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Resisting regulation, e-retail industry says counterfeit problem is under control

Senators harangued industry leaders Tuesday about how the rise of counterfeit goods hurts everyone — from the parent who unwittingly buys an unsafe toy to the retailer struggling to safeguard its intellectual property — but their solution poses its own problems to small business.

WASHINGTON (CN) — Representatives for the Amazons and eBays of the world pushed back Tuesday against legislation that the Senate Judiciary Committee is considering to make e-retailers crack down on the counterfeiters who use their platforms.

The proposed legislation includes the bipartisan INFORM Consumers Act, introduced by Democratic Committee Chairman Dick Durbin and Republican Ranking Member Chuck Grassley, as well as three other members of the committee, and the SHOP SAFE Act, introduced by Senators Chris Coons and Thom Tillis, who are also on opposing sides of the aisle.

Both bills aim to target the proliferation of counterfeit goods on online platforms by requiring sites to vet sellers and provide more pathways for consumers to report products that are unsafe or violate trademarks.

"Consumers deserve better than being deceived into buying sham products," Durbin said at a 10 a.m. hearing to mark up the bills.

The chairman called the growth of counterfeit goods online a threat both to consumers and to retailers, costing the industry $45 billion in annual losses.

Aaron Muderick, inventor of Crazy Aaron's Thinking Putty, a non-toxic toy putty for kids, testified before the committee Tuesday that from the inception of his business, he experienced a "tidal wave of infringing products sold online by third party sellers.”

In recent years, Muderick said he has noticed fewer products that infringe on his trademarks, but he said he continues to see similar counterfeit toys that do not meet federal safety standards sold as "child-safe."

Muderick asked the committee to add provisions to the legislation that would require posts to be removed if products are proven to be unsafe, not just if they violate intellectual property rights.

"The problem remains, we just no longer have standing to go to the marketplace through these brand-owner protection mechanisms and say, 'Please take this down,'" Muderick said.

Durbin and Grassley criticized current federal law for not requiring e-commerce sites to be proactive about targeting counterfeit goods.

Kari Kammel, assistant director of education and outreach for the Anti-Counterfeiting and Product Protection Center at Michigan State University, noted that federal precedent in Tiffany Inc. v. eBay Inc. requires only that e-commerce sites act on counterfeit posts if they have knowledge or have been notified of a dubious post.

Under Tiffany, platforms are not responsible for the actions of third-party sellers.

While no executives of online marketplaces testified Tuesday, the committee did hear from Dane Snowden, president and CEO of the Internet Association trade group that represents Amazon, Etsy, eBay and other e-commerce sites.

Snowden said that online sites don't just wait for notice of counterfeit goods to take action, testifying that less than 0.01% of Amazon products last year received a counterfeit complaint.

"We don’t want this information on our marketplaces. It is not our goal. It hurts our reputation as online stores to have this kind of activity," Snowden said.

Amazon's particular to the legislation meanwhile has been in flux amid reporting by The Wall Street Journal and The Markup that Amazon used consumer data to create its own copycat versions of popular products on its site and that the platform has promoted its own products over those of competitors despite non-Amazon branded products receiving better reviews.

“It’s clear that voluntary efforts by big tech companies, while a good first step, are not enough,” Senator Grassley said. “Online companies profit off every sale of an item on their platform, even if it’s counterfeit or stolen.”

When asked by Democratic Senator Amy Klobuchar about whether he opposed these practices by Amazon, Snowden said he could not take a stand.

After first opposing the INFORM Act back in April, claiming it punished small online businesses with its requirements that online sites vet large-scale sellers, last week Amazon endorsed the House version of the bill.

"From my observation, Amazon is late to the party but they are welcome as guests," Durbin said of Amazon's endorsement of the House bill.

The House Judiciary Committee threatened Amazon last week with an investigation if it did not provide additional clarification on the allegations about its business practices.

At Tuesday's hearing, Republican Senator Mike Lee highlighted aspects of the legislation that he said may pose concerns to small marketplaces and to small sellers who may work a home address. One provision requires marketplaces to verify high-volume sellers within three business days. Another requires sellers to make their contact information public.

Mike McKenna, an intellectual law professor at the University of California, Los Angeles, echoed these concerns.

"There's no question it would raise the cost for companies that now exist because they can now sell on Amazon rather than having to build their own distribution platform," McKenna said in an interview.

On top of potentially pushing out small businesses from being able to compete online, McKenna said the sheer scale of online marketplaces makes it doubtful that platforms would effectively implement a system of vetting third-party sellers.

"I can't really imagine a world where a verified-seller rule works. Every company that sells on these things has a million affiliated companies," McKenna said. "It's not going to work on Amazon or eBay."

While he recognizes counterfeit products can be a problem on online marketplaces, McKenna said the presence of misbranded or counterfeit products is partially inevitable without more platform competition online.

"If we are going to have an internet with big platforms that have some of the kind of features that Amazon does, meaning availability for third parties to sell on it, there are some risks that are going to be difficult to reduce to zero," McKenna said.

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