Nike suit showcases new world of counterfeiting and responsive strategies

March 3, 2020

Nike latest Air Force 1 shoes. Image credit: Nike

Nothing in the business world stands still, and that includes the business of counterfeiting. Luxury goods and fashion companies must continuously evolve their anti-counterfeiting strategies to keep up.

A recent suit commenced by Nike – one of the most counterfeited brands in the world – in the federal court in Manhattan illustrates some of the changing techniques being employed by counterfeiters, and how Nike in response has adapted its enforcement strategies.

Review of the case and Nike’s action can teach valuable lessons for anti-counterfeiting efforts.

The case

Nike’s complaint spins an interesting tale.

In early 2019, U.S. Customs notified Nike that it had seized a container at the Port of Newark, New Jersey, shipped from China, that contained about 9,000 pairs of counterfeit Nike sneakers, valued at almost $1 million.

Subsequent investigation revealed that this was the fourth of four related shipments. The first three avoided seizure, and were delivered to somewhere in the United States.

That is when the story gets interesting. Transportation records for all four shipments stated that the shipments contained “lamps” and were to be delivered to a company operating under the name “Artiva” or “Artiva US, Inc.”

In fact, there is such a company, located in Southern California. Artiva manufactures lamps in China for importation and sale in the U.S. The company never deals in shoes or sneakers.

In an attempt to hide their tracks, the counterfeiters engaged in “identity theft” of the legitimate company, providing false contact information with no connection to Artiva. And, the customs declarations were not only false in providing the consignee identity, but also as to the goods themselves, listing as “lamps” what was really counterfeit Nike shoes.

While most of the shoes bore registered marks such as “Nike” and “Air Max 270,” some bore no marks whatsoever.

Those shoes, however, were designed to look exactly like one Nike model, the Jordan 11.

As Nike alleged, “[c]ounterfeiters often import footwear that copies the Jordan 11 Trade Dress without any identifying trademarks, and then after those products clear U.S. Customs, they attach counterfeit trademarks.”

The named defendants

Typically, counterfeiting cases are brought against the manufacturers and sellers of the counterfeit items.

Nike’s complaint, however, only names such parties as unknown, “John Doe” defendants.

The companies Nike does name are: (1) Shine Shipping, a Hong Kong-based company that arranged for the four shipments from China to the U.S.; (2) Hana Freight, a New Jersey-based freight forwarding company, also involved in the shipping; and (3) B&H Customs, a licensed customs broker based in New York.

Customs brokers arrange for shipments to be cleared through U.S. customs, and they are subject to regulations by U.S. Customs as to the records they are required to maintain and other steps they must take.

Nike’s primary complaint against these three named entities is that they failed to verify the information on the shipping documents.

The contact information – email and phone numbers – simply did not match that of Artiva, the party that the papers indicated was to receive the goods.

And, the shipping documents contained discrepancies, such as an email contact address that did not match Artiva’s domain name that were never looked into or confirmed.

In the complaint, Nike construes these failures in the worst possible light – these parties just wanted to get paid, so they looked the other way and proceeded to process the shipments.

Nike paying tribute to brand ambassador and tennis star Maria Sharapova, who recently announced her retirement from the sport at the age of 32. Image credit: Nike

Nike’s legal theories

So, do Nike’s theories hold legal water?

Nike advances two theories – direct and contributory trademark infringement.

Direct infringement means that the defendant itself infringed the trademark.

Generally, that means using a false or confusing mark – here a counterfeit mark – for goods in commerce, i.e., in connection with the sale, offer for sale or advertisement of the goods.

“Use” of a trademark means employing it to identify the brand of goods, either by selling goods bearing the mark or using it in advertising.

If the mark is a counterfeit or infringing trademark, there is liability for trademark infringement.

Shippers and customer brokers generally do not use trademarks in this way – they do not sell or advertise anything. They are simply involved in arranging for the transportation and importation of product, product that might bear trademarks.

Nevertheless, on various theories, some courts have held them liable.

One theory is that using a trademark in connection with shipping also constitutes infringement.

The other is that importing counterfeit goods is itself an infringement.

Both are based on different sections of the Trademark Act. So far only lower courts have accepted these theories, but Nike and others have been aggressive in pursuing these actors.

Nike’s other theory is what is called contributory infringement – the civil equivalent of aiding and abetting. Basically, providing a service that aids another in infringing a trademark is itself a basis for liability.

Crucially the law requires that this “contributory” activity be done with knowledge of the infringement. Unknowing aid is not enough.

Courts have held, however, that “willful blindness” is treated as the equivalent of knowledge.

Willful blindness means more than carelessness – it means deliberately ignoring clear warning signs that there are problems, for fear that one will discover an inconvenient truth.

Nike’s complaint clearly tries to bring these defendants within “willful blindness” by pointing to problems with the shipping documents that were apparently ignored and, had they been followed up, the fraud would have been discovered much earlier.

Whether Nike can show this high level of “willful blindness” remains to be seen.

First lesson: Pursue secondary actors

The first lesson to be learned is the importance of pursuing secondary actors.

Nike has been very aggressive on this front. And for good reason.

Counterfeiters are notoriously hard to identify and trace, and that has become only harder now that most of the worldwide counterfeiting originates from China.

But counterfeiters must still employ various third-party actors – including shippers and customer brokers – to get the goods from China to the U.S. and other markets.

This is one of the counterfeiter’s Achilles’ heels, and it is here that pressure is likely to have significant effect on the counterfeiting activities.

The National Customs Brokers and Forwarders Association of America, an industry group which purports to speak for these actors, has previously commented on Nike’s aggressive position.

In 2010, at its annual meeting, the group reported that its counsel “had previously spoken at length with Nike's counsel and expressed our concern with both the merits of the claims being raised against the brokers and the potential precedential value that a successful claim could have on the industry.”

That conversation did not, however, seem to deter Nike, and it has pressed ahead with such suits.

More recently, the same organization has stated that it wants to be “part of the solution” to combat counterfeiting and seeks greater information-sharing with U.S. Customs.

What is important for a company such as Nike is not so much collecting money damages from these actors but getting them under an injunction – a court order not to further infringe on Nike’s marks.

Once under an injunction, a company that repeats the action will face contempt sanctions, so it will have to be much more careful to scrutinize shipments in the future. That is the primary benefit for a company from pursuing these actors.

Second lesson: Importance of design protection

As discussed, Nike also alleges that some of the sneakers did not have any Nike trademarks attached, but did closely imitate the design of a popular Nike model. The apparent scheme was to attach the counterfeit marks later, after importation.

Nike deals with this by claiming that the design itself is protected as Nike’s “trade dress,” which means that the design itself is recognizable as that of Nike, and so functions as a trademark.

Trade dress has its own special requirements, but if proven can be a powerful tool for companies selling products.

This highlights the importance for companies to seek protection not only for their brand names, but also for their popular designs.

Nike owns many registrations for word and symbol trademarks, none of which were infringed by the counterfeiters on these plain sneakers.

Instead, Nike relies on trade dress, in this case unregistered trade dress.

While that could be a valid claim, Nike will have to go to considerable lengths to prove it has valid trade dress rights.

In prior Luxury Daily articles such as Must-know basics of design patent law for fashion and luxury goods and Must-know basics of copyright law for the luxury business, we wrote about different kinds of protection for product designs, including design patents, copyrights and trade dress. Each might be appropriate in different cases.

As shown in the Nike case, counterfeiters often ship product with no markings on them, so product design protection becomes another important tool in the fight against counterfeits.

AS COUNTERFEITERS find new ways to commit and seek to hide their piracy, so too must brand owners fighting counterfeiting adjust their enforcement strategies.

As the Nike case shows, it is critical to find the weak links in the counterfeiting chain and attack there.

And, as in all intellectual property enforcement, one must always have the foundation in place – securing all of one’s intellectual property rights – well before the problem comes to a head.

Milton Springut is a partner at Springut Law PC

Milton Springut is a partner at Springut Law PC, New York. Reach him at [email protected]. Mr. Springut's opinions are solely his.

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