Special Feature -- The EU Sends Infringers Where They Belong – To Customs Detention

Wednesday, January 27, 2010

A closer look at Europe’s lesser-known tool for combating intellectual property threats – infringing goods check in at the border, but they don’t check out; welcome tool for stemming flow of unauthorized products

By Jeremy Morton, Fasken Martineau

Companies the world over, faced with an unrelenting stream of counterfeit and other unauthorized goods, need effective ways to protect their trademark and patent assets before the goods reach the consumer market.

In one notable tactic, international companies - including manufacturers and retailers – are taking advantage of a European tool called customs detention to stop infringing goods from entering the European Union, one of the world’s biggest markets. Customs detention provides a method of blocking suspect goods at the border of EU countries without a rights holder either having to pay a steep fee, provide evidence of infringement or initiate a prior judicial proceeding. Detention is the ideal IP enforcement tool for companies with international markets, and a new way of stopping an infringement problem before it infiltrates the marketplace, whether it be brands, designs or patent rights.

In the realm of counterfeit and pirated goods, there is in particular a pressing need to deal effectively with infringements, in view of the additional concerns surrounding inferior quality and serious public health risks. However, customs detention is equally applicable to hi-tech patent infringements, for example.

The US offers its own border exclusion procedure, known as ITC or Section 337 proceedings. However, this is limited to patents, requires a full trial before goods are excluded, and involves demonstrating a need to protect a domestic industry. These factors make it far less flexible and cost-effective than EU customs detention. On the other hand, the latter procedure is administrative and does not itself provide a wide-ranging exclusionary order; and in some cases it still needs to be followed up with litigation. Nevertheless, customs detention is a serious tool that can help fight back against infringement. Understanding how to smoothly execute and follow up on a detention is an important means of protecting valuable IP assets.

The Basics of Customs Detention

In a customs detention, a host country’s customs agents literally detain goods suspected of infringing intellectual property rights for a period of time until a court determines infringement issues. In some cases goods found to be counterfeits are destroyed.

Customs detention is available throughout the European Economic Area, which includes the EU’s 27 member states and three additional members, Norway, Liechtenstein and Iceland. The process works in two primary ways: ex officio, at the customs official’s discretion without having received word from the rights holder; or at the behest of a customs detention order (CDO) filed by the rights holder or licensee.

Ex officio customs detention ought not to be relied on as the only measure, since it is not within the rights holder’s control. Furthermore,discretionary detention applies to counterfeits and pirated goods only, such as fake clothing, which are easier for customs officials to spot by sight.

With a CDO, the IP rights holder alerts an EU member country’s customs department that they suspect infringing goods could be headed to that country’s borders. The applicant offers a detailed description of the goods believed to infringe, along with extra information on suspected patterns of infringement, and other relevant information, such as comparison photographs of the goods and examples of counterfeits to aid customs officers in detecting fakes.

A Rising Practice Throughout Europe

The growing volume of goods detained by EU customs authorities shows a broad upward trend year by year. Meanwhile, rights holders' use of detention has also increased sharply in the last several years. Particular hot spot destinations for pirated goods include sea ports such as Hamburg, Rotterdam and Antwerp.

In 2009, the European Commission Taxation and Customs Union reported on national customs activities within the EU for the previous year. The figures show a continuing increase in the overall number of customs detention cases, with a 13% rise in the total number of detentions in 2008 over 2007. The number of total articles detained rose to almost 179 million for 2008 alone.

As for countries of origin, the most recently available statistics from the EC indicate that the majority of detained goods originated from China, although India is increasingly a lead source of detained medicines.

The most active customs authorities, in terms of volumes of goods detained, were those in the Netherlands, Germany and Spain, followed by France, Italy and Denmark, although this can change year by year. Hungary is also relatively active, a reflection of that country’s links to Eastern Europe, which is a major gateway for counterfeiters working in Russia.

Most detained articles entered by shipping vessels. The majority of goods are detained on the basis of trademark rights - pertaining in large part to fake food and drink items, cigarettes, medicines and clothing.

Other infringing goods, including those violating copyright and patent rights, account from 1% to 15% annually, although in 2008 over 40% of detained articles were alleged to infringe patent rights. This peak was the result of large shipments of CDs and DVDs being detained on behalf of patent owners as opposed to copyright owners.

The products detained on the basis of patent rights have also tended to comprise electronic equipment such as MP3 and DVD players, medicines and even shoes.

The Threat of Detention: A Powerful Deterrent

Detention of goods is commercially troublesome to the alleged infringer, paves the way for enforcement, and will often force them to desist from their practices without the need for court proceedings. Detention can also be a useful retaliatory tactic for defendants in IP infringement disputes between rival rights holders. And the procedure provides added benefits as a tool in the anti-counterfeiting armory, by virtue of the available procedures for destruction of goods.

One type of infringement where customs detention is unavailable is parallel imports (these involve genuine goods, imported without the rights holder’s consent). In one case, however, the European Court of Justice has indicated that information about parallel imports, which were inadvertently detained by Customs, could be used to bring civil infringement proceedings. Goods should also not be detained if they are merely in transit through the EU – at least that is the currently confirmed position under EU law regarding trade mark infringements. Nevertheless, some countries continue to do so on the basis of national law, causing tensions with regions such as India. Nokia is currently appealing this legal point to the central European Court of Justice in an effort to empower customs authorities and courts to act on obvious fakes that pass through the EU.

The CDO Application Procedure

Once rights holders have determined they might risk infringement problems in Europe, they can begin the CDO application procedure.

EU regulation 1383/2003 sets out the procedure for IP rights holders to apply to customs authorities for detention of infringing imports. Notably, it can also be used to control exports, including those going to the United States, though this procedure is still relatively rare.

The EEA is a customs union – that is, once imported goods are cleared through customs at any one location, they are free to move around the EEA without further hindrance from customs. This means that the customs detention procedure can only be effective at the point within the EEA where the goods are presented for customs clearance – after that it is too late. Rights holders therefore normally request detention in respect of every European country where their rights subsist.

They must apply individually to each relevant national customs authority, with the exception of unitary EU-wide rights, where a single application to any customs authority suffices. The applicant should provide customs with as much information as available concerning the nature of the incoming goods and how customs may identify them.

IP holders that are susceptible to counterfeiting and piracy often work with customs authorities to educate them about the genuine product and how to spot infringements.

When it comes to more complex infringement issues, as in patent rights, companies whose patents are essential to a technical standard (such as 3G technology for mobile phones or MPEG compression for digital images) will have a potential advantage. They provide customs with a list of valid licensees and request that products from any suppliers not on the list should be detained, since their rights to aspects of the technical standard (assuming these rights stand up to scrutiny) mean that all such products require a license from them.

In other cases, rights holders may need to conduct investigations to identify particular shipments of infringing goods so that customs can be given fuller details of their nature, likely dates of importation, port of entry, and so on.

The application contains an undertaking to accept liability for harm caused by wrongful detention, but in many cases either the alleged infringer does not put in an appearance or the parties settle, and so the stage at which such liability might be assessed is not reached.

Once Detained, a 10-day Window

Customs officials allow inspection of the detained goods by the rights holder, which then has 10 working days (extendable by another 10 working days) to commence infringement proceedings in court (or a non-extendable three working days in the case of perishable goods). Where the goods were detained by customs ex officio, they will allow the rights holder three working days in which to lodge an application for detention.

If no proceedings follow, the goods will be released. Thus, it is essential for rights holders to stay on top of all the steps and timetables at work in a detention. The alleged infringer could also have the goods released on payment of a security bond, unless the case relates to alleged copyright or trademark infringement or, in any type of case, the rights holder has obtained interim injunctive relief. However, in practice, the parties often have difficulty agreeing to the amount of security, which may need to be in a substantial amount, and customs are reluctant to get involved in this aspect.

In certain countries, including the UK, a simplified procedure applies, which means that litigation is unnecessary if the owner of the goods agrees to their destruction. This is further simplified in certain countries, where lack of response by the importer equates to consent to destruction.

Defenses and Evasive Action by Infringers

The most obvious evasive action available is for importers to re-route goods so that they clear customs at an entry point where the relevant IP rights do not exist. In addition, it may be possible to adopt certain customs procedures, as a result of which infringing goods are less likely to be detained.

Attempts have been made to challenge border detentions in patent cases on the grounds of non-compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights, since the latter requires prima facie evidence of infringement. However, such challenges have had limited, if any, success, and rights holders have attempted to meet this potential objection by including infringement evidence with detention applications.

The Latest Threat: Pharmaceuticals

While fake handbags, music players and many other goods damage businesses, one relatively new threat to rights holders, as well as the public at large, is the surge in counterfeit pharmaceuticals.

Although they represented less than 7% of all customs intervention cases in 2008, the seizure of medicines by customs authorities was up 118% when compared with 2007 and was the third largest product category of intercepted articles, after cigarettes, CDs/DVDs, and clothing. Trademark violations constituted the large majority of cases that resulted in detention.

The Number 1 point of origin, according to recent statistics, for knock-off pharmaceuticals is India, followed by – surprisingly – Syria and the United Arab Emirates. Most pharmaceutical products were discovered by customs in air transport.

A partial explanation for the rise in pharmaceutical detentions is the direct impact of the European Commission’s "Medi-Fake" Action launched in 2008. On the basis of a risk profile carried out by the Commission, customs authorities from the 27 EU Member States coordinated to prevent counterfeit pharmaceuticals from entering the EU and detained them at national borders.

The Medi-Fake initiative resulted in the detention of more than 32 million pharmaceutical products by national customs authorities, of which more than 15% were suspected of infringing IP rights. Among the seized products: antibiotics, anti-cancer drugs, and anti-malaria and anti-cholesterol medicines, as well as painkillers and even fake Viagra, along with drug precursors.

The past two years have seen some of the largest pharmaceutical seizures on record by national customs authorities. Customs at the Brussels airport registered the biggest seizure of illegal medicines ever recorded in Europe: 2.2 million counterfeit tablets were seized, of which 1.6 million were painkillers and 600,000 were anti-malaria pills.

Detentions on the Rise in Media and Electronics

EU customs statistics provide interesting figures for the categories of "electrical equipment", "computer equipment" and CDs/DVDs, the top category among all product types seized.

The overall increase in articles detained in 2008 was attributed in large part to an increase in the category including CDs, DVDs and cassettes. While only 4% of total detention cases involved these items, the category accounted for 44% of the total articles seized, of which most detentions were in sea transport (in fact three Member States accounted for 97% of the articles intercepted at sea).

China was the main source country for these products, with 68% of detained items originating there.

As for electronic equipment, this is an active sector for detentions, showing a 58% increase in detention cases for electrical equipment (excluding computer equipment).This category includes batteries and mobile phone accessories. The main country of origin for these goods was (unsurprisingly) China, accounting for 72% of detained articles.

The EU Customs statistics report highlights the potential danger of counterfeit electrical equipment such as batteries and chargers, which should provide a persuasive reason for right holders to take action even in small-scale cases, although they may be reluctant to expend resources on doing so.

Increased Infringement Equals Smarter Action

When it comes to trademarks and other intellectual property rights, the economic downturn will only continue to exacerbate the problem of cheap infringements sweeping global consumer markets. It is perhaps surprising that rights holders in various sectors are not making greater use of EU customs detention, especially in relation to potentially dangerous counterfeits, as well as where technical standards make patent enforcement relatively easy.

The deceptions used by those selling and distributing pirated products will only grow more sophisticated and,more dangerous, as counterfeit goods threaten to appear in your medicine cabinets and high-tech electronic equipment. It is imperative that rights holders keep the latest tools in their arsenals. For a growing number of companies, there is no better ally in the global fight against infringements than the European model of customs detention.

Jeremy Morton is a London-based technology and intellectual property partner with Fasken Martineau, an international law firm. He advises on all aspects of intellectual property, as well as data protection and privacy. He can be reached at (+44) 207-917-8526 or jmorton@fasken.co.uk.

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