TradeKey Found Liable for Contributory Counterfeiting

In a strongly-worded decision issued by a California federal district court judge this week, the owners of TradeKey.com were found liable for contributory counterfeiting and placed under a permanent injunction.

TradeKey is a multinational company with offices in Saudi Arabia, China and Pakistan, which claims to be one of the largest and fastest growing online business-to-business (B2B) marketplace that connects small and medium businesses across the globe for international trade.

For an annual fee of $519, wholesale sellers and distributors can set up customized accounts on TradeKey, offering thousands of items for sale to businesses in bulk quantities.  TradeKey also solicits its wholesale buyers and distributors worldwide to become "premium" members, which costs $3,000 annually.

TradeKey had garnered something of a reputation for being a retail counterfeiters' supermarket.

Undercover investigators working for Richemont became premium members, and were contacted by TradeKey's sales representatives.

When the undercover investigators (posing as wholesale distributors) asked TradeKey's sales representative if there was any problem with selling counterfeit luxury goods on the TradeKey website, the sales representative replied that it was "not a problem," and further said that "as far as the replica industry is concerned it's one of the businesses that we rely on to get us a whole lot revenue."

The investigators also were able to purchase numerous counterfeit goods from a variety of sellers on TradeKey.

Richemont filed suit in Los Angeles federal court against the individual sellers (who defaulted by not defending themselves), but also against TradeKey and its various corporate owners, alleging that they were contributorily liable for counterfeiting.

Essentially, Richemont's lawyers alleged that, by knowingly aiding and abetting the sale of counterfeit goods and receiving a direct financial gain from doing so, TradeKey's owners should be held liable for the sellers' conduct.  Richemont moved for summary judgment against TradeKey and won.

Notably, based on the written decision, it is clear that TradeKey's legal defense was an unmitigated disaster.

TradeKey's lawyers first tried to argue that the undercover investigation was "sloppy" and not credible, suggesting that technical defects in chain of custody forms injured the investigators' credibility.

The Court roundly rejected this criticism, finding that the goods that where purchased were clearly counterfeit and the results of the investigation was very persuasive.

Further, TradeKey alternatively tried to argue that the sales representative "clearly misunderstood the term replica."  The Court found this argument wholly unpersuasive, as it was "undermined by the plain language of his [own] statements, their context" and the fact that the investigators posted multiple listings for counterfeit goods using the term "replica," all with TradeKey's clear knowledge.

TradeKey also even tried to argue that counterfeit products don't cause any consumer confusion, because those consumers purchasing the spurious goods in bulk essentially knew the goods were fake.

Ultimately, the Court rejected all of these arguments, and found that TradeKey had known about widespread counterfeiting activity that was taking place on its website, and found that TradeKey had permitted it to continue in order to unlawfully profit.

Consequently, TradeKey was found legally responsible for the conduct of its counterfeit sellers, and a Court order was entered that permanently prohibits any seller on the site to sell goods bearing the Plaintiffs' counterfeit trademarks.

What lessons can be learned from this important decision?  

First, other trade boards similar to TradeKey should stop harboring counterfeiters.

Second, conducting a thorough undercover investigation before filing litigation is the paramount way to gather evidence.

Third, as a matter of legal strategy, if you are a lawyer defending a client with a difficult factual record, pick your best single legal argument and stick with it.

Attacking the credibility of reputable undercover investigators and simultaneously trying to claim that your client didn't know what the word "replica" means, is not likely to sustain your credibility with the Court, especially when combined with obviously silly arguments such "the sale of counterfeit goods doesn't cause consumer confusion."

Such a tactic will likely anger most judges and won't give you a very strong appellate record if you lose.

When is Undercover Recording Legal?

Recording telephone calls and in-person conversations is a common practice of undercover private investigators as well as aggressive investigative journalists. Such recordings can make or break a case or investigation.  In fact, most private investigators view undercover recording as an indispensable tool in their arsenal. However, others don't use recordings because of the complex legal risks that it creates.

However, there are important questions of law that must be fully understood before developing a consistent policy about making and using undercover recordings. Both federal and state statutes govern the use of electronic recording equipment. The unlawful use of such equipment can give rise not only to civil lawsuits brought by the "harmed" parties, but also criminal prosecution is possible.

Accordingly, it is critical that investigators, lawyers and journalists fully understand all the laws that may apply to a given set of circumstances, and appreciate what their rights and responsibilities are when recording and disclosing communications.

Although many of the relevant statutes address wiretapping and eavesdropping (i.e., listening in on conversations of others without their knowledge), these same laws may apply to recording of any conversations, including phone calls and in-person discussions.

Federal law generally allows recording of telephone calls and other electronic communications with the consent of at least one party to the call. A majority of the states and territories have adopted wiretapping statutes based on this federal law, although most also have extended the law to cover in-person conversations.

Thirty-eight states and the District of Columbia permit individuals to record conversations to which they are a party, without expressly informing the other parties that they are doing so. These states are generally referred to as "one-party consent" states, and as long as the investigator (or the person doing the recording) is a party to the conversation, it is legal for him to record it.

Twelve other states require, under most circumstances, the consent of ALL parties to a conversation. Those jurisdictions are California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania and Washington.

Regardless of the specific jurisdiction involved, it is almost always illegal to record a conversation to which you are NOT a party, do not have consent to tape, and could not naturally overhear in a public place.

Additionally, complex legal concerns can arise when interstate telephone calls are recorded by one of the parties to the call. For example, an investigator located in New York State who records a telephone conversation without the consent of a party located in Illinois would not violate New York State law, but could be civilly and even criminally liable under Illinois law.

A court located in New York State may even apply Illinois' laws, depending on its "conflict of laws" rules. Therefore, an aggrieved party may choose to file suit or a criminal complaint in either jurisdiction, depending on which law is ultimately more favorable to the party's claim (and where jurisdiction lies).

Additionally, federal law may apply when the conversation is between parties who are in different states, although it is unsettled whether a court will hold in a given case that federal law preempts state law.

Therefore, in light of the complex laws governing electronic recording of conversations between private parties, private investigators are strongly advised to err on the side of caution when recording or disclosing an interstate telephone call.