Background
8. There is a growing problem around the world related to the trade in counterfeit products. For example, the World Customs Organization estimates counterfeiting and piracy accounts for five to seven percent of global merchandise trade, estimated to be equivalent to lost sales of as much as US$512 billion per annum. The World Health Organization estimates that up to ten percent of medicines sold worldwide are counterfeit.1
9. The types of goods commonly targeted by counterfeiters are luxury items because their retail price greatly exceeds their costs to manufacture and distribute. Typical counterfeits are therefore fashion clothing, footwear and accessories like perfume, sunglasses, handbags, watches, caps and jewellery. New technologies have facilitated the copying, distribution and sale of pirated movies, music and software. Many other types of goods are also being counterfeited, such as auto parts, motorcycles, cigarettes, medicines, sports equipment, toys, and even foodstuffs.
10. There is a growing body of evidence that these types of counterfeits can pose serious health and safety risks through the use of inferior quality ingredients (and sometimes poisonous ingredients), materials and manufacturing processes. There is also some evidence that counterfeits provide a ready a source of income for terrorist organisations2 and organised crime as trading in counterfeits is increasingly viewed as a more viable and safer source of cash, compared to other unlawful activities, such as trading in illicit drugs.
11. Trade mark owners and copyright holders ("right holders") are reporting strong growth in the sale of counterfeits in New Zealand. This growth is reflected in New Zealand Customs Service ("Customs") statistics concerning the volumes of counterfeits being encountered at the border. For example, the volume of goods Customs has detained under the border protection measures prescribed in the Trade Marks and Copyright Acts3 have risen by over 400 percent since July 2000 During the last the last financial year Customs detained over 260,000 suspected counterfeited items, an increase of over 70,000 items compared to the previous period. Since Customs cannot inspect every shipment of goods entering New Zealand,4 the true volume of counterfeits being imported is likely to be substantially higher than these statistics suggest.
12. Aside from isolated incidents, New Zealand does not yet appear to face problems associated with counterfeits, such as medicines, foodstuffs and auto and machinery parts, that pose a risk to public health and safety. It is likely, however, that as more counterfeits find their way into the New Zealand market, the risk to public health and safety will increase.
Civil Remedies
13. The Trade Marks and Copyright Acts provide a civil remedies regime through which right holders may undertake civil enforcement to prevent further manufacture, importation, or sale of counterfeits. The court may grant relief in the form of an injunction, damages, and an account of profits.
14. Right holders can also enforce their trade marks and copyright rights under the common law tort of passing off and under the Fair Trading Act 1986 to address the sale of counterfeits in New Zealand. The court may grant relief in the form of an injunction, damages, and an account of profits.
15. Both the Trade Marks and Copyright Acts provide for a border protection regime against the importation of counterfeits, whereby a right holder may lodge a notice with Customs. Thereafter, the Customs is obliged to identify and detain any suspected counterfeits covered by these notices that are encountered at the border for a limited period to enable the right holder to initiate civil action against the importer.
16. In keeping with international practice, right holders are responsible for taking civil enforcement action. There are a range of issues that often make it impractical or uneconomic for right holders to take effective action against the sale of counterfeits, including:
- the cost of private legal action often renders this enforcement mechanism uneconomical;
- tactics employed by offenders and their itinerant nature can make civil enforcement by an individual right holder difficult;
- right holders do not normally pool their intelligence and resources to pursue civil enforcement against repeat offenders;
- the majority of importers forfeit counterfeit products that are discovered and detained by Customs, reducing any incentive for legal action by right holders as the counterfeits are removed from the market at no cost to the right holders;
- repeat offenders regard the cost of civil penalties, such as the forfeiture of goods, as being merely a cost of doing business; and
- offenders can structure their businesses so as to avoid being able to pay civil costs and penalties, even if they are imposed. For example, the use of structures such as limited liability companies is common in order to avoid civil costs such as court orders to pay damages or an account of profits to right holders.
17. In short, the private civil enforcement efforts are not providing an effective deterrent to serious and repeat offenders.
Criminal Offences
18. Consistent with our international obligations under Article 61 of the WTO TRIPS Agreement, both the Trade Marks and Copyright Acts include criminal offences for cases of wilful counterfeiting or piracy on a commercial scale. Penalties for a person convicted of manufacturing, importing and/or selling counterfeited goods consist of fines of up to $150,000 dollars or imprisonment for a term not exceeding 5 years. The courts may also issue orders for the seizure, forfeiture and destruction of any infringing goods and of any materials and implements used in the commission of the offence.
19. Criminal penalties are also provided for under the Fair Trading Act 1986 (the "Fair Trading Act") for breaches of its provisions. The Fair Trading Act provides that the Commerce Commissioner is responsible for prosecutions of criminal offences under that Act and provides the Commerce Commission with investigative and prosecution powers.
20. The Police are considered to be the only government agency to possess necessary powers to undertake prosecution of the criminal offences provided for under the Trade Marks and Copyright Acts. Limitations on their resources, however, means prosecutions for the sale of counterfeits must be given a low priority. This in turn has led to the infrequent and ad hoc prosecutions under the criminal offences in the Trade Marks and Copyright Acts and, therefore, the criminal offences are not having the deterrent effect originally intended by government and the TRIPS Agreement.
Other Government Enforcement Activity
21. While the Commerce Commission has previously followed up on complaints about the sale of counterfeits and taken action under the misleading and deceptive conduct and false representations provisions of the Fair Trading Act, such action is rare when considered in the context of the Commission's overall enforcement activities. Before the Commission takes action under the Fair Trading Act it needs to be satisfied that it will be acting in the wider public interest, rather than just in the interests of the right holder. The Commerce Commission therefore has a standard set of criteria to assess every complaint against before determining whether it will investigate the complaint.
22. The Censorship Compliance Unit of the Department of Internal Affairs ("DIA") plays a significant role seizing and destroying pirated movies under the Films, Videos, and Publications Classification Act 1993. All films and restricted computer games supplied to the public must have an official censorship label issued by the Film Labelling Body or the Office of Film and Literature Classification. One of the functions of the Censorship Compliance Unit is to ensure that the decisions of the Office of Film and Literature Classification are adhered to by the film and video industry and the computer gaming industry, and retail outlets. Pirated movies and restricted computer games offered for sale either without official censorship labels or with counterfeit censorship labels in breach of the Films, Videos, and Publications Classification Act 1993 can be seized by the Censorship Compliance Unit. The Censorship Compliance Unit, however, may not seize pirated movies and restricted computer games if they are supplied to the public with official censorship labels.
23. As noted previously, Customs administers the border protection measures under the Trade Marks and Copyright Acts within the extent of their powers, but is not considered to have any power to prosecute.
24. Other laws related to the importation, manufacture and sale of foodstuffs, cosmetics and pharmaceutical goods can sometimes be used by other government agencies to address the sale of these types of counterfeits.
25. The sale of counterfeited rugby merchandise is of concern to the New Zealand Rugby Union, especially in relation to the hosting of the Rugby World Cup in 2011. This issue was briefly discussed in the Cabinet paper Major Events Management: Ambush Marketing and Other Related Issues. In that paper Cabinet agreed in principle for the Ministry of Economic Development's National Enforcement Unit (the "NEU") to be responsible for the enforcement of the criminal offences under the Trade Marks and Copyright Acts against the manufacture, importation and sale of counterfeits, subject to consultation and establishing the feasibility of such a role for the NEU. Cabinet directed officials to report back to Cabinet's Economic Development Committee by 30 November 2006 (CAB Min (06) 32/12 refers).
26. This paper therefore reports back on the feasibility of the NEU playing a role in the enforcement of the criminal provisions under the Trade Marks and Copyright Acts.
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