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Online Counterfeiting

The United States Census Bureau releases statistics for e-commerce activities on a regular basis.  These statistics compare the percentages from previous years in order to show the growth of the e-commerce industry.  So far, the reports have indicated that the rates are rising, and this trend will most likely continue with the widespread use of the Internet.

Dangers of Online Counterfeiting

Although, e-commerce can be viewed as a great addition to the Internet, but it can create problems for commercial entities.  For example, businesses that engage in the online sale of products, are subject to counterfeiting and unauthorized sales by unlicensed sellers.  Auction sites, such as eBay, have come under fire for the sale of counterfeit goods and product diversion. These websites provide a medium that allows users to sell products to other users. Most of eBay’s sellers are consumers, and not businesses, so there is a danger of buying a designer item that is a counterfeit, i.e., fake.   There is also a danger that the seller is selling a product it obtained from the gray market. In general, eBay and similar websites, do not monitor every single item, so it creates a breeding ground for the sale of counterfeit items and unlicensed sales.

Counterfeit Items and Product Diversion

Counterfeit items are sold by sellers falsely claiming a certain item is authentic. Before the Internet, a person could walk down a street and be met with vendors selling fake designer handbags for a significant discount. With the advent of the Internet, and the widespread participation in e-commerce, counterfeiters have found an opportunity to expand. The biggest problem businesses face with counterfeit items is the loss of profit from the sale of their own items. If a person unknowingly buys a counterfeit item, that purchase takes away sales from the authorized seller. Another issue is the possible damage to the business’s reputation or good will.  If a consumer buys an item believing it is authentic, and the quality is not up to par, then the fake item can create a negative opinion on the brand.

The other problem is product diversion. Product diversion is when an unauthorized seller sells a product for less than the retail price.  The process typically involves a party that has a contractual relationship with the manufacturer.  A third party then offers a deal to the party regarding the products. The third party then sells the product to mass retailers, who are unauthorized to sell the products. Products that go through this diversion stage often end up on websites like Amazon and eBay.

Product diversion is common in the beauty industry. It is dangerous for both the business and consumer. For the business, the unauthorized sales will hurt its profits and reputation. If the product has gone through more channels than authorized, then there is a risk the product has been tampered with, possibly placing the consumer in danger.

Online counterfeiting can bring rise to various claims for businesses. These claims include trademark infringement, copyright infringement, or unfair competition. Product diversion can also bring additional claims, such as tort and breach of contract claims.

At our law firm, we assist clients with legal issues related to business, technology, and e-commerce transactions. You may contact us to set up an initial consultation.