Battle Over Trademark Liability for Customs Brokers Continues as Judge Vacates Celco Judgment

The judge’s order doesn’t mean that the jury verdict itself has been thrown out. But if the judge rules in favor of Celco’s defense, there will be no judgment, and the verdict won’t have any legal meaning, said John Stephens of Stephens Friedland. Stephens replaced Celco’s former attorney on April 17. Any legal issues related to the customs broker’s liability for trademark violations would only be raised if its defense fails, Stephens said.

The Celco case is one of a series of suits brought by trademark holders, most notably Nike, against customs brokers for counterfeiting violations based on failure to validate powers of attorney. On March 28, a Central California U.S. District Court jury came down with a verdict awarding Coach $8 million from Celco and its owner (see 13041520). The suit was based on CBP’s seizure of 22,040 allegedly counterfeit handbags and 10,300 allegedly counterfeit wallets bearing Coach’s trademarks.

Judgment Vacated to Hear Arguments on Timeliness of Filing

Coach alleged that Celco, the customs broker that entered the shipment, played a part in the counterfeiting scheme. According to Coach, the customs brokerage blew through several red flags related to the power of attorney associated with the shipment, including irregularities with the tax identification number for the importing company and the POA’s eight-day duration. Faced with an alleged case of identity theft, Celco never attempted to verify the importer’s identity, Coach said. The leather goods maker argued that the customs brokerage’s errors of omission were so great as to prove its complicity in the counterfeiting scheme. The jury agreed.

In a typical trademark infringement case, the defendant is the person who made the goods and tried to insert them into U.S. commerce, said Lewis Leibowitz of Hogan Lovells. “This case is different -- Coach couldn’t reach the actual counterfeiter, at least not yet, because the offender was located in a foreign country. So they found a U.S. participant in a scheme to import and distribute infringing goods,” Leibowitz said. “They concluded that the customs broker was an active participant in the scheme because of the specific facts of the case.”

But on April 22, the judge vacated the judgment against Celco, because some of the customs broker’s defenses hadn’t been fully heard. When the jury announced its verdict, the judge had scheduled time for the parties to the case to submit briefs related to some of Celco’s defenses, including a laches defense. Laches relates to a delay in filing the case which impeded the ability of the defendant to defend itself. A court can rule in the defendant’s favor if it agrees with a laches defense. If the judge does, the jury’s verdict won’t have legal force. But despite the judge’s instructions, the clerk had mistakenly entered judgment based on the verdict instead.

“A judgment was entered, and so my predecessor didn’t brief the issues, because he thought there was no point,” Stephens said.

Now that the judgment has been vacated, Celco will argue that it couldn’t effectively defend itself because Coach filed its suit well after the alleged violations occurred. “In between the time that Coach received notice of the fact that the goods had been seized in September of 2009, and when they filed the case In December of 2011, the allegedly counterfeit products were destroyed,” said Stephens. “So there was no opportunity for either the defendants or the jury or the court to actually see those products,” he said. “They had been destroyed by Customs. Our position is that’s obviously lost evidence, that wouldn’t have been lost had they acted more quickly in terms of filing.”

Despite the vacated judgment, “the verdict is still there, and the implications of that verdict are here and now,” said Leibowitz. Based on the evidence of the case, brokers need to account for the fact that they could be liable for millions of dollars if they neglect to perform due diligence. According to Leibowitz, the implication of the verdict remains that “the broker does not have a duty of care only to his clients, and to the Customs authorities, but to people whose right may be violated by the importation of these goods.”

If Defense Rejected, Celco to Argue Against Infringement, Penalty

In the meantime, if Celco’s defense is rejected by the court, it will bring post-trial motions on several issues, said John Stephens. First, to allege contributory trademark infringement, as Coach did, the plaintiff must show either intentional inducement to commit the violations, or continuation of services despite knowledge of the infringement. “In contributory infringement cases, typically what you have is situations where the trademark owner sends out cease and desist orders, and then the person who provides the services for the offender ignores them,” said Stephens. “You had none of that here.”

Second, there is insufficient evidence of trademark infringement, Stephens said. At the trial, no counterfeit products were shown, no photographs of the products were in evidence, and no witness testified that he or she observed the products, he said.

Finally, Celco will also argue against the size of the penalty. “There’s really no basis for an $8 million verdict,” Stephens said. There were no actual damages to Coach, because the allegedly counterfeit goods were seized immediately and never left the port. Coach didn’t even try to tack on actual damages, and the jury should consider that, Stephens said. The jury should consider Celco’s ability to pay, and there was little evidence of that, Stephens said. “Certainly nothing that would support an $8 million verdict on statutory damages.”

Lawsuit One of Many Trademark Claims Against Customs Brokers

Coach’s lawsuit came as Nike pursues several suits of its own over alleged trademark infringement by customs brokers. Those Nike cases never got to trial, because most of the customs brokers involved have settled. “In the end it’s just cheaper to settle than litigate,” said Susan Kohn Ross of Mitchell Silberberg. The customs brokers involved weren’t covered by errors and omissions insurance, so they had to come out of pocket to defend themselves. “If you have the chance to settle for five or ten thousand dollars and get it over with, you’re going to do that,” she said.

“The question of how we could possibly get dragged into this has been something that has occupied the brokerage community for at least the last couple of years,” Kohn Ross said.

The Nike suits differ in that they try to bring a private claim against brokers for customs violations, in addition to the claims of Lanham Act trademark violations brought by Coach, said Alan Klestadt of Grunfeld Desiderio. Whether that’s possible still has yet to be settled, said Klestadt, who is also customs counsel at the National Customs Brokers & Forwarders Association of America. “Nike is attempting to assert that the broker has a legal obligation to validate the identity of the party signing the power of attorney and of their right to make entry, when they accept the power of attorney.” And Nike is trying to enforce this obligation as a private party, he said. “That ability to sue, or press a claim, is not spelled out anywhere,” said Klestadt, “so Nike was really trying to create some new law here.”

The Coach case is also different in that the leather goods maker is asserting that Celco had knowledge of the scheme, Klestadt said.

But the Coach case shares several similarities with Nike's litigation. Each suit alleges use of a stolen company identity and a fraudulent power of attorney to bring in allegedly counterfeit goods. In each case, the power of attorney was given to the customs broker by a third party, such as a freight forwarder, And in each suit, the rights holder alleges that the Customs Broker would have known the POAs associated with the entries were fraudulent, had it performed enough due diligence. “Both the importers have suggested that the brokers are responsible in some fashion for the attempt to import counterfeit goods,” said Klestadt. But the reality is that the brokers in these cases have no visibility as to what is actually being imported, he said. “All they see are documents. They don’t know if the documents are accurately describing what’s in the containers.”

Efforts Continue to Reduce Scope for Identity Theft

One problem, according to Klestadt, is that the regulations are silent as to the legal responsibility of brokers to exercise due diligence before accepting a power of attorney. “The law as it’s currently written today doesn’t require the broker to do anything but collect the power of attorney, which on its face is complete and valid,” he said. That leaves open a large window for problems to arise, like the problems surrounding the transactions at issue in Coach’s suit and the Nike cases.

“The majority of customs brokers are only interested in doing business with legitimate individuals in a legitimate fashion,” Klestadt said. “No one is interested in violating the law or helping bad actors circumvent, whether it’s in trademarks statute or any other law that is enforced by the United States government,” he said. “So it’s in everybody’s interest for brokers and importers and rights holders to work together to make it more difficult for people to circumvent the rules.”

The NCBFAA has been communicating with CBP on potential regulatory revisions that would include requiring importers to provide brokers with their proof of identity and their right to make entry, Klestadt said. Brokers would also have to obtain the power of attorney directly from the importer of record, instead of through a freight forwarder or another third party. “We want to encourage the parties in interest to provide proof of their bona fides to the broker before the transactions occur, so that we reduce the opportunity for bad actors, like the ones identified in the Nike claims and the Coach case, to perpetrate a fraud on the parties involved,” said Klestadt.

We all recognize we’re all on the same side on this,” Klestadt said. “Nobody is interested in helping a bad actor import counterfeit merchandise,” he said. “We’re trying to do what we can do as brokers to close the identity theft window, or at least make it much more difficult to scam a broker, and slip goods through that would otherwise not be permitted entry into the United States.”

Email ITTNews@warren-news.com for a copy of the judge's order vacating the judgment.