Intellectual property attorney Chris Rourk was quoted in an article by Asia IP discussing contractual provisions to challenge counterfeiting and grey market sales of licensed products. In the article, Rourk explains that contracts themselves cannot prevent counterfeit and grey market sales, but that including certain provisions can give IP owners recourse in instances where these actions take place.

“Prior to even entering into an agreement, the IP owner should be clear about the scope of the engagement,” Chris told Asia IP. “As such, prior to even entering into an agreement with a manufacturer, distributor, shipper, shipping agent, sales agent or any other party, the IP owner should be clear about the scope of the engagement, such as by discussing limitations on territories in which the products can be sold, the types of downstream parties that the other party to the agreement is authorized to do business with, the actions that the other party to the agreement must perform in response to any investigation or enquiry into unauthorized sales, and so forth.”

According to Chris, territory clauses should be included not only to specify the territories in which the counter-party is authorized to do business, but also the territories in which it is not authorized to do business.

“For example, many agreements will state that a party is authorized to sell a product in market X, but might not state that the party is not authorized to sell the product to parties in market X who will resell the product outside of that market, or might not place any requirements on the parties in market X that the other party is authorized to sell to,” Chris said. “A contractual record keeping and audit provision that requires the other party to keep records of who they ship, sell or otherwise provide products to, as well as quantities and dates of shipment, and to provide that information upon request, can help with any investigation of unauthorized sales. A periodic audit of such information with follow up enquiries to ensure that all recipients/buyers are legitimate business entities is also advisable, even if the audit is only performed on randomly selected parties.”

Next, Chris mentions that a marking clause should be included in order to help identify the source of counterfeit or grey goods. This is particularly applicable to products that can be marked in some manner. If the product cannot be individually marked, he advises that every level of packaging should be marked with the country of origin and information about the market for which the product is authorized.

“For example, a country-specific trademark (e.g. MARK X) can be used for products that are intended for specific markets, in addition to the primary mark for the product (e.g. MARK Y). The other parties to any agreement should be required to include those country-specific marks on the product or to inspect to ensure that those marks are present. The country-specific marks can then be registered in other countries, to allow the trademark owner to use trademark laws of other countries to take action against grey market sales, such as by registering those marks with customs of the other countries. In that manner, customs can properly seize products that include MARK X, but can allow products with only MARK Y (that are presumably authorized) to enter the country. Such country-specific marking can also catch counterfeits, if the counterfeiters copy the country-specific mark for subsequent sale in the wrong country.”

Finally, Chris advises that liquidated damages clauses can make counter-parties aware of the risk of unauthorized sales with another party. This is especially notable where the amount of liquidated damages is fair and equitable and where funds are held in escrow to be applied to any such liquidated damages.

“In addition to compensation for lost sales, the cost to enforce the IP owner’s rights can be included as a factor in determining the amount of liquidated damages,” Chris added. “Restrictions on the number of units that can be sold and the price that can be charged can also help prevent grey market sales.”

Chris reiterates that counterfeiting is difficult to prevent with contractual provisions, especially in cases where the product can be manufactured at an unauthorized facility. He adds that many counterfeits are made with parts from authorized suppliers or by employees with proprietary knowledge.

“In such cases, contractual limitations on the parties who are authorized to make parts, contractual requirements to perform background checks of employees, and contractual provisions to cooperate with investigations can be useful not only to raise awareness with the other party, but also to provide some basis for recourse against the other party if they fail to take adequate steps to prevent counterfeiting, and counterfeiting occurs as a result of that failure.”

For more information, read “Rogue One: A Fake Goods Story” in the February issue of Asia IP. A subscription may be required to view the article.

Meet Chris

Christopher J. Rourk focuses his practice on intellectual property matters. In addition to prosecuting over 300 patents, Chris has represented many high profile clients in a variety of intellectual property litigation matters. His work spans a diverse range of fields, including nanotechnology devices, semiconductor systems and devices, radio frequency systems and devices, analog systems and devices, telecommunications systems and devices, medical devices, image data processing systems and devices, and consumer electronics. Chris is AV Rated by Martindale-Hubble and was recognized as a Legal Lion by Law360 for his work on Magnum Oil Tools International Ltd., case number 15-1300, in the U.S. Court of Appeals for the Federal Circuit.