Lending to Importers — Avoiding U.S. Custom Seizures
Mitchell Silberberg Attorney Susan Kohn Ross says that financing imported goods bearing trademarks or logos can be a procedural minefield. She assures that potential seizures and penalties are avoidable with an effective due diligence program.
A lender whose collateral includes imported goods bearing trademarks or logos must undertake extensive due diligence to ensure that its lien will, in fact, attach when the goods have cleared U.S. Customs and are taken into the borrower’s custody. The process is fraught with risks that a savvy lender must identify and manage.
Approximately 80% of all seizures by U.S. Customs and Border Protection (CBP) involve goods from China. The greatest number of these seizures is for violations that relate to trademark and/or copyright infringement. A secured lender may have perfected its security interest, but that interest typically does not attach until the goods are in the customer’s inventory. Generally, that does not occur until the goods are cleared through CBP’s import formalities, and have been taken into the importing company’s custody (whether into its warehouse, a third-party warehouse, a distribution center, or are directly shipped to its buyer).
If the goods are found to bear counterfeit marks or logos/designs, they will never leave CBP’s custody; therefore the lender’s lien may never attach. Even though the importer’s ocean bill of lading is a document of title, which means the goods are property of the importer and nominally covered by a secured lender’s lien, the secured lender will not be able to get possession of that collateral if it is seized by CBP. To make matters worse, not only does the borrower lose the goods, but it is also subject to a significant penalty for trading in counterfeit goods, and may also be pursued by the legitimate rights holder of the trademark or copyright.
The current legal framework provides an ever more challenging environment for companies of all sizes when it comes to identifying regulatory risks, and presents additional hurdles for companies to identify meaningful and cost efficient measures to ensure their compliance programs are sufficient. While recent changes in the legal landscape include anti-corruption, Dodd-Frank, “conflict minerals” and various social accountability concerns, some long-standing challenges seem to no longer be on secured lenders’ radar, especially when it comes to imported goods.
With the ever-expanding influx of counterfeit goods in the marketplace, importing goods bearing any mark or logo is increasingly challenging. The relevant CBP regulations build upon existing trademark and copyright laws: So long as the trademark is recorded with the U.S. Patent and Trademark Office, or the copyright (in the case of a logo or design) is recorded with the U.S. Copyright Office, CBP will enforce it.
The CBP risk management process starts long before the goods actually arrive. As a first step, the importing carrier files a “manifest” within the prescribed time prior to arrival, with the actual deadline determined by the mode of transportation (e.g., ocean, air, truck or rail), containing bare-bones shipment details. Similarly, with an advance deadline determined by the mode of transportation, importers are also required to file an Importer Security Filing (ISF) containing designated commercial shipment details. CBP compares the manifest and ISF data with risk cri-teria in its targeting system, and the results identify those shipments to be physically inspected. Once CBP decides to inspect a shipment, there is an administrative process that applies.
When the shipment arrives at the destination port, it is unloaded and inspected, and subject to a “detention” process. The law provides that if CBP is going to take more than five days to release the shipment, it must issue a Notice of Detention, which is designed to advise the importer about CBP’s concerns with the shipment; often this notice contains little information, and importers can be left in the dark about the exact mark or logo/design (or other problem) on which CBP is focused.
When CBP issues the notice, it has already checked any publicly available listings of authorized licensees of trademarks and copyrights, and found that neither the shipper nor the importer ap-pear to be an authorized licensee. At the same time, information about authorized licensees is more available for some industries than others. For example, if the imported goods consist of ap-parel, other than for a certain zipper maker, there is little information published by rights holders listing their authorized licensees. The same is true in the toy industry. In contrast, for electronic products, the identity of authorized licensees is routinely published on many of the rights hold-ers’ websites.
Once the Notice of Detention advises about CBP’s intellectual property rights (IPR) concern, the importer is given the opportunity to prove its right to use the trademarks or logos, usually in the form of a copy of a license agreement or letter of authorization. Any such submission is then val-idated by CBP with the rights holder, and a final decision made about disposition of the ship-ment: If the shipper or importer is found to be an authorized licensee, the shipment is released, but if not, it is seized. The decision by CBP whether to seize or release the goods must be made within 30 days of the notice being issued. As a practical matter, this short time frame effectively means the importer must submit its rights authorization documentation within 15 days of the no-tice; otherwise, CBP’s caseload may not leave sufficient time for the decision to release to be made before the 30-day expiration.
Verifying Trademarks, Logos
A secured lender should, therefore, know whether its borrower imports goods bearing any log-os/designs or trademarks, and should also require borrowers to report to the lender anytime a No-tice of Detention is received. If the trademark or logo/design belongs to the borrower, lenders should confirm it has been properly recorded, including with CBP. If the goods are being pro-duced as “private label” for the borrower, lenders should confirm that existing intellectual prop-erty protection is sufficient.
For example, most electronic products bear a logo affirming compliance with product safety cri-teria issued by a standards organization. A common mistake made by suppliers and importers of such products is the failure to realize that certification for one product does not cover that same product with a private brand on it, even if it bears the same model number (and usually the model number changes).
If the borrower does not own the trademark or logo, what is its authority to use it? Most often, the importer has only informal assurances its supplier has the needed authorization, but may not have the actual proof. It is not sufficient to obtain just the first and last pages of the license agreement; a full copy is needed, and it must cover the current license period. Lenders should also ensure the borrower has provided appropriate written assurance regarding its entire product line, i.e., that the borrower has complete copies of applicable license agreements for all the trademarks and logos/designs appearing on its products and their packaging.
If the borrower is selling goods purchased from a third party that represents itself as the author-ized licensee, the borrower must be able to provide proof the goods shipped were purchased from that third-party licensee, even if purchased through a distributor or other intermediary (this can be particularly tricky with electronic device adaptors and batteries). The borrower should check the product, including its inner and outer packaging and any product inserts (such as instruction booklets), to ensure that all trademarks and copyrights are properly authorized, and the seller or importer is indeed an authorized licensee. This also applies to software that may be preloaded into electronic products, since license agreements covering such software must also be in order.
There is a concept of “fair use,” whereby an importer is permitted to state that its product is compatible with a named product made by a specific third party, which is the rights holder, but that exemption only applies if the product compatibility language is properly stated and does not include a protected trademark or copyright of the product to which the shipped item is compared.
CBP will look at all of these issues and, if in doubt, will validate its findings with the rights holder. Further, if the borrower has been lied to by his foreign supplier, and there is no authorized licensee, most American rights holders will not agree to a one-time license allowing the goods to be imported. In fact, most will not even agree to allow the trademark or copyright to be removed, and the goods exported back to their country of origin, or sold to some third country buyer. Therefore, making sure the borrower’s trademark and copyright authorizations are in order in advance of shipment, is critical to ensuring the lender’s security interest covers the intended goods, not to mention avoiding customs delays and jeopardizing the borrower’s on-time cus-tomer deliveries.
If the goods are seized, CBP has interpreted the law to mean it has no flexibility. Unless the im-porter is able to establish that either it or its supplier is an authorized licensee, there is little wiggle room to get the goods released. As such, seized shipments are generally forfeited to the gov-ernment. The law provides that where goods are illegal to import, they are to be destroyed, ex-cept in certain limited charitable circumstances. In other words, the government does not sell them, since that would be injurious to the legitimate rights holder.
A noted earlier, in addition to the loss of the goods by way of seizure and forfeiture, a civil pen-alty is also imposed upon the importer. This penalty is based upon the manufacturer’s suggested retail price, as if the goods were properly authorized. There is a mitigation process, but the eco-nomic penalty typically ends up being significant.
The loss of the goods and the imposition of a penalty are hurdles to importing that can generally be avoided with a borrower doing the proper homework. A borrower should have an appropriate due diligence program in place, which lenders should review regularly. These regulatory compli-ance steps are also potentially important to the overall financial health of the borrower, because once goods are seized as counterfeit, the rights holder learns about it, and typically pursues do-mestic litigation remedies for infringement.
Susan Kohn Ross is international trade counsel at Mitchell Silberberg + Knupp LLP in Los Angeles.