Distributor Liability -

What You Need to Know

Presented by

Anthony Lupo & Sarah BrunoArent Fox PLLC

Washington, DC

March 12, 2008

Distributor Liability – What You Need to Know.

Overview

Section I: Theories of holding a distributor liable for Counterfeiting

• Tips for Distributors and Marketers

• Taking Action

Section II: Theories of holding a distributor liable for Product Liability

• Tips for Distributors and Marketers

Section III: Liability for Distributing Private Label or Will-Fit Products

• What can you do to Protect Yourself?

Distributor Liability – What You Need to Know.

Section I:

Distributor Liability for Counterfeiting

Distributor Liability – What You Need to Know.

Active Participation

Active Participation in a Counterfeiting Scheme

• Obviously, distributors can be liable for active participation.

• Microsoft case – distributor found liable for failing to act to remove counterfeit goods after receiving notice.

• Tiffany v. eBay - Tiffany may be found liable for distributing counterfeit Tiffany goods after receiving notice.

But it is not limited to active participation…Distributors can be liable for simply "ignoring" what appears to be illegal.

Distributor Liability – What You Need to Know.

“Willful Blindness”

Distributors are liable for being “willfully blind”

• They should have known about the counterfeit goods or they failed to inquire.

• Factors the courts have considered:

– Where the goods were purchased

– Whether the goods were sold with the authenticating documentation

– Whether the quality differs from the quality expected by consumers

– The pricing of the goods

– Evidence on billing slips

Distributor Liability – What You Need to Know.

What does this mean for Distributors?

Pay attention to the details....

• Packaging slips – do they look tampered, altered or raise red flags for other reasons?

• Quality – is the product of the quality that you expected?

• Safety standards – does the product include the safety specifications?

• Country of origin – was the product manufactured in the country that you expected?

• Trademarks and logos – do they look authentic?

Distributor Liability – What You Need to Know.

Pay Attention to the Logos and Packaging Elements

Trademarks - It can be a product name, logo, trade name, part number, the name of a service, the color and design of a product’s packaging.

Distributor Liability – What You Need to Know.

Contractual Protection

- Protect yourself contractually

- Have an agreement with the manufacturer that asks them to indemnify you for any claim of infringement.

- Warranty provision from the manufacturer attesting to the legitimacy of the product.

- Be vigilant! Look for the red flags and then take action when you come across them.

- Notify the manufacturer when you believe there is a counterfeit goods problem.

Distributor Liability – What You Need to Know.

What Does this Mean for Marketers?

Always use your logo

Be consistent in packaging your products

• Include the same items and brochures

• Billing slips

Consider challenging the small parties for a settlement - then market the settlement!

Brand your trade dress

Distributor Liability – What You Need to Know.

Taking Action

You can take action in a situation involving a Counterfeit Product

Several theories:

• Trademark Infringement

• Counterfeiting

• Unfair Competition

• Patent Infringement

Distributor Liability – What You Need to Know.

Taking Action

(1) Research – e.g., does the company have assets in the U.S., what have they been distributing, assemble evidence that they had knowledge or “should have known”

(2) Gain Jurisdiction - Attempt to make a purchase to ensure they can be brought into U.S. courts

(3) Notice – government authorities, the infringer, etc.

(4) File Suit

(5) Contributory, Vicarious, Aiding and Abetting, and Conspiracy Theory

- Louis Vuitton

- Credit Card Liability

Distributor Liability – What You Need to Know.

Section II:

Distributor Liability for Product Liability

Distributor Liability – What You Need to Know.

Product Liability

Distributors may also be found liable for damage or harm caused by a defective product

• A distributor may be “strictly liable” if it is in the chain of distribution. This means that it can be found liable without any evidence that it was negligent or acted willfully.

• A distributor can also be liable if the advertising or product label indicates the product is manufactured by the distributor.

• A distributor can also be liable if the foreign manufacturer is located outside of the U.S.

Distributor Liability – What You Need to Know.

What Can Distributors Do?

Trust your gut - if something doesn’t seem right, pull it, or contact the manufacturer and put them on notice of the problem.

Protect yourself contractually

• Require the manufacturer to indemnify you.

• Require the manufacturer to meet all the required safety specifications.

• Require the manufacturer to warranty the quality of the product and the fact that it meets the appropriate safety standards

Distributor Liability – What You Need to Know.

What does this mean for Marketers?

Keep the public informed about what you do

• Advertise that you meet the standards

• Advertise that you use only use known manufacturers in China

• Advertise that you give warranties and indemnities

Stand behind your claims

Distributor Liability – What You Need to Know.

Response to a Claim in the Industry

Distinguish yourself from the claim

• In the eyes of the public…

– Highlight that your product meets the safety specs, etc.

– Explain that it was not your product (i.e., a non-branded product in a Ford car)

• In the eyes of your customers…

– Opportunity

– Touch base and differentiate yourself from the problem product

– Remind customers of your quality

– Highlight the benefits of using your product

Distributor Liability – What You Need to Know.

Section III:

Theories of Liability for

Private Label or Will-Fit Products

Distributor Liability – What You Need to Know.

Recall of Private Label or Will-Fit Product

What is a private label or Will-Fit product?

• Generic equivalent to a branded product

• In some instances, they are more affordable

In order to make the products more affordable, producers may have to cut costs.

• May lead to safety issues

• The products may not meet government or industry standards

• Lack of quality control

• However, it arguably keeps the cost down for customers

Distributor Liability – What You Need to Know.

Private Label Products

Insurance Companies are also supporting the industry

• State Farm case (2006) – State Farm was allowed to continue to require repairs to include non-OEM parts. Policyholders had sued for breach of contract.

• American Family Mutual Insurance Company case (2007) – insurer had to pay $17 million to 315,000 residents of Missouri who claimed that repairs included inferior auto parts.

In response to this issues, the public has demanded that NHTSA and Consumer Product Safety Commission take a more active role

• NHTSA has began to put blame on the importing reseller when attributing liability for a product that does not meet U.S. standards

• NHTSA took action against a tail-light distributor and assessed fines in the range of $650,000

• Spitzer asked the CPSC to draft legislation that imposes penalties against distributors, as well as manufacturers, that are selling unsafe products. The product must ID the distributor and the manufacturer.

Distributor Liability – What You Need to Know.

What does this mean for Marketers?

Protect your trade dress

Trade Dress - shape, color or design of a product

Trade Dress protection

protects the way your product is “dressed”

Distributor Liability – What You Need to Know.

Developing a Trade Dress

• Choose a color or design that your company can identify with:

– Yellow and black for Stanley® tools

– The magenta color used by T MOBILE®

• Don’t use colors that other parties have already started using

– Check the market and see what others are using

– Avoid these colors and designs

• Don’t use functional colors

– e.g., Orange in construction

Distributor Liability – What You Need to Know.

Be consistent!

Distributor Liability – What You Need to Know.

Use it in your advertising and packaging

Distributor Liability – What You Need to Know.

Keep using it…

Distributor Liability – What You Need to Know.

Questions?