Ignorance Is No Excuse

With counterfeit products, the burden may be the installer’s.

By William J. Ferguson

Should personal injury or property damage result, one can expect to be sued for negligence, gross negligence, intentional misrepresentation, strict liability in tort, unfair and deceptive trade practices, and fraud.

It is clear that those who sell and/or install a counterfeit electrical product will be exposed to potential legal liability. Counterfeit electrical products bring unique safety risks associated with their components. The most common counterfeit electrical products include circuit breakers, smoke alarms, electrical cords, decorative light strands, lighting fixtures, power adapters and surge protectors. Such counterfeit products are almost always of inferior quality and not built to the rigid standards and codes legitimate manufacturers adhere to.

This results in increased risks of fire, shock and other hazards that threaten life, safety and the property of consumers. For those who sell or install a counterfeit electrical product and damage results, at stake is nothing less than their company’s goodwill and reputation in the industry, and possibly even its existence.

Moreover, counterfeit products infringe upon intellectual property rights, such as trademarks, patents and copyrights. The inevitable result of counterfeit products is a loss of market share to the legitimate manufacturer, distributor and supplier, as well as the corresponding risks associated with the failure of such products.

If an electrical contractor is associated with a counterfeit electrical product, the legal ramifications can be severe. The inadvertent installation of a counterfeit product almost always will result in a breach of contract, since the product will not meet plans and specifications, nor will it comply with applicable codes and standards, including a valid Underwriters Laboratories (UL) certification. This means that, in the first instance, the cost of replacing the counterfeit product likely will be borne by the electrical contractor who installed it. Even if the product works properly throughout the warranty period, there is the potential for a claim to be brought later if the product fails under theories of latent defect or, worse, fraud. In many states, the applicable statutes of limitation are tolled with respect to defects not apparent on visual inspection by owners and inspecting authorities.

Of course, counterfeit products are intended to create the appearance of legitimacy. Manufacturers of counterfeit products, wholesale distributors, retail suppliers and others who put a counterfeit product into the stream of commerce also will share potential liability. It is common, however, that the manufacturer of the counterfeit product cannot be reached or is located in a country not easily subject to the jurisdiction of the U.S. courts. These unscrupulous manufacturers are often undercapitalized and lack appropriate insurance or other assets to assume responsibility for their wrongdoing.

Liability

In addition to potential contract liability, those involved in selling or installing counterfeit electrical products face claims from third parties under a variety of legal theories. Should personal injury or property damage result, one can expect to be sued for negligence, gross negligence, intentional misrepresentation, strict liability in tort, unfair and deceptive trade practices, and fraud. Ignorance is no excuse with respect to breach of contract, negligence and even strict liability in tort actions.

Even worse, if an installer or someone else in the organization had knowledge or reason to know that the purchased and/or installed product was counterfeit, it is possible—if not likely—that claims of fraud and unfair and deceptive trade practices will be pursued. This will expose both the company and individuals not only to a penalty of direct damages but, potentially, to punitive damages and attorneys fees in favor of a claimant.

Of course, those who knowingly participate in the trade of counterfeit products also are exposed to criminal liability. Accordingly, distributors, suppliers and contractors must be vigilant. If an unknown counterfeit product fails, each entity will be exposed to liability, and recourse back against the manufacturer of the product may not be possible.

In today’s market, with many transactions occurring on the Internet, it is difficult, if not impossible, to know exactly with whom one is dealing. Counterfeit products almost always are represented as being genuine, but are offered at a much lower price. The saying, “If it seems too good to be true, it probably is,” certainly applies in the case of counterfeit products. For those duped, it can be very difficult to reach the online seller or original manufacturer.

Supreme Court Justice Oliver Wendell Holmes Jr. often is credited with the phrase, “the law is a seamless web.” When it comes to counterfeit products, international markets and imperfect foreign legal systems tear a hole in the web. When counterfeit electrical products are introduced into the North American marketplace, an innocent distributor, supplier or contractor may be held solely responsible for any defects and problems if recourse to the fraudulent manufacturer cannot be established. Moreover, the genuine manufacturer of the product bears no responsibility and is, in fact, a victim of the counterfeit crime.

Unfortunately, in many states, the concept of joint and several liability can result in one party bearing a disproportionate share of legal responsibility for the damages caused by a counterfeit product. For example, if an electrical contractor is found 1 percent negligent for not identifying a particular product that it installed as being counterfeit and 99 percent of responsibility is placed on other parties who are not subject to the jurisdiction of the court (e.g., an Internet-based seller), the electrical contractor could be required to pay 100 percent of the damages suffered as a result of the failure of the counterfeit product. If there were loss of life or substantial property damage, the liability likely would be in the millions of dollars.

Combat the risks

There are ways to combat the risks associated with counterfeit electrical products. First, make sure you are purchasing from an authorized distributor or supplier. UL has built its reputation on the integrity of the UL mark. However, recently, manufacturers of counterfeit products are attaching counterfeit UL labels to their products (for more on counterfeit UL and CSA labels, see page 52i).

The good news is UL is fighting back. It recently developed a new labeling system that uses holographic technology, making it difficult for counterfeiters to duplicate its mark. In addition, UL is working closely with the Department of Justice, United States Customs and Border Protection, Immigration and Customs Enforcement, and local law enforcement to combat the importing and trafficking of counterfeit products. Seizures of products bearing counterfeit UL certification marks now number in the thousands.

In addition, penalties for trafficking in counterfeit products are becoming increasingly severe. An individual who intentionally traffics or attempts to traffic in goods or services and knowingly uses a counterfeit mark could be fined up to $2 million, face up to 10 years in prison or both.

In March 2006, President Bush signed the Stop Counterfeiting in Manufactured Goods Act into law, strengthening laws against trading counterfeit labels and packaging as well as penalties for counterfeiters. It also gave prosecutors new tools, including requiring courts to order the destruction of all counterfeit products seized and ordering convicted counterfeiters to turn over their profits and pay reparations to their victims.

There also are organizations such as the International Anti-Counterfeiting Coalition (IACC), whose mission is “to combat counterfeiting and piracy by promoting laws, regulations and directives designed to render the theft of intellectual property undesirable and unprofitable.” The Washington, D.C.-based nonprofit is composed of business and industry members. The IACC notes that counterfeiting costs United States business between $200 billion and $250 billion per year and represents approximately 5–7 percent of the world’s trade. In addition, the IACC said the global trade in counterfeit goods has increased dramatically in recent years, from approximately $5.5 billion in 1982 to $600 billion in 2008.

International cooperation

There is increasing cooperation in the international community to stop the trade in counterfeit products. The France-based Organisation for Economic Co-operation and Development recently completed a 30-nation study to determine what countries are doing a good job in combating intellectual property theft. The top performing countries were the United States, United Kingdom, Germany, France and Japan. China and Russia bear significant responsibility for the international trade of counterfeit products, followed by India, Brazil and Indonesia. It has been estimated that approximately 20 percent of all products currently being manufactured in China are counterfeit products, often supported by organized crime and international pirates. In 2005, almost 70 percent of the counterfeit products seized at United States borders were found to have originated in China.

The insurance industry also is hurt by counterfeit electrical products. General liability and completed operations policies inevitability will evolve to address the increased risks associated with counterfeit products. Insurance carriers face huge exposures to claims involving personal injury or property damage associated with a failed counterfeit product. The obvious solution for insurance carriers is to add exclusions to the policies to eliminate coverage for counterfeit products used by their insureds, or if coverage is to be provided, there will be large premium increases associated with purchasing such coverage.

The electrical industry must band together to stop the flow of counterfeit products into the marketplace. Those in the electrical industry should actively support government agencies and local law enforcement in the prevention of trafficking in counterfeit products. Aggressive pursuit of the offshore manufacturers of counterfeit products also is needed.

The World Trade Organization is actively combating the illicit trade in counterfeit goods. With international cooperation and expanding free trade agreements, the ability to prevent the marketing of counterfeit products across international borders is improving with time. In addition, extradition treaties are making it possible to reach criminal counterfeiters in foreign countries and bring them to justice. Counterfeiting hurts workers, undercuts honest competition and rewards illegal competitors while exposing the public to serious health and safety risks, including property damage. The electrical industry needs to use its resources in concert to combat this threat.

FERGUSON is the vice president of administration, general counsel and secretary of Babcock Power Inc. with responsibility for all of the legal affairs of the company. He specializes in construction law.