United States: Clarifying Wrongful Seizures Under the Trademark Counterfeiting Act

Originally published in Trademark World, April 2000

As many trademark owners in the United States and abroad know, the rampant practice of trademark counterfeiting can cost owners millions of dollars in the form of injury to business reputation, lost sales, and litigation costs incurred to ward off counterfeiters. In fact, some estimates indicate that counterfeiting costs U.S. businesses billions of dollars per year. As a result, U.S. courts have reacted by making counterfeiting laws increasingly favorable to trademark owners in the United States.

In 1984, Congress enacted the Trademark Counterfeiting Act (the "Act") to alleviate the burden imposed on U.S. and foreign trademark owners by trademark counterfeiters. In addition to imposing stiffer penalties on counterfeiters, this Act enables owners of U.S. trademark registrations to seek ex parte seizure orders, which allow trademark owners to obtain evidence before the trademark counterfeiter disposes of it. Prior to the availability of the ex parte seizure order as a remedy, trademark counterfeiters would often destroy or sell off the counterfeit products and destroy records relating to those products before the trademark owner could prove its case, leaving the trademark owner without an effective remedy.

The severe nature of the ex parte seizure remedy under the Trademark Counterfeiting Act led Congress to anticipate possible misuses or overreaching by trademark owners. As a result, the Trademark Counterfeiting Act provides the alleged counterfeiter with a cause of action for "wrongful seizure." The Act, however, does not specifically define the term "wrongful seizure." Further, the legislative history to the Trademark Counterfeiting Act provides only minimal guidance as to what might constitute a "wrongful seizure" under the Act. Thus, the task of interpreting "wrongful seizures" has largely been left to U.S. courts facing this issue.

 In the approximately sixteen years since the Trademark Counterfeiting Act went into effect, U.S. courts have generally provided little guidance as to what actions constitute a wrongful seizure and have instead decided the narrow issue in front of the court rather than expounding on the wrongful seizure issue generally. Indeed, there have been very few published cases discussing the wrongful seizure issue in any depth. Many of the counterfeiting cases in which this issue arises are clear-cut on liability and are quickly settled. This lack of guidance has left trademark owners in a precarious position. Although they now have available the remedy of an ex parte seizure order, trademark owners must face the risk of a counterclaim for wrongful seizure by the alleged counterfeiter while having little idea of what actions will render them liable for damages. Indeed, wrongful seizure counterclaims are common because the alleged counterfeiters are often caught in the act of counterfeiting after an ex parte seizure order is executed, and their only leverage for possible settlement is to claim wrongful seizure.

Recently, however, in one of the few U.S. Court of Appeals cases to discuss the issue and one of the only decisions to discuss the issue in as much depth, the U.S. Court of Appeals for the Fifth Circuit attempted to shed further light on the wrongful seizure issue in Martin’s Herend Imports, Inc. v. Diamond & Gem Trading USA Co. ("Martin's II"). To provide some background to the state of the law surrounding wrongful seizure, this article briefly discusses the leading wrongful seizure cases, followed by a discussion of the effect of Martin's II, and its predecessor Fifth Circuit decision before remand ("Martin's I").Leading Wrongful Seizure Cases Prior to Martin’s IIn one of the first cases to discuss wrongful seizures, the U.S. District Court for the Northern District of Illinois in Slazenger v. Stoller held that although the party obtaining an ex parte seizure order had "mischaracterized the emergency nature of the circumstances," this action alone did not constitute a wrongful seizure. Specifically, defendant had not alleged bad faith on the part of the seizure applicant, nor had it alleged seizure of more than what was authorized by the seizure order. Moreover, the parties had not yet presented evidence regarding the counterfeit nature of the seized goods. Although the court did not find that a wrongful seizure had occurred, it allowed defendant to counterclaim on a theory of wrongful emergency seizure to determine the matter on an exhaustive hearing on the facts.

In another early and often cited seizure case, the Seventh Circuit Court of Appeals in General Electric Co. v. Speicher scathingly reversed the lower court’s finding of wrongful seizure. The district court had found that plaintiff General Electric conducted a wrongful seizure even though it had not acted in bad faith in seeking the seizure order. Specifically, the district court held that General Electric’s actions in executing the seizure order were wrongful because it seized non-counterfeit items, took photographs even though this was not provided for in the order, and failed to place the seized items in the court’s custody as required by statute. The Seventh Circuit reversed the finding of wrongful seizure, however, on several grounds. First, even though non-counterfeit items were seized, all of them were within the scope of the district court’s "extraordinarily broad" seizure order. Second, although the order did not specifically authorize the taking of photographs, everything photographed could have been seized under the order, thus making it unclear how defendant could have been harmed by the taking of photographs. Third, although the district court had chastised General Electric for failing to place the seized items in the court’s custody, the Seventh Circuit found that the seizure order signed by the district court judge himself authorized the plaintiff’s counsel to act as substitute custodian for the seized items. In sum, although the Seventh Circuit clearly thought the district court’s seizure order was overbroad, plaintiff was not liable for wrongful seizure because it acted within the scope of that order.In Skierkewiecz v. Gonzalez, the U.S. District Court for the Northern District of Illinois denied a motion to dismiss a wrongful seizure claim filed against the seizure applicant and its attorneys, even though the court acknowledged that the seizure applicant had complied with the seizure order. The court found that there was no conditional privilege to shield attorneys from a wrongful seizure claim when misleading statements are presented to the court to support the entry of a seizure order. Further, the court refused to require the party alleging wrongful seizure to prove "malice" on the part of the seizure applicants, holding instead that an allegation of "bad faith" is sufficient to avoid a motion to dismiss a wrongful seizure claim.

In contrast to Skierkewiecz, the Third Circuit Court of Appeals held in Electronic Laboratory Supply Co. v. Cullen that there can be no attorney liability for wrongful seizure under the Trademark Counterfeiting Act. Electronic Laboratory Supply Co. ("ELSCO") alleged that a wrongful seizure had occurred because Motorola and its counsel failed to disclose certain material facts to the court when it sought a seizure order against ELSCO. Although ELSCO eventually settled and dismissed the claims against Motorola, it preserved the claims against Motorola’s counsel. Motorola’s counsel moved for summary judgment on the ground that they were improper defendants, because the statute only creates a cause of action against the "applicant" for an ex parte seizure order. Both the lower court and the Third Circuit on appeal agreed with Motorola’s counsel, and held that they did not fit the statutory definition of "applicant," nor were they liable for "aiding and abetting" Motorola.In Major League Baseball Promotion Corp. v. Colour-Tex, Inc., the U.S. District Court for the District of New Jersey addressed the issue of whether there can be a wrongful seizure in a case in which no items were actually seized. In this case, after seeking and obtaining an ex parte seizure order, the plaintiffs and two U.S. Marshals went to the location specified in the order to conduct the seizure. Because the defendants alleged they were authorized to print the allegedly counterfeit t-shirts that plaintiffs were seeking to seize, plaintiffs called off the seizure. They did not seize any items, although defendants voluntarily surrendered samples of the allegedly counterfeit shirts. Plaintiffs proceeded against defendants alleging that the surrendered shirts infringed plaintiffs’ copyrights and trademarks.Plaintiffs filed a motion for summary judgment on its infringement claims, which the court granted. Defendant filed a motion for summary judgment on its counterclaim of wrongful seizure. The court held that there could be no wrongful seizure claim, because the common understanding of the term "seizure" requires that some "tangible property be taken from an individual in order for a seizure to occur."

Recent Developments - Martin’s I and Martin’s IIAlthough the case law makes it clear that no court has fully articulated the law surrounding wrongful seizures, the Fifth Circuit's Martin's I decision and the appeal after remand decision in Martin's II provide some additional insight, and are particularly informative as to what actions would not constitute a wrongful seizure. In these related cases, Herendi Porcelangyar ("Herendi"), a Hungarian manufacturer of fine porcelain, and Martin’s Herend Imports, Inc. ("Martin’s"), the exclusive U.S. distributor for Herendi, sought and obtained an ex parte seizure order against Diamond & Gem Trading Company and its owners (collectively "Diamond & Gem"), alleging that Diamond & Gem was selling "counterfeit" porcelain bearing Herendi’s federally registered trademark HEREND and Design. During the seizure, Herendi seized numerous HEREND porcelain pieces, as well as documents relating to the purchase and sale of those pieces.Herendi could not confirm that any of the products it seized from Diamond & Gem were counterfeits. On the contrary, Diamond & Gem maintained throughout the lawsuit that the products it sold were genuine HEREND products purchased through American and foreign sources, including genuine Herendi stores in Hungary. Accordingly, while it admitted selling HEREND porcelain products, Diamond & Gem contended that these products were not counterfeit, but were instead "gray market" or parallel import goods.

Because its products were higher-end, luxury porcelain pieces, Herendi was extremely selective about the pieces it allowed to be sold in the United States. Herendi authorized Martin’s to import and sell only certain porcelain pieces that met the high standards and aesthetic desires of Herendi’s U.S. customers. Although the pieces authorized for sale in the U.S. changed from time to time, certain pieces were never authorized for sale in the United States. Diamond & Gem admitted that many of the HEREND products it sold fell into this latter category. The U.S. District Court for the Southern District of Texas therefore awarded Herendi and Martin’s injunctive relief and damages for trademark infringement, on the ground that Diamond & Gem sold gray market goods that were "materially different" from those offered for sale by Herendi and Martin’s in the United States. Diamond & Gem counterclaimed in the district court for wrongful seizure on the ground that no counterfeit goods were seized and that Martin’s and Herendi sought the seizure order in bad faith. The district court denied the wrongful seizure counterclaim on summary judgment, holding that the seizure was warranted "because plaintiffs ‘seized several porcelain products that were different from the products that Herend sells in the United States.’"Diamond & Gem appealed the district court’s finding of trademark infringement and the dismissal of its wrongful seizure counterclaim on summary judgment to the Fifth Circuit Court of Appeals in Martin's I. The Fifth Circuit affirmed the district court’s award of injunctive relief and damages, but reversed the grant of summary judgment dismissing the wrongful seizure counterclaim. The Martin's I court stated that the ex parte seizure remedy does not apply to "gray market" goods such as those at issue, such that plaintiffs’ seizure of gray market products alone was insufficient to defeat a counterclaim for wrongful seizure on summary judgment.On remand to the district court, Diamond & Gem again raised its wrongful seizure counterclaim. In response, Martin’s and Herendi moved for partial summary judgment to establish that they had not acted in bad faith when they sought and obtained the ex parte seizure order against Diamond & Gem. The district court granted the motion, finding that Martin’s and Herendi had acted in good faith.Once again, Diamond & Gem again appealed to the Fifth Circuit Court of Appeals on the wrongful seizure issue in Martin's II. The Fifth Circuit recognized that a seizure can be wrongful, thus entitling the defendant to the recovery of punitive damages, when it is brought in "bad faith." The district court opined that bad faith would be established when an applicant for a seizure order seeks the order knowing that it is baseless. The district court acknowledged that this standard would not require the applicant to have a good faith belief that an entity was selling counterfeit goods prior to seeking a seizure order.

Diamond & Gem urged the Fifth Circuit to adopt an objective standard for determining bad faith by analyzing "anticompetitive motive" and the applicant’s "knowing lack of need for a seizure." The Martin's II court did not reject Diamond & Gem’s proposed standard, but instead found that it was closely similar to the standard used by the district court, and thus Diamond & Gem implicitly accepted the district court’s standard.Diamond & Gem next argued that even if the appropriate standard for bad faith was applied by the district court, the district court failed to consider facts that might rebut a finding of Martin’s and Herendi’s lack of bad faith. Specifically, Diamond & Gem argued that Martin’s and Herendi sought the seizure order in retaliation for prior disputes over counterfeiting. The court rejected this argument, however, on the ground that Diamond & Gem did not present any specific facts showing that Martin’s and Herendi had sought the seizure order knowing that it was baseless.Diamond & Gem also attempted to argue that the district court’s grant of the seizure order in the first place was improper. The Martin's II court again rejected Diamond & Gem’s argument, stating that "the sole issue is whether Martin’s may have acted in bad faith, not a second-guessing of the seizure." The fact that Martin’s had produced testimony from its company officials supporting its belief that Diamond & Gem was selling counterfeit products was sufficient to rebut Diamond & Gem’s claims of bad faith.It is unclear how the Martin's II case might have come out had Diamond & Gem pursued its wrongful seizure claim on the ground that Martin’s and Herendi had seized primarily, if not all, gray market rather than counterfeit products. The Fifth Circuit acknowledges in Martin’s II that in addition to seizures sought in bad faith, "[a] seizure can be wrongful if the items seized are predominantly legitimate." The court did not decide this issue, however, because Diamond & Gem had appealed only the partial summary judgment in favor of Martin’s and Herendi on the bad faith issue. Thus, it remains to be seen whether a seizure order sought in good faith, but resulting in the seizure of predominantly non-counterfeit goods, would subject the seizure applicant to damages for wrongful seizure.ConclusionAlthough the Martin's II case provides more insight than many, if not all, of the wrongful seizure cases to date, the case leaves questions remaining such as the one posed above. Accordingly, trademark owners must be very careful when pursuing the remedy of an ex parte seizure order in the United States. There is one source of comfort to trademark owners, however, which stems from the nature of a counterfeiting action itself. Because seizure orders require strong allegations and evidence of counterfeiting, the parties against whom seizure orders are sought are generally "bad guys." As seen above in the discussion of case law in this area, U.S. courts favor the equitable outcome, meaning the "good guy," or trademark owner, often emerges the victor.

Copyright © 2002 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. The information provided in this article is for informational purposes only and is not intended and should not be construed as legal advice. This memorandum may be considered advertising under applicable state laws.