CHARITY OR . . . What is Done with Knock-Off Clothing

By: Lindsey Chessum*

jerseyWe have all seen knockoffs. Maybe we were even tempted to buy one. Knockoffs are a special source of concern for the National Football League (“NFL”) leading up to the Super Bowl. As game day approached, tents were lined up only a couple blocks away from the stadium boasted jerseys in all sizes and at a significantly lower price than the shops inside CenturyLink Field. Of course upon closer inspection, the material appeared less than quality and small details, such as coloring or pattern, were inconsistent with the official NFL jerseys. They were knockoffs.

What can be done? Before Super Bowl XLVIII, federal authorities seized $21.6 million in fake jerseys, hats, and the like. This amounted to at least 202,000 items. The U. S. Customs and Border Patrol (“CBP”) monitored international imports, searching for suspicious shipments that may not be what they purported to be. Additionally, Nike, the NFL’s official uniform supplier, joined up with the NFL in two federal court cases to shutdown websites selling counterfeit merchandise. Unsurprisingly, the defendants did not show, giving the victory to Nike and the NFL, but for every site they took down another seems to pop up.

What happens next? Like in the recent case with Super Bowl XLVIII knockoffs, federal authorities normally retain knockoffs in warehouses for evidentiary purposes, and after those purposes are served, the knockoffs are destroyed, incinerated. With the Super Bowl XLVIII, the CBP announced that thousands of the knockoff Super Bowl items would be destroyed.

This power comes from 19 U.S.C. § 1526(e) where it states, in pertinent part:

Any such merchandise bearing a counterfeit mark . . . imported into the United States . . . , shall be seized and, . . . the Secretary shall notify the owner of the trademark, and shall, after forfeiture, destroy the merchandise.

Destruction is necessary because trademark holders cannot compete with the low cost of knockoffs. Legitimate businesses spend the time and money to make a trademark valuable only for an illegitimate business to step in and free ride off the trademark’s notoriety. In this regard, knockoffs are a huge threat to the very thing American intellectual property rights seek to protect, “innovative capacity.” If they are allowed back into the market, it could be devastating, and it would be impractical to expect them to be stored forever.

US CustomsWhat else can be done? There is an alternative to destroying knockoffs, but its availability is limited. 19 U.S.C. § 1526(e) goes on to say the when “merchandise is not unsafe or a hazard to health, and the Secretary has the consent of the trademark owner” then the Secretary “may obliterate the trademark where feasible and dispose of the goods seized” in the following ways:

(1) deliver them to government agencies with a need for such merchandise,
(2) gift them to a charitable institution with a need for such merchandise, or
(3) sell by public auction more than 90 days after the date of forfeiture, only if (1) and (2) do not apply and specific procedures are followed.

The CBP has used this alternative in a number of cases. In 2007 the CBP seized near $200,000 in toys and ended up donating them to the Toys-for-Tots in Montana. In 2008, the CBP donated 10,000 pairs of shoes to Samaritan Feet, a charity out of Charlotte, NC.

In the aftermath of Katrina in 2005, the CBP went even further. Due to Katrina many displaced survivors were without many basic provisions, including clothing. The CBP pulled thousands of counterfeit items our of warehouses so that survivors would have underwear, jeans, baseball caps, T-shirts, shoes and socks. This was done without consent of the trademark owner, and trademarks were not obliterated as required under §1526(e). Still federal authorities argued their actions were legal under §1316(b)(2) where the Commission of Customs is allowed to take any “lesser action that may be necessary to spend to the specific threat.” This provision, they argue, is triggered whenever the President declares a state of emergency as was done after Katrina.

At this act of power, trademark holders became unnerved. The few items they fought so hard to keep out of circulation were reintroduced into the market. People in legal circles criticized the actions of federal authorities, saying good intentions should not trump law. Even when federal authorities inquire after consent from trademark holders, it is a catch-22. Trademark holders declining redistribution of knockoffs are considered greedy and heartless, but redistribution, even of goods with obliterated trademarks, take up a portion of the overall market, hurting trademark holders’ revenues.

Knockoff ChartWhat is going on today? Recently, the Nike, in response to questions from the press about the thousands of items set to be destroyed by the CBP, responded by saying it has a practice of donating surplus merchandise to charities. Nike representatives went on to say that they also give some counterfeit items to World Vision, a humanitarian organization, who distributes the goods in countries where the trademark has no value.

Unfortunately, as long as there are trademark infringers, there will be costs to the economy. It costs money to incinerate thousands of knockoff items. Even redistributed items must have the trademark obliterating which takes money, if the trademark holder consents. Trademark holders must set aside funds to pursue infringers, passing along costs to customers. Is there a better way of mitigating costs? Should good intentions reign over strict legal interpretation?

At least everyone can agree on one thing, when knockoffs are seized at least the trademark infringing business is sharing in the costs because it is not getting paid for its illegal activity.

* Lindsey M. Chessum is a third year law student at Wake Forest University School of Law. She has a Bachelor’s in Economics & Business and a Bachelor’s in Philosophy from Westmont College. She spent nearly two years in the stock market industry prior to law school, and upon graduation in 2014, Ms. Chessum plans to return to California to practice business law.