By Scott Hervey

According to the Department of Commerce, losses to U.S. businesses from the counterfeiting of trademarked consumer products are estimated at $200 billion a year. A model trademark law proposed by the International Trademark Association and currently winding its way through the legislative process in California includes a provision which appears to be an attempt to slow this ever growing enterprise.

The proposed new trademark law provides that the owner of a state registered mark may bring an action for infringement against any persons that “knowingly facilitate, enable, or otherwise assist a person to manufacture, use, distribute, display, or sell any goods or services bearing any reproduction, counterfeit, copy, or colorable imitation of a mark registered under this chapter, without the consent of the registrant.” Under the new trademark law, a person is presumed to have acted knowingly if that person continues to engage in the complained of activity following delivery and receipt of a cease and desist demand letter containing certain language and information. 

In the case of brick and mortar commerce, this provision appears to be entirely reasonable. If a landlord leasing retail space to a business receives a cease and desist letter from a mark owner, the landlord has the ability to visit the property and investigate the claim. Likewise, a swap meet operator receiving such a cease and desist letter can investigate the claim and, presumably after personally inspecting the complained of goods, would have the ability to determine whether the goods are infringing or legitimate. Given the ability to reasonably investigate any such infringement claims, it is reasonable that persons akin to landlords and swap meet operators bear some responsibility for merchandise sold on their premises. However, the question being posed now by Internet activists such as the Electronic Frontier Foundation is how such a provision will play out in cyberspace.

While companies such as Google, Yahoo and eBay have a large enough legal department to handle the predicted onslaught of cease and desist letters, smaller providers would be hard pressed to deal with the receipt a significant number of cease and desist letters in a cost efficient manner. Rather than face litigation and any possible adverse judgment, its likely that a smaller provider would rather terminate service to the alleged infringer. 

Cease and desist letters sent under California’s proposed new trademark law appear somewhat related in function to the “takedown notices” under the Digital Millennium Copyright Act. The takedown provisions of the DMCA essentially compels an internet service provider to disable access to material allegedly infringing the complainant’s copyright or otherwise face the loss of immunity from claims of contributory infringement. Similarly, under the proposed trademark law, an ISP who receives a cease and desist demand could face a trademark infringement claim if it continues to provide access for the infringer or otherwise continues to facilitate the infringing activity. 

What about if the alleged infringer is not engaged in any infringing activity, or the complaining party is compelled by a desire to hobble its competition? Under the DMCA, the alleged infringer may send the ISP a counter notice claiming non-infringement. If the ISP receives a proper counter notice the ISP is prevented from disabling access to the complained of material and maintains its immunity from contributory infringement. However, under the proposed trademark law if the alleged infringer insists that it is not engaged in any infringing activity the ISP is stuck between the proverbial rock and a hard place; the ISP is left to decide what it must do. If the ISP believes the alleged infringer, who may also be the ISP’s customer, but later turns out to be wrong, the ISP could face infringement liability. If the ISP terminates service to its customer and it is later determined that its customer was not engaging in any infringing activity, the ISP could possibly face a breach of contract claim. Even if the ISP has language in its contract which allows it to terminate the customer’s contract, firing a customer is not good for business.

Given the prospect of litigation or the fallout from firing a customer, ISPs and other service providers would rather terminate a contract then face litigation. An unscrupulous brand owner could take advantage of this by sending cease and desist letters to end truthful but unfavorable comparative advertising or other non-infringing uses of its marks. Unless the California legislature further amends its proposed trademark law to address the untenable position ISPs and service providers would be placed in, brand owner bullying is certain to occur.