Customs and Border Protection

Counterfeit and Contraband Goods — Issuance of A Presidential Executive Order on January 31, 2020

Rounding out a busy January on trade issues, President Trump on January 31st issued an Executive Order (“EO”) addressing the ballooning volume of illicit trade (counterfeit and pirated goods). The EO is directed at traffickers and those seeking to avoid U.S. customs duties, taxes, and fees but will also affect “express consignment operators, carriers, hub facilities, international posts, customs brokers, and other entities, including e-commerce platform operators”.

Executive Order 13904 of January 31, 2020, on Counterfeit Goods

The Executive Order issued by President Trump follows the issuance of a Memorandum on Combating Trafficking in Counterfeit and Pirated Goods from the President issued on April 3, 2019, calling for a study by the Department of Homeland Security on the extent of the problem and presenting suggested potential solutions. See, e.g., https://www.whitehouse.gov/presidential-actions/memorandum-combating-trafficking-counterfeit-pirated-goods/.

  1. April 3, 2019 Presidential Memorandum

President Trump’s April 3, 2019 Memorandum was a call for a coordinated game plan by the Administration on addressing the challenges posed by counterfeit and pirated goods including via the internet. Here is the relevant part of the Memorandum:

“Section 1.  Policy and Background.  (a)  It is the policy of my Administration to protect American businesses, intellectual property rights holders, consumers, national and economic security, and the American public from the dangers and negative effects of counterfeit and pirated goods, including those that are imported through online third-party marketplaces and other third-party intermediaries.  We must improve coordinated efforts within the Federal Government to address this challenge, which are led by the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, through the Intellectual Property Enforcement Coordinator, and the United States Trade Representative.

“(b)  Counterfeit trafficking impairs economic competitiveness by harming United States intellectual property rights holders and diminishing the reputations and trustworthiness of online markets; cheats consumers and poses risks to their health and safety; and may threaten national security and public safety through the introduction of counterfeit goods destined for the Department of Defense and other critical infrastructure supply chains.  An estimate from the Organisation for Economic Co-operation and Development (OECD) indicates the value of trade in counterfeit and pirated goods to be approximately half a trillion dollars per annum, with roughly 20 percent of this trade infringing upon intellectual property belonging to United States persons.  A recent Government Accountability Office report examined four categories of frequently counterfeited goods, and, based on a small sample of these goods purchased through various online third-party marketplaces, found that more than 40 percent were counterfeit.

“(c)  Preventing the manufacture, importation, and sale of counterfeit and pirated goods is a priority for Federal law enforcement agencies.

“(d)  Existing efforts within the Federal Government to deter online trafficking in counterfeit and pirated goods through third-party intermediaries should be expanded and enhanced to better address the scale, scope, and consequences of counterfeit and pirated goods trafficking.

“(e)  Third-party intermediaries, including online third party marketplaces, carriers, customs brokers, payment providers, vendors, and others involved in international transactions, can all be beneficial partners in combating trafficking in counterfeit and pirated goods.  In order to build on cooperative efforts that are already underway with such partners, a coordinated approach by the Federal Government, including its law enforcement agencies, and private industry is needed.

“(f)  Comprehensive data regarding the extent of counterfeit trafficking through online third-party marketplaces are lacking.

“Sec. 2.  Report on the State of Counterfeit and Pirated Goods Trafficking and Recommendations.  (a)  Within 210 days of the date of this memorandum, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, and in consultation with the Attorney General, the Director of the Office of Management and Budget, the United States Trade Representative, the Assistant to the President for Economic Policy, the Assistant to the President for Trade and Manufacturing Policy, the heads of other executive departments and agencies (agencies) and offices as determined by the Secretary of Homeland Security, shall prepare and submit a report to the President through the Assistant to the President for Economic Policy and the Assistant to the President for Trade and Manufacturing Policy.  In preparing the report, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, shall, consistent with applicable law, consult with intellectual property rights holders, third-party intermediaries, and other stakeholders.

“(b)  The report shall:

“(i)     Analyze available data and other information to develop a deeper understanding of the extent to which online third-party marketplaces and other third party intermediaries are used to facilitate the importation and sale of counterfeit and pirated goods; identify the factors that contribute to trafficking in counterfeit and pirated goods; and describe any market incentives and distortions that may contribute to third-party intermediaries facilitating trafficking in counterfeit and pirated goods.  This review should include data regarding the origins of counterfeit and pirated goods and the types of counterfeit and pirated goods that are trafficked, along with any other relevant data, and shall provide a foundation for any recommended administrative, regulatory, legislative, or policy changes.

“(ii)    Evaluate the existing policies and procedures of third-party intermediaries relating to trafficking in counterfeit and pirated goods, and identify the practices of those entities that have been most effective in curbing the importation and sale of counterfeit and pirated goods, including those conveyed through online third-party marketplaces.  The report should also evaluate the effectiveness of Federal efforts, including the requirement for certain Federal contractors to establish and maintain a system to detect and avoid counterfeit electronic parts under the Defense Federal Acquisition Regulation Supplement (DFARS) 252.246-7007, as well as steps taken by foreign governments, such as France and Canada, to combat trafficking in counterfeit and pirated goods.

“(iii)   To the extent that certain types of data are not currently available to the Federal Government, or accessible in a readily usable form, recommend changes to the data collection practices of agencies, including specification of categories of data that should be collected and appropriate standardization practices for data.

“(iv)    Identify appropriate administrative, statutory, regulatory, or other changes, including enhanced enforcement actions, that could substantially reduce trafficking in counterfeit and pirated goods or promote more effective law enforcement regarding trafficking in such goods.  The report should address the practices of counterfeiters and pirates, including their shipping, fulfillment, and payment logistics, and assess means of mitigating the factors that facilitate trafficking in counterfeit and pirated goods.

“(v)     Identify appropriate guidance that agencies may provide to third-party intermediaries to help them prevent the importation and sale of counterfeit and pirated goods.

“(vi)    Identify appropriate administrative, regulatory, legislative, or policy changes that would enable agencies, as appropriate, to more effectively share information regarding counterfeit and pirated goods, including suspected counterfeit and pirated goods, with intellectual property rights holders, consumers, and third-party intermediaries.

“(vii)   Evaluate the current and future resource needs of agencies and make appropriate recommendations for more effective detection, interdiction, investigation, and prosecution regarding trafficking in counterfeit and pirated goods, including trafficking through online third-party marketplaces and other third-party intermediaries.  These recommendations should include suggestions for increasing the use of effective technologies and expanding collaboration with third party intermediaries, intellectual property rights holders, and other stakeholders.

“(viii)  Identify areas for collaboration between the Department of Justice and Department of Homeland Security on efforts to combat trafficking in counterfeit and pirated goods.

“(c)  Within 30 days of submitting the report required by section 2(a) of this memorandum, the Secretary of Homeland Security is authorized and directed to prepare, consistent with applicable law, a public version of the report and publish it in the Federal Register.”

2. The January 24, 2020 Report to the President from Homeland Security, Combating Trafficking in Counterfeit and Pirated Goods.

Last month, following outreach to stakeholders, the U.S. Department of Homeland Security (“DHS”) submitted its report to President Trump. Combating Trafficking in Counterfeit and Pirated Goods, Report to the President of the United States, January 24, 2020 (“January 24, 2020 DHS Report” or “Report”). https://www.dhs.gov/sites/default/files/publications/20_0124_plcy_counterfeit-pirated-goods-report_01.pdf.

It is this report that was relied upon for Executive Order 13904 issued on January 31.

The report reviews the severity of the problem counterfeiting and pirated goods pose to the U.S. economy, U.S. competitiveness, health and safety and to national security. It references information gained from other studies and from the private sector. For example, a 2018 report from the OECD, Governance Frameworks to Counter Illicit Trade, is cited by DHS for its finding that there was “a 154 percent increase in counterfeits traded internationally – from $200 billion in 2005 to $509 billion in 2016.” January 24 DHS Report at 4. “Relevant to the President’s inquiry into the linkages between e-commerce and counterfeiting, OECD reports that ‘E-commerce platforms represent ideal storefronts for counterfeits and provide powerful platform[s] for counterfeiters and pirates to engage large numbers of potential consumers.’1/” Page 4 of the Report citing OECD, Governance Frameworks to Counter Illicit Trade, Illicit Trade, OECD Publishing, https://doi.org/10.1787/9789264291652-en.

The health problems from counterfeit medicines and food products have been widely reported over the last decade or more with knock-of medicines not containing the proper elements. Similarly, counterfeit food products (for humans and animals) may be made with fillers that may cause health problems or even death. The quantity of counterfeit auto and defense sector parts, made of inferior materials and not to manufacturer or government specifications create quality issues and can pose problems for national security. The examples are endless and are found around the world.

The report reviews the complications in combating counterfeit and pirated goods with the growth of e-commerce, the shift from ship cargo shipments to express delivery and mail shipments, from expanded de minimis levels and reduced information from such shipments, and from failure of the private sector to broadly adopt best practices to reduce availability of such goods.

The report both identifies product categories with high levels of counterfeit and pirated goods, some of the major sources of such goods, and provides a list of actions for the U.S. Government and a list of best practices for the private sector involved in e-commerce platforms and third-party marketplaces.

For example, Customs and Border Protection publishes data on annual seizures of goods involving intellectual property rights. The top ten product categories from 2018 were wearing apparel/accessories, footwear, watches/jewelry, handbags/wallets, consumer electronics, consumer products, pharmaceuticals/personal care, optical medial, toys and computers/accessories. Seizures also occur of prohibited substances (e.g., drugs like cocaine, ecstasy, marijuana, LSD, DMT, etc.). January 24, 2020 DHS Report at 10 and 16.

While China is identified as the largest source of counterfeit and pirated goods (id.at 8), other countries are obviously also the source of such goods. China, Hong Kong, Singapore and India were identified as having shipped 97 percent of the counterfeit medicines seized in the U.S. Id at 17.

The report makes clear that there are many actions that the U.S. government must take to deal with the evolving threat from counterfeit and pirated goods. However, the report and private sector input also make clear that there must be a stronger government-private sector partnership for future efforts to be successful. Below are the summary tables from the Report on government actions and best practices for the private sector that are meant to address both government and private sector practices.

From page 5 of the Report:

Immediate Actions by DHS and Recommendations for the U.S. Government

  1. Ensure Entities with Financial Interests in Imports Bear Responsibility
  2. Increase Scrutiny of Section 321 Environment
  3. Suspend and Debar Repeat Offenders; Act Against Non-Compliant International Posts
  4. Apply Civil Fines, Penalties and Injunctive Actions for Violative Imported Products
  5. Leverage Advance Electronic Data for Mail Mode
  6. Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION) Plan
  7. Analyze Enforcement Resources
  8. Create Modernized E-Commerce Enforcement Framework
  9. Assess Contributory Trademark Infringement Liability for Platforms
  10. Re-Examine the Legal Framework Surrounding Non-Resident Importers
  11. Establish a National Consumer Awareness Campaign

From page 6 of the Report:

Best Practices for E-Commerce Platforms and Third-Party Marketplaces

  1. Comprehensive “Terms of Service” Agreements
  2. Significantly Enhanced Vetting of Third-Party Sellers
  3. Limitations on High Risk Products
  4. Rapid Notice and Takedown Procedures
  5. Enhanced Post-Discovery Actions
  6. Indemnity Requirements for Foreign Sellers
  7. Clear Transactions Through Banks that Comply with U.S. Enforcement Requests for Information
    (RFI)
  8. Pre-Sale Identification of Third-Party Sellers
  9. Establish Marketplace Seller ID
  10. Clearly Identifiable Country of Origin Disclosures

3. Executive Order 13904, 85 Fed. Reg. 6725-6729

The Executive Order (“EO”) was issued on January 31, 2020 and published in the Federal Register on February 5. The EO lays out the Administration’s policy on addressing the problems of counterfeit and pirated goods in e-commerce, including its intent to not permit those engaged in such conduct to be able to do business with the U.S. government or to engage in importing or to avoid liability under U.S. law. Section 1 of the EO, 85 FR 6725.

Section 2 of the EO instructs DHS to engage in rulemaking to establish criteria importers must meet in order to obtain an importer of record number. One such criteria shall be that any person seeking a number has not been debarred or suspended by CBP “for lack of present responsibility”. 85 FR at 6725-6726.

Section 3 of the EO outlines responsibilities of express consignment operators, carriers, hub facilities and licensed customs brokers (‘group”) including to identify efforts of individuals or entities not entitled to importer of record status to resume trade. DHS through CBP is also instructed to consider measures against any member or members of the group who facilitate business by those not entitled to importer of record rights. 85 FR at 6726.

Sections 4 and 5 deal with efforts to be undertaken by the U.S. Postal Service in conjunction with other parts of the Administration to work with the international postal network to adopt similar restrictions as are contained in Section 2 and to provide a series actions the U.S. will take against foreign posts that are deemed not to be compliant. 85 FR at 6726-6727.

Section 6 reviews Administration intention to publish more information on seizures pertaining to illicit trade. It also calls on the Attorney General to make available resources to ensure Federal prosecutors will accord a high priority to going after import violations of the EO. 85 FR at 6727.

Section 7, reflecting the concern of DHS that import fees are not sufficient to cover the costs evaluating imports and importers for counterfeit and pirated goods, orders DHS to prepare a report on the adequacy of current fees and suggesting modifications if appropriate and consistent with U.S. law. 85 FR at 6727-6728.

Conclusion

There is strong support in the Congress and amongst the business community for strong enforcement against illicit trade, including shutting down counterfeit and pirated goods.

The growth of e-commerce has had many positive effects on the U.S. and world economies. It has also unleashed a massively expanding capability of those engaged in counterfeiting and the pirating of goods to market such goods to consumers in the U.S. and around the world without consequence. The risks identified in the DHS Report to manufacturers, to consumers, to health and safety and to national security are real and expanding.

The tension between growing e-commerce and ensuring that all players in the e-commerce system bear responsibility to address shutting down counterfeit and pirated goods is apparent in the Executive Order and the disciplines it does and doesn’t impose on players.

Similarly, the business community (particularly those involved in e-commerce, express delivery and the retail sector) have pushed hard for larger de minimis level imports to facilitate the movement of trade. As the DHS report makes clear, however, those engaged in shipping counterfeit and pirated goods are working the de minimis process to make identification of their products harder. The Report envisions making the de minimis exception harder to hide behind where users may be suspected on engaging in illicit trade.

The EO and related actions described above have the potential to strengthen enforcement in this important area of global commerce. Time will tell whether the actions envisioned will be enough to make a difference in fact in the rate and direction of growth of counterfeit and pirated goods.