Landlords Can Be Liable For A Tenant’s Sale Of Counterfeit Goods

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Should a landlord be concerned about trademark or copyright law? Perhaps, not overly concerned (considering how many other challenges they face), but the answer is: “Yes.” Simply stated, a landlord can be liable to legitimate product suppliers if a tenant is selling counterfeit goods. Is it as simple as that? Well, no – but that’s the law, and there are court decisions that have cost some landlords “big bucks.”

The “problem” is mostly at flea market or swap shop projects, but there is no legal principle that would exempt “legitimate” shopping centers if a tenant is selling counterfeit goods. What we find interesting is that the only places we’ve seen a lease provision directly addressing this issue are at “super-max” centers where the probability of a tenant deliberately selling such goods is pretty low.

We’ll begin with some background. Everyone knows that trademarks are protected by law. To get all of us on the same page, here is how the United States Patent and Trademark Office explains a trademark:

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods. Some examples include: brand names, slogans, and logos. The term “trademark” is often used in a general sense to refer to both trademarks and service marks.

When we think of a trademark, such as “Coca-Cola,” Ruminations adds the word “brand” immediately after it. So, what we get is: “Coca-Cola” brand beverage. When we see a trademark, we believe we know the source of the goods or services and whatever impression we have about that source is embedded within the product or service. So, if we see a familiar, respected “brand” mark (trademark) on a product, we have confidence that the item will match our expectations or quality or whatever. Counterfeit goods are all (or almost all) of inferior quality. They disparage genuine goods of that brand and tarnish the brand’s image. They dilute the value of the trademark. Moreover, to the extent that a buyer of a counterfeit product would have otherwise purchased a legitimate one, the trademark holder has been cheated out of the revenue.

To a lesser extent, a tenant could be violating another’s copyright. This isn’t just a problem for large internet sellers now in the news for facilitating sellers of “knock-off” reproductions of books. Landlords can find themselves in the same place – providing a marketplace for the sale of unauthorized books or recordings, thus depriving the legitimate authors or copyright holders of royalties. Again, to get all of us on the same page, here is how the United States Copyright Office describes a copyright:

Copyright [is a] a form of intellectual property law, [and] protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.

Now, why should a landlord be concerned about what its tenants are doing? We’ve already given a clue: landlords provide a marketplace. “So what,” you say? Here’s “what,” when it comes to the legal basis for a landlord’s liability.

First, there is a federal trademark law known as The Lanham Act, originally passed in 1946. It is the source of protection for trademarks and service marks, and also protects against unfair competition. Everyone knows that unauthorized use of another’s trademark violates the law and the legitimate trademark owner can sue to stop the violation. It can also obtain an award of damages. But even persons who are not directly violating another’s trademark right can be “guilty” of contributory liability under the Lanham Act. It isn’t just a direct infringer who would be liable; so would be “those who induce or facilitate the infringing conduct of others.”  In 2007, the 9th Circuit United States Court of Appeals expressed that exposure as follows:

To be liable for Contributory Trademark Infringement, a defendant must have (1) ‘intentionally induced’ the primary infringer to infringe, or (2) continued to supply an infringing product to an infringer with knowledge that the infringer is mislabeling the particular product supplied.

In 2012, a federal court in Florida, citing a 2007 decision out of Oregon, wrote: “The doctrine of contributory trademark infringement has been extended into cases brought against operators of flea markets that included vendors selling infringing goods. ‘One variety of such contributory infringement is when the defendant suppl[ied] the necessary marketplace for [the sale of the infringing product] in substantial quantities.’”

Under what circumstances would a landlord be liable to a trademark or copyright holder? Is the liability “automatic”? No, it isn’t. As one would expect, just providing a marketplace won’t make the landlord strictly liable for a tenant’s violation of someone else’s rights. In general, a landlord “may be liable for trademark violations by [a tenant] if it knew or had reason to know of” the violation. Closing one’s eyes, however, is not a very good shield. That’s because “the knowledge element for purposes of the Lanham Act can be met by demonstrating that the operator was “willfully blind. …  To be willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.” We particularly like the way a federal court in Michigan said this in 2011: “[O]strich-like business practices amount to willful blindness, which is sufficient to show the intent necessary to be a contributory infringer under the Lanham Act.” There is a line: “negligence—i.e., failure to take reasonable precautions against sales of counterfeit items—is insufficient for purposes of contributory liability of flea market operators for vendors’ trademark infringement.”

So, if a landlord actually knows that a tenant is selling counterfeit goods or is “willfully blind” when it comes to what it would readily discover if it opened its eyes, then it can be financially liable to an aggrieved trademark or copyright holder. Supplying “services and support – such as space, utilities, maintenance, and parking – that facilitat[es] [a] direct infringers’ sales of counterfeit goods” is the foundation of such liability, and that’s what landlords do.

There is also liability for contributory copyright infringement. And, just like with trademark infringement, it isn’t necessary that a landlord actually knows of a tenant’s copyright infringement. Federal case law teaches the following:

Contributory copyright infringement occurs when one with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another. Contributory copyright infringement occurs where a party with knowledge of infringing activity materially contributes to the infringing conduct of another.

All that must be shown [for contributory infringement] is that [a landlord has] reason to know of the infringing activity.

Knowledge of the infringing activity may be actual or constructive. In other words, this prong is satisfied if the defendant knew or should have known of the infringing activity at the time of its material contribution.

Contributory liability requires that the secondary infringer “know or have reason to know” of direct infringement.

Willful blindness to the possibility that the infringing parties were infringing [a holder’s copyright] is sufficient knowledge for purposes of liability for contributory copyright infringement).

[T]urning a blind eye to detectable acts of infringement for the sake of making a profit can give rise to liability for contributory copyright infringement.

There are further bases for a landlord’s liability if it doesn’t stop a tenant from selling counterfeit goods when the landlord knows this is going on or deliberatively chooses to look aside when it might suspect it is is going on. This would include vicarious liability, where a landlord profits “from direct infringement while declining to exercise a right to stop or limit it.” It also includes a violation of state-level laws banning deceptive and unfair trade practices.

Now, in all of the cases we’ve read, it was pretty clear that the landlords knew what was going on. Most had received “cease and desist” letters from legitimate trademark holders. It seems that, in every case, there had been police or ICE raids of one or more tenants’ premises and counterfeit merchandise had been confiscated. A couple of landlords did nothing at all. One claimed that it could do nothing unless a court found that its tenant had violated the trademark holder’s rights. One even signed new and renewal leases with the very same tenants whose counterfeit merchandise had been confiscated. Universally, all of those landlords who were aware of the sale of counterfeit merchandise at their shopping centers were found to be liable to the legitimate trademark owners.

What is the common link that joins these “liable” landlords together? It is that they were unwilling to demand that their tenants cease the infringing activity and were unwilling to evict those tenants who were selling counterfeit merchandise. We presume that all of the leases contained a provision that the tenant would abide by all laws. “All laws” would include trademark and copyright law. To the extent that there is some doubt as to whether such a broad provision extends beyond real property (land use, fire and safety, etc.) laws, landlords would be wise to both include a lease provision similar to the following and enforce the provision, even to the point of evicting a defaulting tenant.

Tenant will not infringe upon any other person’s or entity’s patent, copyright, trademark or other exclusive rights. Tenant will not engage in unfair competition or businesses practices, or violate any laws with respect to labeling or governing the description of merchandise or services. Tenant will not violate so-called “fair trade” laws. Tenant will indemnify, defend, and save Landlord, its officers, partners, members, shareholders, employees, and each mortgagee of the Shopping Center harmless from claims that arise: (a) from the character or quality of any product or other merchandise sold or administered or any service performed by Tenant; (b) from actual or alleged infringement of patent, copyright, trademark or other rights of others; (c) from actual or alleged unfair competition or business practices, violations of laws with respect to labeling or other deficient or misleading or defective descriptions of merchandise; or (d) from actual or alleged violation of so-called “fair trade” laws.

The most recent case we have seen is one decided on August 7, 2019 by the United States Court of Appeals for the Eleventh Circuit. Masochists can read it by clicking: HERE.]

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Comments

  1. Jeremy Deeken says:

    I believe a more common violation is restaurant/bar tenants hosting cover performers without the tenant having a public performance license. This could be an additional avenue to liability for landlords, in addition to the sale of counterfeit goods.

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