Novel Trademark Counterfeiting Count Nixed

by Saul Ewing Arnstein & Lehr LLP

In Brief

  • Where goods bearing a genuine trademark are altered and resold without altering the mark itself, such conduct does not constitute trafficking in counterfeit goods. Actual use of a counterfeit mark is a necessary element of the offense under federal law.

Intellectual property crime takes numerous forms, including trafficking in counterfeit goods and counterfeit labeling. The use of fake or altered trademarks is a common problem that can be addressed under both the criminal and civil laws, as there is significant overlap between the two in this context. Surprisingly, however, the use of a genuine trademark on altered goods does not create criminal liability under current federal law. The Fourth Circuit recently held that where goods bearing a manufacturer’s genuine trademark are altered and resold without altering the mark itself, such conduct does not constitute trafficking in counterfeit goods under the Trademark Counterfeiting Act, 18 U.S.C. § 2320(a). United States v. Cone, Nos. 11-4888, 11-4934, 2013 WL 1502007 (4th Cir. Apr. 15, 2013).

United States v. Cone

Cone concerned a conspiracy to import and resell sophisticated computer networking equipment manufactured by Cisco Systems, Inc. (“Cisco”). Defendant Chun-Yu Zhao and her co-defendant, Donald Cone, operated JDC Networking, Inc. (“JDC”) as a licensed distributor of Cisco products. Cisco prohibits its licensed distributors from purchasing Cisco products outside the United States for resale within the United States. From 2004 through 2010, however, JDC imported from China and Hong Kong more than 200 shipments of counterfeit equipment as well as genuine Cisco equipment. JDC sold the imported equipment to resellers and to consumers at a significant markup over the low prices it paid for the products by purchasing them outside the United States.

Zhao and Cone were convicted on several counts of conspiracy and trafficking in counterfeit goods and labels, importation and sale of improperly declared goods, and wire fraud based on their operation of JDC. The objects of the trafficking conspiracy, according to the government, were threefold:

(1) the sale of “pure” counterfeit products, which were never made with Cisco’s authorization;

(2) the sale of relabeled or mislabeled Cisco products; and

(3) the sale of legitimate Cisco products that Zhao and Cone converted into different Cisco products but without altering the original labels (the “material alteration” theory).

The Fourth Circuit agreed with the District Court that the first two theories satisfied all the elements of criminal trafficking. The court rejected the material alteration theory, however, and vacated Zhao’s conviction for the underlying offense. The case was remanded for resentencing as to both defendants.

Section 2320 requires proof that the defendant “(1) trafficked . . . in goods or services; (2) did so intentionally; (3) used a counterfeit mark on or in connection with such goods and services; and (4) knew the mark was counterfeit.” United States v. Lam. A mark is counterfeit under Section 2320 if it is a “spurious mark,” meaning it is “identical with, or substantially indistinguishable from, a [registered] mark . . . the use of which is likely to cause confusion, to cause mistake, or to deceive.” The Lanham Act’s definition of counterfeit is similar to the definition of counterfeit in Section 2320. The government therefore urged the Fourth Circuit to apply civil precedents holding that a genuine mark transforms into a counterfeit mark when the product to which the genuine mark has been applied is altered without authorization.

The Fourth Circuit, however, recognized that in the civil context, “‘the important test is whether the practice of the defendant is likely to cause confusion, not whether the defendant duplicated the plaintiff’s mark.’” Westinghouse Elec. Corp. v. General Circuit Breaker & Elec. Supply, Inc. By contrast, Section 2320 makes duplication or alteration of the genuine mark an element of the offense, which the court could not ignore even if material alteration would support a finding of civil liability. Moreover, the appellate court emphasized that unlike the Lanham Act, Section 2320 contains an exception for authorized use. Under that exception, a spurious mark does not include a mark that the manufacturer was authorized to use at the time the goods were manufactured. Because criminal statutes must be narrowly construed, these distinctions between the civil and criminal laws were critical to the Fourth Circuit’s holding.

Notes for Practitioners

Combating intellectual property (“IP”) crime is currently a high priority for the Department of Justice (“DOJ”), the Department of Homeland Security (“DHS”) and several federal agencies and task forces. In 2012, DOJ brought 178 cases and DHS brought 334 cases related to IP crimes. DHS seized more than $1.26 billion in counterfeit and pirated goods, as measured by manufacturer’s suggested retail prices (“MSRP”). With the rapid increase in IP crime facilitated through the Internet and the current administration’s focus on increasing IP enforcement, it is likely these statistics will increase in 2013. Civil efforts to stem counterfeiting are also likely to increase as the economic impact of counterfeiting continues to grow.

Given the government’s heightened focus on combating IP crime, both criminal and civil practitioners should be aware of the parallels between civil and criminal IP laws. Cone illustrates that there are gaps between those laws that create opportunities for the defense where the government’s theories are based on civil standards. Trademark owners also should take note and implement a strategy to routinely monitor unauthorized use of their brands. Where authorized use becomes unauthorized but without alteration of the owner’s genuine mark, only civil remedies may be available to stop infringement or obtain compensation for the unauthorized sales.

Defense practitioners in particular should be aware that penalties for trafficking in counterfeits are stiff. As currently in effect, Section 2320 provides penalties for first-time individual offenders of up to 10 years in prison and a $2 million fine, or for a corporation or other entity, up to a $5 million fine. The penalties and fines for repeat offenders are substantially higher. In addition, a defendant can be ordered to pay restitution to anyone directly or proximately harmed by the defendant’s conduct. If measured by the MSRP of the goods and a 1:1 substitution ratio between counterfeit and genuine goods is assumed, the total restitution can be staggering. As civil practitioners are aware, however, a 1:1 substitution ratio can be difficult to prove. While not addressed in Cone, practitioners should keep informed of developments in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP

Saul Ewing Arnstein & Lehr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.