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Articles

Disposal of Counterfeit Goods Requires Final Judgment and Adequate Notice

IP Litigator
March/April 2009

Sommers, Mark , Kilaru, Naresh

Article

Authored by Naresh Kilaru and Mark Sommers

As one of the most popular professional sports in the United States, NASCAR generates over $3 billion in sales of licensed products annually. The popularity of NASCAR branded merchandise has, not surprisingly, created a lucrative market for counterfeiters. To curb counterfeit sales, for years NASCAR has obtained a preliminary injunction before each racing season enjoining any street vendor within a 10-mile radius of its racetracks from selling counterfeit merchandise. NASCAR also obtains a seizure order allowing it to confiscate such merchandise. The preliminary injunction and seizure orders remain in effect through the entire racing season and, at the end of each season, NASCAR distributes the confiscated goods abroad or to charity. NASCAR then voluntarily dismisses the case, without obtaining a default judgment or a permanent injunction. When NASCAR attempted to employ this procedure in 2008, the court sua sponte addressed the legality of NASCAR's enforcement strategy in NASCAR, Inc. v. Does, 2008 U.S. Dist. LEXIS 105463 (W.D.N.C. Nov. 6, 2008).

Summary of Decision
Before counterfeit goods can be destroyed or otherwise disposed of, the Counterfeiting Act of 1984 requires that a Lanham Act violation be "established." [15 U.S.C. § 1118.] By voluntarily dismissing its case against the counterfeiters before a final judgment issued, the court held that NASCAR had never "established" a Lanham Act violation and thus had no statutory authority to dispose of the counterfeit goods. As a result, the court reasoned that NASCAR was disposing of goods that were still legally owned by the counterfeiters. The court ruled that going forward, NASCAR would have to follow through with obtaining a final judgment (be it by trial or default) before disposing of any counterfeit products. Short of a final judgment, the court held NASCAR must return the seized goods to the counterfeiters.

The requirement of obtaining a final judgment before disposing of counterfeit merchandise stems from Congress' intent that the seizure provisions of the 1984 Act serve exclusively as an evidentiary mechanism to preserve evidence for trial that might otherwise be destroyed or concealed by the counterfeiter. In other words, the seizure provisions were intended to serve only as a means to an end (i.e., to aid the plaintiff in obtaining a final judgment), and not as the final relief itself. A plaintiff seizing counterfeit products is merely a temporary custodian of those products until a final judgment issues. Until the court issues a final judgment, legal title to the products technically remains with the counterfeiters.

In addition to obtaining a final judgment, the court held that NASCAR must provide adequate notice to all interested parties before disposing of the counterfeit products. As the seizure of counterfeit goods under the Counterfeiting Act is an in rem forfeiture, rights to the property must be settled as to all potential claimants, not just the named defendants. Here, while the named defendants already had received sufficient notice by virtue of being served with process of the lawsuit, the court said it could not presume that ownership interests in the seized property were limited to those defendants. In an in rem action, due process requires that all interested parties (known and unknown) be provided with an opportunity to be heard by the court prior to any final disposition of the property.

As to how notice should be accomplished with regard to unnamed defendants, the court noted that the 1984 Counterfeiting Act itself does not specify any particular procedure. In the court's opinion, this omission was intentional because the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions govern the notice requirements for all in rem forfeiture actions arising under a federal statute. [Fed. R. Civ. P., Supp. R. A(1)(B).] Under these rules, a notice for forfeiture must: (1) describe the property with reasonable particularity, (2) state the time by which a claim and answer must be filed with the court, and (3) direct that any claims be served on plaintiff 's attorney. Additionally, the notice must be published in a way reasonably calculated to notify potential claimants of the action. While newspaper publication is the most common method, the court determined that NASCAR's Web site was the most suitable place for publication because it offered the most exposure to the universe of potential claimants—those interested in motor sports.

Conclusion
The court's decision makes clear that the Lanham Act's seizure provisions must be used solely as an evidentiary mechanism to aid plaintiffs in obtaining a final judgment and not as an end in itself to dispose of counterfeit products. Plaintiffs who use the seizure provisions must pursue a full and final judgment, or otherwise return the seized property to the suspected counterfeiters. Once a final judgment is obtained and proper notice given, plaintiffs may then dispose of the property.

Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.