PROPERTY OWNER LIABILITY: Why Brand Owners and Law Enforcement Should Involve Property Owners in Counterfeit and Piracy Investigations

Kevin Gilligan
Deputy City Attorney
Director, Anti-Counterfeit Enforcement Program, Office of the Los Angeles City Attorney

Readers of The Brand Protection Professional know intellectual property (IP) crimes are a massive worldwide problem. The proceeds of counterfeit goods fund gangs, organized crime, and terrorism. How can law enforcement and brand owners best investigate and stop these crimes? In Los Angeles, we have found that when IP crimes involve a fixed location, it is imperative to involve the property owner. Once notified by law enforcement, most property owners are willing to help reduce criminal activity on their property.  

For the last seven years, the Los Angeles City Attorney’s Office has involved property owners of targeted chronic counterfeit sales locations in resolving IP crime issues. When an IP case is referred to us, we evaluate it for both criminal prosecution and civil enforcement actions. Potential defendants include individuals, businesses, and property owners. While our program, with one full-time prosecutor handling IP misdemeanors and the other IP civil enforcement. may be unique, many of its practices discussed below can be adapted to other jurisdictions.

Law enforcement investigating a fixed location where counterfeits are suspected to be sold should ask:

  • What makes this place ideal for sellers of counterfeit goods?
  • Is it the location?
  • Is it the way the property is (not) managed?
  • Is it the lack of lighting?
  • Or does it lack security?
  • Does anyone verify who the tenants are? 
  • Does the owner visit the property regularly?
  • Are the counterfeit and pirated goods displayed openly or hidden?
  • Are counterfeit goods stored nearby?
  • What other crime is occurring in the vicinity?
  • Does the history of the property justify filing additional legal actions against the owner?
  • Properties Where IP Crimes Occur Should Be Subject to Investigation.
    Most investigations of IP theft start with questions about the bad actor. Questions about where the bad actor operates are secondary, and questions about ownership of that property are rarely asked.

    Consider the following hypothetical. A private investigator finds counterfeit goods are being sold at a strip mall. The case is referred to law enforcement. Police conduct an undercover buy of the counterfeit goods and then serve a search warrant at the location. At the execution of the search warrant officers recover extensive counterfeit goods. The sellers are arrested, prosecuted, and may serve jail time and pay restitution to the victims. This process typically takes three to six months at a cost to brand owners and law enforcement of tens of thousands of dollars. A typical search warrant alone costs about $10,000 to investigate, prepare, and serve. Yet within a year, the storefront is again open and the same people, or new people, are selling counterfeits to the same customers. 

    Though doing nearly everything right, law enforcement and brand owners could have done one more thing: involved the property owner. Typically, law enforcement does not notify owners when a warrant is served at their property. If the property is commercial and the owner does not live there, the owner may never hear about the warrant or at least can deny hearing about it.

    Involving the property owner can help speed results and save enforcement resources. Property owners can evict problem tenants, improve property management practices, such as installing security cameras accessible by law enforcement, and hire security guards. Such changes may serve to make it difficult for counterfeit sellers to return to the property. 
  • Work with a Prosecutor to Notify the Property Owner of Illegal Activity. 
    Notification includes mailing a certified return receipt letter to the property owner with specifics about the dates, times, and individuals involved in the IP crimes. Such notifications may come from prosecutors or brand owners. Louis Vuitton does this well. In our larger and more serious cases, the notification invites the property owners to a Case Conference with the prosecutor and an investigating officer. There, the prosecutor explains the property owner’s potential civil liability for secondary trademark infringement, if the criminal activity continues.

    The L. A. City Attorney’s Office files civil lawsuits against businesses and property owners under the Unfair Competition Law (“UCL”) [(CA Business and Professions Code section 17200 et seq., alleging trademark violations under CA Penal Code section 350(a)]. This mandates civil penalties for each violation; given the maximum penalty per violation is $2,500, a case where 2,000 counterfeit items are found may result in a penalty of $5,000,000. Many states have similar unfair competition laws (see Carolyn L. Carter, 2009, “A 50-State Report on Unfair and Deceptive Acts and Practices Statutes”). Property owners have secondary trademark liability under the UCL only after they know of the infringing activity (see Fonovisa, Inc. v. Cherry Auction Inc. 76 F. 3d. 259).

    Property owners may provide useful information for a criminal or civil case against defendants illegally operating on the property. Owners may have lease agreements signed by counterfeit sellers, which demonstrates the owner’s control over the location. The owner may have photo IDs of tenants which can help prove the identity of defendants. An owner may also have information on the defendants’ financial condition and bank accounts, both useful for penalty calculations.
  • Property Owners Will Often Evict Tenants and Close a Business.
    Most property owners don’t want to be sued by prosecutors for IP violations. Once notified, they will do whatever is necessary to stop crime at their property. In one recent counterfeit pharmaceutical case, I filed an unlawful competition action and a narcotics abatement action against two defendants selling from a storefront. In a notification letter, I invited the property owner to meet with the investigating officer and me. The owner did so immediately, and after learning about the gravity of the situation, issued a three-day notice to quit to the defendants. The defendants were evicted before they could even answer our civil complaint. This did not affect our pursuit of civil enforcement actions against the defendants. It did mean a location selling dangerous and counterfeit drugs was promptly closed. It doesn’t always happen this way, but there is little downside to putting property owners on notice of the problem after a search warrant has been served or arrests are made.
  • Give Property Owners a List of Suggested Improvements to Help Them Make Positive Changes at Their Properties.
    We don’t tell property owners to evict. We tell them what the law requires, and that, if the illegal activity continues, they could be future defendants. We also explain the potential civil penalties. To help owners avoid these penalties, we suggest improvements such as video cameras for common areas, criminal background checks on prospective tenants, use of written leases, obtaining photo IDs and better training of staff to recognize counterfeit goods. The prosecutor and investigating officer should collaborate on the list to ensure it addresses the issues at that particular property. Brand owners can assist by offering to provide free training to property owners and management about how to recognize counterfeit goods. Alternatively, the brands could train law enforcement or private investigators to provide this information to the property owners and their agents.  
  • Property Owners Who Have Been Notified and Fail to Take Reasonable Steps to Stop Illegal Activity Make Great Defendants.
    Occasionally, you will encounter a property owner who is not helpful, and who fails to take reasonable steps to address the problems at the location. The list of suggested improvements provided during the in-person meeting will then become the starting point for the court-ordered injunction you will seek. The attorney and investigating officer should keep notes of what occurred at the property-owner meeting. This information may be included in your filing, if needed.

    Prosecutors may also seek civil penalties. Using this strategy assumes you have a prosecutor who can file these actions, but many are unfamiliar with civil enforcement actions. Brand owners may also file civil complaints, but public prosecutors, who can represent multiple victims, can file more powerful sweeping complaints with a higher number of violations. Should illegal drug or gang activity be occurring at these properties, prosecutors may also add causes of actions that brand owners cannot.

    There is some grey area here. Sometimes the property owner does a little, but not enough. Then it becomes a judgment call. In some cases, you may want to send a second certified letter or have a second Case Conference. This becomes appropriate when years have passed in between crimes, or when a new property owner buys the problem property. Ultimately, judges do not look favorably on property owners who have been notified of criminal activity and then fail to take reasonable steps to stop the activity.

Involving the property owner in your investigation requires a different thought process, and some additional effort. In Los Angeles we have found that the effort often pays excellent dividends. I encourage you to give this a try in your next case.

THE BRAND PROTECTION PROFESSIONAL | SEPTEMBER 2017 | VOLUME 2 NUMBER 3
2017 COPYRIGHT MICHIGAN STATE UNIVERSITY BOARD OF TRUSTEES

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