Consumers, retailers and intellectual property (IP) owners are likely to benefit from the INFORM Consumers Act. The sale of counterfeit and pirated goods totaled $509 billion globally in 2016, according to an OECD report. Traditionally, individuals sold such goods at flea markets and on street corners. Today they reach a much wider audience through online marketplaces.
The Rise of Third-Party Sellers
Third-party sellers now account for 60 percent of Amazon.com’s sales. Walmart launched Walmart Fulfillment Services for third-party sellers in 2020 and has grown robustly with 20,000 new sellers joining in 2022 and plans for continued expansion. Shein, an online retailer with $24 billion in revenue in 2022, also recently launched a third-party marketplace.
Both third-party sellers and online marketplaces benefit from these arrangements. Sellers can reach hundreds of millions of customers while offloading the work of storing inventory, shipping orders and managing returns onto large, established companies. Selling a product on Amazon or Walmart is also simpler than starting a website or opening a brick-and-mortar store, and selling on a widely known platform offers consumers a sense of credibility. In return, online retailers receive a greater variety of products to sell and fees to use their services.
Unfortunately, third-party sellers offering counterfeit and pirated goods also benefit from these advantages. They can sell their products globally through online marketplaces instead of out of the trunks of their cars, making it harder for consumers to identify counterfeits. A 2017 study found that 39 percent of all unwitting purchases of counterfeit goods happened through online third-party marketplaces. Additionally, these sellers abuse the ease of offering their products on these sites by opening multiple virtual storefronts, simply selling from another one if their nefarious activity is discovered.
Sales of counterfeit goods by third-party sellers harm many. Consumers end up unwittingly purchasing counterfeit goods, sometimes with disastrous consequences. IP owners do not reap the benefits of their hard work and R&D costs. Sellers of genuine goods are run out of business, and brand owners compete with counterfeited versions of their own products.
Courts often find online marketplaces not to be liable for harm caused by the counterfeit or pirated products sold by third parties on their platforms. Amazon compares itself to an auctioneer or mall, merely facilitating the sale. Under current interpretations of U.S. law, one harmed by the product of a third-party seller would likely have to sue the third-party seller for compensation. Similarly, a marketplace that has hosted a third-party seller of counterfeit items is immune if it removes the products and provides contact information to the seller (though the information is often as fake as the products).
Enter the INFORM Consumers Act
To protect consumers from counterfeit goods, Congress passed the INFORM Consumers Act, which went into effect on June 27, 2023. Online marketplaces are now required to comply with the following:
- Collect: Online marketplaces must collect (i) a bank account number, (ii) contact information, (iii) a tax ID number, and (iv) a working email and phone number from high-volume third-party sellers, which the act defines as someone who entered into 200 or more sales and received $5,000 or more in revenue in any 12-month period over the last 24 months.
- Verify: Online marketplaces must verify the information collected and any change to said information.
- Disclose: Online marketplaces must require that any high-volume third-party resellers with $20,000 or more in revenue on their platforms provide them with a full name, physical address and contact information. This information must be disclosed in a clear and conspicuous manner, either on the product listing page or the order confirmation document.
- Provide a Reporting Mechanism: Online marketplaces must provide a clear and conspicuous way to report suspicious marketplace activity on the product listing page.
- Suspend: Online marketplaces must suspend any high-volume reseller who does not comply with these requirements.
What’s Next?
While the INFORM Act is to be enforced by the Federal Trade Commission and may also be enforced by state attorneys general, it will not necessarily stop third parties from selling pirated or counterfeit goods on online marketplaces, though it may help reduce it.
The requirement to disclose identifying information may lead such sellers to scatter like cockroaches when the light is turned on. IP owners whose rights are being violated will have an easier time identifying the perpetrators. It will be more difficult for sellers of counterfeit or pirated goods to simply pop up under a new name. Parties harmed by third-party sellers will have an easier time pursuing legal action with the mandatory disclosure of sellers’ identifying information. Finally, consumers, retailers and IP owners will have a means to report suspicious activity.
Jeremiah J. Foley is an intellectual property attorney at Harness IP. He can be reached at [email protected].
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