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05 October 2020
Congress is taking action after recognising the growing problem of counterfeit and unregulated products being sold through online marketplaces and the associated safety concerns. Currently, there are three pending bills with the stated goals of protecting consumers and improving transparency – namely:
This article provides a high-level overview of the proliferation of counterfeits on online marketplaces and a summary of the pending bipartisan bills and their stated goals.
In 2019 annual e-commerce sales accounted for more than 10% of total sales in the United States, with US consumers collectively spending more than $600 billion on e-commerce platforms. With the COVID-19 pandemic, widely publicised decrease in brick-and-mortar retail sales and consumers' concurrent reliance on online purchases, this number will surely increase in 2020.
In combination with the growth of e-commerce in recent years, there has been an explosion of counterfeit products offered through e-commerce marketplaces. Third-party sellers have flooded online marketplaces with counterfeit and unregulated products. While rights holders scour online marketplaces and investigate and report counterfeits to the marketplaces, and some marketplaces have stepped up proactive enforcement, the sheer volume of listings and ease with which sellers can enter the e-commerce market mean that counterfeiters have the advantage.
Increasingly, consumers unwittingly purchase these counterfeit and unregulated products, unknowingly subjecting themselves and their loved ones to risk. Counterfeiters are adept at hiding in plain sight, making it difficult for consumers to distinguish between genuine and fake products. For example, counterfeit sellers:
Even when a consumer is cautious and conscientious about the third-party seller from which they purchase, they may receive a product from a different seller. This is because online marketplaces that assist with fulfilment frequently have policies in place that allow for more efficient shipping from the warehouse closest to the consumer. In other words, goods may ship from a different seller from that which the consumer selected.
The government is working to address these problems. On 3 April 2019 the president issued a memorandum that instructed the Department of Homeland Security (DHS) to work with several other federal agencies to prepare a report on the state of counterfeit and pirated-goods trafficking. On 24 January 24 2020 the DHS published the requested report. The report discusses many of the same issues addressed by the three bills identified above and cites competition, national security and public safety as driving forces for a multi-faceted approach that involves both the federal government and the private sector. Among its calls to action in the report, the DHS lists several best practices that e-commerce platforms and third-party marketplaces should immediately adopt.
Congress has also swung into action, holding several hearings on the topic throughout 2019 and recently introducing the above three bills to protect consumers and improve transparency.
On 3 March 2020 New York Representative Jerry Nadler (Democrat) introduced the SHOP SAFE Act 2020. The five co-sponsors of the bill are:
Section 2 of the SHOP SAFE Act would amend Section 32 of the Trademark Act 1946 to provide for contributory liability for e-commerce platforms for the use of a counterfeit mark by a third-party seller, unless the platforms satisfy certain statutory requirements (ie, the best practices).
The bill's stated purpose is to combat the proliferation of unsafe counterfeit goods by:
However, the bill applies only to 'goods that implicate health and safety', as defined in the bill. According to the US House of Representative's one-pager for the act, counterfeit goods of that kind have the most serious safety consequences for consumers.
The act would require e-commerce platforms to demonstrate that they are following the 10 best practices before "any alleged infringing act by the third-party seller". These best practices are:
The act would require e-commerce platforms to adopt new practices or bolster existing ones. However, by following the 10 best practices set out in the bill, online retailers would avoid the new statutory contributory liability that the act would establish. This bill has been referred to the US House Committee on the Judiciary for debate before moving on to the US House of Representatives' floor (for further details please see "Shop Safe Act 2020: new tool for brand owners in fight against online counterfeits?").
On 17 December 2019 Louisiana Senator Bill Cassidy (Republican), together with co-sponsors North Carolina Senator Thom Tillis (Republican), New Jersey Senator Robert Menendez (Democrat) and Illinois Senator Dick Durbin (Democrat) introduced the SANTA Act. The act would require online marketplaces to verify and disclose to consumers the identities of those who sell children's products. An online marketplace would need to obtain a third-party seller's bank account information, government-issued photo identification and business contact information. It then requires that the online marketplace disclose each seller's name, business address, phone number and email address on the face of the product listing. That contact information must be verified on an ongoing basis "to ensure [that the] seller is available for consumer outreach". Disclosing this verified information about online sellers of children's goods would help purchasers to avoid counterfeit toys and other fake children's products.
In addition, to address the efficient shipping policies where a product ships from different sellers, the current text of the bill requires marketplaces to notify consumers before purchase about the seller of the shipped children's products if it differs from the seller on the product listing.
This bill has been referred to the Senate Committee on Commerce, Science and Transportation for debate before it is sent to the Senate floor.
Broadening the SANTA Act more generally to high-volume third-party sellers, as opposed to only sellers of children's products, the INFORM Consumers Act would require online marketplaces to verify and disclose certain seller information. Cassidy, along with Durbin and Georgia Senator David Perdue (Republican), introduced the bill on 10 March 2020. Hawaii Senator Marzie Hirono (Democrat) has also joined the bill.
The INFORM Consumers Act would require online marketplaces to verify "on at least an annual basis" the identity of all high-volume third-party sellers that list products on the marketplace. The act defines a 'high-volume third-party seller' as one that has made at least 200 discrete sales in any 12-month period over the past two years with a gross revenue of at least $5,000.
The marketplaces would have to conspicuously display that verified information, with exceptions for sellers which have only personal contact information. Further, the marketplace would be required to identify in the product listing whether a given seller is a manufacturer, retailer, importer or reseller. This act, like the SHOP SAFE Act, would also require online marketplaces to tell consumers whether the seller of the shipped product differs from the seller named on the listing. The stated goal is that armed with this verified information about third-party sellers, informed consumers could better avoid purchasing goods from unscrupulous and criminal actors and thereby help to fight fakes and thwart organised retail crime.
Like the SANTA Act, this bill has also been referred to the Senate Committee on Commerce, Science and Transportation for debate before going to the full chamber.
These three bills and the DHS report on counterfeit and pirated goods seek to raise the monitoring, enforcement and consumer protection against e-commerce regimes to a level that comports with brick-and-mortar retail. It is worth monitoring the SHOP SAFE Act, the SANTA Act and the INFORM Consumers Act as they move through the legislative process.
For further information on this topic please contact Meaghan Kent or Nicholas W Jordan at Venable LLP by telephone (+1 410 244 7400) or email (email@example.com or firstname.lastname@example.org). The Venable LLP website can be accessed at www.venable.com.
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