10/21/99 Committee on the Judiciary

Summary

John S. Bliss, Esq.

Executive Director

Coalition Against Product Tampering

before

the Subcommittee on Courts and Intellectual Property

Committee on the Judiciary

U.S. House of Representatives

HR 2100, The "Anti-Tampering Act of 1999"

October 21, 1999

The Coalition Against Product Tampering submits this testimony in strong support of HR 2100, the Anti-Tampering Act of 1999. HR 2100 is a narrowly tailored legislative response to a serious problem - the intentional decoding of consumer products that are sold to unwitting consumers, placing the public at health and safety risk. Simply put, there is no legitimate basis for decoding products. Decoding simply masks the operations of an underground industry: illegitimate decoders obtain through fraud, theft or false pretenses legitimate goods produced by manufacturers. They then decode and otherwise tamper with product labeling to avoid detection so that they may sell these ill-gotten goods to unauthorized points of sale. A substantial portion of U.S.-made decoded goods sold by illegitimate decoders have been adulterated or otherwise tampered with after manufacture, and present health and safety risks to consumers.

Some diverters utilize the services of counterfeiters to facilitate their diversion schemes by affixing fake codes to decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are intended for a different market. Counterfeiters often utilize the services of unscrupulous diverters to shield the distribution of unlawful counterfeit product. Thus, diverters willingly permit counterfeiters to use their distribution channels and infiltrate a diverter's product inventory with counterfeits. In this way, counterfeiters have at their disposal a disingenuous defense if ever caught: "we thought the product we purchased was lawfully diverted product". Unless product decoding is rendered unlawful, Congress will permit the fostering of an alternate channel of distribution for counterfeit goods.

The Anti-Tampering Act of 1999 is necessary to sever this symbiotic relationship between diversion and counterfeiting activities, which harms consumers, and frustrates legitimate law enforcement efforts, and undermines the integrity of product trademarks. The Act is a necessary follow-on Congressional response to the Anticounterfeiting Consumer Protection Act of 1996.

According to the National Association of Manufacturers, manufacturers cannot conceive of a single legitimate reason to decode products. Law enforcement, consumer groups, unions and other members of the CAPT agree. Intentional decoding of products threatens the health and safety of American consumers. HR 2100 is a narrowly tailored approach to this problem and should be enacted.

STATEMENT

JOHN S. BLISS, ESQ.

EXECUTIVE DIRECTOR

COALITION AGAINST PRODUCT TAMPERING

BEFORE

THE SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

H.R. 2100, THE "ANTI-TAMPERING ACT OF 1999"

OCTOBER 21, 1999

Good afternoon. My name is John Bliss. I am Executive Director of the Coalition Against Product Tampering (CAPT). Mr. Chairman, Mr. Berman, and Members of the Subcommittee, on behalf of the CAPT, it is my pleasure to testify today in support of HR 2100, the Anti-Tampering Act of 1999. I wish to commend Representatives Goodlatte and Lofgren for sponsoring this narrowly tailored approach to a very serious problem - the decoding of consumer products and their sale to US consumers which threatens public health and safety.

Coalition Against Product Tampering - Background

The CAPT is a coalition of private sector companies, consumer groups, unions and law enforcement agencies which are concerned about product decoding and product tampering and the role these activities play in fueling and supporting other criminal enterprises, including money laundering, organized retail theft and counterfeiting. The CAPT is comprised of a cross-section of U.S. industry, including manufacturers of apparel, appliances, food and beverages, health and beauty aids, pharmaceuticals, and software. The CAPT has more than 59 members. Their combined member companies exceed 69,000. All of CAPT's members share a common goal of protecting consumer safety and health.

Congress' Most Recent Response to Counterfeiting: The Anticounterfeiting Consumer Protection Act of 1996 (ACPA)

Three years ago, in response to the growing threat posed by counterfeiters to the health and safety of consumers and the U.S. economy, Rep. Goodlatte sponsored, passed and ultimately obtained enactment of the Anticounterfeiting Consumer Protection Act of 1996 (ACPA). That legislation marked the first significant reforms to federal anticounterfeiting law in over a decade. ACPA (H.R. 2511) was unanimously reported out of this Subcommittee and the full Committee, unanimously passed the House of Representatives, and was signed into law on July 2, 1996 as Public Law 104-153.

The Need for a Second Congressional Response to the Counterfeiting Epidemic: The Symbiotic Relationship between Criminal Diversion and Counterfeiting

Distinctions between diversion and counterfeiting.

With the passage in July 1996 of ACPA, Congress sent a message to the public that counterfeiting is a serious crime that involves domestic and international organized crime rings. Unfortunately, three years later, the counterfeiters are sending us an even louder message: they are stronger, more organized and sophisticated and have uncovered and exploited a loophole of ACPA and current federal law: the symbiotic roles that unscrupulous diverters and counterfeiters can play in facilitating each of their respective criminal schemes.

The commercial practice of diversion is defined as the distribution of legitimate goods through unauthorized distributors or retailers. Diversion is lawful in the United States inasmuch as diverted goods are manufactured by the trademark owner or an authorized manufacturer and thus are considered to be "genuine". Diversion is generally accomplished through three principal means: (1) the diversion of foreign-manufactured goods into the U.S.; (2) reimportation, which involves the reimportation of U.S.-manufactured goods exported for sale in a foreign market; and (3) domestic diversion, or the diversion of U.S.-manufactured goods within the U.S.

Counterfeiting, on the other hand, is unlawful both in the United States and abroad because goods are produced without the trademark owner's authorization, and their manufacture or sale represents a clear violation of the trademark owner's intellectual property rights. Moreover, because counterfeit goods typically are of poor quality and can consequently pose serious risks to the consumer, the manufacture and sale of counterfeit goods are considered per se illegal.

The Anti-Tampering Act of 1999 would not prohibit diversion. It would simply prohibit the removal or affixing of fake product codes, which manufacturers embed in products for identification purposes. The bill would thereby contribute toward strengthening the system that manufacturers and government agencies use to ensure consumer health and safety - the integrity of the product's identity - a goal of our trademark laws, and also enhance the tools of law enforcement agencies to combat counterfeiting and diversion activities that threaten public health and safety.

While there are economic arguments which support the activity of diversion in its most pristine state, these theoretical views oversimplify the problem of diversion, and ignore the reality that some diverters are allied with professional organized criminals, violate civil and criminal laws in order to successfully divert product, and willingly introduce into the market products which often pose significant economic harm to the manufacturer and potentially serious risks to the U.S. consumer. For example:

diverted products manufactured for sale in a foreign market may not meet U.S. regulatory standards;

diverted product may lack the proper storage or shipping conditions necessary to preserve product quality; and

diverted products are often intermingled with, and provide cover for, counterfeit products.

For instance, the enactment of the Prescription Drug Marketing Act, which prohibits the unauthorized reimportation of U.S.-manufactured prescription goods, was due, in part, to concerns that reimported pharmaceuticals labeled as "American Goods Returned" were providing cover for foreign-made counterfeits.

The manufacturers' response to diversion: implementation of product identification codes.

Because of the difficulty in obtaining legal protection against diversion, which leaves manufacturers open to increased liability, manufacturers have attempted to implement business strategies to control distribution and limit the potential for diversion. One very important strategy is the use of product identification codes to monitor distribution and trace products to their final retail destination. Product identification codes allow manufacturers to track vital production data, including the batch number, the date and place of manufacture, and the date and destination of shipment.

The importance of product codes to consumer protection and law enforcement.

When a product is found to be defective, whether through tampering or a manufacturing error, product coding enables the manufacturer to identify the production batch, determine how and when the defect occurred, assess the number of products affected, pinpoint the intended geographical market, and expedite the removal/recall of the defective product from the marketplace.

(A) Consumer Protection

As noted by the International Formula Council, product identification codes are, without question, the single most important factor in a successful recall. In recent years, this link between product coding and consumer protection has become increasingly evident. Following the Tylenol poisonings of 1982, product coding enabled Johnson & Johnson to identify the tainted production lots and issue a nationwide recall of potentially dangerous products. Similarly, the manufacturers of automobiles, toys, food products and other consumer goods have consistently relied upon product coding to identify and recall goods that fail to meet consumer quality and safety standards.

Last year, the FDA used product codes to quickly identify a shipment of contaminated strawberries that had caused an outbreak of hepatitis in Michigan schools. More recently, the Slim Fast Corporation relied on product codes to identify and recall 192,000 cans of its ready-to-drink diet shakes because, according to the New York Times (Apr. 18, 1999), some of the cans might have been filled with a diluted cleaning solution. In addition, this summer a leading manufacturer of infant formula used its product codes to identify and recall 7,000 cases of infant formula after a labeling error resulted in distribution of infant formula cans that may have contained an adult nutritional supplement that could have been harmful to infants. (USA Today, June 9, 1999).

In short, without product coding, the task of identifying and recalling defective goods becomes infinitely more difficult and often impossible, leaving consumers exposed to potential harm, illness and even death. According to the U.S. Consumer Product Safety Commission, there were 273 product recalls last year and, on average, one high profile recall each week.

(B) Law Enforcement

Product codes also play a critical role in certain criminal investigations, allowing law enforcement officers to pinpoint the location and in some cases, including the World Trade Center bombing, the identity of the offender. In cases of stolen or tainted goods, product codes point to the source of the product and the site of the crime. More recently, product codes have assisted in the investigation of terrorist acts. For example, in the Atlanta bombing, the codes found on batteries used in the pipe bomb enabled federal agents to trace their site of the purchase, which led to a significant shift in the investigation. Similarly, in the Pan Am bombing, the part number found on a microprocessor from the bomb provided the vital clue as to the identity of the Libyan terrorists.

The Anti-Tampering Act of 1999 Will Sever the Symbiotic Relationship between the Criminal Diverter and Counterfeiter

Despite the importance of product coding - and the potential dangers of decoding - federal law currently lacks a uniform or comprehensive regulatory framework to prevent the removal of product coding or the affixing of fake codes. Indeed, federal decoding regulations apply only to a limited category of products, including pharmaceuticals, medical devices, and certain foods. These regulations do not apply to other products such as the bulk of dry grocery products. Even in those rare cases in which product coding may be prosecuted under the Federal Anti-Tampering Act, the Act only applies if the decoder exhibits the requisite criminal intent to harm the consumer. Thus, this law is of no practical use in the vast majority of decoding cases that are motivated purely by economic considerations.

Thus, most manufacturers have no federal remedy in cases of decoding and no means of ensuring that defective, hazardous or stolen products will be traceable. In order to close the gap in consumer protection and law enforcement legislation, the proposed Anti-Tampering Act of 1999 would prohibit for all products the intentional removal or alteration of product codes, as well as the affixing of counterfeit codes. Significantly, the Act would provide the remedies and enforcement authority necessary to ensure implementation of these prohibitions.

Passage of Comprehensive Product Decoding Legislation as Necessary Complement to Brand Name Protection

To be sure, product decoding of the kind to be proscribed by this Act constitutes unauthorized, injurious and frequently criminal activity. Moreover, in addition to the criminal component to this legislation, there is an equally important trademark issue, because rampant product decoding frustrates the efforts of U.S. manufacturers to protect their brand names from dilution and adversely affects the integrity of the product's mark. U.S. manufacturers each expend millions of dollars per year to protect and enforce their intellectual property rights. These efforts are clearly frustrated when the unholy alliance of unscrupulous diverters and counterfeiters permits decoded products to enter the stream of commerce, thus threatening the health and safety of the public and frustrating the important forensic and recall efforts of law enforcement.

Summary

Criminal diverters often utilize the services of counterfeiters to facilitate their diversion schemes by affixing fake codes to decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are intended for a different market. Counterfeiters often utilize the services of unscrupulous diverters to shield the distribution of unlawful counterfeit product. Thus, diverters willingly permit counterfeiters to use their distribution channels and infiltrate a diverter's product inventory with counterfeits. In this way, counterfeiters have at their disposal a disingenuous defense if ever caught: "we thought the product we purchased was lawfully diverted product". The Anti-Tampering Act of 1999 is necessary to sever this symbiotic relationship between diversion and counterfeiting activities, which harms consumers, and frustrates legitimate law enforcement efforts, and undermines the integrity of product trademarks. The Act is a necessary follow-on Congressional response to the Anticounterfeiting Consumer Protection Act of 1996.