Altering, Importing Trademarked Goods Not a Criminal Violation if Marks Otherwise Genuine, says 4th Circuit
The 4th Circuit U.S. Court of Appeals remanded in part the conviction and sentencing of two importers for trademark violations, finding the government overstepped the bounds of the criminal trademark statute. A lower court had found the defendants guilty of, among other things, trademark violations stemming from alteration of merchandise that still bore the original mark. The appeals court said that while such “material alteration” violates the Lanham Act, which governs civil trademark cases, it does not constitute a crime under the criminal trademark statute at 18 USC 2320. The court vacated convictions on several counts, and remanded to the lower court for resentencing only on the counts of counterfeiting based on “pure” counterfeit labels.
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Defendants Donald Cone and Chun-Hui Zhao, a married couple living in Rockville, Md., formed a company called JDC Networking, a licensed distributor of Cisco products. Despite the license agreement’s prohibition on buying Cisco products abroad for retail in the United States, GDC imported from China over 200 shipments of both real and fake Cisco products between 2004 and 2010, the ruling said. CBP began intercepting and seizing shipments sent from one of GDC’s suppliers, Han Tong, to “Lucy” and “Donald” in Rockville. The investigation went cold, however, when Han Tong began declaring a very low value for the goods shipped, and used variant spellings of the destination address, foiling CBP’s tracking techniques.
After coordinating its efforts with shipping company DHL on other shipments of electronics that were similar to the products it had investigated earlier, the agency allegedly caught Zhao red handed trying to pick up a shipment from a Parcel Plus retail storefront. With their marriage on the rocks, Cone was living in China, where Immigration and Customs Enforcement interviewed him by phone. Cone admitted that JDC received and resold both real and counterfeit Cisco products. He also admitted the company modified authentic Cisco products obtained from China, and sold them to clients, representing that they were higher-end products than they actually were. According to the court, Cone was arrested when he returned from China in December 2010.
After a trial in the Eastern Virginia U.S. District Court, the jury convicted Cone of conspiracy, and sentenced him to 30 months in prison. Zhao was convicted of conspiracy, four counts of improperly declared goods, four counts of trafficking in counterfeit goods and labels, two counts of money laundering, and one count of making a monetary transaction with criminally derived proceeds. She was sentenced to 60 months in prison.
On appeal, Cone and Zhao argued that several of the convictions should be overturned, because they were improperly based on material alteration, where the good bore a genuine and authentic mark, but that good was altered to be a different product than the one to which the mark as originally fixed.
For example, one count charged Zhao with intentionally trafficking in a counterfeit Cisco unit when she sold a Cisco switch to the Fish and Wildlife Service through a distributor. According to the government, the switch was actually a standard Cisco model, with a proper and genuine Cisco mark affixed. But Zhao and JDC upgraded the product to resemble an enhanced model switch, and sold it as such. The product still had the original, unmodified mark.
The appeals court found that although such an action violates the civil trademark statute, material alteration is not a crime. Under 18 USC 2320, a defendant must have trafficked in goods or labels bearing a “spurious,” or fake, mark to expose that defendant to criminal liability. The statute does not provided that alteration of a product can transform an unaltered genuine mark into a genuine one, the court said. The fact that Congress did not insert that language, only criminalizing trafficking in “counterfeit” marks, means that it didn’t intend to criminalize material alteration, the court said. And despite the government’s arguments to the contrary, a number of cases have instructed that courts construe the criminal trademark statute more narrowly than the civil one.
The court didn’t vacate the entire conviction, because most of it was based on actual fake marks. The court did, however, overturn convictions on several counts, and remanded to the lower court for sentencing.
(U.S. v. Donald Cone and Chun-Yu Zhao, 4th Circuit Court Nos. 11-4888 and 11-4934, Dated 04/15/13)