal length which meet

neatly in the middle of the pocket. Levi Strauss has a trademark registration for the design. In 2006,

A&F began using what it called the “Ruehl” design on the stitching of its back pockets, which the Ninth

Circuit Court of Appeals described as consisting of “two less-pronounced arches that are connected by

a ‘dipsy doodle,’ which resembles the mathematical sign for infinity.” A & F tried to defend by arguing

“Ruehl” was not identical or nearly identical to “Arcuate.”

The Ninth Circuit searched the Federal Trademark Dilution Act, 15 U.S.C. §1125(c), in vain for that

phrase “identical or nearly identical.” Instead, the court traced the language back through a number of

its precedents to a decision involving New York’s trademark dilution statute. Then it turned to the

post-Moseley10 amendment, specifically, 15 U.S.C. § 1125(c)(2)(B), which defines “dilution by

blurring” as the “association arising from the similarity between a mark and a trade name and a

famous mark that impairs the distinctiveness of the famous mark.” [emphasis in original] Again, no

mention of identical marks; similarity is enough.11

Apart from the dilution (blurring or tarnishment) context, usually the key for trademarks is whether

consumers associate the mark or the trade dress with the source of origin of the product, and whether

someone else’s copying or near-copying of the mark or trade dress creates the possibility of confusion

10 Moseley v. Secret Catalogue, Inc., 537 U.S. 418 (2003).

11 To similar effect in a trademark context, see Starbucks Corp. v. Wolfe’s Borough Coffee, Inc., 588 F.3d 97 (2d Cir. 2009) (defendant coffee shop used the mark “Charbucks”).

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about that source. I would argue this legal focus has significant potential consequences. If I can’t

protect my design, but I can protect my trademark, I am more likely to divert creative effort to the

incorporation and display of the trademarks (or trade dress). Journalist Dana Thomas argues that this

shifts the emphasis from superior materials, craftsmanship and artistic qualities toward an alternative

aura cultivated by advertising expenditure, branding and celebrity endorsements — undercutting the

very aspects which formerly made the items valuable and desirable.12 One commentator has noted a

similar diversion in software development, when resources are devoted to devising protection against

copying the software rather than functional design work to develop the software.13

Trademarks typically last for an initial five years, with a five-year re-up, so to speak, by showing

ongoing use, but as long as they continue in use, they can be renewed indefinitely thereafter for

further ten-year terms. Unlike many European systems, trademark rights in the U.S. arise from use,

not registration. This difference between filing and use has tripped up many American companies

venturing abroad after becoming successful at home, only to find out someone already has registered

the name they’ve been using in the U.S. in other jurisdictions where use is not a prerequisite. The use

requirement is not ironclad, and one can file an application premised on an intent to use, provided one

later files proof of use. Trademark registration applications are published and can be opposed by

others; they also are subject to examination and challenges raised by U.S. Patent and Trademark

Office personnel in so-called “office actions.” The process can include reviews of decisions taken at

first instance by the Trademark Trial and Appeal Board.

One grave problem with trademark protection for up-and-coming designers is that they are less likely

to be able to establish that a new mark or trade dress is associated with the designer, especially a

designer just starting up with no advertising budget. For established brands, it’s much more

appealing; and for famous brands, as noted, there are special protections against dilution.

D. State Law

There are some potential avenues for fashion protection under state law as well. Many states have

unfair and deceptive practice statutes, sometimes called “little FTC Acts.” In New York, for example,

General Business Law §349(a) provides: “Deceptive acts or practices in the conduct of any business,

trade or commerce or in the furnishing of any service in this state are hereby declared unlawful.”

Selling copies but representing to consumers that they are the real thing could violate such a statute.

Section 349(h) allows private claims to be brought for violation of the statute. Relief can include an

injunction, and/or US$50 in statutory damages or actual damages, whichever is greater; reasonable

12 Dana Thomas, Deluxe: How Luxury Lost Its Luster (Penguin Press: 2007).

13 Thierry Rayna, “Piracy Innovation: Does Piracy Restore Competition,” paper prepared for delivery at DRUID Summer 2004 Conference on Industrial Dynamics Innovation and Development.

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attorneys’ fees to a prevailing plaintiff; and, in cases of willful or knowing violation, the court has

discretion to grant treble actual damages, up to a ceiling of US$1,000.

Trademark registration also is available under New York law.14 More significantly, whether or not a

mark has been registered with New York State, there is a statutory claim for injury to reputation

(tarnishment) or from dilution under General Business Law §360-l:

Likelihood of injury to business reputation or of dilution of the distinctive quality of a mark or

trade name shall be a ground for injunctive relief in cases of infringement of a mark registered

or not registered or in cases of unfair competition, notwithstanding the absence of competition

between the parties or the absence of confusion as to the source of goods or services.

A designer also may be able to protect creative work from being copied by a disloyal employee and

taken to a competitor by using restrictions in employment contracts to protect trade secrets. Most

U.S. states have trade secret statutes, many modeled on the Uniform Trade Secrets Act.

If someone just out and out copies a design, the creator of the design also may have recourse in some

situations to a claim for misappropriation under state common law. For example, before copyright in

recordings of particular musical performances was recognized, a leading New York case used the

misappropriation theory to ban making recordings of broadcasts of performances of the Metropolitan

Opera by a defendant where the Met had entered into contracts with others for both recording and

radio broadcasting the performances.15 Similarly, a combination of common law misappropriation and

employment duties formed the basis for a New York court sustaining claims by four Paris fashion

houses against American firms and individuals who had sketched designs at a Paris show for the

purpose of manufacturing copies of them.16 New York’s highest court reaffirmed the validity of this

doctrine in a restaurant copying case in 2007.17

II. THE INDEPENDENT DESIGN PROTECTION ACT (PROPOSED)

Since 2006, federal legislators have introduced bills in the House and Senate proposing design right

protection for fashion creations. On September 10, 2012, in the midst of New York Fashion Week,

Senator Chuck Schumer of New York introduced the latest version, S. 3523, titled the Innovative

14 N.Y. General Business Law §360 et seq.

15 Metropolitan Opera Association v. Wagner-Nichols Recorder Corp., 199 Misc. 786, 101 N.Y.S.2d 483 (Sup. Ct. N.Y. Co. 1950), aff’d, 279 A.D.2d 632, 107 N.Y.S.2d 795 (1st Dep’t 1951).

16 Dior v. Milton, 9 Misc.2d 425, 155 N.Y.S.2d 443 (Sup. Ct. N.Y. Co.), aff’d, 2 A.D.2d 878, 156 N.Y.S.2d 996 (1st Dep’t 1956).

17 ITC Limited v. Punchgini, Inc., 9 N.Y.3d 467, 850 N.Y.S.2d 366 (2007).

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Design Protection Act of 2012. The bill was reported favorably by the Senate Judiciary Committee on

December 20, 2012.18

The IDPA would amend the Copyright Act and create a three-year term of protection for original

articles of apparel. It would use as its framework a part of the statute that now protects the designs of

boat hulls, another useful object.19 A fashion design would be defined as:

“(A) … the appearance as a whole of an article of apparel, including its

ornamentation; and

(B) includes original elements of the article of apparel or the original;

arrangement or placement of original or non-original elements as

incorporated in the overall appearance of the article of apparel that –

i. are the result of a designer’s own creative endeavor; and

ii. provide a unique, distinguishable, non-trivial and non-utilitarian

variation over prior designs for similar types of articles.”20

Like the previous year’s bill, S.3523 also creates a claim for infringement where a copy of a protected

fashion design is “substantially identical” to the original work, which is defined to mean “so similar in

appearance as to be likely to be mistaken for the protected design and contain[ing] only those

differences in construction or design which are merely trivial.” The protection would be available for

men’s, women’s or children’s clothing, including undergarments, outerwear, gloves, footwear, and

headgear; handbags, purses, wallets, tote bags and belts; and eyeglass frames.21

The evolution of the bill has charted a course of continuing narrowing of what copying of what designs

would constitute infringement, coupled with greater requirements for bringing claims in order to deter

non-meritorious ones. The immediately previous version of the current bill built on a consensus forged

between the bill’s chief proponent, the Council of Fashion Designers of America, and a former bill

opponent, the American Apparel and Footwear Association, in 2011. As a result, the scope of the law

was modified and significantly narrowed. These changes included:

18 The text of the bill can be found at http://thomas.loc.gov/cgi-bin/query/D?c112:2:./temp/~c1120CLB60:: The Senate Judiciary Committee report on the bill (No. 112-259), including minority views, can be found at http://thomas.loc.gov/cgi-bin/cpquery/T?&report=sr259&dbname=112& (both last viewed on May 31, 2013).

19 17 U.S.C. § 1301 et seq.

20 Proposed § 1301(b)(8).

21 Proposed § 1301(b)(10).

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• To be protected, a design would had to have been “the result of a designer’s own creative

endeavor” resulting in “a unique, distinguishable, non-trivial and non-utilitarian variation

over prior designs for similar types of articles.” Infringement would require “substantial

identity,” to be determined by the fact trier viewing the protected design and the copy

sequentially and from the perspective of an ordinary observer, as opposed to merely

similarity between a copy and the original; even so, there would be no infringement if the

independent creation of the purported copy could be shown.

• The requirement of registration was eliminated, tracking a concept used in the European

Union.

• The bill would apply only prospectively. Any design made public in the U.S. or elsewhere

before the law took effect or, once it has taken effect, made public more than three years

before protection is sought, would be in the public domain and available for copying.

• To try to fend off frivolous claims, the bill would require detailed allegations concerning the

originality of the design for which protection it claimed, substantial identity between that

design and the purported copy, and a statement of the basis for the allegation that the

defendant had access to or awareness of the original design. If these allegations were

insufficient, the complaint would be dismissed; if they were false, the plaintiff would face

statutory damages of from $5,000 to $10,000.

S. 3523 continues that limiting trend. For example, the bill now requires that a design rights owner

provide written notice before suing a suspected infringer. The design rights owner would have to

observe a 21-day waiting period before being able to go to court. No damages would be available for

infringement which occurred before the end of the 21-day period.22 That’s a very defendant-

protective provision, particularly as ordinarily one would want to seek immediate injunctive relief. The

bill also would exempt telecommunications and internet service providers from fashion rights

infringement liability for the transmission, storage, retrieval and hosting of allegedly infringing

communications provided that the service provider did not select or alter the content of the

communications. This new subsection expressly provides that the exemption parallels the exemption

in Section 230(c) of the Communications Decency Act.

What are the prospects for enactment of the IDPA? There is a long history of Congressional

reluctance to restrict copying of fashion. One commentator counted 83 separate, failed attempts from

1910 to 1983.23 Part of the reason is a sentiment that it’s not fair to prevent everyone from being

22 Proposed §§1306(d)(3), (4).

23 Samantha Heatherington, “Fashion Runways Are No Longer the Public Domain: Applying the Common Law Right of Publicity to Create Couture Fashion Design,” 24 Hastings Communications and Entertainment L.J. 43, 44 n.4 (2001).

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able to afford pretty clothing or to ride the latest trend wave in some form. Part is also the opposition

of industry groups that make or sell mass market goods.

The good news for IDPA is that some major former opponents of the bill are now on board. The bad

news is that the price of their support has been the narrowed scope of protection and the significant

added barriers to suit and the limitations on remedy. So practically speaking, many fashion items

would gain little or no protection from IDPA. Even so, there was opposition in the Senate Judiciary

Committee, based both on the Piracy Paradox argument and on a concern to make plaintiff’s risk in

bringing an infringement claim greater still, by imposing a “loser pays” rule for attorneys’ fees.24 But

at least some designs would gain some protection and, importantly, the principle that copycatting

original creative fashion design is wrong would be embodied in law.

A candid assessment of the chance for passage would militate against ordering celebratory

champagne just yet. Congress has many pressing matters competing for its attention, any of which

could push IDPA aside. Last time, consideration of a nuclear arms treaty took precedence on the

Senate’s calendar at the end of the term. Although the bill has enjoyed some bipartisan support, the

dissenters in committee were all Republican. The bill has an extremely able shepherd in Senator

Schumer, but even if it gains passage in the Senate, it might die in the House of Representatives

(although the Republican Chair of the House Judiciary Committee has been a supporter in the past).

Perhaps the most telling indicator was CFDA’s decision to place less emphasis on IDPA’s passage, at

least for the time being.

III. COUNTERFEITING

Counterfeiting is a constant in the fashion marketplace in the United States. Tourist buses trundle

visitors to New York’s Canal Street to buy obvious rip-offs. You can see people flogging purported

“Rolex” watches or “designer” handbags spread out on bed sheets on Fifth Avenue so they can be

scooped up and scurried away if a look-out whistles a warning that a police officer is approaching.

Suburban housewives hold house parties to sell counterfeits. And, of course, you can find a world of

fakes online.

The Lanham Act defines a counterfeit as “a spurious mark which is identical with, or substantially

indistinguishable from, a registered mark.”25 Here is a statistical snapshot: federal law enforcement

authorities made 22,848 seizures of counterfeit goods coming into the United States in fiscal year

2012 (ending September 30, 2012), worth a total of US$1.26 billion.26 State and local law

24 In the United States, in the absence of a special statutory provision, each side bears its own attorneys’ fees, regardless of outcome.

25 15 U.S.C. § 1127.

26 Kristi Ellis, “Counterfeit Seizures Down Slightly in 2012,” Women’s Wear Daily (January 18, 2013). All statistics in this paragraph are drawn from this article as well.

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enforcement officials also made their own seizures. Of the federal seizures, the largest single group,

some 40%, was of handbags and wallets, with a value of US$511.2 million. Counterfeit watches were

15% by value, or US$186.9 million. Apparel came in third, at US$133 million, or 11%, and footwear

was fourth, at US$103.3 million, or 8%. China was the largest source of the seized counterfeit goods,

accounting for 72% (US$906 million) of the total.

US$1.26 billion sounds like a lot, but consider that the International Anti-Counterfeiting Coalition

estimates that, worldwide, US$600 billion in counterfeit goods is sold annually.27 So even allowing

for the fact that the U.S. is the largest national economy, that still means that an awful lot of

counterfeit goods aren’t being intercepted by law enforcement.

I would argue that most counterfeiters are highly opportunistic and you don’t need to shut down every

single one; rather, you need strategically to create the impression that knocking off your product

successfully will be more painful and less profitable, relatively speaking, than picking on someone

else. It’s the same logic that causes companies that install alarm systems to give you a sign or a

sticker announcing you’ve installed the system — maybe the burglar will pick another house.

So far this discussion has been about someone who has copied elements of a design to sell “knock-

offs” — look-alikes but not outright counterfeit items masquerading as the real thing. Federal law

provides special provisions dealing with counterfeiters, including provisions for seizure and forfeiture

and for ex parte civil seizure by private parties, say, by rounding up fake T-shirts being sold outside a

rock concert.28 The Lanham Act, which contains the federal trademark statute, also prohibits false

representation of, among other things, source or origin, which can be used to attack counterfeiters.

Specifically, Section 43(a) of the Lanham Act prohibits a false and misleading representation of fact

that is likely to cause confusion or mistake. See 15 U.S.C. § 1125(a)(1)(B). Injunctive relief is

available, 15 U.S.C. § 1116, as are damages, 15 U.S.C. § 1117.

Congress enhanced some of these anti-counterfeiting protections in 200829, including:

• Allowing treble damages in trademark cases.30 The award of treble the amount of

damages or profits, whichever is larger, as well as reasonable attorneys’ fees, is now

required not only when someone intentionally and knowingly uses a counterfeit mark to

sell, offer to sell or distribute goods or services, but also when, with intent, they provide

27 https://www.iacc.org/about-counterfeiting/ (last viewed on June 6, 2013).

28 15 U.S.C. § 1116.

29 The Prioritizing Resources and Organization for Intellectual Property Act of 2008 (P.L. 110-403).

30 15 U.S.C. § 1117(b).

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goods or services necessary for someone else to do so. Trebled damages and attorneys’

fees must be awarded unless the court affirmatively finds the existence of extenuating

circumstances.

• Trademark statutory damages were increased.31 Trademark statutory damages generally

got an upgrade; in the case of willful use of a counterfeit name, the range was increased

from $1,000,000 to $2,000,000 per type of good or service.

• Criminal sanctions were enhanced, imposing graver penalties when someone knowingly or

recklessly causes or attempts to cause serious bodily harm or death in connection with

counterfeiting activity. The former now is punishable by fine and up to 20 years in prison;

the latter, by a fine and imprisonment up to life.

• Other changes: Federal courts’ power to employ civil or criminal forfeiture in connection

with certain counterfeit or copyright-infringing goods was expanded. Changes were made

in the organization of the federal government’s intellectual property enforcement efforts, a

term specifically defined to include trade secrets and other forms of intellectual property,

not just patents, copyrights and trademarks.

Many states also have anti-counterfeiting statutes.

Turning to private enforcement, different brands take different approaches toward counterfeiting.

Some, particularly after the Great Recession, cut back their enforcement and anti-counterfeiting

efforts to a bare minimum. Others, like Coach and Louis Vuitton, have been extremely aggressive. In

Coach, Inc. v. Gata Corporation, 2011 WL 1582954 (D.N.H. April 26, 2011)(McCafferty, U.S.M.J.)(not

for publication), for example, Coach successfully sued a New Hampshire flea market and its sole

owner and shareholder, who ran the ticket booth and claimed to patrol the flea market for illegal

merchandise. Coach claimed that the market and its owner violated the Lanham Act, 15 U.S.C. § 1114

et seq., which imposes liability not only upon direct infringers but also on those who “induce or

facilitate” the infringing conduct of others. As federal courts have explained in decisions like Tiffany

(NJ) Inc. v. e-Bay Inc., 600 F.3d 93 (2d Cir.), cert. denied, 131 S.Ct. 647, ___ U.S. ___ (2010), and

Hard Rock Café Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143 (7th Cir. 1992), the law

does not permit a flea market owner to be “willfully blind” – to know of or suspect wrongdoing, yet fail

to investigate or continue to encourage the infringing sales by supplying services like access to the

market.32

31 15 U.S.C. § 1117. 32 Very recently, and to similar effect regarding contributory infringement at a flea market, see Coach, Inc. v. Goodfellow, 2013 WL 2364091 (6th Cir. May 31, 2013).

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In a typical raid where counterfeits are seized, the people arrested, if any, will not be the captains of

the pirate crew. Often, those pirate chiefs will be abroad, where most counterfeit fashion goods sold

in the U.S. are manufactured. It was hard enough to track back to the chief bad guys when the goods

had to be sold from a physical location in the U.S. The ubiquity of e-commerce has made going after

counterfeiters-in-chief harder still.

The mere existence of a website which can be seen in a U.S. jurisdiction typically will not be sufficient

to afford jurisdiction over the site’s operators.33 If the site actively transacts business on-line with

people or businesses in the U.S., however, that may be enough.34 Moreover, in the trademark

context, the display of statements which cause confusion in the jurisdiction as to the source of origin

of the goods or which falsely represents it can support the entry of an injunction.

If the website involves an improper use of a brand’s name, or a near-similar one, such as “typo-

squatting” in a domain name, the brand owner may be able to get the domain name transferred to

the brand by using the World Intellectual Property Organization’s arbitration program. In 2012, retail

and fashion accounted for the largest and second-largest number of such filings (18% and 13%,

respectively).35

The latest tactic a number of brands have adopted against off-shore/on-line sellers of counterfeit

goods is to sue them and obtain default judgments for big numbers. They don’t really expect to collect

the judgments. But they also seek injunctions and move to shut down the websites themselves. If

they catch the same folks at it again, they pursue a finding of contempt of court. In one case with

which I was involved some years ago, what began as a limited restriction imposed by the court on use

of part of a designer’s name, requiring distinguishing disclaimers, evolved into a flat ban in response

to repeated violations of Court orders accompanied by multiple findings of contempt for non-

compliance.36

For a more recent example, Richemont secured an order from a federal district court in April shutting

down an additional 2,700 websites it accused of selling counterfeit goods (above and beyond 2,200

other sites it already had shuttered). The company previously had obtained a US$100 million

33 See, e.g., Best Van Lines, Inc. v. Walker, 490 F.3d 239 (2d Cir. 2007).

34 See, e.g., Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010) (jurisdiction sustained against motion to dismiss where alleged counterfeiter’s website was highly interactive, offered items including the counterfeit Chloe bag for sale in New York, and its records showed 52 other transactions where Queen Bee had sent items to New York; court concluded there was a showing of purposeful transaction of business in New York for long-arm jurisdictional purposes and that Constitutional due process standard was satisfied.)

35 John Zarocostas, “Fashion, Luxury Head Cybersquatting Cases,” Women’s Wear Daily (April 1, 2013).

36 A.V. By Versace, Inc. v. Gianni Versace, S.p.A., 87 F. Supp.2d 281 (S.D.N.Y. 2000) (finding of contempt in trademark infringement case based on use of Internet) and 2005 WL 147364 (January 24, 2005) (granting permanent injunction), aff’d, 213 Fed.Appx. 34 (2d Cir. 2007).

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judgment and a permanent injunction against two individuals who had run other sites selling

counterfeits of Richemont items. It also shut down various payment-processing accounts and seized

several hundred thousand dollars they contained.37

Here are some other eye-popping figures, at least on paper:

• An Illinois federal district court awarded Coach a $257 million judgment as well as seizing

573 domain names being used to sell counterfeits.38

• True Religion Brand Jeans sued 650 websites in a recent two-month period, according to

Deborah Greaves, the company’s secretary and general counsel.39 True Religion also won

a judgment of US$863.9 million for Internet counterfeits in March, 2012.40

• UGG Australia won a US$686 million verdict in May, 2012;

• Tory Burch won a $164 million judgment in 2011; and

• Hermes and Burberry each won US$100 million judgments, both in 2011.41

IV. THE PIRACY PARADOX

Now for the promised dessert: the Piracy Paradox. The phrase comes from the title of a law review

article that appeared in The Virginia Law Review in 2006 by Professors Kal Raustiala and Christopher

Sprigman, of UCLA and the University of Virginia, respectively.42 This was a very original and very

thoughtful article that tried to sort out the impact of a low level of intellectual property protection in

the United States on fashion design and innovation. It came to this conclusion: “[C]opying is not

very harmful to originators. Indeed, copying may actually promote the innovation and benefit

originators.” In particular, the authors argued that copying contributes to fashion’s “swift cycle of

innovation” — despite the claims of creative designers to the contrary.

The article sparked an outpouring of commentary, pro and con.43 It has figured significantly in the

policy debate over IDPA and its predecessor proposals. It’s only fair for me to say that a colleague,

37 Evan Clark, “Richemont Takes Down 2,700 Counterfeit Sites,” Women’s Wear Daily (April 8, 2013).

38 Alexandra Steigrad, “Coach Wins $257M Counterfeit Case,” Women’s Wear Daily (November 2, 2012).

39 Michelle Tay, “FN Platform Panelists: Shock & Awe Counterfeiters,” Women’s Wear Daily (February 19, 2013).

40 Alexandra Steigrad, “Coach Wins $257M Counterfeit Case,” Women’s Wear Daily (November 2, 2012).

41 Id.

42 “The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,” 92 U. Va. L. Rev. 1687 (2006).

43 Possibly the most-cited opposing academic analysis is C. Scott Hemphill and Jeannie Suk, “The Law, Culture, and Economics of Fashion,” 61 Stanford L. Rev. 1147 (2009). Professors Hemphill and Suk look not only at law and

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Judy Roth, and I wrote a law review article several years ago critiquing the Privacy Paradox and

arguing it had reached the wrong conclusion.44

I will try to summarize the key points of the Privacy Paradox article, but I can’t do it full justice in a

few minutes. The authors concede that existing patent, copyright and trademark laws provide

relatively little protection for fashion designs. They agree that protection against outright

counterfeiting of the kind we’ve just discussed is another topic entirely. Professors Raustiala and

Sprigman posit two interrelated theories to account for the observed behavior they describe in the

fashion industry. The first they label “induced obsolescence.” Fashion can be, although it need not

be, a positional good, something that signals its owner’s status relative to others. But the more

widely distributed an item is, the less status owning it bestows. To quote again: “We argue that

fashion’s low-IP regime is paradoxically advantageous for the industry. IP rules providing for free

appropriation of fashion designs accelerate the diffusion of designs and styles.” Hence: induced

obsolescence.

The authors argue that copying “prices in” buyers who cannot afford to buy the original. Beyond that,

they contend, allowing relatively free appropriation promotes designers embodying additional

significant creation of their own in their copies, which in turn prompts status-hungry first-adopters

continually to seek out newer designs, which prompts more copying, which leads to another design

shift. Second, the authors posit that trends are established through “anchoring,” a process enabling

the trendy to spot the trends. The core concept is that copying effectively amplifies seasonal trends.

To Judy’s and my view, it is not at all clear, as between copying and minimal IP protection, which is

cause and which is effect. The professors argue that the fashion industry is nonchalant about all this

copying. We contend it’s not nonchalance at all; in large measure, it’s a frustrated recognition of the

difficulties in preventing copying or getting help about it from the law over decades. The industry’s

historical major effort, a self-enforcement program against dealing with copycats, was found by the

U.S. Supreme Court to violate the antitrust laws.45 The push for IDPA suggests it is a matter of

serious concern to many creators.

The low level of IP protection introduces its own economic distortions. One consequence that can be

observed is a diversion of effort from the purely creative to a focus on what can be protected.

economics, but cultural aspects as well. They disaggregate fashion into two phenomena: “flocking” (the desire to be part of a trend) and “differentiation” (the desire to distinguish oneself from others). Some copying is necessary for flocking to occur in fashion, they argue, but “close copying” defeats differentiation. Hence, they would “tailor” legal protection to ban only close copying, but permit copying embodying significant changes. Cf. n.46, infra.

44 David Jacoby and Judith S. Roth, “Fashion and Copying: Imitation is not the Sincerest Form of Flattery,” 4 Convergence (No. 1) at 4 (July, 2008).

45 Fashion Originators’ Guild v. Federal Trade Commission, 312 U.S. 457 (1941).

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Trademarks and logos can be protected more readily legally, so that’s where greater effort flows. The

cost of producing clothing designs that cannot effectively be protected also may help explain the

widespread interest of high-end design firms in expanding into accessory items that offer equal brand

appeal but lower sunk costs, shorter lead times and maybe less readily-copied design aspects.

Worse, the creative people hurt most by the non-creative copying often are newcomers and small

designers. Unlike established designers, they can’t fall back on protecting a developed brand through

use of trademark law.

Technology also has altered the context for copying radically. Is the induced obsolescence/anchoring

function even viable when on-line availability, “fast fashion” and what Anna Wintour called a

“seasonless cycle” for fashion predominates? A sufficient commercial space and time must be

preserved for the original creation to earn a return. In fashion, the balance may have tipped to a

point where that no longer happens.46

History suggests that as industries change and technology evolves, intellectual property concepts

change as well. As Harvard’s Professor Arthur Miller wrote in 2006, “American IP law is properly

recognized as a work in progress.”47 Or, as David Kappos, who just left the position of Director of the

United States Patent and Trademark Office, wrote recently:

Our public dialogue on IP must move beyond arguments rooted in the traditional silos of

patent, trademarks and copyrights — to a dialogue about how the system as a whole can

champion design in the 21st century. In doing so, we will be recommitting ourselves to the

ambition that our IP system must grow to keep pace with human creativity, if it is to continue

serving as the foundation incentivizing innovation as enshrined by our founding fathers in the

Constitution.48

46 A fascinating example of an industry and its fans who wish to copy creative content for transformative purposes is the informal détente Japan’s manga publishers have reached with the creators of dojinshi (fan fiction, more or less), dubbed anmoku no ryokai. Daniel H. Pink, “Japan, Ink” Wired (November, 2007) p. 216. The publishers refrain from heavy-handed enforcement against fan works, which are openly displayed and sold, but the fans acknowledge the original sources and refrain from making or selling more than a relative handful of copies of their works. Pink compares the concept favorably to Stanford Professor Lawrence Lessing’s “Creative Commons license” concept.

47 Arthur R. Miller, “Common Law Protection for Products of the Mind: An “Idea” Whose Time Has Come,” 119 Harvard L. Rev. 703, 779 (2006).

48 David J. Kappos, “Design is the New Frontier of Intellectual Property,” National Law Journal (April 24, 2013).

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But beyond all that, I think there’s one more important, perhaps the most important reason, to

protect fashion design rights. It’s a pretty fundamental one, too. Law incorporates a society’s

normative values. It communicates what a society thinks should or shouldn’t be allowed. Here, I

would argue that society should teach that blatant, non-transformative copying is wrong. As one

practitioner wrote, “In any other artistic field, this shameless wholesale copying would be

unthinkable.”49

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49 Samantha Heatherington, “Fashion Runways Are No Longer the Public Domain: Applying the Common Law Right of Publicity to Create Couture Fashion Design,” 24 Hastings Communications and Entertainment L.J. 43, 45 (2001).