On May 21, 2012, the Senate Armed Services Committee issued a report of its inquiry into counterfeit parts in the Department of Defense Supply Chain. The Committee’s report stated that the problem of counterfeit electronic parts was widespread, noting approximately 1,800 cases of suspect counterfeit parts including over one million individual counterfeit components. While the counterfeit electronic component problem was already well known, the Senate Committee’s concern for the safety of sophisticated U.S. aircraft being compromised by cheap (primarily) Chinese counterfeit components has further raised the level of government scrutiny.
The main focus of this U.S. government scrutiny takes place at the border, where Customs & Border Protection (“CBP”), a division of the Department of Homeland Security, has the authority and opportunity to examine imported goods and accompanying shipping documents. It has been said that there is no Constitutional right to import and it is certainly clear that a person’s right to avoid search and seizure doesn’t apply to their Customs transactions.
CBP has recently established a Center of Expertise and Excellence at the port of L.A./Long Beach, California to deal with issues involving electronic goods. One of the Center’s main tasks has been to establish strategies and priorities to prevent entry of counterfeit electronic components. Not surprisingly, CBP has directed its inspection and enforcement efforts on components from China, focusing on particular origin points in China that have become known as centers of the trade in counterfeits.
The Customs Regulations, at 19 CFR 133, provide a very detailed framework for the treatment of imports bearing suspected counterfeit trademarks. The Regulations define a “counterfeit mark” as a “spurious mark that is identical with, or substantially indistinguishable from, a mark registered on the Principal Register of the U.S. Patent and Trademark Office.” Electronic components bearing U.S. registered trademarks that have been reclaimed and refurbished by unauthorized parties are considered to be counterfeit by Customs. These refurbished components often do not perform to the exacting quality standards guaranteed by the original component manufacturer (and owner of the trademark.) All such counterfeit items are subject to detention, seizure and forfeiture by Customs. A significant problem with the entire Customs process is determining whether or not a particular suspect electronic component import is indeed “counterfeit.”
The Legal Gray Market:
While counterfeit component imports continue to be a significant problem for the integrity of the supply chain, there is a robust, legal trade in importing “genuine” electronic components outside of the Original Component Manufacturer’s authorized distribution channels. It is usually perfectly legal for an independent distributor to import genuine electronic components without the blessing or authorization of the U.S. trademark owner. While in particular instances a U.S. trademark owner may be able to exclude unauthorized imports of genuine product, this is usually not the case with electronic components manufactured overseas by its affiliates or licensees. Independent component distributors regularly import genuine trademarked product sourced primarily in China. Not surprisingly, it is sometimes difficult for Customs to distinguish between genuine, legal gray market components and illegal counterfeit components. Since the counterfeiters are starting with discarded genuine components, the differences between genuine and counterfeit components can be elusive.
U.S. Customs Procedures:
If a Customs officer suspects that an item presented for entry is counterfeit, he will “detain” the goods. Within five (5) days, Customs notifies the importer of the detention and the importer then has seven (7) days to convince Customs that the trademarked component is not counterfeit. The Customs detention presents two major difficulties for the independent distributor/importer. First of all, once delivery of the component is delayed, even by a few weeks, the ultimate purchaser of the component has often found an alternate source or otherwise no longer wants to buy the item. And the second problem is that the independent distributor, having no relationship with the U.S. trademark owner and usually only a tenuous relationship with its source in Asia, has no way of proving that the component is genuine. After detention, Customs will often send samples of suspected counterfeits to the U.S. trademark owner for verification. However, verification is not often a high priority for the U.S. trademark owners, who have no relationship with the independent distributor/importer. Further delay usually ensues.
If the U.S. trademark owner verifies the authenticity of the goods, they are eventually released to the importer. If authenticity is not verified, the goods are legally “seized” by Customs and proceed to forfeiture (usually accomplished by destruction.) The importer can challenge the seizure, both by administrative petition and in a judicial proceeding. However, the time and expense of petition and hearing often make the legal remedy commercially useless.
Some Practices to Consider:
An independent electronic component distributor can check the Customs protection status of a trademark prior to placing its order overseas. The CBP website contains a search function for all trademarks “recorded” with the agency. This search can determine whether or not a trademark has been recorded with Customs and whether the recording provides gray goods exclusion protection to the U.S. trademark owner.
If possible, the importer/distributor can try to condition payment for the goods upon Customs clearance. As a practical matter, this is not the customary arrangement for payment and may be very difficult, if not impossible, to negotiate with the supplier. Alternatively, the component distributor can condition its resale obligations to its U.S. buyer upon Customs clearance. Again, this arrangement may be difficult to negotiate with the U.S. customer.
The distributor can also enlist the help of its overseas supplier in verifying that the components are genuine. This diligence could involve contract language, certificates of authenticity, other documentation proving source and general vetting of the supplier. Unfortunately, none of these measures are fool proof.