Encourage Cooperation on Data Sharing to Counter E-Commerce Counterfeits – Center for Data Innovation

As more Americans shop online, they face a growing risk of purchasing counterfeit goods, some of which can endanger their health and safety. The U.S. Government Accountability Office (GAO) found that “the growth in e-commerce has contributed to a shift in the sale of counterfeit goods in the United States, with consumers increasingly purchasing goods online and counterfeiters producing a wider variety of goods that may be sold on websites alongside authentic products.” Just this January, for example, U.S. Customs and Border Protection (CBP) officers at John F. Kennedy International Airport seized over 100,000 counterfeit Chinese-made 3M N95 masks in two shipments from Hong Kong. According to the U.S. Chamber of Commerce Global Intellectual Property Center, as much as 86 percent of all global counterfeits originate in China and Hong Kong’s markets.

Companies that manufacture and distribute counterfeit goods are taking advantage of new technologies that globally source and distribute products to customers. Meanwhile current U.S. laws and regulations limit the ability of businesses, e-commerce platforms, and law enforcement agencies to cooperate in disabling counterfeit networks. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) notably, does not provide CBP sufficient authority to disclose information on containers used to ship the goods to the United Sates (exclusive of retail packaging) to right holders.  According to CBP, it is also prevented by the Trade Secrets Act (TSA) from sharing information on counterfeit goods that are seized or detained at U.S. ports. Antitrust concerns regarding the sharing of corporate information also forestall cooperation among sellers and e-commerce platforms.

Countering the rise in counterfeiting will require active cooperation across brands, e-commerce sites, and law enforcement agencies—who all have a common interest in shutting down fakes. They need to share up-to-date information about authorized manufacturers and sellers, the geographic origin of products, and key identifying aspects of authentic products and their packaging. This information can enable all three sets of actors to remove fakes from market as well as go to the root of counterfeiting operations. By contrast, current legislative efforts to push liability for harm done to consumers from counterfeit products to e-commerce platforms does not solve the underlying problem.

Currently, however, brand sellers and online marketplaces are employing somewhat separate strategies that are sometimes at cross-purposes. Seeking to prevent the production and sale of counterfeits, many brand sellers have invested in new authentication technologies, and some are reshoring their manufacturing to gain better control over their supply chains. And they are cooperating with law enforcement agencies to prevent the proliferation of branded counterfeits. Beyond this, some brand sellers have also sought legislation that pushes the liability for harm created by counterfeits onto e-commerce platforms where counterfeit versions of their products may appear for sale.

Seeking to preserve their own reputation and maintain customer trust, online marketplaces that connect third-party sellers with consumers are also cracking down on counterfeits. They are making major investments to detect and remove fakes before they reach their platforms, removing counterfeit listings that do appear, and compensating consumers who have unwittingly bought a fake product.

Meanwhile, counterfeiters continue to evade detection on these platforms by using multiple merchant accounts, and by withholding their business information to consumers, or providing false information. Even if an e-commerce platform shuts down a counterfeiter’s account, the counterfeiter often reemerges through the creation of a new merchant account—creating a game of “whack-a-mole.”

Congress is currently considering the INFORM Consumers Act, which would require online marketplaces to verify “on at least an annual basis” the identity of all high-volume third-party sellers that list products in the marketplace. Another proposed bill, the SHOP SAFE Act would amend the Trademark Act of 1946 to hold online third-party marketplaces squarely liable for contributory infringement of a counterfeit mark in “connection with the sale, offering for sale, distribution, or advertising of goods that implicate health and safety.”

However, neither of these approaches—which seek to place the onus on e-commerce marketplaces—are adequate to fix the problem. Even if they were able to gather the information required annually by the proposed INFORM Act, counterfeiting organizations can move faster to evade detection. The presence of added liability that would be introduced by the SHOP SAFE act would appear to increase the motivation for e-commerce marketplaces to act but does not provide the means to take meaningful action. Instead, it may foster risk-avoidance, such as e-commerce platforms imposing restrictions on third-party sellers on their platforms, that will not only limit consumer choice but also potentially inhibit further innovations in marketplace platforms. For these reasons, these policy approaches, which emphasize shifting verification and liability to e-commerce marketplaces could, in the end, be ineffective at best and harmful at worst.

The key challenge, as highlighted in a 2020 report by the Department of Homeland Security, is the lack of a commonly accepted set of best practices for information sharing where industry, CBP, and other law enforcement agencies can cooperate not only to intercept counterfeit goods but also to combat the strategies and tactics of counterfeit traffickers. Enhanced information sharing along with improved AI solutions can work to prevent evasion by counterfeiters, encourage stronger vetting to keep counterfeiters off e-commerce platforms and block items when found, and help small and large e-commerce actors develop a common system of digital identification for third-party verification. In this regard, a recent report by the Senate Finance Committee also takes note of the statutory and regulatory barriers arising from TSTEA and TSA that inhibit public-private information sharing on counterfeit goods. Legislation that encourages this cooperation on data sharing, including by overcoming antitrust concerns, can go a long way to encourage innovation, improve consumer welfare, and keep us safe through this pandemic and beyond.

Rather than move liability from one actor to another or impose annual seller verification requirements, Congress needs to amend existing laws to facilitate real-time data sharing among federal law enforcement agencies, businesses, and e-commerce platforms about authorized manufacturers and sellers, the geographic origin of products, and key identifying aspects of authentic products and their packaging. One proactive step Congress should take is establishing a public-private partnership to assimilate this information and foster new data-driven technologies to disrupt the flow of counterfeits and other related threats to the nation’s commerce and public welfare.

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