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TESTIMONY OF EDWARD T. BORDA, PRESIDENT, ASSOCIATION

OF GENERAL MERCHANDISE CHAINS, INC., ACCOMPANIED BY ROBERT W. STEELE, PARTNER, HOWREY & SIMON; AND JOSEPH W. RARES, PRESIDENT, AMERICAN FREE TRADE ASSOCIATION, ACCOMPANIED BY ROBERT ULLMAN, GENERAL COUNSEL, BASS, ULLMAN & LUSTIGMAN

Mr. BORDA. Thank you, Mr. Chairman. My name is Edward T. Borda. As noted, I am president of the Association of General Merchandise Chains. AGMC appreciates the opportunity to express its views on H.R. 2447, the proposed Trademark Counterfeiting Act of 1983.

I am accompanied by Mr. Robert Steele of the law firm of Howrey & Simon, who is on my left, who is serving as counsel to AGMC on this issue.

Mr. Rares and his counsel will introduce themselves following my presentation.

The Association of General Merchandise Chains represents the Nation's discount and variety general merchandise retail industry. AGMC's membership includes retail companies that operate more than 20,000 discount, variety, dollar, junior department, family center, off-price, factory outlet, catalog showrooms and other general merchandise stores.

Our members range widely in size and include many of the Nation's largest retail chains, as well as companies active in one or more regions of the country, and those with only a few localities or even a single store. AGMC member company stores are located in all 50 States and accounted for over $40 billion in annual sales last year.

At the outset, Mr. Chairman, I want to make clear that AGMC members are unequivocally and unalterably opposed to the counterfeiting of trademarked goods. The knowing and willful manufacture or sale of counterfeit trademarked goods is an undesirable practice which should not be condoned. It harms consumers, trademark owners and AGMC members, many of whom have their own trademarks and private labels to protect.

However, many of AGMC's members are concerned that this bill to strengthen the law against the counterfeiting of trademarks is neither a good nor a desirable answer. We are concerned that this bill would impose substantial and inequitable burdens on retailers who would be subject to severe criminal sanctions and to civil remedies with enormous consequences on their businesses.

This bill fails to allow for basic due process guarantees. It is unnecessary, as the problem of counterfeit trademarked goods can be and is being adequately addressed in other ways. Moreover, it has the distinct potential for being used as a subterfuge to injure competition in the retail industry.

Our testimony today will identify some of the major areas of concern which prevent AGMC from supporting H.R. 2447. I might add, also, that with the list of companies that we represent, we would note that the No. 2 and the No. 3 nonfood retailers in the country, both K-Mart and J.C. Penney, filed statements in opposition to the Senate bill and the National Retail Merchants Association, another retail group, has also filed opposition to the Senate bill.

Now, while recognizing that trademark counterfeiting represents a matter of serious concern, this bill does not get to the root of the problem. There is general consensus that overseas manufacturers, especially those in a relative handful of countries, produce the lion's share of misbranded items.

Existing law already calls for the seizure and confiscation of imported counterfeit goods. The U.S. Customs Service has recently announced an upgraded program, Operation Tripwire, aimed at strengthening enforcement in this area. Manufacturers who believe that their brand-name products are being duplicated by foreign counterfeiters can work with the Customs Service in many ways, such as supplying Customs with the specifications of their products to help customs agents spot and crack down on imported fakes.

In addition, the Lanham Act already provides trademark holders with the right to sue, obtain injunctions, impound and destroy infringing trademarks, recover actual damages, and in appropriate cases, punitive treble damages, attorneys' fees and court costs.

Whether a counterfeit product is produced by a domestic or a foreign manufacturer, the most logical and efficient time to move against it is when it first enters the stream of commerce. Yet, H.R. 2447 would encourage trademark holders to concentrate private enforcement actions, not against counterfeit producers, but rather against established retailers.

That represents a piecemeal approach to a problem best dealt with at the producer level. AGMC would not oppose carefully drawn, narrowly focused legislation directed at the manufacturers of clearly counterfeit goods.

This bill would authorize private citizens to seek ex parte orders allowing them to seize goods alleged to be counterfeit. Because their use is not restricted to instances where an actual need has been demonstrated, the ex parte seizure provisions of H.R. 2447 are unacceptable.

Extraordinary remedies of ex parte seizure are urged by some trademark holders as necessary to prevent disposal of counterfeit in advance of court action. Repeatedly, they refer to their difficulties with fly-by-night operators, street vendors, and other transient distributors.

Yet the proposed legislation lacks specific standards for issuing ex parte orders. AGMČ is deeply concerned that established, legitimate retailers for whom ex parte orders are not appropriate, will become the main target of the trademark holders' ex parte seizure orders.

To avoid this serious problem, the ex parte provisions should be dropped or should require that the plaintiff make a preseizure showing of probable cause that the goods are counterfeit, that the defendant knows the goods are counterfeit, and that the goods will be removed or destroyed if advance notice is given.

Any retailer, no matter how reputable and long-established, would face the real danger of extensive adverse publicity if subjected to an ex parte seizure. In many instances, trademark holders' agents making seizures have been accompanied by television film crews and other media. The public cannot be expected to know that the official-appearing seizure may have been made without any showing that the goods were, in fact, counterfeit and without affording the retailer an opportunity to dispute the claim.

Retail success, in large part, is based on a company's reputation for honesty and value. Highly publicized ex parte vigilante raids could greatly harm a retailer's hard-won reputation overnight. In effect, ex parte seizure may amount to the summary execution of a retailer's good name.

A proposal has been made to allow recovery of attorneys' fees by parties subjected to ex parte seizures when the trademark holder fails to prove his claim. Any business subjected to an ex parte seizure should at a minimum receive full damages, including attorneys' fees and compensation for lost good will, without having to show that the seizure was prompted by bad faith. In addition, punitive damages ought to be available in appropriate cases.

Further, the definition of counterfeiting in H.R. 2447 would also seem to apply to trade practices which are greatly different from out and out brand-name piracy. The bill's scope must be redrawn to distinguish counterfeiting claims from those involving infringement, trade dress, knockoffs, and other less serious or even beneficial trade practices. If this is not done, retailers will run the risk of becoming involved in trademark infringement disputes between competing manufacturers.

I think we saw a good example in some of the products presented this morning.

Some manufacturers apparently believe that H.R. 2447 can be used against rival producers who use similar packaging or marks, or who employ somewhat similar trade names or product design. This would mean that legitimate makers of private-label products, generic drugs, and the like, may be threatened with penalties and procedures intended only for counterfeiters.

In fact, some foreign manufacturers have said that even imports of the products they produce overseas ought to be regarded as counterfeit if brought into the United States by any importer other than the one under the manufacturer's control. I refer to attempts by some producers to overturn longstanding U.S. Customs regulations interpreting section 526 of the Tariff Act.

A very serious problem with H.R. 2447 is the failure to distinguish between intentional and unintentional possession or sale of counterfeit merchandise. At present, this bill does make intent to deceive or defraud or to assist in deceiving or defrauding an element of the new criminal offense.

However, this must be matched by a requirement that the defendant must act willfully and must know that the goods are counterfeit and there should be clear evidence of actual knowledge.

H.R. 2447 offers difficulties for innocent parties in another significant way. As it presently stands, section 2(c) of the bill would determine intent to deceive or defraud by a consideration of pertinent factors. Of these, the only one specified is the likelihood that goods or services will be mistaken for goods or services for which the genuine mark is registered and is in use.

This standard may be appropriate under existing tests of trademark infringement, but it is entirely too broad in a statute supposedly aimed at a much different issue of out-and-out counterfeiting. Even more serious is the possibility, indeed, the likelihood that

the powers of this bill conveys on private compa. used by suppliers seeking to restrain price competk op ex parte seizure is

parte selling their products.

of counterfeit in Price-competitive retailers would generally prefer to ies with “fly-bywith a manufacturer, rather than face the additional cu. taining merchandise through middlemen or other legitimatarte orders.

ex parte direct sources.

lders' ex Some manufacturers refuse to sell to discounters, however. though those manufacturers claim many reasons for this, AGMuld strongly believes that the real reason is often their desire to insue late their products from price competition. In such cases, price-competitive retailers must seek secondary sources of supply for popular merchandise.

AGMC believes that the extraordinary remedies created by H.R. 2447 would offer very tempting tools for such manufacturers seeking to cut off, harass, or intimidate price discounters.

AGMC notes here that the Assistant Attorney General, Mr. William Baxter, head of the Antitrust Division in the Department of Justice, saw similar linkage between the issue of retail price maintenance, that is, manufacturer fixing of retail prices, and counterfeit trademark legislation.

The Assistant Attorney General is leading a campaign to change the law so as to allow manufacturers to fix retail prices which AGMC strongly opposes.

I would also like to note that many of the manufacturers who today seem most eager to keep their goods away from price competitors were the same firms that restricted price competition when it was legal to do so.under State fair trade laws, which Congress wisely abolished in 1975.

Many of the same companies are now clamoring for trademark counterfeiting legislation. I would ask the subcommittee to consider very carefully the bill's practical impact on price-competitive retailers and to be sure that in the name of remedying commercial counterfeiting, it will not unintentionally be creating new obstacles to free marketplace competition.

AGMC believes that H.R. 2447 continues to present serious problems for legitimate merchants and we urge the subcommittee to reject this bill.

Thank you.

[The statement of Mr. Borda follows:]

TESTIMONY OF EDWARD T. BORDA, PRESIDENT, ASSOCIATION OF GENERAL MERCHANDISE

CHAINS, INC. (AGMC) I am Edward T. Borda, President of the Association of General Merchandise Chains. AGMC appreciates this opportunity to express its views on H.R. 2447, the proposed “Trademark Counterfeiting Act of 1983”.

The Association of General Merchandise Chains represents the nation's discount and variety general merchandise retail industry. AGMC's membership includes retail companies that operate more than 20,000 discount, variety, dollar, junior department, family center, offprice, factory outlet, catalog showroom, and other general merchandise stores. Our members range widely in size and include many of the nation's largest retail chains as well as companies active in one or more regions of the country and those with only a few localities, or even a single store. AGMC member company stores are located in all 50 states and accounted for over $40 billion in annual sales.

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vo years in opposition to proposed trademark the 97th Congress, and S. 875 in the present tions also submitted statements opposing such r this type of legislation. In addition, several United States Trademark Association (USTA) ognized potential problems in several aspects

finition of "counterfeit,” the lack of required wa Mas VULCIUM, ang che possibility of the bill's extraordinary new private remedies against "counterfeiting" being misapplied in "garden variety" trade mark infringements complaints.

AGMC is deeply concerned that such bills would impose substantial and inequitable burdens on retailers, who would be subject to severe criminal sanctions and to civil remedies with enormous consequences on their businesses. The legislation presently before Congress, H.R. 2447, fails to allow for basic due process guarantees. It is unnecessary, as the problem of counterfeit trademarked goods can be, and is being, adequately addressed in other ways. Moreover, it has the distinct potential for being used as a subterfuge to injure competition in retail industry.

To assist the subcommittee in reviewing this issue, AGMC wishes to raise some serious problems which must be solved so that proposed anti-counterfeiting remedies do not harm legitimate businesses. While AGMC recognized that trademark counterfeiting represents a matter of serious concern, it would be ill-advised to take poorly directed measures which do not get to the root of the problem.

H.R. 2447 DOES NOT GET TO THE ROOT OF THE COUNTERFEITING PROBLEM There is general consensus that overseas manufacturers, especially those in a relative handful of countries, produce the lion's share of misbranded items. Existing law already calls for the seizure and confiscation of imported counterfeit goods. The U.S. Customs Service has recently announced an upgraded program, Operation Tripwire, aimed at strengthening enforcement in this area. Manufacturers who be lieve that their brand-name products are being duplicated by foreign counterfeiters can work with the Customs Service in many ways, such as by supplying Customs with the specifications of their products, to help Customs agents spot and crack down on imported fakes.

In addition, the Lanham Act already provides trademark holders with the right to sue, obtain injunctions, impound and destroy infringing trademarks, recover actual damages, and in appropriate cases, punitive treble damages, attorney's fees and court costs.

The argument has been made that enactment of legislation such as H.R. 2447 is needed to demonstrate to foreign governments the seriousness of the counterfeiting issue for this nation. There are, of course, better targeted trade and diplomatic means for conveying this message. But an even more fundamental question is: If foreign producers are the main cause of the problem, why should the United States not apply the pressure on them and at those closely associated with them? That would be far preferable to proposals like H.R. 2447, which are so broad-scale and far-reaching as to pose serious problems for retailers in this country.

Whether a counterfeit product is produced by a domestic or a foreign manufacturer, the most logical and efficient time to move against it is when it first enters the stream of commerce. Yet H.R. 2447 would encourage trademark holders to concentrate private enforcement actions not against counterfeit producers, but rather against established retailers. That represents a piecemeal approach to a problem best dealt with at the producer level. AGMC would not necessarily oppose carefully drawn, narrowly focused legislation directed at the manufacturers or importers who knowingly traffic in clearly

counterfeit goods. H.R. 2447 ALLOWS UNNECESSARY AND HARMFUL EX PARTE SEIZURE ORDERS H.R. 2447 would authorize private citizens to seek ex parte orders allowing them to seize allegedly counterfeit merchandise. Because their use is not restricted to in

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