stances where an actual need has been demonstrated, the ex parte seizure provisions of H.R. 2447 are unacceptable. The extraordinary remedy of ex parte seizure is 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-bynight" operators, street vendors, and other transient distributors.

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

Because H.R. 2447 fails to set out any standards for issuance of ex parte orders, there is a very real danger that courts will be urged by trademark holders to issue such extraordinary orders without any persuasive showing that the goods in question are actually counterfeit. In this regard, we note that the mere fact that a brand-name good was not purchased directly from the manufacturer or its authorized distributors should not be grounds for issuing an ex parte seizure order. Safeguards are lacking in the proposed bill to require even the most generalized proffer of evidence that the goods to be seized are in fact counterfeit. Clearly, because of the extraordinary harm that ex parte seizures would cause, such a drastic remedy should not be put into private hands without concrete safeguards against its casual or mistaken use.

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 serious 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 are in fact counterfeit, and without affording the retailer an opportunity to dispute that claim. Retail success in large part is based on a company's reputation for honestly 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.

It is wholly inadequate to argue that a bond may be required to be posted before ex parte search and seizure is authorized. Not only does H.R. 2447 not presently require the posting of a bond (and since the hearing of the request is ex parte, the affected business is not present to suggest it), but it is also unlikely that a bond would be able to compensate for the tremendous damage to the retailer's goodwill. A proposal has been made to allow recovery of attorney's fees by parties subjected to ex parte seizures when the trademark holder fails to prove its claim. Any business subjected to an ex parte search and seizure should at a minimum receive full damages, including attorney's fees, without having to show that the seizure was prompted by bad faith. In addition, punitive damages ought to be available in appropriate cases.

In summary, AGMC believes that, if ex parte orders are to be permitted at all, they should not be granted where less extreme procedures are available, and that full damages, including the costs of its defense, should be automatically available to any party subjected to seizure, unless the seizing party is able to prove that it found goods which were in fact counterfeit.

H.R. 2447 IS OVERBROAD IN SCOPE

The trade practices which are greatly different from out-and-out brand-name piracy. Counterfeiting must be narrowly defined to distinguish counterfeiting claims from those involving infringement, trade dress, knock-offs 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. This problem points up the need for narrowly focused legislation which will hit actual counterfeiters without affecting others.

AGMC would also urge caution in setting up new criminal and civil sanctions in an area which has proved so difficult to define. The Lanham Act definition of "counterfeit" is, we believe, too broad and, since such terms as "spurious mark” have not been interpreted, provides little guidance.

In this context, we point out that some supporters of H.R. 2447 appear to believe that the bill's draconian penalties and extraordinary procedures will be available in cases alleging trademark infringement. For example, some manufacturers apparent

ly believe that H.R. 2447 could be used against rival producers who use similar packaging or marking, 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.

The so-called "gray market" debate illustrate one pitfall of an expensive definition of "counterfeiting". 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 one under that manufacturer's control. These producers and their U.S. affiliates are aggressively seeking to overturn long-standing U.S. Customs regulations interpreting § 526 of the Tariff Act. Particularly since the term "counterfeiting" is being used by diverse interests to describe widely varying situations, it becomes all the more important to see that any remedy for trademark counterfeiting contains a tightly focused range, which will not permit counterfeiting penalties and procedures to be used in any instances but clear cases of out-and-out brand-name piracy.

H.R. 2447 LACKS ADEQUATE PROTECTION FOR INNOCENT RETAILERS, ESPECIALLY PRICE COMPETITORS

A very serious problem with H.R. 2447 is the failure to distinguish between intentional and unintentional possession or sale of counterfeit merchandise. As a result, a retailer who has unknowingly received counterfeit merchandise runs the risk of being doubly victimized: first by the supplier, and then by the trademark holder. The legislation as presently drafted recognizes that counterfeit merchandise may appear identical to genuine goods. In such instances, even a retailer's careful examination may not disclose any counterfeit goods in a particular shipment. A related problem occurs when a manufacturer's authorized licensee overproduces genuine merchandise, which enters the stream of commerce. This situation should be resolved between the manufacturer and its licensees, rather than involving other parties further down the chain of distribution.

At present, H.R. 2447 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 wilfully and must know that the goods are counterfeit.

There should be clear evidence of actual knowledge. Some manufacturers are quick to send supposed notification letters to retailers, alleging that the retailer has counterfeit merchandise, based on nothing more than the retailer's offering for sale merchandise obtained from a legitimate supply source other than the manufacturer. Such a routine "notification" by a manufacturer should not by itself be regarded as proof of a retailer's 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 the goods or services. will be mistaken for goods or services for which the genuine mark is registered and is in use."

This provides an extremely questionable, uncertain and subjective test for determining criminal intent and civil liability. In effect, a retailer acting in good faith could be found to have committed a criminal act based on the subjective reactions of his customers. This standard may be appropriate under existing tests of trademark infringement, but it is entirely too broad in a statute supposedly aimed at the much different issue of out-and-out counterfeiting.

Even more serious is the possibility, indeed the likelihood, that the powers that H.R. 2447 conveys on private companies would be misused by suppliers seeking to restrain price competition by retailers selling their products.

Price-competitive retailers would generally prefer to deal directly with a manufacturer, rather than face the additional costs of obtaining merchandise through middlemen or other legitimate but indirect sources. Some manufacturers refuse to sell to discounters, however. Although those manufacturers claim many reasons for this, AGMC strongly believes that the real reason is often their desire to insulate their products from price competition.

In such cases, price-competitive retailers must seek secondary sources of supply for popular merchandise. As mentioned earlier, some foreign manufacturers seek to exclude imports of genuine merchandise purchased from American import companies not under their control, and other manufacturers are quick to claim counterfeit when their genuine merchandise ends up in the hands of price competitors. 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 Assistant Attorney General William F. Baxter, head of the Antitrust Division in the Department of Justice, saw a similar linkage between the issue of resale 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 which prevents manufacturers from fixing retail prices, which AGMC strongly opposes.

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. Some of these same companies are now clamoring for trademark counterfeiting legislation. AGMC urges the subcommittee consider very carefully the practical impact on price-competitive retailers of any recommendations it may make, in order to be sure that, in the name of remedying commercial counterfeiting, it will not unintentionally be creating new obstacles to free marketplace competition.

Mr. SMITH. Thank you, Mr. Borda.

Mr. Rares, if you would like to summarize your statement.

Mr. RARES. Good morning, Mr. Chairman. Thank you for your kind introduction. I would like to first introduce Mr. Robert Ullman, of the law firm of Bass, Ullman & Lustigman. Mr. Ullman is counsel for the American Free Trade Association.

As president of the American Free Trade Association, I wish to thank the committee for this opportunity to present the views and concerns of AFTA with respect to H.R. 2447, which has been introduced and proposed as the Trademark Counterfeiting Act of 1983. Members and supporters of the American Free Trade Association are engaged in the importation, exportation and distribution of perfumes, fragrances, cosmetics, health and beauty aids and other related sundry items.

Initially, I would like to also emphasize that the American Free Trade Association shares the concern that heretofore has been expressed with respect to the subject of trafficking in counterfeit and trademarked goods. I think it is sufficient to say that our association and myself, personally, are diametrically opposed to any counterfeiting in any shape or form.

AFTA's concern with bill, H.R. 2447, as proposed, is a very real one. Among many concerns we have, we are concerned that this bill can be used by domestic manufacturers and trademarkowners to interfer with the sale in the United States of genuine products which are offered in the markets outside the United States and are legally imported into the United States and made available for sale in the United States to the American consumer at prices substantially below the artificially high prices some manufacturers seek to maintain for the U.S. market.

The American Free Trade Association must express its fear that in the absence of clear and express limiting language, the proposed bill's definition of the term "counterfeit" and the bill's ex parte search and seizure provisions are so broad that at the very least, they may present a temptation to these manufacturers and purported trademarkowners to use the act for purposes other than to counterfeit-excuse me, to combat counterfeiting.

The term "counterfeit" could be applied to goods which are not at all counterfeit, just upon allegations involving infringement, trade dress, or other acts of alleged unfair competition. This applies particularly to the bill's reference to identical or "substantial

ly" indistinguishable "spurious" marks, the general reference to "a genuine mark that is specifically protected by Federal statute" and the direction that a trier of the facts may find an intent to deceive by mere "likelihood" that the goods in question "will be mistaken" for trademarked goods.

AFTA is particularly concerned that the present bill does not provide adequate standards and guidelines for the applicability of the bill's provision for the extraordinary ex parte remedy of search and seizure. As presently worded, the bill lacks what AFTA believes is an essential requirement of a showing of probable cause for the application of such drastic pretrial relief.

It is an established fact that in many instances, genuine goods manufactured overseas can be purchased abroad at substantially lower prices than those at which the same genuine goods are sold in the United States. An importer can legally purchase such goods, pay duty, overhead, transportation and all other costs involved in bringing them into the United States and then sell them to wholesalers and to retailers, who in turn can sell them to the U.S. consumer, to the public, at cheaper prices than they are sold normally. This is an integral part of what the parallel market, or the "gray market," have you, is all about. It is also an established fact that American manufacturers and trademark owners are seeking to terminate the parallel market in order to maintain their structure of higher prices in the United States.

Under the present bill, a manufacturer or even a competitor, could get an ex parte seizure order on allegations, allegations, that an importer, exporter or other distributor has goods claimed to be counterfeit; seize the goods; determine their source and channel of distribution; and then having obtained such information; back off the counterfeit charge and apologize, "I made a mistake.

No amount of penalty could undo or compensate for the irreparable injury that would flow from the havoc and attack such practice would reap upon the channels of distribution which are so important to the members and supporters of AFTA.

This is no mere conjecture. In another but not entirely unrelated context, I have personally had the experience of an American trademark owner bandying the term "counterfeit" in an attempt to interfere with the importation of his genuine product through legitimate channels of distribution.

In addition, the penalty provisions of the bill, on the one hand, are substantially more severe than those applicable to crimes of greater magnitude. While on the other hand, no provision is made for full monetary relief available to victims of an improper or erroneous ex parte seizure.

I would like to, in addition to the written text which I have read, just make a couple of comments on comments that were made by the previous panel.

Mr. Bikoff, in his summary, says that neither he nor his members want to stop or interfere with the "gray market." However, I have stated in my summary that with the ex parte seizure and investigation elements, a very, very dangerous vehicle is being put forward that can effectively give the manufacturers the opportunity to accomplish exactly what everybody has been denying this bill will accomplish.

In addition to that, under the Sears, Roebuck amendment—the Sears, Roebuck amendment is not enough. For example, why should attorneys' fees be allowed only when erroneous seizure and investigation of goods has been made without adequate evidence? At the very, very least, if we are going to have these kinds of seizures, then the relief to the aggrieved party, the party wrongfully accused of having counterfeit goods, should be at least be equivalent the penalties for having counterfeit goods. Now, I understand we can't have the prison term provision, but I am talking about the monetary compensations.

AFTA respectfully urges that the subcommittee reject H.R. 2447 in its present form and we would like to thank the committee for permitting us to testify here today.

Thank you.

[The statement of Mr. Rares follows:]

STATEMENT OF JOSEPH W. RARES, THE AMERICAN FREE TRADE ASSOCIATION (AFTA) STATEMENT OF THE AMERICAN FREE TRADE ASSOCIATION (AFTA) ON “THE TRADEMARK COUNTERFEITING ACT OF 1983" (H.R. 2447)

As president of the American Free Trade Association I wish to thank the Committee for this opportunity to present the views and concerns of AFTA with respect to H.R. 2447, which has been introduced and proposed as "The Trademark Counterfeiting Act of 1983".

My name is Joseph W. Rares, and I am president of AFTA whose members and supporters comprise importers, exporters and distributors of various products including perfumes, fragrances, cosmetics and sundry items made available to the American consumer at prices which frequently represent substantial and important savings in comparison to the artificially high prices sought to be maintained by many manufacturers for the United States market.

Initially, it must be emphasized that the American Free Trade Association shares the concern that has heretofore been expressed with respect to the subject of trafficking in counterfeit trademarks and counterfeit merchandise. It should be sufficient to note that AFTA is diametrically opposed to and does not countenance any such practice.

The Association is also concerned, however, that H.R. 2447 has the potential for going beyond the expressed purpose of its application to counterfeiting of trademarked goods, and, in the absence of express clarifying language, that it could be used and abused to the detriment of the legitimate business interests of the members and supporters of AFTA and to the detriment of the consuming public. Thus, we are concerned that the bill could be used by the manufacturers of trademarked goods to harass discounters, to interfere with the distribution of such goods in various legitimate channels of domestic and foreign commerce, and to encourage and facilitate the enforcement of resale price maintenance. We recognize that such uses of this bill could be discouraged by an expression in any Report on H.R. 2447 that such is not its intent. We recognize also, however, that such expressions are themselves subject to later interpretations which could cloud their meaning. AFTA hopes, therefore, that these hearings will produce a more direct approach to clarifying and limiting language which cannot be extended beyond its expressed target of the counterfeiting of trademarked goods.

The American Free Trade Association must express its fear that, in the absence of clear and express limiting language, the proposed bill's definition of the term "counterfeit" and the bill's ex parte search and seizure provisions are so broad that, at the very least, they may present a temptation to manufacturers and purported trademark owners to use the Act for purposes other than to combat counterfeiting. We believe that, as presently worded, the "counterfeiting" terms of H.R. 2447 could be disingenuously used in conjunction with allegations involving infringement, trade dress, or other acts of alleged unfair competition. This is particularly so in the light of the bill's reference to identical or "substantially" indistinguishable “spurious" marks, the general reference to "a genuine mark that is specifically protected by Federal statute" and the direction that a trier of the facts may find an intent to deceive by a mere "likelihood" that the goods in question "will be mistaken" for trademarked goods. Such language could easily be applied to properly labeled goods