Intellectual Property Crime

Intellectual property (IP) includes, among other things, the books that we read, the music that we listen to, and the products that improve our lives. Just as the law grants ownership rights over material possessions, such as a home or a bicycle, it similarly grants individuals legal rights over IP, including trademarks, copyrights, trade secrets, and patents. When a person creates something that is novel and unique, the law recognizes its value and grants the creator the respect and integrity of ownership for this IP.

IP may be stolen or misappropriated in many ways. A copyrighted work, such as computer software, may be illegally infringed by making and selling an unauthorized copy. A trademark may be infringed by selling a good with a counterfeit mark. A trade secret may be stolen from its owner and used to benefit a competitor. A patent may be infringed upon if someone makes, uses, or sells the patented invention without the patent owner’s permission.

The theft of IP has real-world consequences. Not only are they threats to businesses and the economy, but certain types of intellectual property crimes also endanger lives. As examples: the World Health Organization estimates counterfeit drugs account for eight to ten percent of all pharmaceuticals worldwide; and the Consumer Product Safety Commission reports counterfeit cell phone batteries caused fires and injuries across the United States, resulting in the recall of more than one million batteries.

Misusing copyrighted materials, stealing trade secrets, and counterfeiting trademarked products are crimes. And, just as IP has become more important to the U.S. economy, IP crime has become easier and the consequences more damaging.

Criminal counterfeiting and piracy cost U.S. companies an estimated $200 to $250 billion a year in lost revenues, according to the U.S. Chamber of Commerce. Moreover, as a direct result of counterfeit products and Internet theft of intellectual property, the American economy is losing hundreds of millions of dollars in tax revenues, wages, and investment dollars, as well as hundreds of thousands of jobs.

In response to this growing threat, on March 31, 2004, the Attorney General of the U.S. announced the creation of the Department of Justice's (DOJ) Task Force on Intellectual Property. The Task Force was entrusted with an important mission: to examine all of the DOJ's IP enforcement efforts and to explore methods for strengthening the protection of valuable intellectual resources. The findings of the Task Force were published in the DOJ document, Report of the Department of Justice’s Task Force on Intellectual Property.

More recently, the U.S. Chamber of Commerce established the Global Intellectual Property Center (GIPC) whose mission is to champion IP as vital to creating jobs, saving lives, advancing global economic growth, and generating breakthrough solutions to global challenges. GIPC was created to lead the worldwide effort against the theft of IP. GIPC recently published Intellectual Property Protection and Enforcement Manual: A Practical and Legal Guide for Protecting Your Intellectual Property Rights. The manual is intended to help businesses protect their consumers and their brands from the growing international threat to IP. Business owners will find this manual useful in gaining a better understanding of their IP assets and to develop business practices and procedures that will help protect such assets from falling victim to counterfeiting and piracy.

This report defines IP and provides information on the laws that protect IP.

The Problem

Global intellectual property theft and commerce in counterfeit and pirated goods are growing at an alarming pace. Counterfeiting is no longer limited to the knockoffs of high-end designer handbags sold on city street corners but, instead, has evolved into a sophisticated black market industry involving the manufacture and sale of counterfeit versions of an unimaginable number of products. Reports of counterfeit pharmaceuticals, infant formula, automobile parts, batteries, and electronic products occur all too frequently and make chillingly clear the potential harm that could be inflicted on consumers, not to mention the counterfeited brand. At bottom, counterfeiters are opportunists motivated by greed and will move whatever products they can through their illicit chains of distribution. Indeed, whether it is knockoff designer handbags or fake pharmaceuticals, it does not matter to the counterfeiters — as long as there is a market for the product, they will manufacture and sell it. Accordingly, every business is at risk.

It is estimated that intellectual property theft costs domestic companies between $200 billion and $250 billion a year in lost revenues and has resulted in the loss of 750,000 jobs in the United States. The harm caused by counterfeiting and piracy cannot be overstated. Every sale made by a counterfeiter is a sale that a legitimate business will never make. Because the counterfeiter is unlikely to have access to the same quality raw goods as the legitimate manufacturer and has no incentive to institute quality control practices or procedures, the resulting counterfeit product is most assuredly inferior in quality — and, in many instances, can be downright dangerous — compared to the legitimate product. As a result, an introduction into the market of a single counterfeit product has the potential to undermine and irrevocably damage years of building a business’ goodwill and reputation.

What Is Intellectual Property?

Intellectual property includes trademarks, copyrights, trade secrets, and patents.

Trademarks

Trademarks generally consist of a word, phrase, symbol, or design, or a combination thereof, that identify and distinguish the source of the goods of one party from the goods of another. A service mark is accorded the same legal status as a trademark under U.S. law, except that a service mark identifies and distinguishes the source of a service rather than a product. Although it is recommended, registration of a trademark is not required for a business to have rights in the mark. Adoption and use in commerce by a business is sufficient to give rise to common law rights in the mark. Protection for trademarks exists within common law for as long as the mark is properly used. However, greater protection exists for federally registered trademarks, such as the ability for enforcement at U.S. borders.

Trademark law also protects “trade dress,” the design and appearance of a product together with all the elements making up the overall image, which serves to identify the product presented to the consumer. Trademark law, however, only protects trade dress that is nonfunctional and either inherently distinctive or has acquired secondary meaning, that is, has come to be recognized by the consuming public as an indicator of source. The elements of trade dress must be capable of being identified with particularity so that the public and competitors will know the exact parameters.

Although there are no mandatory notice requirements for trademarks, owners of common law trademarks may use the ™ symbol to provide notice of their claimed rights, while owners of registered marks may use the ® symbol or the designation, Reg. U.S. Pat. & Tm. Off.

Registration

Owning a trademark registered on the Principal Register in the U.S. Patent and Trademark Office (the Trademark Office) provides several advantages, including (1) constructive notice to the public of the registrant’s claim of ownership of the mark; (2) a legal presumption of the registrant’s ownership of the mark and exclusive right to use the mark nationwide on or in connection with the goods or services listed in the registration; (3) the ability to bring an action concerning the mark in federal court; (4) the use of the U.S. registration as a basis to obtain registration in foreign countries; and (5) the ability to record the U.S. registration with U.S. Customs and Border Protection (CBP) to aid in the seizure of infringing or counterfeit foreign goods. Protection for a registered mark exists as long as the mark is properly used and its registration is maintained and renewed.

Applications to register trademarks can either be filed in hard copy or electronically via the Trademark Office’s Trademark Electronic Application Syste (Opens in a new tab)m (Opens in a new tab) (TEAS).

Examination Process

Once a trademark application has been filed, the Trademark Office assigns a Trademark examiner to review the application to determine whether the mark can be registered. During the examination period, the examiner may issue “office actions,” raising specific obstacles to registration. Such obstacles may be procedural in nature, for example, seeking a better description of the goods set forth in the application, or they may be substantive. Substantive obstacles include refusals based on the likelihood of confusion with a preexisting registered mark; the use of a name, portrait, or signature of a living individual without consent; the inclusion of immoral or scandalous matter; or the fact that the mark is either a generic term (which can never be registered) or is merely descriptive, that is, would not be recognized by consumers as an indicator of source.

The applicant has up to six months to respond to an office action by presenting arguments to convince the Trademark examiner that a refusal was in error. With respect to a descriptiveness refusal, for example, the applicant can introduce evidence to show that the mark has “secondary meaning,” that is, that based on exclusive use, promotion, and sales, consumers do, in fact, recognize the mark as an indicator of source. If the Trademark examiner does not accept the applicant’s arguments, the applicant can appeal the determination to the Trademark Trial and Appeal Board, which will make its own determination of whether the mark should be registered.

If the application meets the approval of the Trademark examiner, or if the applicant is ultimately successful on an appeal to the Trademark Trial and Appeal Board, then the mark will be published for opposition in the Trademark Office’s Official Gazette in order to provide third parties with an opportunity to oppose the registration of the mark. If an opposition is filed, an opposition proceeding commences. The proceeding is similar to, albeit not as complex as, a litigation in federal court. The parties engage in discovery, with document requests and interrogatories, take depositions, and, ultimately, submit their evidence and legal memoranda to the Trademark Trial and Appeal Board for determination. Decisions of the board can be appealed to the federal court system. If no opposition is filed, the mark will be registered, and the applicant will receive a certificate of registration in due course. The applicant then becomes responsible for ensuring that the registration is maintained by filing periodic statements of continued use with the U.S. Patent and Trademark Office.

Recordation of Trademarks

Trademark owners who duly register their rights with the Trademark Office may record these rights with CBP. CBP actively monitors imports in order to prevent the importation of counterfeit and pirated goods. To avail themselves of CBP’s assistance, business owners must first have a registered trademark. Electronic recordation of copyrights with CBP is available here (Opens in a new tab). Recordation of the registered trademark becomes effective upon approval by CBP and remains in force for the duration of the registration period.

Any imported article found by CBP to bear a counterfeit mark is then subject to seizure by CBP. Upon seizure, the importer is given written notice of such seizure and has 30 days to establish any claimed exemptions from the prohibition. Failing that, the importer’s goods become subject to forfeiture proceedings. This procedure involves the constitutionally required notice and hearing elements for any administrative adjudication. Upon notice, the importer of the counterfeit goods has the opportunity to petition for relief from the forfeiture. The articles seized will be forfeited unless the trademark owner, within 30 days of notification, provides written consent to importation of the article, exportation, or any other appropriate disposition. If the importer fails to obtain such consent, the articles bearing the counterfeit trademark are disposed of by CBP.

In addition, CBP, in the course of examining imported goods, may disclose to the trademark owner information to obtain assistance in determining whether an imported article bears an infringing trademark. Further, at any time following presentation of the goods for CBP examination, but prior to seizure, CBP may provide a sample of the suspect goods to the trademark owner for examination or testing. This examination helps determine whether the imported article bears an infringing trademark, provided that the trademark owner furnishes a bond holding CBP harmless from any loss or damage resulting from the furnishing of the sample. If CBP makes a determination of infringement on its own and detains the goods, CBP will provide the trademark owner with the foregoing information within 30 days of the date of detention.

Copyrights

Copyright protects original literary and artistic expression that is fixed in a tangible form. It exists automatically when an original work entitled to copyright protection is created. Under basic copyright law, a work is “created” when it is fixed in a tangible medium of expression for the first time.

Although displaying a copyright notice on goods is no longer required under U.S. law, providing proper notice on the packaging of the goods themselves is beneficial. It puts the public on notice that the work is protected by a copyright, identifies the copyright owner, and shows the year of first publication. Importantly, a defendant in a copyright infringement suit shown to have access to works published with the proper notice of copyright may be prevented from claiming the status of an “innocent infringer” in an attempt to mitigate actual or statutory damages. Copyright owners can provide notice of their rights by using the © symbol, or word Copyright, accompanied by the year of first publication and the name of the owner.

The term of copyright protection varies depending on when the work was created. For works created after January 1, 1978, for example, the term is the author’s lifetime plus 70 years. If the work is anonymous or made for hire, the term is the earlier of 95 years from publication or 120 years from creation.

Registration

Registration of copyright in the U.S. Copyright Office is a legal formality intended to make a public record of a given copyright. As with trademarks, registering the copyright with the Copyright Office provides several advantages, including the ability to (1) bring an action concerning the copyright in federal court (in fact, a copyright registration is a prerequisite to filing an infringement action); (2) recover statutory damages and attorneys’ fees in an infringement action; (3) constitute prima facie evidence of validity; and (4) record the U.S. registration with CBP to prevent importation of counterfeit or pirated foreign goods.

To register a copyright in a work, the applicant must send to the U.S. Copyright Office: (1) a properly completed application form (copyright.gov (Opens in a new tab)); (2) a nonrefundable filing fee for each application; and (3) a nonreturnable sample of the work being registered.

Examination Process

The examination process for copyrights is not as rigorous as the examination process for trademarks. The time needed to process an application varies depending on the amount of material the Copyright Office is receiving. If the applicant’s submission is in order, an applicant filing a paper submission can generally expect to receive a certificate of registration within approximately eight months of submission. Applicants filing online will receive their certificates faster. In the event that the Copyright Office refuses to register the copyright for the work, the applicant will have two opportunities to request reconsideration of the determination.

Recordation of Copyrights

Copyright holders who register their works with the U.S. Copyright Office may record these rights with CBP. CBP actively monitors imports in order to prevent the importation of counterfeit and pirated goods. This should be any brand owner’s first (but certainly not only) line of defense against the unlawful importation and exportation of counterfeit and pirated goods.

In order to be recorded with CBP, a copyright must be registered at the U.S. Copyright Office. Electronic recordation of copyrights with CBP is available at here (Opens in a new tab). The application to record must also be accompanied by a copy of the certificate of registration issued by the U.S. Copyright Office, five photographic or other likenesses of the copyrighted work, and a fee. Recordation becomes effective upon approval by CBP, and it remains in force for 20 years unless the copyright ownership of the recordant expires before that time. If the ownership expires in less than 20 years, recordation will remain in effect until the ownership expires. If the ownership has not expired after 20 years, recordation can be renewed.

Once the copyright is recorded, “piratical” articles (i.e., copies or phono records that are made without the authorization of the copyright owner) are then denied entry by CBP and are subject to forfeiture as prohibited imports. Suspect goods may be detained by CBP, and the importer will be notified and advised that it may file a statement denying that the article is in fact an infringing copy and alleging that the detention of the article will result in a material depreciation of its value or a loss or damage to the company. If the importer does not file such a statement within 30 days, the suspect goods will be considered infringing copies and be subject to seizure and forfeiture. This procedure involves the constitutionally required notice and hearing elements for any administrative adjudication. Upon notice, the importer of the pirated goods has the opportunity to petition for relief from the forfeiture. If the importer fails to obtain such relief, the goods are disposed of by CBP. CBP, in the course of examining imported goods, may provide a sample of the suspect merchandise to the copyright owner for examination, testing, or any other use in pursuit of a related private civil remedy for copyright infringement, provided that the copyright owner furnishes a bond holding CBP harmless from any loss or damage resulting from the furnishing of the sample.

Trade Secrets

A trade secret is any information used by a business that has some independent economic value which motivates those who possess the information to keep it secret. The recipes for Coca-Cola and Pepsi, for example, are trade secrets that are protected. Trade secrets are far broader in scope than patents, and include scientific or technological information, business information, such as marketing strategies, and even information on “what-not-to-do,” such as failed or defective inventions. When the information is obtained through legitimate means, however, it can be freely used. For example, a scientist who reverse-engineers a product and discovers how it is assembled can legally use that information to re-create the product. Furthermore, trade secret protection applies only while secrecy is maintained. Once the secret is publicly disclosed, it loses its legal protection.

Patents

The final major category of intellectual property protection is the patent. From the composition of a new drug to the latest time-saving gadget, patents protect the world of inventions. Laws of nature and natural phenomena, such as gravity and acceleration, however, are not eligible for patent protection, as they are not human creations.

A patent conveys to the holder the right to exclude other parties from making, using, selling, or offering for sale the product or process the patent covers. United States patents cover all uses of a patented item in the United States, including the importation of goods a patent describes or goods made by a method the patent describes. Beyond exclusive use of a particular product or process, a patent also provides other ways for the patent holder to earn money. The patent holder can license or assign the patent in whole or in part. A person or company can make millions of dollars each year in royalties simply by licensing out patent rights. Licensing or assigning patent rights allows other parties, for a fee, to use the patented product or process subject to any limitations included in the license or assignment.

Laws Protecting Intellectual Property

Under the U.S. system of federalism, governing is shared between the State and federal governments. In other words, there may be laws at both the State and federal levels that are intended to address the same issues. At the same time, so-called common law may provide additional protections, at least with respect to civil actions. While the following information focuses on the protections available at the federal level with respect to both criminal and civil proceedings, it should be noted that additional trademark protections may exist at the State level.

Trademarks

As it pertains to trademarks, this means that trademarks are protected under federal law and may also be protected under State law through State anti-counterfeiting statutes, trademark infringement, or anti-dilution laws, or unfair trade practices and consumer protection laws.

Federal Civil Trademark Laws

The primary way a trademark owner may enforce its rights is by bringing suit against alleged trademark infringers. The Lanham Act of 1946 created the federal statute governing trademark infringement. Under this act, the key statutory elements of trademark infringement are use in commerce and likelihood of confusion. Use in commerce generally requires the sale, or at least the importation or other shipment, of goods bearing the infringing trademark.

Under the Lanham Act, a successful plaintiff can receive (1) injunctive relief, (2) the defendant’s profits, (3) any damages sustained by the plaintiff, and (4) the costs of the action. Moreover, in cases where it is proven that the infringement was willful, deliberate, or malicious, the plaintiff may recover three times the defendant’s profits or its own damages (whichever is greater), as well as its reasonable attorneys’ fees.

The Trademark Counterfeiting Act of 1984 was enacted to provide additional causes of actions and remedies for injured IP owners. Under the act, courts are authorized to order the seizure of goods and counterfeit marks involved in the violation, the means of making the counterfeit marks, and the records documenting the manufacture, sale, or receipt of items involved in the violation.

Trademark owners may apply to the court for such orders without notifying the adverse party (an ex parte seizure order). Nevertheless, the courts will not grant an application unless security (that is, a dollar amount adequate to cover damages the adverse party may suffer as a result of wrongful seizure or attempted seizure) is provided by the person obtaining the order, and the court finds that the facts clearly show that (1) the application is likely to succeed in showing that the person against whom seizure would be ordered used a counterfeit mark; (2) immediate and irreparable injury to the applicant will occur if seizure is not ordered; (3) harm to the applicant by denying the application outweighs the harm to the interests of the person against whom seizure would be ordered; (4) the person against whom seizure would be ordered would destroy, move, hide or otherwise make the goods in question inaccessible to the court if notified of the proceeding; (5) the applicant has not publicized the requested seizure; and (6) the items to be seized will be located at a place identified in the application.

In 1996, the Lanham Act was further amended to provide for statutory damage awards in counterfeiting cases. Prior to 1996, courts made awards solely on the basis of a defendant’s profits or a plaintiff’s actual damages. Proving defendant’s profits or plaintiff’s actual damages, though, was often difficult, given the typical defendant’s incomplete, inaccurate, or nonexistent records. Recognizing the problem trademark owners were experiencing in proving damages in counterfeiting actions, Congress amended the Lanham Act to provide for an award of statutory damages. Plaintiffs can now elect statutory damages to recover monetary compensation while avoiding the burden of proving actual damages or the defendant’s profits. A court may award statutory damages between $500 and $100,000 per counterfeit mark per type of goods or services sold, but for willful use of the counterfeit mark, the court may award up to $1 million per counterfeit mark per type of goods or services sold. A claim for statutory damages can be a powerful tool, particularly where the conduct is egregious but the quantities involved are relatively small.

Federal Criminal Trademark Laws

In addition to civil remedies, federal law provides a range of criminal law sanctions for the intentional infringement and counterfeiting of federally registered trademarks. For example, the Trademark Counterfeiting Act provides up to 10 years of federal imprisonment and up to a $2 million fine, or twice the gross gain or gross loss, against a defendant who “intentionally traffics or attempts to traffic in goods or services and knowingly uses a counterfeit mark on or in connection with such goods or services.”

Counterfeiting

With very limited exceptions, the U.S. Copyright Act expressly preempted all State and common law protections for copyright. In 2006, the Stop Counterfeiting in Manufactured Goods Act (H.R. 32) modified the federal criminal law relating to the trafficking in counterfeit goods and services by prohibiting trafficking in labels, documents, or packaging that bear counterfeit marks intended for goods or services. The amendment closed a loophole created by a federal court decision which held that individuals who merely traffic in counterfeit marks themselves (for example, labels, patches, or medallions) not attached to any goods did not violate the federal anti-counterfeiting law. Additionally, the act provides for the mandatory destruction of the counterfeit goods and the forfeiture of any assets traceable to illegal counterfeiting activities and expands the definitions of “traffic” and “financial gain” under the federal anti-counterfeiting law to include any distribution of counterfeits (or possession with the intent to distribute counterfeit goods), with the expectation of gaining something of value.

Federal Civil Copyright Laws

A federal court action for copyright infringement under the U.S. Copyright Act is the exclusive recourse for copyright owners seeking to enforce their copyrights in a civil action. The act protects against the unauthorized use or copying of a copyrighted work. In an infringement action, unauthorized use or copying would typically be established by demonstrating that the alleged infringer had access to the copyrighted work and that the alleged infringement is substantially similar to the infringing work. A copyright registration is a prerequisite for filing a copyright infringement action.

Under the Copyright Act, a successful plaintiff can receive (1) injunctive relief, (2) the plaintiff’s actual damages and any additional profits of the defendants or statutory damages, and (3) the costs of the action and its reasonable attorneys’ fees. Statutory damages can range between $750 and $30,000 for infringement of any one work and can be increased up to $150,000 for any one work if the infringement is shown to be willful.

Further, while a copyright infringement action is pending, the court may order the impounding of all copies or phonorecords claimed to have been made or used in violation of the copyright owner’s rights and of all plates, molds, matrices, masters, tapes, film negatives, or other articles by means of which such copies or phonorecords may be reproduced. Also, as part of any final judgment or decree, the court may order the destruction or other reasonable disposition of all copies or phonorecords found to have been made or used in violation of the copyright owner’s rights, and of all plates, molds, matrices, masters, tapes, film negatives, or other articles by means of which such copies or phonorecords may be reproduced.

Federal Criminal Copyright Laws

Copyright infringement is a felony punishable by up to three years’ imprisonment and a $250,000 fine when the defendant willfully reproduces or distributes at least one or more copies of phonorecords or one or more copyrighted works with a total retail value of more than $2,500 within a 180-day period. The maximum penalty is increased up to five years of imprisonment if the defendant acted for commercial advantage or for private financial gain. Misdemeanor copyright infringement with imprisonment less than one year can occur where the value of the copyrighted work exceeds $1,000 but is equal to or less than $2,500.

Protection of Trade Secrets

Federal laws that protect trade secrets criminalize the unauthorized disclosure of information that has an independent economic value and that the owner has taken reasonable measures to keep secret. The law categorizes two types of disclosures: those that are intended to benefit a foreign government and those that are motivated by economic gain. For example, federal law prohibits an employee from providing the secret ingredient of an employer’s famous fried chicken recipe to a competitor. Likewise, a scientist may be committing a crime if he or she provides a company’s confidential research results to a foreign government.

Trade Secrets Laws

• 18 U.S.C. § 1831. Economic Espionage. Maximum penalty of 15 years in prison and a $500,000 fine for an individual and a $10 million fine for a corporate offender.
• 18 U.S.C. § 1832. Theft of Trade Secrets. Maximum penalty of 10 years in prison and a $250,000 fine. A corporate offender is subject to a maximum fine of $5 million.

Protection of Patents

While there are no federal criminal laws that protect patents, there are federal civil laws that protect against patent infringement, and the U.S. government has numerous international agreements with foreign countries to protect patents.

Patent Laws

• 35 USC § 271, Infringement of Patent. The remedies for patent infringement consist of injunctive relief, damages (including treble damages for willful infringement), attorneys' fees in some cases, and court costs.

Other Laws

Finally, many additional laws provide further intellectual property protection in specific areas of technological innovation. To protect performers who entertain audiences in a live setting, federal laws prohibit recording live performances and then financially benefitting from subsequent copying and distribution of the recording. Federal law also prohibits the manufacture and distribution of devices designed to intercept cable or satellite television signals, and devices used to de-scramble satellite television signals, which would enable viewers to receive programming without authorization.

Head to our loss control and risk management page to learn more ways to protect your business.

References

1. Office of the Attorney General. Report of the Department of Justice’s Task Force on Intellectual Property. Washington, DC: U.S. Department of Justice, October 2004.

2. Global Intellectual Property Center (GIPC). Intellectual Property Protection and Enforcement Manual: A Practical and Legal Guide for Protecting Your Intellectual Property Rights. Washington, DC: U.S. Chamber of Commerce, 2009.

COPYRIGHT ©2009, ISO Services, Inc.

The information contained in this publication was obtained from sources believed to be reliable. ISO Services, Inc., its companies and employees make no guarantee of results and assume no liability in connection with either the information herein contained or the safety suggestions herein made. Moreover, it cannot be assumed that every acceptable safety procedure is contained herein or that abnormal or unusual circumstances may not warrant or require further or additional procedure.