SPEAKERS CONTENTS INSERTS Tables
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62–497
2000
ANTITAMPERING ACT OF 1999
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND INTELLECTUAL
PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
ON
H.R. 2100
OCTOBER 21, 1999
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Serial No. 19
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
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MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
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Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
MARY BONO, California
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
MITCH GLAZIER, Chief Counsel
BLAINE MERRITT, Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ROBERT RABEN, Minority Counsel
EUNICE GOLDRING, Staff Assistant
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C O N T E N T S
HEARING DATE
October 21, 1999
TEXT OF BILL
H.R. 2100
OPENING STATEMENT
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
WITNESSES
Bliss, John S., Esq., Executive Director, Coalition Against Product Tampering
Dahl, James A., President, Integrity Resource Group, Inc.
DeJoria, John Paul, Chairman and CEO, John Paul Mitchell Systems
Graham, Aaron, Director of Assets Protection, Matrix Essentials, Inc.
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Mountford, Mardi, Executive Director, International Formula Council
Sandler, Gilbert Lee, Counsel, American Free Trade Association
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Bliss, John S., Esq., Executive Director, Coalition Against Product Tampering: Prepared statement
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property: Prepared statement
Dahl, James A., President, Integrity Resource Group, Inc.: Prepared statement
DeJoria, John Paul, Chairman and CEO, John Paul Mitchell Systems: Prepared statement
Goodlatte, Hon. Bob, a Representative in Congress from the State of Virginia: Prepared statement
Graham, Aaron, Director of Assets Protection, Matrix Essentials, Inc.: Prepared statement
Kocot, S. Lawrence, Senior Vice President, Government Affairs and General Counsel on behalf of NACDS, National Association of Chain Drug Stores: Prepared statement
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Mountford, Mardi, Executive Director, International Formula Council: Prepared statement
Muller, Kim, President, International Trademark Association: Prepared statement
Purity Wholesale Grocers, Inc. and Victory Wholesale Grocers: Prepared statement
Quality King Distributors, Inc.: Letter to Hon. Howard Coble dated October 29, 1999
Sandler, Gilbert Lee, Counsel, American Free Trade Association: Prepared statement
APPENDIX
Material submitted for the record
ANTITAMPERING ACT OF 1999
THURSDAY, OCTOBER 21, 1999
House of Representatives,
Subcommittee on Courts and
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Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 2 p.m., in Room 2226, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] Presiding.
Present: Representatives Howard Coble, Bob Goodlatte, James E. Rogan, Howard L. Berman, John Conyers, Jr., Zoe Lofgren, William D. Delahunt and Robert Wexler.
Staff present: Blaine Merritt, Counsel; Eunice Goldring, Staff Assistant; Bari Schwartz, Minority Counsel; and Stephanie Peters, Minority Counsel.
OPENING STATEMENT OF CHAIRMAN COBLE
Mr. COBLE. Good afternoon, ladies and gentlemen. The subcommittee will come to order.
Today we will conduct a legislative hearing on H.R. 2100, The Antitampering Act of 2000, authored by the gentleman from Virginia, Mr. Goodlatte, who—and this is the successor bill to H.R. 3891 from last term. Many of you, perhaps all of you will recall that.
[The information referred to follows:]
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106TH CONGRESS
1ST SESSION
H. R. 2100
To amend the Trademark Act of 1946 to prohibit the unauthorized destruction, modification, or alteration of product identification codes, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JUNE 9, 1999
Mr. GOODLATTE (for himself and Ms. LOFGREN) introduced the following bill; which was referred to the Committee on the Judiciary
A BILL
To amend the Trademark Act of 1946 to prohibit the unauthorized destruction, modification, or alteration of product identification codes, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Antitampering Act of 1999''.
SEC. 2. PROHIBITION AGAINST UNAUTHORIZED ALTERATION OF PRODUCT IDENTIFICATION CODES.
(a) IN GENERAL.—Title VIII of the Act entitled ''An Act to provide for the registration and protection of trade-marks used in commerce, to carry out the provisions of certain international conventions, and for other purposes.'', approved July 5, 1946 (commonly referred to as the ''Lanham Act'' and the ''Trademark Act of 1946'') is amended by inserting after section 43 (15 U.S.C. 1125) the following:
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''UNAUTHORIZED MODIFICATIONS OF PRODUCT IDENTIFICATION CODES
''SEC. 43A. (a) DEFINITIONS.—In this section—
''(1) the term 'consumer'—
''(A) means—
''(i) the ultimate user or purchaser of a good; or
''(ii) any hotel, restaurant, or other provider of services that must remove or alter the container, label, or packaging of a good in order to make the good available to the ultimate user or purchaser; and
''(B) does not include any retailer or other distributor who acquires a good for resale;
''(2) the term 'good' means any article, product, or commodity that is customarily produced or distributed for sale, rental, or licensing in interstate or foreign commerce, and any container, packaging, label, or component thereof, but does not include any article of clothing;
''(3) the term 'manufacturer' includes the original manufacturer of a good and a duly appointed agent or representative of that manufacturer acting within the scope of its agency or representation;
''(4) the term 'product identification code'—
''(A) includes any number, letter, symbol, marking, date (including an expiration date), code, software, or other technology that is affixed to or embedded in any good, by which the manufacturer of the good may trace the good back to a particular production lot or batch or date of removal, or otherwise identify the date of manufacture, the date of expiration, or other comparable critical data; and
''(B) does not include copyright management information conveyed in connection with copies or phonorecords of a copyrighted work or any performance or display of a copyrighted work;
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''(5) the term 'Universal Product Code' refers to the multidigit bar code and number representing goods in retail applications; and
''(6) the term 'value' means the face, par, or market value, whichever is the greatest.
''(b) PROHIBITED ACTS.—Except as otherwise authorized by Federal law, it shall be unlawful for any person, other than the consumer or the manufacturer of a good, knowingly and without authorization of the manufacturer—
''(1) to directly or indirectly alter, conceal, remove, obliterate, deface, strip, or peel any product identification code affixed to or embedded in that good;
''(2) to directly or indirectly affix or embed a product identification code to or in that good which is intended by the manufacturer for a different good, such that the code no longer accurately identifies the source of the good;
''(3) to directly or indirectly affix to or embed in that good any number, letter, symbol, marking, date, code, or other technology intended to simulate a product identification code; or
''(4) to import, reimport, export, sell, distribute, or broker that good, in a case in which the person knows that the product identification code has been altered, concealed, removed, obliterated, defaced, stripped, peeled, affixed, or embedded in violation of paragraph (1) or (2), or in a case in which the person knows that the good bears an unauthorized number, letter, symbol, marking, date, or other code in violation of paragraph (3).
''(c) APPLICABILITY.—The prohibitions set forth in subsection (b) shall apply to product identification codes (or simulated product identification codes in a case to which subsection (b)(3) applies) affixed to, or embedded in, any good held for sale or distribution in interstate or foreign commerce or after shipment therein.
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''(d) EXCLUSION.—
''(1) UPC CODES.—Nothing in this section prohibits a retailer or distributor from affixing a Universal Product Code or other legitimate pricing or inventory code or information required by State or Federal Law if such code or information does not (or can be removed so as not to) permanently alter, conceal, remove, obliterate, deface, strip, or peel any product identification code.
''(2) REPACKAGING FOR RESALE.—(A) Nothing in this section prohibits a distributor from removing an article, product, or commodity of retail sale from a shipping container and placing such article, product, or commodity in another shipping container for purpose of resale in a quantity different from the quantity originally provided by the manufacturer or from replacing a damaged shipping container, if, except as provided in paragraph (1), such article, product, or commodity of retail sale retains its original product identification code, without any obstruction or alteration, and if—
''(i) such distributor is registered with all applicable Federal and State agencies;
''(ii) such distributor repackages the article, product, or commodity in full compliance with all applicable State and Federal laws and regulations; and
''(iii) the act of repackaging does not result in a prohibited act under section 301 of the Federal Food, Drug, and Cosmetic Act or violate any other applicable State or Federal law or regulation.
''(B) As used in this paragraph, the term 'shipping container' means—
''(i) a container or wrapping used for the transportation of any article, product, or commodity in bulk or in quantity to manufacturers,
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packers, or processors, or to wholesale or retail distributors thereof; and
''(ii) containers or wrappings used by retailers to ship or deliver any article, product, or commodity to retail customers, if such containers and wrappings bear no printed matter pertaining to any particular article, product, or commodity.
''(e) CRIMINAL PENALTIES.—Any person who willfully violates this section shall be punished as provided in section 1365A of title 18.
''(f) CIVIL REMEDIES.—
''(1) IN GENERAL.—Any person who is injured by a violation of this section, or threatened with such injury, may bring a civil action in an appropriate United States district court against the alleged violator.
''(2) INJUNCTIONS AND IMPOUNDING AND DISPOSITION OF GOODS.—In any action under paragraph (1), the court may—
''(A) grant 1 or more temporary, preliminary, or permanent injunctions on such terms as the court determines to be reasonable to prevent or restrain the violation;
''(B) at any time while the action is pending, order the impounding, on such terms as the court determines to be reasonable, of any good that is in the custody or control of the alleged violator and that the court has reasonable cause to believe was involved in the violation; and
''(C) as part of a final judgment or decree—
''(i) order the destruction of any good involved in the violation that is in the custody or control of the violator or that has been impounded under subparagraph (B); or
''(ii) if the court determines that any good impounded under subparagraph (B) is not unsafe or a hazard to health, dispose of the good by delivery to such Federal, State, or local government agencies as, in the opinion of the court, have a need for such good, or by gift to such charitable or nonprofit institutions as, in the opinion of the court, have a need for such good, if such disposition would not otherwise be in violation of law, and if the manufacturer consents to such disposition and is given the opportunity to reapply a product identification code to the good.
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''(3) DAMAGES.—
''(A) IN GENERAL.—Subject to subparagraph (B), in any action under paragraph (1), the plaintiff shall be entitled to recover the actual damages suffered by the plaintiff as a result of the violation, and any profits of the violator that are attributable to the violation and are not taken into account in computing the actual damages. In establishing the violator's profits, the plaintiff shall be required to present proof only of the violator's sales, and the violator shall be required to prove all elements of cost or deduction claimed.
''(B) STATUTORY DAMAGES.—In any action under paragraph (1), the plaintiff may elect, at any time before final judgment is rendered, to recover, instead of actual damages and profits described in subparagraph (A), an award of statutory damages for any violation under this section in an amount equal to—
''(i) not less than $500 and not more than $100,000, with respect to each type of goods involved in the violation; and
''(ii) if the violation threatens the health and safety of the public, as determined by the court, not less than $5,000 and not more than $1,000,000, with respect to each type of goods involved in the violation.
''(4) COSTS AND ATTORNEY'S FEES.—In any action under paragraph (1)—
''(A) in addition to any damages recovered under paragraph (3), a prevailing plaintiff may recover the full costs of the action; and
''(B) the court, in its discretion, may also award reasonable attorney fees to the prevailing party.
''(5) REPEAT VIOLATIONS.—
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''(A) TREBLE DAMAGES.—In any case in which a person violates this section within 3 years after the date on which a final judgment was entered against that person for a previous violation of this section, the court, in an action brought under this subsection, may increase the award of damages for the later violation to not more than 3 times the amount that would otherwise be awarded under paragraph (3), as the court considers appropriate.
''(B) BURDEN OF PROOF.—A plaintiff that seeks damages as described in subparagraph (A) shall bear the burden of proving the existence of the earlier violation.
''(6) LIMITATIONS ON ACTIONS.—No civil action may be commenced under this section later than 3 years after the date on which the claimant discovers the violation.
''(7) INNOCENT VIOLATIONS.—In any action under paragraph (1), the court in its discretion may reduce or remit the total award of damages in any case in which the violator sustains the burden of proving, and the court finds, that the violator was not aware and had no reason to believe that the acts of the violator constituted a violation.
''(g) ENFORCEMENT.—The Attorney General shall enforce this section.''.
(b) CONFORMING AMENDMENT.—The heading for title VIII of the Act of July 5, 1946, is amended by striking ''AND DILUTION'' and inserting ''DILUTION, AND ADULTERATION OF PRODUCT CODES''.
SEC. 3. CRIMINAL PENALTIES.
(a) IN GENERAL.—Chapter 65 of title 18, United States Code, is amended by inserting after section 1365 the following:
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''§1365A. Criminal tampering with product identification codes
''(a) CRIMINAL PENALTIES.—Any person who willfully violates section 43A of the Act of July 5, 1946 (commonly referred to as the 'Trademark Act of 1946') shall—
''(1) be fined under this title, imprisoned not more than 1 year, or both;
''(2) if the total retail value of the good or goods involved in the violation is greater than $5,000, be fined under this title, imprisoned not more than 5 years, or both;
''(3) if the person acts with reckless disregard for the risk that the health or safety of the public would be threatened and under circumstances manifesting extreme indifference to such risk, and the violation threatens the health or safety of the public, be fined under this title, imprisoned not more than 10 years, or both;
''(4) if the person acts with reckless disregard for the risk that another person will be placed in danger of death or bodily injury and under circumstances manifesting extreme indifference to such risk and—
''(A) serious bodily injury to any individual results, be fined under this title, imprisoned not more than 20 years, or both; or
''(B) death of an individual results, be fined under this title, imprisoned for any term of years or for life, or both; and
''(5) with respect to any second or subsequent violation, be subject to twice the maximum term of imprisonment that would otherwise be imposed under this subsection, fined under this title, or both.
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''(b) INJUNCTIONS AND IMPOUNDING, FORFEITURE, AND DISPOSITION OF GOODS.—
''(1) INJUNCTIONS AND IMPOUNDING.—In any prosecution under this section, upon motion of the United States, the court may—
''(A) grant 1 or more temporary, preliminary, or permanent injunctions on such terms as the court determines to be reasonable to prevent or restrain the alleged violation; and
''(B) at any time during the proceedings, order the impounding, on such terms as the court determines to be reasonable, of any good that is in the custody or control of the defendant and that the court has reasonable cause to believe was involved in the violation.
''(2) FORFEITURE AND DISPOSITION OF GOODS.—Upon conviction of any person of a violation of this section, the court shall—
''(A) order the forfeiture of any good involved in the violation that is in the custody or control of the defendant or that has been impounded under paragraph (1)(B); and
''(B) either—
''(i) order the destruction of each good forfeited under subparagraph (A); or
''(ii) if the court determines that any good forfeited under subparagraph (A) is not unsafe or a hazard to health, dispose of the good by delivery to such Federal, State, or local government agencies as, in the opinion of the court, have a need for such good, or by gift to such charitable or nonprofit institutions as, in the opinion of the court, have a need for such good, if such disposition would not otherwise be in violation of law and if the manufacturer consents to such disposition and is given the opportunity to reapply a product identification code to the good.''.
(b) CONFORMING AMENDMENT.—The table of sections for chapter 65 of title 18, United States Code, is amended by inserting after the item relating to section 1365 the following:
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''1365A. Criminal tampering with product identification codes.''.
SEC. 4. ATTORNEY GENERAL REPORTING REQUIREMENTS.
Section 2320(f) of title 18, United States Code, is amended—
(1) by inserting ''criminal tampering with product identification codes under section 1365A,'' after ''involve''; and
(2) in paragraph (4), by inserting ''1365A,'' after ''sections''.
Mr. COBLE. Members will recall furthermore that the legislation did not pass by the necessary two-thirds majority when it was considered on the House floor under the suspension of the rules.
The bill is intended to protect identification codes which manufacturers affix to their products. These codes enable a manufacturer to trace the routing of a product through the stream of commerce. By ensuring the integrity of product identification codes, H.R. 2100 will help law enforcement officials to solve crimes while advancing public health and safety efforts.
With that said, I am convinced that we will all benefit from a more thorough review of the legislation during this term. A criticism of the bill which apparently resonated on the House floor last session was that H.R. 3891 constituted a veiled attempt to inhibit the sale of ''gray market'' goods or parallel imports. In light of these developments, proponents, it seems to me, are going to have to do a better job of explaining the economic consequences of enacting the bill.
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One final comment, if I may. I think the coalition supporting H.R. 3891 and Mr. Goodlatte made good-faith efforts to accommodate some of the concerns voiced during the last session. I would—I don't mean to be presumptuous, but I would urge the critics of H.R. 2100 this year to work with the coalition and Majority and Minority staffs to develop language that, if necessary, will address further problems.
We have a good panel of witnesses today, and I am looking forward to hearing their testimony.
[The prepared statement of Mr. Coble follows:]
PREPARED STATEMENT OF HON. HOWARD COBLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA, AND CHAIRMAN, SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY
''Good morning. The Subcommittee will come to order.
''Today we will conduct a legislative hearing on H.R. 2100, the 'Antitampering Act of 2000.' Authored by the Gentleman from the Roanoke Valley, Mr. Goodlatte, this is the successor bill to H.R. 3891 from last term. Members will recall that the legislation did not pass by the necessary two-thirds majority when it was considered on the House floor under suspension of the rules.
''The bill is intended to protect identification codes which manufacturers affix to their products. These codes enable a manufacturer to trace the routing of a product through the stream of commerce. By ensuring the integrity of product identification codes, H.R. 2100 will help law enforcement officials to solve crimes while advancing public health and safety efforts.
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''That said, I am convinced that we will all benefit from a more thorough review of the legislation during this term. A criticism of the bill which apparently resonated on the House floor last year was that H.R. 3891 constituted a veiled attempt to inhibit the sale of ''gray market'' goods or parallel imports. In light of these developments, proponents must do a better job of explaining the economic consequences of enacting the bill.
''One final comment. I think the coalition supporting H.R. 3891 and Mr. Goodlatte made good-faith efforts to accommodate some of the concerns voiced last year. I would urge the critics of H.R. 2100 this year to work with the coalition and the majority and minority staffs to develop amendatory language, if necessary, to address further problems.
''We have a good panel of witnesses, and I am looking forward to their testimony. I now turn to my friend, the Ranking Member from California, Mr. Berman, for his statement.''
Mr. COBLE. Our Ranking Member, the gentleman from California, probably will be along. And I recognize Mr. Delahunt, the gentleman from Massachusetts, if he has an opening statement.
Mr. DELAHUNT. No, I don't have an opening statement, Mr. Chairman, I would just echo your admonition about the coalition and those that are proponents and opponents working together to present to us language that we can work with.
Mr. COBLE. I thank you.
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And we have also been joined by the Ranking Member of the full committee, the gentleman from Michigan.
John, do you have an opening statement?
Mr. CONYERS. Thank you, Mr. Chairman. And I welcome the witnesses again.
This is legislation that we have had brought before us before, and the last time I had reservations about this to sell measure because it would have made it more difficult to discount goods and would have a negative consumer effect. Currently, brand names are often sold in what is called a parallel market, which saves American consumers billions of dollars a year, and under this legislation manufacturers could use product codes to trace the chain of distribution on a particular market item which could lead to retaliatory effects.
What does that mean? Numerous products presently available at discount prices might disappear from the discount shelves. Consumer prices could rise. Jobs could be lost among both retailers and distributors. So given the strong feelings that American customers hold toward discount merchandise, this does not seem to be a wise policy move.
So I believe that we need to work together to craft a bill which allows us to protect both the vital safety and health information while not at the same time eliminating legitimate discount operations, and so I would want to consider at least three changes: One, to review the broad scope of the bill. And although it has been narrowed from last year's bill, I think we need to take a close look at whether it can be further narrowed to focus on health-related products, and also whether the bill's legal protections can be limited to ''recall'' information.
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The next thing I think, members of the subcommittee, is that we need to consider whether we can include safeguards in the bill so that we don't encourage manufacturers to use our product code information to terminate discounters. Although the antitrust laws apply in theory to such activity and practice, it has proven very difficult to pursue resale price maintenance actions.
Finally, we need to make sure that the bill does not impose new burdens on Federal law enforcement and judiciary, and we need to consider an appropriate transition period.
So the last thing that we might want to do in this Congress is to take action which makes it more difficult for our citizens to have access to discounted goods, and it is in that spirit that I approach these hearings, and I look forward to hearing from all of our witnesses.
Thank you very much.
Mr. COBLE. Thank you, Mr. Conyers.
We have been joined by the Ranking Member of the subcommittee and the author of the bill. I recognize Mr. Berman, the Ranking Member, the gentleman from California.
Mr. BERMAN. Mr. Chairman, I am going to waive reading an opening statement or giving an opening statement.
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Mr. COBLE. Mr. Goodlatte, as an author of the bill, do you have an opening statement?
Mr. GOODLATTE. I do, Mr. Chairman, and I thank you for holding this hearing on this important legislation.
Mr. Chairman, as you recall, this is legislation that we held hearings on and moved in the last Congress, and we received more than 240—I think 250 votes on the bill. We had the bill up under suspension, and we came up short of the necessary votes to pass it.
We have introduced the bill this year with some significant changes in the legislation to address some of the concerns that were raised by the gentleman from Michigan and others. We have more bipartisan support. It is a better bill, and I look forward to working with the gentleman to see if we can move this legislation through the Congress.
It is, I think, vitally important. This bill is not designed in any way shape, or form, as I think you will hear from a number of the witnesses today, to preclude citizens from being able to purchase discount products. There are laws that protect against companies attempting to do that, but the laws related to product code are far too weak, and we have some serious health and safety problems that I think we will hear from a number of witnesses about today that need to be addressed to make sure that these codes put on these products by the manufacturers remain on the products.
If you have a pharmaceutical, or if you have another type of product and it turns out to be defective, the recalls will be totally ineffective and are ineffective when the codes have been tampered with or removed. You have got to be able to identify the product for which you have the problem and remove it from the shelves.
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We have through this legislation removed some of the types of products at the request of the gentlewoman from California that might not very often encounter a recall, and I think that was certainly a good measure on the part of the legislation.
I look forward to working with her in a bipartisan fashion. We make a good team, Mr. Chairman, because we were successful in gaining the support of 258 Members of the House on our SAFE Act dealing with encryption, and so I look forward to garnering the same kind of support with her help for this very important legislation. And I would ask that the remainder of my statement be made a part of the record.
Mr. COBLE. Without objection. And I concur, you two make a good team. You all have your fingerprints on several common pieces of legislation.
[The prepared statement of Hon. Bob Goodlatte follows:]
PREPARED STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. Chairman, I want to thank you for holding this hearing today. We have before us a wide ranging group of witnesses, and I look forward to hearing from all of them this afternoon. Mr. Chairman, as you know, the legislation we are discussing today was introduced by Congresswoman Lofgren and myself because we see a gaping hole in the fabric of our federal laws ensuring product safety and consumer protection. The Anti-Tampering Act Amendments of 1999 will provide law enforcement the tools they need to combat the growing crime of altering or removing product identification codes from goods and packaging. This bill will also provide manufacturers and consumers with civil and criminal remedies to fight those counterfeiters and illicit distributors of goods with altered or removed product codes. Finally, this bill will protect consumers from the possible health risks that so often accompany tampered goods.
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Most of us think of UPC codes when we think of product identification codes—that block of black lines and numbers on the backs of cans and other containers. However, product ID codes are different than UPC codes. Product ID codes can include various combinations of letters, symbols, marks or dates that allow manufacturers to ''fingerprint'' each product with vital production data, including the batch number, the date and place of manufacture, and the expiration date. These codes also enable manufacturers to trace the date and destination of shipments, if needed.
Product codes play a critical role in the regulation of goods and services. For example, when problems arise over drugs or medical devices regulated by the Food and Drug Administration, the product codes play a vital role in conducting successful recalls. Similarly, the Consumer Product Safety Commission and other regulators rely on product codes to conduct recalls of automobiles, dangerous toys and other items that pose safety hazards.
Product codes are frequently used by law enforcement to conduct criminal investigations as well. These codes have been used to pinpoint the location and sometimes the identity of criminals. Recently, product codes aided in the investigation of terrorist acts, including the bombing of Olympic Park in Atlanta and the bombing of Pan Am Flight 103 over Lockerbie, Scotland.
At the same time, manufacturers have limited weapons to prevent unscrupulous distributors from removing the coding to divert products to unauthorized retailers or place fake codes on counterfeit products. For example, one diverter placed genuine, but outdated, labels of brand-name baby formula on substandard baby formula and resold the product to retailers. Infants who were fed the formula suffered from rashes and seizures.
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We cannot take the chance of any baby being harmed by infant formula or any other product that might have been defaced, decoded or otherwise tampered with. FDA enforcement of current law has been vigilant and thorough, but this potentially serious problem must be dealt with even more effectively as counterfeiters and illicit distributors utilize the advanced technologies of the digital age in their crimes.
Manufacturers have attempted, at great expense and with little success, to prevent decoding through new technologies designed to create ''invisible'' codes, incapable of detection or removal. However, decoders have proven to be equally diligent and sophisticated in their efforts to identify and defeat new coding techniques. We therefore must provide manufacturers with the appropriate legal tools to protect their coding systems in order for them to protect the health and safety of American consumers.
Currently, federal law does not adequately address many of the common methods of decoding products and only applies to a limited category of consumer products, including pharmaceuticals, medical devices and specific foods. Moreover, current law only applies if the decoder exhibits criminal intent to harm the consumer. It does not address the vast majority of decoding cases which are motivated by economic considerations, but may ultimately result in harm to the consumer.
My legislation will provide federal measures which will further discourage tampering and protect the ability of manufacturers to implement successful recalls and trace product when needed. It would prohibit the alteration or removal of product identification codes on goods or packaging for sale in interstate or foreign commerce, including those held in areas where decoding frequently occurs.
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The legislation will also prohibit goods that have undergone decoding from entering the country, prohibit the manufacture and distribution of devices primarily used to alter or remove product identification codes, and allow the seizure of decoded goods and decoding devices. It will require offenders to pay monetary damages and litigation costs, and treble damages in the event of repeal violations. The bill will also impose criminal sanctions, including fines and imprisonment for violators who are knowingly engaged in decoding violations.
The bill would not require product codes, prevent decoding by authorized manufacturers, or prohibit decoding by consumers. It is a good approach designed to strengthen the tools of law enforcement, provide greater security for the manufacturers of products, and most importantly, provide consumers with improved safety from tampered or counterfeit goods. I urge my colleagues to join me in supporting this bill, which will go a long way toward closing the final gap in federal law enforcement tools to protect consumers and the products they enjoy. Mr. Chairman, I look forward to hearing from our witnesses today, and I thank you again for holding this hearing.
Mr. COBLE. We have been joined by the lady from California. Ms. Lofgren, did you have an opening statement that you wanted to make?
Ms. LOFGREN. Just briefly, Mr. Chairman.
Last Congress we had discussions about this tampering issue. There was concern about legitimate discounters and how they might be impacted. That was not the intent of the legislation. We did not seek to constrain discounters. I think that the bill before us today, which I am proud to cosponsor with my colleague from Virginia, redresses that past confusion, indeed, makes that issue disappear.
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Obviously manufacturers have an interest in the protection of their products, but there is also a significant consumer protection issue here that deserves our attention and bipartisan action. I was quite pleased this morning at the press conference when we announced the bill to hear from the private sector proponents of this bill. They expressed their interest and willingness to sit down with anybody, any time if there were issues of drafting or whatever else had to be worked out. We want to make sure that we can all feel very comfortable that we have a bill that does exactly what we want it to do and that is worthy of bipartisan support.
So I am pleased to have the witnesses here today, and I am hopeful that we can take action on this as soon as possible. I yield back the balance of my time. Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentlelady.
It is indeed good to have you all with us. And you all pardon my detailed introduction, but I think it is important that all of us know who you are and your credentials, so I will advise for the benefit of the uninformed so they will know as the hearing progresses.
Our first witness is Mr. John S. Bliss, who is the executive director of Coalition Against Product Tampering. He is also a partner the Washington law firm of Higgins, McGovern and Smith. Mr. Bliss provides strategic counseling to corporations experiencing counterfeiting, diversion and organized retail theft.
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Mr. Bliss is the immediate past president of the International Anticounterfeiting Coalition, IACC. Prior to assuming his role as president of the IACC, Mr. Bliss served as a senior legislative aide and principal legal advisor to Senator Hank Brown of Colorado and was a chief counsel for the Senate Judiciary Committee, Subcommittees on the Constitution, Juvenile Justice and Technology and the Law.
Prior to his entry into government service, Mr. Bliss was in private practice specializing in complex business, financial and securities litigation. He received his BA from the University of California, San Diego, and his JD from the Georgetown University Law Center.
Our next witness is Mr. Gilbert Lee Sandler, who is counsel at the American Free Trade Association. Mr. Sandler is a partner at Travis & Rosenberg, south Florida's first firm to concentrate on Customs and international trade regulation. In addition, the Secretary of the Treasury recently appointed him to a 2-year term on the Commercial Operations Advisory Committee on Customs Procedures. The Secretary of Commerce has appointed him to a sixth term as an adviser to the United States Government on international trade negotiations under the Federal Advisory Committee Act.
Prior to entering private practice, Mr. Sandler served as a Department of Justice trial attorney. He earned his AB from Dartmouth College and his JD from the New York University School of Law.
Mr. Sandler, I am sure you have fond memories of winter carnival days in Hanover. I have never been there, but I have heard good things about it.
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Mr. SANDLER. The winter carnival convinced me to move to Florida.
Mr. COBLE. Our next witness, and I am not necessarily reading these in the order of their appearance at the table, but our next witness is Aaron Graham, who is the director of assets protection for Matrix Essentials, Incorporated. He has global responsibility for corporate security functions, including investigations of trademark and copyright infringement, counterfeiting and diversion of consumer products.
Prior to joining Matrix, he was a senior official with the U.S. Food and Drug Administration, Office of Criminal Investigations. He also served as a special agent with the United States Drug Enforcement Administration.
Mr. Graham is a graduate of the United States International University in San Diego and a member of the American Society of Industrial Society.
Our next witness is Mr. John Paul DeJoria. Am I pronouncing that correctly, Mr. DeJoria?
Mr. DEJORIA. Yes, sir.
Mr. COBLE. After serving as a consultant to Paul Mitchell, and with no funding sources identified at the time, the two men founded John Paul Mitchell Systems in 1980 with $750. Mr. DeJoria is now chairman and CEO of the company. John Paul Mitchell Systems has continued growing, with retail sales exceeding $600 million annually. The company currently produces more than 90 products. The products are sold through 35 distributors, excluding nine in-house accounts within the United States, to more than 90,000 hair salons. Internationally John Paul Mitchell Systems has 27 distributors and three subdistributors located in 45 countries who market company products to approximately 15,000 hair salons.
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Our next witness is Ms. Mardi Mountford who is the executive director at the International Formula Council, an association of manufacturers and marketers of formulated nutrition products, such as infant formula and adult nutrition formulas. Prior to joining the Infant Formula Council in 1981, Ms. Mountford served as a nutritionist for management consulting firms in Atlanta and Boston. She received her BA in chemistry and biology from St. Andrew's Presbyterian College in North Carolina, and this doesn't say so, Ms. Mountford, but I will say at Laurinburg, North Carolina, and her master's degree in public health from the University of North Carolina at Chapel Hill.
Our next and final witness is Mr. James A. Dahl, who is the president of the Integrity Resource Group, Inc. Mr. Dahl is a security professional with over 28 years of experience, including field investigations, senior management and Executive Level business consulting. He spent over 20 years as a field investigator and manager with the U.S. Postal Inspection Service. In 1992, he was recruited to become the first Assistant Director of the Food and Drug Administration's newly formed Office of Criminal Investigations. While serving with the FDA, he supervised all the agency's criminal investigations.
He retired from government service in 1997 to become the managing director of the Kroll-O'Gara Company's Crisis Management Group. He left Kroll in 1999 to form Integrity Resource Group.
He holds a BS degree in business administration and accounting from the Michigan Technology University.
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I again apologize for the detailed introductions, but as I said before, I think it is important that we know who you all are.
We have written statements from all the witnesses on the panel. And, again, I welcome you. And, ladies and gentlemen, I want to admonish you, we operate under the 5-minute rule. We have your written statements. They have been examined, they will be reexamined. But if you would restrict your oral testimony to 5 minutes, we will be appreciative to you.
Since we have only one panel, if time permits, we may have a second round of questions because of the interest generated by this bill. When you see the red light illuminate in your eyes, you will know that the fiddler is approaching.
Mr. Bliss, we will start with you.
STATEMENT OF JOHN S. BLISS, ESQ., EXECUTIVE DIRECTOR, COALITION AGAINST PRODUCT TAMPERING
Mr. BLISS. Thank you, Mr. Chairman. Good afternoon members of the subcommittee. I am pleased to be here today to submit this testimony on behalf of the Coalition Against Product Tampering in full support of H.R. 2100, the measure sponsored by Mr. Goodlatte and Ms. Lofgren.
In our view, H.R. 2100 is a narrowly tailored legislative response to a serious problem, the intentional decoding of consumer products that are sold to unwitting consumers, placing the public at health and safety risk. And I might add that the Coalition is comprised of manufacturers, consumer groups, unions and law enforcement agencies, all of whom share this goal of trying to protect the consumer from health and safety risks.
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Mr. COBLE. Mr. Bliss, if you would pull that mike maybe down a little bit and closer to you.
Mr. BLISS. Is that better?
Mr. COBLE. That is good.
Mr. BLISS. Codes for manufacturers are part of an important business strategy to ensure consumer health and safety and reduce potential liability that results from product counterfeiting and tampering. They are absolutely critical to maintaining the integrity of the Nation's product recall system. They are an important tool for law enforcement. And last, and most important, there is absolutely no legitimate business purpose to remove these codes. Decoding simply masks the operations of an underground industry. Illegitimate decoders obtain through fraud, threat or false pretenses legitimate goods produced by manufacturers. They then decode and otherwise tamper with product labeling to avoid detection so they may sell these ill-gotten goods to unauthorized points of sale. A substantial portion of U.S.-made decoded goods sold by these decoders have been adulterated or otherwise tampered with after manufacture, and present health and safety risks to consumers, and I am sure you will hear from the other witnesses on that score.
Now, some of the diverters utilize the services of counterfeiters to facilitate their diversion schemes by affixing fake codes to decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are intended for a different market. Counterfeiters in turn often utilize the services of unscrupulous diverters to shield the distribution of unlawful counterfeit product. Thus diverters willingly permit counterfeiters to use their distribution channels and infiltrate a diverter's product inventory with counterfeits, and in this way counterfeiters have at their disposal a very disingenuous defense if ever caught: ''We thought the product we purchased was lawfully diverted product.''
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Unless product decoding is rendered unlawful, Congress will permit the fostering of an alternate channel of distribution for counterfeit goods. The Antitampering Act of 1999, therefore, is necessary to sever this symbionic relationship between diversion and counterfeiting activities which harms the consumer and frustrates legitimate law enforcement efforts and undermines the integrity of product trademarks. The act, in our view, is a very appropriate and narrowly tailored follow-on response to the Trademark Anti-Counterfeiting Consumer Protection Act that with a passed a few years ago that was sponsored by Mr. Goodlatte.
According to the National Association of Manufacturers, there is simply no manufacturer who holds the view that there is a legitimate business reason to decode these products. Law enforcement, consumer groups, unions and other members of the Coalition agree.
I want to turn just briefly to some mischaracterizations about the bill. The bill on its face will not prohibit diversion, only the removal and manipulation of product codes and affixing of fake codes. Similarly, it will not prevent discount retailers from obtaining low-cost goods through parallel sourcing. It will also not affect consumer prices, unless opponents are stating by their opposition that their retail prices are based on an ability to sell counterfeit, expired or rejected products, activities that are often disguised by tampered codes.
There has been written testimony submitted to this committee, that speaks to certain errors with respect to the legislation. Concerns have been expressed relating to what is regarded as an absence of a knowledge test. We dealt with that last year, and we have continued to deal with that issue this year. We have an innocent violator exception built into the bill. There have been some concerns about due process considerations. We have been willing and remain willing to work with the opponents of the measure to make sure that due process is accorded everyone.
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Mr. COBLE. Mr. Bliss, I won't cut you off in the middle of a sentence. If you can just wrap up.
Mr. BLISS. One sentence. A U.S. Attorney was quoted in BusinessWeek as saying that this operation, this decoding operation, is a ''sinister and evil form of fraud that threatens the health and safety of consumers.'' We agree with him. We believe this bill will drive a stake into that activity, and we urge its passage. Thank you very much.
[The prepared statement of Mr. Bliss follows:]
PREPARED STATEMENT OF JOHN S. BLISS, ESQ., EXECUTIVE DIRECTOR, COALITION AGAINST PRODUCT TAMPERING
Good afternoon. My name is John Bliss. I am Executive Director of the Coalition Against Product Tampering (CAPT). Mr. Chairman, Mr. Berman, and Members of the Subcommittee, on behalf of the CAPT, it is my pleasure to testify today in support of HR 2100, the Anti-Tampering Act of 1999. I wish to commend Representatives Goodlatte and Lofgren for sponsoring this narrowly tailored approach to a very serious problem—the decoding of consumer products and their sale to US consumers which threatens public health and safety.
COALITION AGAINST PRODUCT TAMPERING—BACKGROUND
The CAPT is a coalition of private sector companies, consumer groups, unions and law enforcement agencies which are concerned about product decoding and product tampering and the role these activities play in fueling and supporting other criminal enterprises, including money laundering, organized retail theft and counterfeiting. The CAPT is comprised of a cross-section of U.S. industry, including manufacturers of apparel, appliances, food and beverages, health and beauty aids, pharmaceuticals, and software. The CAPT has more than 59 members. Their combined member companies exceed 69,000. All of CAPT's members share a common goal of protecting consumer safety and health.
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CONGRESS' MOST RECENT RESPONSE TO COUNTERFEITING: THE ANTICOUNTERFEITING CONSUMER PROTECTION ACT OF 1996 (ACPA)
Three years ago, in response to the growing threat posed by counterfeiters to the health and safety of consumers and the U.S. economy, Rep. Goodlatte sponsored, passed and ultimately obtained enactment of the Anticounterfeiting Consumer Protection Act of 1996 (ACPA). That legislation marked the first significant reforms to federal anticounterfeiting law in over a decade. ACPA (H.R. 2511) was unanimously reported out of this Subcommittee and the full Committee, unanimously passed the House of Representatives, and was signed into law on July 2, 1996 as Public Law 104–153.
THE NEED FOR A SECOND CONGRESSIONAL RESPONSE TO THE COUNTERFEITING EPIDEMIC: THE SYMBIOTIC RELATIONSHIP BETWEEN CRIMINAL DIVERSION AND COUNTERFEITING
Distinctions between diversion and counterfeiting.
With the passage in July 1996 of ACPA, Congress sent a message to the public that counterfeiting is a serious crime that involves domestic and international organized crime rings. Unfortunately, three years later, the counterfeiters are sending us an even louder message: they are stronger, more organized and sophisticated and have uncovered and exploited a loophole of ACPA and current federal law: the symbiotic roles that unscrupulous diverters and counterfeiters can play in facilitating each of their respective criminal schemes.
The commercial practice of diversion is defined as the distribution of legitimate goods through unauthorized distributors or retailers. Diversion is lawful in the United States inasmuch as diverted goods are manufactured by the trademark owner or an authorized manufacturer and thus are considered to be ''genuine''. Diversion is generally accomplished through three principal means: (1) the diversion of foreign-manufactured goods into the U.S.; (2) reimportation, which involves the reimportation of U.S.-manufactured goods exported for sale in a foreign market; and (3) domestic diversion, or the diversion of U.S.-manufactured goods within the U.S.
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Counterfeiting, on the other hand, is unlawful both in the United States and abroad because goods are produced without the trademark owner's authorization, and their manufacture or sale represents a clear violation of the trademark owner's intellectual property rights. Moreover, because counterfeit goods typically are of poor quality and can consequently pose serious risks to the consumer, the manufacture and sale of counterfeit goods are considered per se illegal.
The Anti-Tampering Act of 1999 would not prohibit diversion. It would simply prohibit the removal or affixing of fake product codes, which manufacturers embed in products for identification purposes. The bill would thereby contribute toward strengthening the system that manufacturers and government agencies use to ensure consumer health and safety—the integrity of the product's identity—a goal of our trademark laws, and also enhance the tools of law enforcement agencies to combat counterfeiting and diversion activities that threaten public health and safety.
While there are economic arguments which support the activity of diversion in its most pristine state, these theoretical views oversimplify the problem of diversion, and ignore the reality that some diverters are allied with professional organized criminals, violate civil and criminal laws in order to successfully divert product, and willingly introduce into the market products which often pose significant economic harm to the manufacturer and potentially serious risks to the U.S. consumer. For example:
diverted products manufactured for sale in a foreign market may not meet U.S. regulatory standards;
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diverted product may lack the proper storage or shipping conditions necessary to preserve product quality; and
diverted products are often intermingled with, and provide cover for, counterfeit products.
For instance, the enactment of the Prescription Drug Marketing Act, which prohibits the unauthorized reimportation of U.S.-manufactured prescription goods, was due, in part, to concerns that reimported pharmaceuticals labeled as ''American Goods Returned'' were providing cover for foreign-made counterfeits.
The manufacturers' response to diversion: implementation of product identification codes.
Because of the difficulty in obtaining legal protection against diversion, which leaves manufacturers open to increased liability, manufacturers have attempted to implement business strategies to control distribution and limit the potential for diversion. One very important strategy is the use of product identification codes to monitor distribution and trace products to their final retail destination. Product identification codes allow manufacturers to track vital production data, including the batch number, the date and place of manufacture, and the date and destination of shipment.
The importance of product codes to consumer protection and law enforcement.
When a product is found to be defective, whether through tampering or a manufacturing error, product coding enables the manufacturer to identify the production batch, determine how and when the defect occurred, assess the number of products affected, pinpoint the intended geographical market, and expedite the removal/recall of the defective product from the marketplace.
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(A) Consumer Protection
As noted by the International Formula Council, product identification codes are, without question, the single most important factor in a successful recall. In recent years, this link between product coding and consumer protection has become increasingly evident. Following the Tylenol poisonings of 1982, product coding enabled Johnson & Johnson to identify the tainted production lots and issue a nationwide recall of potentially dangerous products. Similarly, the manufacturers of automobiles, toys, food products and other consumer goods have consistently relied upon product coding to identify and recall goods that fail to meet consumer quality and safety standards.
Last year, the FDA used product codes to quickly identify a shipment of contaminated strawberries that had caused an outbreak of hepatitis in Michigan schools. More recently, the Slim Fast Corporation relied on product codes to identify and recall 192,000 cans of its ready-to-drink diet shakes because, according to the New York Times (Apr. 18, 1999), some of the cans might have been filled with a diluted cleaning solution. In addition, this summer a leading manufacturer of infant formula used its product codes to identify and recall 7,000 cases of infant formula after a labeling error resulted in distribution of infant formula cans that may have contained an adult nutritional supplement that could have been harmful to infants. (USA Today, June 9, 1999).
In short, without product coding, the task of identifying and recalling defective goods becomes infinitely more difficult and often impossible, leaving consumers exposed to potential harm, illness and even death. According to the U.S. Consumer Product Safety Commission, there were 273 product recalls last year and, on average, one high profile recall each week.
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(B) Law Enforcement
Product codes also play a critical role in certain criminal investigations, allowing law enforcement officers to pinpoint the location and in some cases, including the World Trade Center bombing, the identity of the offender. In cases of stolen or tainted goods, product codes point to the source of the product and the site of the crime. More recently, product codes have assisted in the investigation of terrorist acts. For example, in the Atlanta bombing, the codes found on batteries used in the pipe bomb enabled federal agents to trace their site of the purchase, which led to a significant shift in the investigation. Similarly, in the Pan Am bombing, the part number found on a microprocessor from the bomb provided the vital clue as to the identity of the Libyan terrorists.
THE ANTI-TAMPERING ACT OF 1999 WILL SEVER THE SYMBIOTIC RELATIONSHIP BETWEEN THE CRIMINAL DIVERTER AND COUNTERFEITER
Despite the importance of product coding—and the potential dangers of decoding—federal law currently lacks a uniform or comprehensive regulatory framework to prevent the removal of product coding or the affixing of fake codes. Indeed, federal decoding regulations apply only to a limited category of products, including pharmaceuticals, medical devices, and certain foods. These regulations do not apply to other products such as the bulk of dry grocery products. Even in those rare cases in which product coding may be prosecuted under the Federal Anti-Tampering Act, the Act only applies if the decoder exhibits the requisite criminal intent to harm the consumer. Thus, this law is of no practical use in the vast majority of decoding cases that are motivated purely by economic considerations.
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Thus, most manufacturers have no federal remedy in cases of decoding and no means of ensuring that defective, hazardous or stolen products will be traceable. In order to close the gap in consumer protection and law enforcement legislation, the proposed Anti-Tampering Act of 1999 would prohibit for all products the intentional removal or alteration of product codes, as well as the affixing of counterfeit codes. Significantly, the Act would provide the remedies and enforcement authority necessary to ensure implementation of these prohibitions.
PASSAGE OF COMPREHENSIVE PRODUCT DECODING LEGISLATION AS NECESSARY COMPLEMENT TO BRAND NAME PROTECTION
To be sure, product decoding of the kind to be proscribed by this Act constitutes unauthorized, injurious and frequently criminal activity. Moreover, in addition to the criminal component to this legislation, there is an equally important trademark issue, because rampant product decoding frustrates the efforts of U.S. manufacturers to protect their brand names from dilution and adversely affects the integrity of the product's mark. U.S. manufacturers each expend millions of dollars per year to protect and enforce their intellectual property rights. These efforts are clearly frustrated when the unholy alliance of unscrupulous diverters and counterfeiters permits decoded products to enter the stream of commerce, thus threatening the health and safety of the public and frustrating the important forensic and recall efforts of law enforcement.
SUMMARY
Criminal diverters often utilize the services of counterfeiters to facilitate their diversion schemes by affixing fake codes to decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are intended for a different market. Counterfeiters often utilize the services of unscrupulous diverters to shield the distribution of unlawful counterfeit product. Thus, diverters willingly permit counterfeiters to use their distribution channels and infiltrate a diverter's product inventory with counterfeits. In this way, counterfeiters have at their disposal a disingenuous defense if ever caught: ''we thought the product we purchased was lawfully diverted product''. The Anti-Tampering Act of 1999 is necessary to sever this symbiotic relationship between diversion and counterfeiting activities, which harms consumers, and frustrates legitimate law enforcement efforts, and undermines the integrity of product trademarks. The Act is a necessary follow-on Congressional response to the Anticounterfeiting Consumer Protection Act of 1996.
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According to the National Association of Manufacturers, manufacturers cannot conceive of a single legitimate reason to decode products. Law enforcement, consumer groups, unions and other members of the CAPT agree. Intentional decoding of products threatens the health and safety of American consumers. HR 2100 is a narrowly tailored approach to this problem and should be enacted.
Mr. COBLE. You quoted who when you said that Mr. Bliss?
Mr. BLISS. An acting assistant U.S. Attorney out of the District of New Jersey whose quote is attributed to in BusinessWeek, December 4th, 1995.
Mr. COBLE. I thank you, sir.
We have a bell announcing a vote. Mr. Graham, why don't we hear from you, then we will go vote and come back.
Mr. Graham, you are recognized for 5 minutes.
STATEMENT OF AARON GRAHAM, DIRECTOR OF ASSETS PROTECTION, MATRIX ESSENTIALS, INC.
Mr. GRAHAM. Thank you, Mr. Chairman. Thank you, committee, for the opportunity to speak to you today about this serious public protection issue. H.R. 2100 should be viewed strictly as a consumer safety initiative. Current Federal law does not adequately address decoding of consumer goods. I am not aware of any legitimate or ethical business reason to decode a consumer product.
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To the contrary, typically it is purely deceptive and criminal. Furthermore, the decoding of consumer goods leads to alternate channels of distribution through which decoded, counterfeit, adulterated and stolen goods flourish. Needless to say, these products of questionable authenticity, efficacy and safety put the consumer at risk, and because they are decoded, ethical manufacturers have no effective way to conduct a recall of an adulterated product that again puts the consumer at risk.
Other crimes associated with the alternate distribution of decoded consumer goods include mail fraud, wire fraud, conspiracy, money laundering and tax evasion. In my many years of undercover work with both the DEA and the FDA, Office of Criminal Investigations, I have spoken with traffickers of diverted goods, decoded goods and counterfeit goods. I have learned their intention is purely to make money at the expense of the unwitting consumer, meaning that the consumer is now purchasing products in unauthorized retail locations of questionable quality, authenticity and efficacy.
If I may, I can give you some anecdotal examples of the people that we are dealing with who are trafficking in decoded goods. We recently concluded an investigation in Little Rock, Arkansas, in which a convicted narcotics felon was trafficking in decoded hair care products. In fact, under oath in deposition, people that were paid by him and hired by him sat in dark rooms, lit only by a black light, wearing protective rubber gloves, rubbing dangerous and potentially life-threatening chemicals on products to decode the products. To date we are not sure why they did that.
We have asked repeatedly why they decode these consumer goods, and repeatedly they have failed to answer our questions. We can only conclude that in a manner much like the criminal scheme of money laundering, their intent is to disguise the origins of these consumer goods, in effect leaving the consumer in jeopardy and precluding the manufacturer from conducting a recall of an adulterated product that could put the consumer at risk.
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In another case that made national publicity, in the mid-1990's while working as a supervisor investigator with the FDA in California, we had an international terrorist organization involved in the application of false codes to counterfeit infant formula, infant formula that got into the hands of infants who experienced serious health problems. These individuals had taken authentic product, developed what appeared to be an alternate channel distribution, procured counterfeit generic product, manufactured counterfeit labels, placed phony batch coding on the bottom of these cans, filled these cans in a former diesel repair shop, with no attention to good manufacturing practices, labeled these products, canned these products, and distributed these products through what appeared to be legitimate channels of distribution to a regular retail location. Unassuming consumers purchased these products, assuming them to be authentic, legitimate and safe. Children were hurt and harmed by the consumption of these products.
In a more recent incident, we had nearly $1 million of Matrix Essentials hair care products stolen off a street in a semitractor in Los Angeles, California. After recovering about $700,000 of this product in a warehouse, we learned that the criminals involved had utilized counterfeit Southeast Asian passports to rent this warehouse, demonstrating again the sophistication and complexity of the people involved in this crime. We subsequently recovered the same product in unauthorized retail locations, and the product had been decoded. This decoding effectively precluded law enforcement from apprehending the people involved in this major theft.
Thank you, Mr. Chairman.
Mr. COBLE. Thank you, Mr. Graham.
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[The prepared statement of Mr. Graham follows:]
PREPARED STATEMENT OF AARON GRAHAM, DIRECTOR OF ASSETS PROTECTION, MATRIX ESSENTIALS, INC.
Good afternoon Mr. Chairman and thank you for the opportunity to speak before your Committee about this important matter. It is an honor to be here and speak on behalf of HR 2100, The Anti-Tampering Act of 1999. I believe my professional experience in the area of federal law enforcement and corporate security has prepared me to provide expert testimony in this area. As the Director of Assets Protection for Matrix Essentials, Inc., and a former senior special agent with both the US Drug Enforcement Administration (DEA) and FDA—Office of Criminal Investigations (FDA–OCI), I feel strongly that this proposed legislation should be considered first and foremost a consumer safety initiative.
The decoding of personal care products leads to the distribution of goods of questionable authenticity, safety and efficacy. Without the ability to track a product through the batch code or other codes affixed to products for such purposes, the manufacturer is precluded from conducting a recall in the event of adulteration, contamination or performance issues. Furthermore, this unscrupulous practice creates an alternate channel of distribution through which the distribution of misbranded, decoded, adulterated and counterfeit products flourishes. My experience has shown that there is a definite link between the many facets of criminality involving these offenses.
I would like to describe for you the manner in which product tampering, adulteration, decoding, counterfeiting and theft are interrelated. I will also provide anecdotal evidence to support the assertion. In the professional beauty care field for example, hair care products are generally manufactured and sold through independent distributors. The products are then resold to strictly professional beauty salons. At this point individuals called collectors approach salon professionals and attempt to entice them to sell these products out the back door for a 20% tax-free profit. The products are then often times decoded and moved several times in order to disguise the origins of the products, much the same as in a traditional money laundering scheme.
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This clandestine decoding and transferring of product creates an alternate channel of distribution which is completely unmonitored for good manufacturing practices or safe handling procedures. Once this unmonitored alternate channel of distribution is established, it is ripe for the introduction and unauthorized distribution of counterfeit, outdated or adulterated products. These products of questionable authenticity, efficacy and safety are then offered for sale at traditional retail outlets, leaving the consumer virtually unprotected.
In my years in federal law enforcement and corporate security I have seen serious and dangerous felons engage in product theft, tampering, counterfeiting and diversion of consumer goods. Furthermore, I believe it is reasonable to presume that career criminals have made a conscious decision to traffic in decoded consumer goods due to the inherent lack of consequences. Unfortunately, today's laws do not adequately address product tampering as HR 2100 will if passed as currently written. Please allow me to identify several instances in which product decoding, tampering, counterfeiting and other examples of criminality are indicative of the need for this legislation and how the consumer is at risk without it.
In November 1998, United States District Judge James Moody permanently enjoined an individual from Scott, AR, from dealing in diverted Matrix products. The subject referenced above, who ran a major shampoo diversion operation on a national level, had previously been convicted of a felony narcotic trafficking charge. In addition, sworn depositions taken in this matter revealed that this previously convicted felon had hired and paid individuals to use potentially life threatening and dangerous chemicals to decode professional hair care products. It should be added that to my knowledge nobody in this matter ever identified why they were decoding these products in this manner.
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In another example, while with the FDA–OCI I personally supervised an investigation involving the distribution of counterfeit infant formula. In this investigation, suspected members of a terrorist organization operating in Los Angeles, CA, were identified as those responsible for manufacturing and distributing the counterfeit infant formula. The basic scenario, however, is key to understanding the complexity of the issues involved. These subjects began by purchasing infant formula as a loss leader from a retail store. They then established an alternate channel of distribution by re-distributing the products under the guise of acting as an authorized distributor of authentic goods. Once credibility as a ''legitimate'' distributor was established, they proceeded to manufacture counterfeit infant formula in an unsafe environment with absolutely no attention to Good Manufacturing Practices. The bandits then distributed the counterfeit products through this alternate channel of distribution, taking advantage of the relationship they had established under false pretenses. Several infants had adverse consequences from consuming the counterfeit formula.
In another incident I investigated while at the FDA–OCI, we encountered subjects who had purchased empty soda bottles from a major manufacturer under the pretext of shipping the bottles to the Soviet Union. The suspects in this matter subsequently found bottle caps from a separate vendor. They then convinced a soda bottler to fill the authentic bottles with generic soda, essentially manufacturing a counterfeit product. The bottler subsequently told me that they had not carefully washed the bottles before filling them with the generic soda. The counterfeit products were then sold to unassuming retail vendors and customers in the Armenian community of Los Angeles, CA.
A separate incident involved a cargo theft of nearly $1,000,000.00 of Matrix Essentials Vital Nutrients hair care products in Los Angeles, CA. While much of the contraband was recovered by law enforcement, nearly 25% of it remains unaccounted for. Investigative results revealed that suspects in this incident may have used counterfeit passports from a southeast Asian country to facilitate this scheme, once again indicative of the complexity and sophistication of those involved in this criminal arena. We have since purchased Vital Nutrients products (similar to those that were stolen) from unauthorized retail locations and the batch codes have been removed. The decoding of these products effectively precluded law enforcement from successfully identifying and apprehending those responsible for this crime.
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In another recent investigation that is still active, I have discovered new evidence of the decoding of consumer goods. The subjects responsible for re-distributing professional-only hair care products have gone so far as to list ''decoding'' as a separate line item on the actual invoices under cost of goods. Because this investigation is active I am not in a position to further elaborate.
In a recent industry specific incident involving shampoo and conditioner, Redmond Products, Inc. issued a press release stating that they were voluntarily recalling all Aussie Land Kangaroo Island Detangler because routine quality assurance testing revealed that the shampoo may have been contaminated. The batch codes for the products in question were provided to retailers so the products could be pulled from retail shelves and returned to Redmond for destruction. Redmond also provided a toll free telephone number for consumers. Needless to say, without the ability to recall these products by batch numbers there would have been no way to accurately recall these products and protect consumers.
Through the few examples I have mentioned above, I have tried to identify and articulate the complexities and dangers of the proliferation of decoded, misbranded and counterfeit consumer goods and the inner-relationship they share. Once a product is diverted out of the authorized channels of distribution, where merchandise is acquired, stored and transported under unknown conditions, by unauthorized individuals, its authenticity, quality, and efficacy are questionable. And this leaves the consumer at risk, to say the least.
In summary, let me just add that I am not aware of any legitimate reason to tamper with or remove a batch code from a consumer product. I urge your support in furtherance of passage of this critical piece of consumer safety legislation, HR 2100.
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Mr. COBLE. We have a series of votes. We will return imminently as soon as we finish that, and we will resume the hearing, so you all stand easy in the interim.
[Recess.]
Mr. COBLE. Best laid plans of mice and men, you know, oftentimes go awry. I apologize to the members of the panel and to those in the hearing room. We had a series of votes, and we had little choice but to conclude that business prior to coming back.
I am sure my colleagues will join me, but I think in the interest of time, we need to move along. And, Mr. Sandler—Mr. Graham, you had completed your testimony; had you not?
Mr. GRAHAM. Yes, sir. Thank you, sir.
Mr. COBLE. Mr. Sandler, we are pleased to recognize you at this time.
STATEMENT OF GILBERT LEE SANDLER, COUNSEL, AMERICAN FREE TRADE ASSOCIATION
Mr. SANDLER. Thank you, Mr. Chairman. On behalf of the American Free Trade Association and the coalition, whose statement we filed, I want to thank you for inviting us to testify today. And I want to also thank you for returning from the vote. And I understand the need for the votes to be cast on important issues in Congress.
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I am very encouraged by the opening statements made by the members of this committee with respect to the recognition that there is a serious issue here with respect to the impact upon the parallel market, and I can assure you that our association and its members are prepared to move forward with the dialogue to address all of those issues. We did make an attempt on that in the last Congress, and as the chairman knows, we have made an attempt in this Congress to visit with all the members of the subcommittee to be able to explain the issues as we see them and to respond to the genuine issues of concern of the members of the subcommittee.
To preface our remarks, clearly there is a large common ground here that we are—that we share with those who have already testified and those who I am sure will testify after this. We are concerned as anyone about the integrity of trademarks, of copyrights and the products that they identify. We are as concerned as anyone else about counterfeit goods, about eliminating them and about unsafe products being unleased into the marketplace.
The sales of our members are dependent upon the integrity and safety of the genuine brand-name products that we buy and that we resell. Our members are importers, they are distributors, and they are retailers of health and beauty aids, of colognes and perfumes which are sold in the parallel market in this country. Some of those goods are foreign-manufactured goods, where the marks and the ownership of the manufacturer is done outside the country; some are U.S. goods, which are manufactured here; some are purchased and distributed strictly in the United States, and some are reimported into the United States.
This bill we have opposed as it is drafted, and there are perhaps five basic issues that I would want to address in this short time. First is that we do not believe that this is an anticounterfeiting bill. It deals with genuine goods. It does not deal with counterfeit goods. We don't believe it is a health and safety bill. And for reasons which are made very clear in our testimony, we do not remove batch codes, we do not remove the expiration dates that appear on the products that we distribute. What we focus upon are—and when you look at the exhibit in our testimony, you will see that there is a product that has a batch code on it, and it has bar codes which are not removed, but it has two hidden codes and one invisible code which were removed on that product. Those codes are put on for other reasons. They are not the codes that are used for recall for health and safety reasons. They don't trick—track the goods back to the batch. They have to do with the long-standing battle in dealing with the parallel market.
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The batch codes and the expiration codes, we think, are also pretty well protected under existing Federal law, but we would certainly join in crafting a bill, as Congressman Conyers had pointed out, that would be focused upon those codes which are really designed to deal with the health and safety issues and not with the diversion or parallel market issue.
We also don't believe that it is an antitampering bill. It doesn't deal with the tampering or the adulteration of product. It deals with these codes. It is not a fair assumption to assume that the removal of a code means the parallel market activities are illegal, or involve wire fraud, or involve tax evasion or tax fraud, or involve counterfeit goods; that equation is simply not an appropriate equation. It would be no more sensible to say that we will deal with our drug problem in the United States by stopping all trade with Haiti and Jamaica and Colombia because they are a source of drugs coming into our country.
We need to be more focused in this legislation on the issues that drive it. We say it is an antiparallel market bill, that is my fourth point; it is directed at virtually every brand-name product. The only limitation in the new bill is the exclusion of clothing. When discussed last year, it was said clothing needed to be included because of flammability issues. We think that its exclusion in the new bill is a good sign of progress that we may be able to focus upon those products which really pose a consumer health and safety issue and deal with those issues directly.
The Congress did that with prescription drugs some years ago. It has done it with the gray market automobiles to protect DOT and EPA standards. And if there are genuine health and safety issues in particular product areas, we are certainly prepared to discuss those issues.
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I want to thank you for the opportunity to be here. And I would be more than happy to respond to questions. We look forward to working with everyone on the revision of this bill.
Mr. COBLE. Thank you, Mr. Sandler.
[The prepared statement of Mr. Sandler follows:]
PREPARED STATEMENT OF GILBERT LEE SANDLER, COUNSEL, AMERICAN FREE TRADE ASSOCIATION
It is a privilege and honor to appear before this Subcommittee and address the serious economic consequences of H.R. 2100, the Antitampering Act of 1999.
This testimony is offered on behalf of the American Free Trade Association (AFTA). The American Free Trade Association is a not-for-profit trade association of independent American importers, distributors, retailers and wholesalers, dedicated to preservation of the parallel market to assure competitive pricing and distribution of genuine and legitimate brandname goods for American consumers. The parallel market embraces a broad range of products but AFTA's members are primarily involved in sale and distribution of fragrances, colognes, health and beauty aids (e.g. shampoo, soap, etc.).
AFTA has been an active advocate of parallel market interests for over fifteen years. It has appeared as amicus curiae in the two leading Supreme court cases affirming the legality of parallel market trade under the federal trademark, customs and copyright acts (the 1985 Kmart case and the 1998 Quality King case) and in numerous lower court decisions.
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I. THE ANTITAMPERING ACT OF 1999 DOES NOT STOP PRODUCT TAMPERING
H.R. 2100 has nothing to do with product tampering—in fact, the bill could more accurately be called the ''Anti-Consumer Act'' or the ''Anti-Competition Act'' because H.R. 2100 intends to eliminate competition, overriding the interests and wishes of the American consumer.
The title of the ''Antitampering Act'' is appealing and misleading, similar to the title of the identical bill which failed to pass in the last Congress—the ''Anticounterfeiting Act of 1998'' (H.R. 3891). Neither the ''Antitampering Act'' or the ''Anticounterfeiting Act'' addresses the problems of counterfeit or tampered products; both bills attempt only to restrict distribution and raise prices of genuine and safe goods traded in the parallel market channels of distribution. H.R. 2100 would effectively overturn two Supreme Court decisions and defy years of historical support and legitimacy of the secondary marketplace, without any consideration of this stunning change in United States law and economics.
The bill would create federal criminal or civil liability for removing, altering or obliterating product codes, or for selling products with removed, altered or obliterated product codes; the Antitampering Act of 1999, however, has no remedies or intended punishments for selling or tampering with consumer products. H.R. 2100 protects product codes that are unrestricted, unregulated, arbitrary as to their nature, placement, content or use. These codes do not even have to be visible to the consumer, retailer or wholesaler. Moreover, the codes are clearly not limited to the batch codes used for product recalls, but extend to the ''secret'' codes historically used to identify and retaliate against sources of parallel market goods. H.R. 2100 is about empowering manufacturers and trademark owners to exclusively control the American marketplace; it is not about protecting consumers from unsafe products.
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The bill's sponsors and advocates have misunderstood or misrepresented what this legislation is about. H.R. 2100 is not about protecting the health and safety of the consumer. H.R. 2100 is about protecting the profit and power of manufacturers by providing federal criminal and civil penalties for removal of codes placed on merchandise in any fashion and for any purpose. The historic use of codes to retaliate against legitimate parallel market competition clearly establishes that this bill should not be adopted and that the Congress should not be beguiled by the misnomer of the ''Antitampering'' language.
2. THE DIFFERENCE BETWEEN LEGISLATION INTENDED TO PROTECT THE CONSUMER AND LEGISLATION INTENDED TO PROTECT BIG BUSINESS
The Congress has adopted a wide-range of bills that thoughtfully and effectively protect consumers from defective and unsafe products. The labeling and branding of foreign and domestic merchandise is regulated under the Federal Food Drug and Cosmetic Act. See 21 U.S.C. 331 (misbranding of any food, drug, medicine and liquor); 334 (food, drug, device or cosmetic), 342 and 342 (food); 350a (infant formulation); 351 and 352 (drugs and devices) and 361 and 362 (cosmetics), as well as the Federal Meat Inspection Act (21 USC 601, et. seq); and consumers are protected against deception, confusion and unfair competition as a result of The Lanham Act (15 USC 1051, et. seq.); The Copyright Act (17 USC 101, et. seq.); The Tariff Act (19 USC 1526) and Anticounterfeiting Consumer Protection Act of 1996 (15 USC 1116–17; 18 USC 2320). The legislative history of all of this legislation clearly reveals an intention to protect American consumers from harm and a genuine concern for their well-being.
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H.R. 2100 seeks to amend the Lanham Act, one of the most critical existing consumer protection statutes. Despite initial objections from the Department of Justice that the legislation would enable monopolies to thrive and anti competitive practices to flourish, the Lanham Act was passed in 1946 as a measure intended to protect consumers against confusion and deception in the marketplace. But protecting hidden, undefined, arbitrary markings and codes does not protect consumers against confusion, and, in fact, enables potentially very monopolistic behavior. It is deceiving for the authors of H.R. 2100 to draft an amendment to the Lanham Act that belies its very intention and thwarts the multitude of consumer protections provided in its existing text.
The broad, sweeping and undefined provisions of H.R. 2100 stand in sharp contrast to the existing bills, noted above, which clearly and transparently protect the American consumer. H.R. 2100 is said to protect ''product identification codes'' from alteration or obliteration or removal or destruction. According to the bill's sponsors, these ''product identification codes'' are necessary to protect the consumer because they are an important part of any effective product recall for safety concerns. This is not true, however, since H.R. 2100 protects codes which are not intended for product recalls and could never be used for such recalls.
3. WHY MANUFACTURERS BELIEVE THEY ARE ENTITLED TO H.R. 2100
For over 15 years, AFTA has been involved in fighting for the rights of the parallel marketplace. The parallel marketplace has, in fact, been present in this country since before the turn of the century. The first published conflict between a manufacturer and a parallel importer goes back to 1886 in Appollinaris Co. Ltd. v. Scherer, 27 F 18 (CC SDNY 1886). In that case, the Circuit Court for the Southern District of New York declined to enjoin an early parallel importer from importing goods bearing a mark legitimately affixed by a foreign manufacturer.
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Since 1886, efforts to limit or eliminate parallel market competition have been mounted in Congress, the Courts and the Executive branch under virtually every conceivable law, including our customs laws, trademark laws, copyright laws, patent laws, the uniform commercial code and, antitrust laws. But, these efforts have failed. As recently as 1998, by the Supreme Court's decision in Quality King v. L'Anza International Research (holding that manufacturers may not rely upon the U.S. copyright law to bar reimportation of domestically manufactured products), or in 1999 with the final Customs regulations implementing the decision in the Lever Brothers case (parallel imports will be allowed even for products determined to be materially different from those authorized for U.S. distribution so long as they are labeled to identify that they are unauthorized merchandise), manufacturers have been stopped in their attempts to quash this desired, legitimate business practice of supplying consumers with more—and less-expensive—branded merchandise.
Accordingly, in 1998,—not long after the Supreme Court rejected the copyright theory for eliminating the parallel market in its holding in Qualily King v. L'Anza—the battle shifted to the Congress with the introduction of H.R. 3891 the ''Anticounterfeiting Act of 1998.'' We firmly believe this bill would have effectively wiped out the secondary marketplace—although, on its surface, it did not appear to contradict the Supreme Court's rulings or the historic support of the parallel market. H.R. 3891 failed in 1998, and, so, in 1999 it has resurfaced as H.R. 2100—legislation that, again, does not appear to obviously eradicate an industry desired by the American consumer and legitimized by America's court systems and administrative bodies. Nevertheless, this is exactly what it will accomplish.
4. THE PARALLEL MARKETPLACE
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Parallel Goods are genuine trademarked consumer products, such as fragrances, 35 mm cameras, electronic products and watches which are imported, distributed and/or sold in the secondary marketplace by independent American businesses rather than by ''authorized'' U.S. dealers. The parallel marketplace exists primarily because the manufacturers, for reasons of their seek significantly higher prices for their products in the United States than elsewhere in the world. They often do this by creating wholly-owned or controlled subsidiaries in this country, designating those companies as the exclusive ''authorized'' importers and distributors for their products here, and refusing to sell to retailers and distributors who will not maintain the higher prices for the products.
The obvious result in a free enterprise, free trade market is that independent American businesses can purchase the same products overseas at the less expensive world price, often directly from the manufacturers' ''authorized'' distributors abroad. These same businesses often purchase the genuine products domestically, either from authorized distributors or from the manufacturers themselves. The foreign manufacturers' price differential for the U.S. market is often so great that, even after paying shipping costs and U.S. Customs duties, the parallel importer can offer the identical articles for twenty to forty percent less than the U.S. ''authorized'' distributor. , Domestically, manufacturers and authorized distributors support the secondary marketplace with excess inventory, overruns and other legitimate product sources.
The result is a saving to American consumers amounting to billions of dollars a year. Another result is the availability of popular products to a much wider spectrum of Americans who do not live in the large cities where the exclusive authorized stores are generally located. The parallel trade has also served as an independent bulwark against unrestrained increases on the domestic price of brand name consumer goods as compared to prices available worldwide.
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5. CONSEQUENCES OF H.R. 2100
If passed, H.R. 2100, the Antitampering Act of 1999, willseeks to eliminate the parallel marketplace. According to Michael Spano, executive director of the Beauty and Barber Supply Institute (Women's Wear Daily, September 10, 1999 ''Diversion Bill Splits Hair Industry''—see Attachment 1) proponents of the bill believe it will ''help stem diversion because it would make illegal one of the chief aids to product diversion—removal of coding that allows manufacturers to trace a product to the final buyer.'' ''Diversion'' is a prejorative term used to describe the activities of the parallel marketplace. Accordingly, there is no mystery; the supporters of H.R. 2100 believe, and intend, that the legislation will eradicate parallel market competition because it will make illegal product decoding.
It is important that the Committee members understand why certain coding is removed from parallel goods. When a legitimate parallel market businessman purchases brand name products for resale, he or she is obligated to protect the source of those products from retaliation by the manufacturer. If the product source has excess inventory or unsellable product, it will oftentimes sell these products to resellers in order to make them available to consumers who otherwise may not have access to the goods. The manufacturer has already made its profit—the manufacturer sold the genuine article to its authorized distributor. That distributor is now obligated to make its own profit, and oftentimes supplies excess inventory to parallel marketers. Despite the fact that this activity is legal—despite the fact that this activity benefits the consumer—despite the fact that this activity promotes and encourages a free and competitive marketplace—manufacturers will almost certainly retaliate against that distributor or its supplier for supplying products to the reseller. Manufacturers place arbitrary and often hidden codes on merchandise in order to identify these sources. Manufacturers want to identify the sources so that they may exclusively control distribution of brand name products. Parallel traders remove these codes to protect their distributors and facilitate the competition created by the secondary marketplace.
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Mr. Spano claims, however, that H.R. 2100 protects only batch codes, stating that parallel marketers remove batch codes and expiration dates. But that is not true. Parallel marketers do not remove batch codes or expiration dates because these markings are important in the event of consumer product recalls. Parallel marketers only remove codes that identify the sources of parallel goods; the codes which are designed to enable restricted distribution and price control of brandname products H.R. 2100 will eliminate the availability of discounted merchandise because, by protecting these codes, it will enable manufacturers to retaliate against secondary marketplace distributors and their suppliers so that these sources will be forced not to support the secondary marketplace
6. THE DIFFERENCE BETWEEN BATCH CODES AND ''PRODUCT IDENTIFICATION CODES''
H.R. 2100 broadly defines ''product identification codes'' as ''. . . any number, letter, symbol, marking, date (including an expiration date), code, software, or other technology that is affixed to or embedded in any good . . .'' But ''product identification codes'' may be invisible—and often are. ''Product identification codes'' may be unrecognizable symbols or hieroglyphics. ''Product Identification Codes'' may be unidentified in a morass of 20 or 30 product markings.
We have reproduced below the same batch code shown in the Women's Wear Daily Article attached to this testimony.
62497a.eps
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Batch codes identify a batch of production. They are easily identifiable by consumers, retailers and wholesalers, and they are recognizable as including the place of production or manufacture and the date—information that is critical in a consumer product recall. However, it is very common for a single batch of products, after being stamped with the proper batch code, to be divided and distributed to many different parties. So, batch codes, generally, do not identify to whom the product was sold and parallel traders, generally, do not remove batch codes.
In sharp contrast to the batch codes, we have reproduced below a fragrance package with a product identification code which would be protected under H.R. 2100:
62497b.eps
The code identified by the arrow cannot be seen because it is hidden—only the manufacturer is supposed to know its there. This hidden code identifies to whom the manufacturer originally sold the product. The code enables the manufacturer to control resale prices and downstream distribution of its products by taking action against distributors. These controls are not permitted under current any existing federal law—they are illegal and contrary to the consumer protections set forth in U.S. copyright, trademark and antitrust laws. Under H.R. 2100, however, if this packaging, with its contained product, is ultimately distributed in the legitimate secondary marketplace, that original purchaser can be sued, labeled a criminal and perhaps put out of business.
Thus, H.R. 2100 would create criminal and civil liability for removing, altering or destroying the invisible mark you can't see in the foregoing picture. Because the legislation does not differentiate between ''product identification codes'' and batch codes, as a result of H.R. 2100, manufacturers would acquire federal protection of arbitrary product markings and suppliers of parallel market goods would lose the ability to freely supply the secondary marketplace—despite the facts that the batch code and production date have not been altered, the manufacturer produced the product and received its profit from the original sale, the original purchaser had every right to dispense of its legally bought product as it chooses, authentic products are being distributed to people who otherwise may not have access to them (and probably at lower cost) and the Supreme Court, the Congress and the Executive Branch have long upheld the right to this commercial activity.
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7. CONCLUSION
The American Free Trade Association is joined in its opposition to H.R. 2100 by the National Association of Chain Drug Stores, the International Mass Retail Association, the Food Marketing Institute, Costco Wholesale Corporation, Purity Wholesale Grocers, Inc., KMart Corporation, Wal-Mart Stores, Inc. and Victory Wholesale Grocers, Inc. Attached to this testimony is our Joint Statement of Opposition to this legislation.
The parallel marketplace thrives because it is a legal and important way for consumers of all income levels and locations to avail themselves of brand name merchandise. Parallel marketers are legitimate businessmen working against the counterfeiting and infringement of intellectual property rights because their own livelihood depends upon the integrity and recognition of valid and genuine trademarks. H.R. 2100 is not about consumer safety or health—it is not about consumers at all. H.R. 2100 is about big business manufacturers seeking to eliminate competition by monopolizing product distribution and product pricing.
The Supreme Court has twice upheld the validity and importance of the parallel marketplace. This is because the economic theories of supply and demand and of the free marketplace mandate that genuine brand name merchandise be made available to all consumers without discrimination and without retaliation against distributors.
H.R. 2100 would cause hundreds of thousands of people to be out of work and would cause thousands of tax-paying businesses to close overnight. H.R. 2100 would instantly make criminals out of retailers and wholesalers and would create undue burdens in the commercial marketplace that would necessarily be passed on to consumers.
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The Antitampering Act of 1999 must not be passed. The citizens of this country are protected through the multitude of existing federal laws policing both the authorized and secondary marketplace. The citizens of this country deserve freedom of choice and unfettered competition. H.R. 2100 seeks to deprive them of both.
Thank you again for the opportunity to testify before the Subcommittee.
.WWD SEPTEMBER 10, 1999
COPYRIGHT 1999 INFORMATION ACCESS COMPANY,
A THOMSON CORPORATION COMPANY;
ASAP
COPYRIGHT 1999 CAPITAL CITIES MEDIA INC.
WWD
SEPTEMBER 10, 1999
SECTION: Pg. 12; ISSN: 0149–5380
IAC–ACC–NO: 55755028
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LENGTH: 2104 words
HEADLINE: DIVERSION BILL SPLITS HAIR INDUSTRY.
BYLINE: Naughton, Julie
BODY:
NEW YORK—The shampoo wars continue—and the hostilities are about to spill onto the floor of Congress.
Legislation that could affect sales of salon or professional hair care brands in unauthorized nonsalon retailing environments is ready to head to the House floor by mid-October—and both the professional and mass channels are taking sides in a battle reportedly worth more than $ 100 million a year to the $ 4.1 billion salon products industry. House Resolution 2100, the Anti-Tampering Act of 1999, was introduced in the House June 9 by Rep. Bob Goodlatte (R, Va.) and Rep. Zoe Lofgren (D, Ca.) HR2100. It would criminalize the actions of diverters who damage, deface or cover batch, bar or other manufacturing codes on products, making such actions a Federal offense.
Such legislation addresses the issue of diversion, which has polarized the salon or professional industry and the retail beauty industry for more than 20 years.
Salon, or professional beauty brands, are intended by their manufacturers for sale only in salons and beauty supply stores, and those manufacturers cite both consumer safety and the products' images in their fight to keep items exclusive. They argue that they have the right to sell their products where they want—and for years have put restrictions in their distributor contracts preventing resale to outlets outside the salon industry.
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Opponents argue that such regulations restrict free trade and penalize legitimate secondary markets.
Proponents of the upcoming legislation say it would help stem diversion because it would make illegal one of the chief aids to product diversion—removal of coding that allows manufacturers to trace a product to the final buyer, said Michael A. Spano, executive director of the Beauty and Barber Supply Institute.
BBSI, which represents product distributors, and a manufacturers' organization called the American Beauty Association, are leading the professional industry fight.
Batch codes generally contain information on specific batches of products, including where and when the products were bottled and to whom they were sold. Bar codes include stockkeeping unit information, prices and more.
Middlemen who purchase merchandise and resell it to drugstores, grocery stores and other retail outlets often scrape off bar or batch codes so they cannot be traced to the salon or distributor that originally purchased the products, said Spano.
''In our industry, batch codes make sure that consumers get properly mixed product that conforms to the laws of the various states, they help keep consumers from using professional-only products, which sometimes contain chemicals or dyes that should be applied only by trained and licensed cosmetologists, and they help trace tainted or stolen goods,'' said Spano.
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Opponents of the bill say it will restrict legitimate secondary-source selling through intimidation.
The mass market industry—in particular, the National Association of Chain Drug Stores—opposes the legislation. According to David Lambert, NACDS vice president of government affairs, many mass merchants obtain products from legitimate secondary sources.
''If company 'A' buys too many widgets [from the manufacturer] and then resells them to company 'B,' we don't want the manufacturer coming back and refusing to sell to company 'A' because they don't like where the product ended up,'' Lambert said.
''Our argument is that once the product has left the hands of the manufacturer, that should be the end of the manufacturer's control over the product. Otherwise, you are giving the manufacturer an excessive amount of control over distribution, which hampers free trade.''
However, Lambert emphasized, ''While we oppose HR2100, we do not support the sale of counterfeit or stolen products. In fact, retailers—including the chain drugstore industry in particular—suffer from counterfeit products as much as anyone else. We have no desire to sell products that have been obtained illegally, and we are exceptionally concerned with public safety. Our concern is only that legitimate secondary markets may be impeded by HR2100.
''Among those in favor of HR2100, it is frequently mentioned that these codes would facilitate recalls and insinuate that we're scratching them off,'' he continued.
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''In fact, there are many product codes used to recall products, and they are not generally removed on products in the legitimate secondary market. We have been characterized by some as being callous regarding counterfeit products, when, in fact, we are not. Instead, we are concerned with retaliation by manufacturers against retailers.''
Lambert said since such codes apply to items other than beauty products, the proposed legislation could impede retailer operations.
''Under HR2100, if you cover one code—which could happen, say, if you have two products shrink-wrapped together with a third stockkeeping code for the set—you could be in violation of the law. Also, the language is very vague. We expect to oppose it in its current form, and we think other retailers groups will, also.''
The legislation will be considered first by the subcommittee on courts and intellectual property of the House Judiciary Committee, probably in early to mid-October, and could be voted on by the full House by late October or early November, said John Bliss, a lobbyist for the professional beauty industry.
There is more than lofty ideals at stake—like money. Estimates vary widely as to how much product diversion to the mass industry costs the professional industry each year. However, it probably tops $ 100 million, according to estimates from the BBSI.
J. Aaron Graham, director of assets protection for Matrix Essentials, a division of Bristol-Myers Squibb and a proponent of the bill, insisted it's about much more than money.
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''The issue is not about price and it never was,'' he said. ''It's solely about protecting the consumer from potentially serious bodily harm resulting from the sale of counterfeit, expired or adulterated consumer merchandise. Salon clients can purchase their salon products in authorized salons, where the salon and the manufacturer guarantee the quality of the merchandise.''
According to Spano, chief proponents of HR2100 include the professional beauty industry, the Coalition to Protect the Integrity of American Trademarks and allies like the pharmaceutical industry.
If the bill passes, it would affect several other industries, including the pharmaceutical industry, he said.
This isn't the first time such legislation has headed to the floor. An earlier version, HR3891, the Anti-Counterfeiting Bill, narrowly missed passing the House on Sept. 28, 1998.
That bill, however, was on a ''fast-track'' system that required that it pass a House vote with a two-thirds majority—and proponents of the new bill said they were confident it would pass this time because only a simple majority is required.
''We think that this time, it will be put on the regular calendar,'' said Bliss. ''And, in fact, we were only 78 votes shy of getting a two-thirds majority in the House last time so we feel pretty confident.''
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Spano said HR3891 had been drafted by a coalition of clothing, fragrance and chemical companies.
''The professional beauty industry came in after that bill was written,'' he said. ''Also, while Congress doesn't see counterfeit apparel as a risk to public safety, they acknowledge that tainted hair color or baby formula could hurt consumers, and the new legislation specifically includes these items.''
While Spano acknowledged the legislation was unlikely to eradicate diversion—''Wherever there is a demand, you're going to see diversion happen,'' he said—he insisted the passage of such a law would ''dramatically stem the problem, and it will send a message that we are serious about facing this issue.''
HR2100 has gained support from a number of beauty manufacturers.
''Such a law would allow law enforcement officials to make arrests and seizures of products,'' said Graham.
''Ten years ago, there weren't many effective ways to deal with this problem,'' Graham continued.
''You started a letter-writing campaign, someone got their wrist slapped and it started all over again. But with a law? When there are handcuffs coming your way, people are quicker to acquiesce. No one wants to go to jail for shampoo.''
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Paul Dykstra, executive director of the ABA, said the legislation would send a message that consumer safety is paramount. ''First and foremost, we are concerned with consumers,'' said Dykstra.
''We want them to be confident of their safety. Bills like this would help assure that.''
Unlike the current initiative, previous legal and legislative efforts to restrict the sale of professional products in other channels have usually focused on trademark infringement and copyright issues.
In many of these cases, state and Federal courts have ruled in favor of mass marketers, ''which has prevented other industry manufacturers from using such issues to restrict or prevent the sale of goods in secondary markets,'' said Spano.
Previous rulings have also stated that copyright law does not protect U.S. manufacturers that export products from having their products shipped back by an unrelated company.
In 1998, the U.S. Supreme Court ruled against L'anza Research International in such a case. According to published statements made by L'anza at that time, it had sued Quality King Distributors, arguing that it was deprived of its ''first sale rights'' under copyright law when Quality King bought L'anza products intended for distribution in Malta and Libya at a deep discount from a L'anza distributor in the United Kingdom and then resold them to a Carmel, Calif., drugstore chain.
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L'anza won $ 3.4 million in a lower court ruling, but the decision was later overturned by the U.S. Supreme Court.
More recently, Albertson's grocery chain, based in Boise, Idaho, filed a Federal antitrust lawsuit against professional manufacturer Sebastian International in March, charging obstruction of free trade. The suit is pending.
There are some laws at the state level. According to Graham, at least two states have laws that prevent anticounterfeiting or code tampering.
A Texas statute prohibits the alteration or removal of batch codes, he said. Similar legislation was passed earlier this year in Oklahoma; Title 21, Section 1990 of Oklahoma law ''protects consumers against traffickers of counterfeit consumer goods'' in such categories as infant formulas, health and beauty aids and over-the-counter medications, said Graham.
According to Graham, Matrix has already seen results from that law.
''Using the weapons of Oklahoma's new anticounterfeiting legislation and our aggressive antidiversion staff, we persuaded Tulsa's Drug Mart and May's Drug, a related company, as well as several other unauthorized retailers of salon-only hair care products, to remove all professional hair care products from their retail shelves,'' said Graham. ''We're very anxious now to make sure that HR2100 gets passed.''
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Earlier this year, the beauty industry formed The Professional Beauty Federation, a nonprofit group that raises money to lobby on industry issues, and hired Bliss, the former president of the International Anti-Counterfeiting Coalition, as its lobbyist.
The federation's founding members were five salon industry groups: the International Chain Salon Association, The American Association of Cosmetology Schools, the BBSI, the National Accrediting Commission of Cosmetology Arts and Science and The Salon Association.
Spano said the BBSI has encouraged all its members to call their Congressional representatives and has raised more than $ 200,000 for awareness campaigns and lobbying efforts from member distributors, board members and professional manufacturers, including Nexxus, Cosmair's Redken Fifth Avenue division, The Wella Corp. and John Paul Mitchell Systems.
Professional beauty firms have taken such measures as developing involved tracking systems, creating embedded or holographic bar coding, initiating lawsuits—and in some cases, hiring former FBI agents as ''shampoo cops'' devoted solely to scouting out sales to unauthorized retailers.
Some manufacturers, such as Shiseido's Brands Exclusive Zotos International division, are offering cash for information on diverters.
In May, Bezi announced it would give a $ 1,000 reward to anyone reporting verifiable information that stopped sales of diverted products.
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JOINT STATEMENT OF OPPOSITION
H.R. 2100 (PROPOSED ANTITAMPERING ACT OF 1999)
The undersigned represent many of the nation's major retailers, wholesalers, and trading companies, who employ hundreds of thousands of Americans and operate in every state in the union. The companies represented sell to millions of American consumers, and their reputation and commercial success depend on providing a broad range of high quality and safe products at competitive prices.
We understand the intent of H.R. 2100, the Antitampering Act of 1999. As we see it, that intent is to avoid tampering with those product identification codes that are used to protect consumer safety and assist with product recalls.
However, we are concerned with the actual language of the bill and its real consequences. It would punish a wide array of legitimate commercial activity. It would unnecessarily place new costs on commerce and consumers (unrelated to the real health and safety concerns).
1. Excessive Burdens On Commerce—And New Costs To Consumers.
H.R. 2100 goes far beyond protecting the integrity of those product codes used to assist in product recalls and consumer safety. For example, the bill would cover other markings that would have nothing to do with a product recall (some of them not even visible to consumers). It would expose legitimate retailers, wholesalers and other traders, and their employees, to new lawsuits, damages and even criminal penalties.
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The bill ignores other realities of today's diverse marketplace. Major retailers and wholesalers handle enormous volumes of goods, most of which are shipped in sealed cartons. For a number of reasons (not the least of which is keeping costs low for consumers) a retailer cannot possibly open every sealed carton and inspect every item that comes across its loading docks. Further, even if a retailer could inspect every item in every carton, it would not necessarily discover if a code was changed or concealed. Yet, this bill exposes the retailer to new liability risks if a problem went undetected.
H.R. 2100 also harms a retailer's ability to deal with wholesalers and trading companies, some of which are small businesses. Each manufacturer's code will obviously be on products purchased directly from the manufacturer, but not necessarily on purchases from distributors and trading companies. By imposing new liabilities when one deals with a wholesaler or trading company instead of a manufacturer, this bill discourages purchases from wholesalers. That harms these small businesses. At a minimum, it increases the costs of buying from a wholesaler—costs that will necessarily be passed on to the consumer.
Transactions between wholesalers and retailers are important not only for the initial distribution of the product; they are also important when one retailer wants to dispose of excess inventories or out-of-season goods. A wholesaler purchases these excess inventories and makes them available to other retailers. If retailers perceive greater risks in buying this stock from a wholesaler, that will certainly restrict the flow of goods and reduce competition in the marketplace.
Perhaps more importantly, the broad language of H.R. 2100 will ultimately injure competition by allowing manufacturers to use their product codes to restrict the free flow of genuine goods. Again, the bill does not distinguish between codes that manufacturers place on their products for safety reasons (such as batch numbers to assist with product recalls) and codes manufacturers use to restrict the discounted re-selling of their merchandise. To combat against unwanted price competition, some manufacturers place other codes on their products so that they can identify—and ultimately cut off—legitimate sources of supply that resell to discounting retailers to the benefit of the U.S. consumer.
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2. The Problem Of The Overly Broad Definition Of ''Product Identification Codes.''
If this bill is to achieve its intended purpose of protecting consumers and product recalls, the definition of ''Product Identification Code'' must be more narrowly tailored to this purpose. A Product Identification Code must be, and only be, relevant to product recalls and other legitimate consumer safety communications.
3. The Problem Of Retailer And Reseller Liability.
H.R. 2100 imposes new civil and criminal liabilities on retailers and wholesalers, which will certainly add costs and burden commerce and amount to draconian measures against legitimate retailers, wholesalers and other distributors. Liability should not rest upon legitimate business operations that may (without actual knowledge) end up with affected product in the millions of units they routinely handle.
The current commercial reality is that retailers and other resellers deal in container loads of products and do not have the opportunity to physically inspect individual packs of film or individual bottles of hair spray. These businesses should not risk liability for these legitimate, and legal, business practices.
4. The Problem of Repackaging.
Under current law and commercial practice, retailers and wholesalers may obtain genuine goods and repackage them for ultimate sale to consumers. These can include ''value packs'' of two or more of the same items (such as a shrink wrap pack of two breakfast cereals) or an assortment of related.items (a blister pack of five carpenter's tools). Or they can include special ''display packs,'' where a single item is placed in a clear plastic pack that can be more easily hung on a circular display rack.
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At times, wholesalers also help retailers with product promotions by combining two different products, such as a toothbrush and toothpaste, using shrink-wrap to create a multi-unit arrangement. In most cases, the new combinations have a reduced price, which benefits consumers.
The U.S. Supreme Court has long recognized the right of third party purchasers to repackage trademarked consumer products. Anyone who purchases a product, ''by virtue of its ownership, has a right to compound or change what it bought, to divide either the original or the modified product, and to sell it so divided'' or repackaged. Prestonettes, Inc. v. Coty, 264 U.S. 359, 368 (1924). The sole requirement is that ''the public is adequately informed'' about the fact that a repackaging has occurred and who has done the repackaging. Id. at 369. Today, as long as there is a label on the repackaging that identifies the fact of the repackaging and who did it, a manufacturer cannot complain. Enesco Corp. v. Price/Costco Inc., 146 F.3d 1083 (1998).
H.R. 2100, however, only allows repackaging in shipping containers, but not repackaging in consumer packages. It only purports to apply to distributors but not retailers—and only if the purpose is to provide a quantity different from the quantity provided by the manufacturer (but not if the purpose is to create a new assortment package or type of display pack). The bill does nothing to protect the full range of current and legitimate practices.
5. The Problem of UPC Codes.
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A UPC code is used to permit electronic scanning at the checkout stand. It is not used to identify a production number used in product recalls.
H.R. 2100 does not address situations where a retailer or wholesaler will designate a third-party to repackage a particular product and affix a new UPC code. Of course, when new UPC codes are added, they do not take the place of product identification codes. Those product identification codes are still available for the consumer in case of a product recall.
6. State Versus Federal Standards.
Some States are beginning to adopt a variety of statutes to deal with issues that would be covered by H.R. 2 100. Yet, inadequate thought has been given to how H.R. 2 100 would relate to these state laws.
The ramifications of H.R. 2100 are much too important to allow this bill to go forward. We would welcome the opportunity to discuss with you further the issues set forth in this correspondence.
Mr. COBLE. Mr. DeJoria.
STATEMENT OF JOHN PAUL DeJORIA, CHAIRMAN AND CEO, JOHN PAUL MITCHELL SYSTEMS
Mr. DEJORIA. Mr. Chairman, Mr. Berman, members of the subcommittee, thank you for this opportunity to appear in front of you to discuss H.R. 2100. My company supports H.R. 2100, and I would like to now show you a brief video presentation that demonstrates many of the reasons for our support.
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[Videotape played.]
Mr. DEJORIA. John Paul Mitchell Systems' interest in this issue extends far beyond to what all of us eat, to what all of us place on our bodies, and to what all of us wear, far beyond. Unscrupulous businesspeople remove manufacturers' codes not just on shampoo, but on baby food, over-the-counter medicines and other consumer products, placing a consumer at risk. Eliminating tampering with consumer products is an issue of consumer safety and corporate honesty, not consumer savings and corporate profit.
We put codes on all of our products as a safety net to protect us all, especially against life-threatening allergic reactions. Three recent experiences have led me to conclude that the United States Government must provide Federal protection against product tampering for all consumers.
First, Quality King Distributors of New York was required to destroy more than $1 million worth of counterfeit Paul Mitchell products. Without an informant's tips, these products would have reached the marketplace. We could not have proven they were counterfeit.
Second, we approached Filene's Basement in Massachusetts and informed them they had counterfeit products in some of their stores. They refused to remove the products. Wouldn't you immediately remove them for customer safety?
Third, we have had trucks hijacked. We have been unable to identify or locate the stolen products. Here the only purpose for removing manufacturers' codes is to cover up a crime, totally frustrating law enforcement.
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Some retailers claim that the enactment of H.R. 2100 will prevent them from putting their codes on the bottles for scanning purposes. However, we can all agree that we will put our codes on the bottom of the bottle or on the top, allowing retailers to put their codes on; we are not disagreeing with them.
If, however, retailers do not support H.R. 2100, then what is their true motive? Is it consumer safety or their own personal profits for the corporation or private entities? Consumer product tampering is about crime, not about marketshare, not about maintaining higher consumer prices. A Federal law resulting from this type of legislation will protect the right of a consumer to be confident about the integrity, quality and safety of the products they purchase.
Thank you so much for the opportunity to address you.
Mr. COBLE. Thank you, Mr. DeJoria.
[The prepared statement of Mr. DeJoria follows:]
PREPARED STATEMENT OF JOHN PAUL DEJORIA, CHAIRMAN AND CEO, JOHN PAUL MITCHELL SYSTEMS
Mr. Chairman, Mr. Berman, and members of the Subcommittee, thank you for this opportunity to appear at this hearing to discuss H.R. 2100 (the ''Antitampering Act of 1999'').
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With my late partner and friend, Mr. Paul Mitchell, I co-founded a company that distributes high quality hair care products and skin care products, all of which are manufactured in the United States.
During the last twenty years, John Paul Mitchell Systems has invested millions of dollars making consumers aware of our products and consumers have come to rely on our company's integrity.
My company supports H.R. 2100. I would like to now show you a brief video presentation which demonstrates many of the reasons for that support. (Show Video Tape)
However, I am here today not just on behalf of my company, or on behalf of the professional beauty industry. I am here as a consumer. I am here as a parent. I am here as a grandparent.
John Paul Mitchell Systems is a leader in the national effort to protect all consumers from unscrupulous individuals who tamper with and decode products, thus endangering the safety of everyone, especially children.
Yes, this is an important issue to the professional beauty industry. However, the interest of John Paul Mitchell Systems in this issue extends far beyond—to what all of us eat, to what all of us place on our bodies, and to what all of us wear.
H.R. 2100 can help to prevent someone's child from being harmed, scarred, or worse. I simply am astonished as to how any company can oppose this legislation because this legislation will protect their customers. Without customers, manufacturers, distributors, and retailers do not exist.
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Unscrupulous business people remove manufacturers' codes on not just shampoo, but on baby food, over-the-counter medicines, and other consumer products, thus placing a trusting consumer at risk.
Eliminating tampering with consumer products is an issue of consumer safety and corporate honesty, not consumer savings and corporate profits.
As a manufacturer, we put codes on all of our products to protect both the consumer and our company. With these codes, we can trace our products back to the date of manufacture and determine the ingredients used in each batch of products. This information is not used too often, but when the information is required it can be because of a life-threatening situation, such as an allergic reaction to an ingredient. These codes are the ''safety net'' for both the consumer and the manufacturer. We cannot permit dangerous, unsafe or substandard products in the marketplace.
These codes also ensure that the consumer is getting fresh product with a shelf life that allows the complete use of a product in its best condition for both safety and performance. The consumer does not know how old a product is when a product is purchased with the date of manufacture code removed.
All manufacturers continue to encounter an increasing threat from both stolen products and counterfeit products. Date codes and special codes are placed on packaging to authenticate products and to enable an efficient removal of unsafe, old, stolen, and counterfeit products from retail stores. Without these codes, both the manufacturer and law enforcement agencies are helpless to prove when the product was produced, where the product was produced, or whether the product is stolen or counterfeit.
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Four recent experiences have led me to the conclusion that the United States government must provide federal protection against product tampering to all consumers:
First, we sued Randall's in Texas to stop the removal and replacement of our codes, the jury agreed, awarding us US$15 million, but the judge overturned the verdict by the jury.
Second, Quality King Distributors of New York was required to destroy more than US$1 million worth of counterfeit PAUL MITCHELL products. If these products had reached the marketplace, we could not have proven that they were counterfeit. This is not the first instance of Quality King Distributors purchasing and reselling counterfeit products.
Third, when we approached the well-known large chain retailer, Filene's Basement of Massachusetts, and informed them that they had counterfeit products in some of their stores, they refused to remove the products. We then had to sue. The case is now suspended because Filene's Basement Corporation has declared bankruptcy, but the company continues to operate and the product continues to be sold. One of the products is supposed to be a skin and hair moisturizer, but in one instance, this particular product found at a Filene's Basement Corporation store contained a nail polish remover-type substance, clearly a health risk to the consumer. Simple logic would dictate that if you own a store and someone, anyone, comes to you and says that a counterfeit product has been found in the store, that the managers of that store would immediately remove all of the products TO BE SAFE.
Fourth, we have had multiple incidents of truck hijacking, and we have been unable to identify or locate the stolen products. These truck hijackings have been violent, in some cases endangering the lives of truck drivers. In these cases, the purpose for removing manufacturers' codes is to cover-up a crime, the theft of products. The consumer has a right to receive first quality goods for their money. A recent survey found that they are selling our products, and presumably other products as well, above suggested retail prices. Further, they are selling products that are old, products that are out of date, and products with a reduced shelf life.
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The consumer is in the dark and cannot realize that they are paying for quality while potentially receiving an inferior product. Consumers have a right to be able to contact each and every manufacturer to question the integrity of the products they purchase, and to feel confident that the integrity of the manufacturer is behind the product.
Just as the consumer has a right to call into question the integrity of the manufacturer, the consumer should be looking at the retailer. Some retailers claim that enactment of H.R. 2100 will prevent them from putting their codes on the bottles for ''scanning'' purposes. We can all agree that we will put the codes on the bottom or top of each container, leaving the sides free for their use.
Whether the managers want to protect themselves, or want to protect their customers, the goal would be to get the products off of the shelves. In reality, it seems that until a child is hurt, until a child is killed, or many people are hurt, making an issue of product tampering, and, more importantly, seeking a federal law to prevent such activity, is unnecessary. Well, Mr. Chairman, unnecessary to me is waiting for a tragedy to happen before I do something that could have prevented it.
There is a solution if retailers truly want consumers to purchase only quality products. But, is that want the retailer really wants to sell? Or, does the retailer want to sell inferior products, but have consumers believe that they are purchasing quality products, and charge quality prices for inferior products?
Supporting H.R. 2100 will permit all retailers to clearly demonstrate to all consumers that the selling of tampered with products will not be tolerated. If, however, retailers do not support H.R. 2100, then what is their true motive? Is it consumer safety or corporate profits? Mr. Chairman, inferior consumer products are usually less expensive than quality consumer products.
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Consumer product tampering is about crime, not about market share, not about maintaining higher consumer prices.
A federal law resulting from this type of legislation will protect the right of a consumer to be confident about the integrity, quality, and safety of the product that they purchase.
Without a federal antitampering law, tamperers have a financial incentive to do what's wrong—and that's not right!
Thank you.
Mr. COBLE. Ms. Mountford, if you will pull that mike a little closer to you. Thank you.
STATEMENT OF MARDI MOUNTFORD, EXECUTIVE DIRECTOR, INTERNATIONAL FORMULA COUNCIL
Ms. MOUNTFORD. Okay. Good afternoon. My name is Mardi Mountford, and I am the executive director of the International Formula Council. The council is the association of manufacturers and marketers of formulated nutrition products, including infant formulas and adult nutritional formulas.
On behalf of the council, I thank all of you for the opportunity to appear today and to offer our strong support for H.R. 2100. This bill will protect the integrity of product identification codes by providing civil and criminal remedies for the intentional alteration or removal of such codes as well as the affixing of fake codes on all consumer goods including infant formulas and adult nutrition formulas.
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It also would strengthen the ability of manufacturers, wholesalers and retailers, as well as government agencies, and especially law enforcement officials, to protect the American consumer from the possible health risks as well as the confusion and deception associated with tampered goods.
Infant formulas are often sole-source food products for the most special and vulnerable segment of our society, newborn babies. About 4 million babies were born in the U.S. last year, and most of these babies received infant formula at some time during their first year of life. This is a very critical time in terms of growth and development. For example, a baby's birth weight usually triples in the first year, and its brain should double in size. Thus tampering with infant formulas, for example, by changing or removing a product code and affixing a fake code or a fake expiration date exposes these innocent babies to potential health risks.At a minimum they may not get the needed nutrients, and this could affect their growth and development. In the worst case, the product may not be a genuine product, and it could be life-threatening. I will mention an example of this later on.
Similarly, adult nutrition formulas are used as supplements or as sole-source food products for patients with a disease or health condition requiring specific dietary management. Frequently these patients are elderly. Tampering with these products, as well with the codes on their products, exposes vulnerable sick people to potential health risks.
Product codes allow the manufacturers to fingerprint each product with vital production data, including the batch number, the date and place of manufacture, and the expiration date. And these codes also enable manufacturers to trace the date and destination of shipments if it is needed.
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The codes are typically stamped in ink or embossed on the bottom of the can. These are different from the UPC codes on the label. Thus, if a product fails to meet the manufacturer's quality or safety standard, product codes enable the manufacturer to assess the number of products affected and to pinpoint their distribution. With this information, the manufacturer, wholesalers, retailers and interested government agencies can quickly and effectively recall those products that are potentially harmful to the consumer and reassure the consumer of products that remain safe.
Product codes are without question the single most important factor in a successful recall. On the rare occasions when a nutritional product has failed to meet a quality or a safety standard, the manufacturers have consistently relied upon product coding to identify and recall the appropriate product.
For the vast majority of consumer goods, including food products like infant formula and adult nutritionals, this type of coding, which is so critical to the health and safety of consumers, is not sufficiently protected under current law. Despite the importance of product coding to consumers' satisfaction, as well as safety and law enforcement efforts, manufacturers are finding it increasingly difficult to the protect coding system.
There is no legitimate reason to remove a product code. Unauthorized distributors typically will deface or remove product coding and then often affix a fake code or a counterfeit label to the decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are stolen, outdated or intended for a foreign market.
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Following are some of the examples of these unscrupulous practices in recent years. In 1995, a wholesaler in Miami acting in combination with at least three other individuals managed to divert thousands of cases of outdated infant formula and adult nutritional products which were destined for destruction. The group removed the original product codes and labels, affixed counterfeit labels, fake batch codes, expiration dates, then resold the expired formulas to wholesalers and retailers in the marketplace. The product subsequently was found in 16 different States.
Also in 1995, a 7-month government investigation uncovered another group of individuals located in Kentucky who were repacking loose cans of infant formula with different batch codes and expiration dates in counterfeit boxes, then ink-jetting fictitious expiration dates on the outside of the cases. The operation was alleged to have handled 70,000 cases of product per month and reportedly had sales of approximately $44 million in a 15-month period.
I have just a couple other examples, and then I will wind up.
Mr. COBLE. All right.
Ms. MOUNTFORD. In 1998, infant formula intended for a government program in Ohio was decoded, in this case the phrase ''not for resale'' was removed from the labels, and then illegally repacked in counterfeit boxes and then resold. Despite a 31-count indictment of four people, the stiffest individual penalties were a $1,000 fine, a suspended 15-year prison sentence and 5 years probation.
Earlier this year in Texas, Federal, State and local law enforcement officials seized more than 60,000 cans of stolen infant formula. Some of the original batch codes and expiration dates had been removed and replaced by fake codes and dates, then repackaged in counterfeit cases and shipped to large northern cities for sale in small stores. Fourteen people were named in the 154-count indictment. The assistant U.S. Attorney also requested forfeiture of over $8 million alleged to be obtained from the stolen infant formula operation.
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One other example of the importance of product codes. Earlier this month, FDA and a product manufacturer alerted consumers that a special infant formula for highly allergic infants had been counterfeited and subsequently sold in stores in southern California. This mislabeled formula could cause severe allergic reactions in some infants, since the actual formula in the can was not the special formula identified by the fake label. In this case, the manufacturers relied on the product codes to help consumers identify the counterfeit product, as well as to verify if they had legitimate product.
We simply can't take the chance of any baby or sick person being harmed by a nutritional product which has been defaced, decoded or otherwise tampered with. We urge your support of this legislation. Thank you.
Mr. COBLE. Thank you, Ms. Mountford.
[The prepared statement of Ms. Mountford follows:]
PREPARED STATEMENT OF MARDI MOUNTFORD, EXECUTIVE DIRECTOR, INTERNATIONAL FORMULA COUNCIL
SUMMARY
The International Formula Council (IFC) strongly supports ''The Anti-Tampering Act of 1999.'' By providing civil and criminal remedies for the alteration or removal of product codes, as well as the affixing of fake codes, on consumer goods including infant formulas and adult nutrition formulas, this bill will strengthen the ability of manufacturers, wholesalers and retailers as well as government agencies to protect the American consumer from the possible health risks as well as the confusion and deception associated with tampered goods.
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Infant formulas are often sole-source food products for the most special and vulnerable segment of our society—newborn babies. Most babies born in the United States receive infant formula at some time during their first year of life. Similarly, adult nutrition formulas are used as supplements or as a sole-source food product for patients who are often elderly and have a disease or health condition requiring specific dietary management. Tampering with infant formulas and adult nutritionals, for example by changing or removing a product code and affixing a fake code, exposes innocent babies and vulnerable sick people to the potential health risks of improperly coded product.
In summary, ''The Anti-Tampering Act of 1999'' provides the necessary additional law enforcement authority and remedies to ensure implementation of needed prohibitions against product tampering, which do not exist under current law. These federal measures are needed to further discourage tampering and to protect manufacturers' ability to trace products and implement successful recalls, when necessary. This legislation will help preserve the availability of safe and healthy nutritional products for all consumers, especially babies and sick people who need these products at a critical time in their life. Additionally, this legislation will further assure consumers they can be confident the nutritional products they purchase are indeed safe, wholesome and nutritious.
* The IFC is the association of manufacturers and marketers of formulated nutrition products (e.g., infant formula and adult nutrition formulas); IFC members are Ross Products Division, Abbott Laboratories; Nestlé USA, Inc., Nutrition Division; and Novartis Nutrition Corporation.
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STATEMENT
My name is Mardi Mountford and I am Executive Director of the International Formula Council (IFC). The IFC is the association of manufacturers and marketers of formulated nutrition products (e.g., infant formula and adult nutrition formulas).(see footnote 1)
On behalf of the IFC, I thank you for the opportunity to appear today and to offer our support for the proposed bill, ''The Anti-Tampering Act of 1999'' (HR 2100). [HR 2100 was introduced in the House on June 9, 1999 by Representatives Goodlatte (R–VA) and Lofgren (R–CA).]
This bill will protect the integrity of product identification codes (subsequently referred to as ''product codes''),(see footnote 2) by providing civil and criminal remedies for the intentional alteration or removal of such codes as well as the affixing of fake codes, on all consumer goods including infant formulas and adult nutrition formulas. It also would strengthen the ability of manufacturers, wholesalers and retailers as well as government agencies to protect the American consumer from the possible health risks as well as the confusion and deception associated with tampered goods.
Infant formulas are often sole-source food products for the most special and vulnerable segment of our society—newborn babies. Additionally, most babies born in the United States receive infant formula at some time during their first year of life. Thus, tampering with infant formulas, for example by changing or removing a product code and affixing a fake code, exposes innocent babies to the potential health risks of improperly coded product.
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Similarly, adult nutrition formulas are used as supplements or as a sole-source food product for patients with a disease or health condition requiring specific dietary management. Frequently, these patients are elderly. Tampering with adult nutritional product codes exposes vulnerable sick people to the potential health risks of improperly coded product.
Product codes allow manufacturers to ''fingerprint'' each product with vital production data, including the batch number, the date and place of manufacture, and the expiration date. These codes also enable manufacturers to trace the date and destination of shipments, if needed. Product codes are typically stamped in ink or embossed on the bottom of the can. (These codes are different from the UPC code on the label which identifies only the manufacturer and the product.) Thus, if a product fails to meet the manufacturer's quality or safety standard, product codes enable the manufacturer to assess the number of products affected, and pinpoint their distribution. With this information, the manufacturer, wholesalers, retailers and interested government agencies can quickly and effectively recall those products that are potentially harmful to the consumer (and reassure the consumer of products that remain safe for consumption).
Product codes are, without question, the single most important factor in a successful recall. On the rare occasions when a nutritional product has failed to meet a quality or safety standard, manufacturers have consistently relied upon product coding to identify and recall the appropriate product. For the vast majority of consumer goods (including most food products), this type of coding, which is so critical to the health and safety of consumers, is not protected under current law.
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Despite the importance of product coding to consumer satisfaction as well as safety and law enforcement efforts, manufacturers are finding it increasingly difficult to protect coding systems from unscrupulous distributors who alter or remove coding in order to divert products to unauthorized retailers. To prevent manufacturers from identifying the source of diverted or stolen products, unauthorized distributors will, as a matter of course, deface or remove product coding before distributing the goods to unauthorized retailers.
After removing product codes, unauthorized distributors often affix fake codes and counterfeit labels to the decoded goods in order to lessen the likelihood of detection and disguise the fact that such goods are stolen, outdated, or intended for a foreign market. Following are examples of these unscrupulous practices in recent years:
In 1995, a wholesaler in Miami, acting in combination with at least three other individuals, managed to divert thousands of cases of outdated infant formula and adult nutritional products which were destined for destruction. The group removed the original product codes and labels, affixed counterfeit labels, fake batch codes and expiration dates, then resold the expired formulas to wholesalers and retailers for distribution in the marketplace; it subsequently was found in 16 states.
Also in 1995, a seven month government investigation uncovered another group of individuals, located in Kentucky, who were repacking loose cans of infant formula with different batch codes and expiration dates in counterfeit boxes, then ink jetting fictitious expiration dates on the outside of the cases. The operation was alleged to have handled 70,000 cases of product per month, and reportedly had sales of approximately 44 million dollars in a 15 month period.
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In 1998, infant formula intended for a government program in Ohio was decoded (i.e., the phrase ''Not for Resale'' was removed from the labels) then illegally repacked in counterfeit boxes and resold into the marketplace. Despite a 31 count indictment of 4 people, the stiffest individual penalties were a $1000 fine, a suspended 15 year prison sentence and 5 years probation.
Earlier this year in Texas, federal, state and local law enforcement officials seized more than 60,000 cans of stolen infant formula. Some of the original batch codes and expiration dates had been removed and replaced by fake codes and dates, then repackaged in counterfeit cases and shipped to large Northern cities for sale to small stores. Fourteen people were named in the 154 count indictment; the Assistant US Attorney also requested forfeiture of over $8 million dollars alleged to have been obtained from the stolen infant formula operation.
Additionally, following is a recent example illustrating the importance of product codes. Earlier this month, FDA and the product manufacturer alerted consumers that a special infant formula for highly allergic infants had been counterfeited and subsequently sold into stores in southern California. The mislabeled formula could cause severe allergic reactions in some infants since the actual formula in the can was not the special formula identified by the fake label. Manufacturers relied on product codes to help consumers identify the counterfeit product, as well as to verify legitimate product.
We simply cannot take the chance of any baby or sick person being harmed by a nutritional product which has been defaced, decoded or otherwise tampered with. Federal, state and local enforcement of current laws has been vigilant and thorough, but this potentially serious problem can and must be dealt with even more effectively if those responsible are to be deterred and brought to justice. Manufacturers need the tools to protect their coding systems in order to protect the health and safety of American consumers. Currently, federal law does not adequately address many of the common methods of decoding products and only applies to a limited category of consumer products, including pharmaceuticals, medical devices and specific foods.
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Moreover, current anti-tampering statutes only apply if the decoder exhibits criminal intent to harm the consumer. They do not address the vast majority of decoding cases which are motivated by economic considerations, but may ultimately result in harm to the consumer.
Enactment of The Anticounterfeiting Consumer Protection Act of 1996 (ACPA), which IFC supported, was an important step in combating product tampering and counterfeiting. However, as John Bliss, Coalition Against Product Decoding, testified to this subcommittee, neither the ACPA nor other existing laws prevent the removal of product codes and the affixing of fake codes. Additional legislation is necessary to ensure consumers are protected from the potential health and safety risks related to intentional and knowing product decoding.
In summary, ''The Anti-Tampering Act of 1999'' provides the additional law enforcement authority and remedies necessary to ensure implementation of needed prohibitions against product tampering, which do not exist under current law. This legislation would provide consumers and manufacturers with a civil right of action against decoders and impose additional criminal sanctions against persons who knowingly engage in decoding activities (including the affixing of fake codes) and threaten the health and safety of the public.
These are the kinds of federal measures that are needed to further discourage tampering and to protect manufacturers' ability to trace products and implement successful recalls, when necessary. This legislation will help preserve the availability of safe and healthy nutritional products for all consumers, especially babies and sick people who need these products at a critical time in their life. Additionally, this legislation will further assure consumers they can be confident the nutritional products they purchase are indeed safe, wholesome and nutritious.
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On behalf of the International Formula Council, I thank the committee for their consideration of this matter, and for the opportunity to submit this testimony.
Mr. COBLE. Mr. Dahl.
STATEMENT OF JAMES A. DAHL, PRESIDENT, INTEGRITY RESOURCE GROUP, INC.
Mr. DAHL. Thank you.
Good afternoon, Mr. Chairman and members of the subcommittee. I appreciate the opportunity to appear here today in support of H.R. 2100, the Antitampering Act of 1999. As indicated during my introduction, during my last 5 years of government service, I served as the Assistant Director of FDA's Office of Criminal Investigations (OCI) and had headquarters oversight responsibility for all criminal investigations conducted by the FDA.
As I begin my remarks, I would like to acknowledge and clarify one very important issue. There is often a mistaken tendency to correlate the term ''diversion'' with criminal activity. However, what I want to talk about here today are those cases in which the line between legal trade practices and criminal activity is crossed, often resulting in a risk to the public health.
Mr. Graham mentioned earlier the investigation in which a counterfeit infant formula was distributed from California. I would like to point out that that case involved the use of fraudulent identification codes and expiration dates sprayed onto the bottom of the cans with an ink jet machine to simulate the legitimate manufacturer's coding. Fortunately, the criminals made a mistake and used an identification code for a French-Canadian version of this product that was never distributed in the United States. Since the counterfeit labels used in this scheme were of relatively high quality, it was actually the illicit product code that facilitated the identification of the totally counterfeit infant formula and the seizure of these dangerous goods by FDA OCI.
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As an offshoot of the California case involving totally counterfeit infant formula, FDA OCI special agents began looking at other related criminal activity. What we found was a massive gray market industry involved in counterfeiting registered trademarks on boxes of infant formula and marking those containers with expiration dates sometimes predating the actual expiration date of the products. To give you an idea of the extent of these operations, just one indictment charged a Kentucky firm with various criminal offenses involving more than $44 million in diverted product in one 15-month period.
Food and drug manufacturers often have a very legitimate need to destroy or dispose of their products. These products could be expired, substandard, damaged, produced only for test purposes, adulterated, over production limits, et cetera. The means used to dispose of these products vary, but if a criminal gets custody of the product prior to destruction, you can be sure he will try to divert it for his own economic gain, and most often this will involve tampering with code numbers and expiration dates.
A 1999 indictment in the Southern District of Florida charged multiple defendants in an elaborate scheme to illegally divert products to unsuspecting food wholesalers around the country. These products were considered unsuitable for human consumption by their manufacturers and were to be destroyed by being used as ingredients in the manufacture of animal feed. However, the products were diverted from the Missouri animal feed manufacturer through a Canadian distribution firm to another company in Miami. Ultimately the Miami firm removed product codes and expiration dates on many products by using a solvent. They then reapplied fraudulent codes using their own ink jet equipment.
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The potential health consequences of this operation were apparent during the execution of the search warrant, when OCI special agents seized rodent-infested products and realized that the criminals were even decoding an expired adult nutritional product commonly used to feed comatose hospital patients through nose tubes.
In another FDA OCI investigation, counterfeit versions of a drug commonly prescribed to AIDS patients were found in commercial distribution channels. The code numbers and packaging were fraudulent and counterfeit; although, the drug itself is believed to have been from a long-outdated batch rejected years ago by the manufacturer for quality reasons. In this case, it is believed that the criminals invented fraudulent code numbers for consumer packages.
In other cases, expensive prescription drugs used for the treatment of AIDS and other serious illnesses frequently surfaced in packaging bearing fraudulent code numbers. In many cases these drugs have been stolen from pharmacies, hospitals, commercial shippers and warehouses.
In some instances, the drugs are believed to have originated in other countries where they were often produced in unknown, unregulated or possibly unsanitary environments. These criminals typically apply bogus code numbers to the packaging to extend the life of the drug and to cover up the true source of the product.
In an undercover FDA OCI investigation in New York that involved wholesale purchases of expensive fertility drugs, fraudulent code numbers appeared on the counterfeit packaging containing these injectable products. Although laboratory analysis indicated the presence of the active ingredient in these products, the FDA was not able to determine the place or conditions of their manufacture, largely because of the absence of legitimate batch code data. This case is scheduled for trial in New York in 2 weeks.
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Fraudulent product identification coding has even been used in schemes involving bulk food products, such as metric tons of frozen shrimp. For instance, a Florida indictment charged an importer with criminal offenses involving repeated washing, mixing and soaking of putrid and decomposed shrimp in a solution containing copper sulfate, chlorine, lemon juice and other chemicals. Central to this scheme was the recoding of product lots as they were repeatedly rejected by buyers, chemically treated, and then resold to others who did not know the product's history.
I hope these few examples based on my FDA experience help demonstrate the absolute confidence we must have in product identification codes.
I would also like to cite my years investigating mail bombs while a U.S. Postal inspector. In any bomb scene search, the ability to identify bomb components through the use of product identification numbers is critical. For example, the World Trade Center bombing investigation was solved in large part because of a code number found on a truck part.
In conclusion, I can think of no legitimate reason for any person to remove product identification codes or expiration dates from consumer products. I urge your favorable consideration of H.R. 2100. Thank you.
[The prepared statement of Mr. Dahl follows:]
PREPARED STATEMENT OF JAMES A. DAHL, PRESIDENT, INTEGRITY RESOURCE GROUP, INC.
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Good afternoon Mr. Chairman and members of the Subcommittee. I appreciate the opportunity to appear before the Subcommittee today in support of HR 2100, the Anti-Tampering Act of 1999. To provide some brief background information I am currently president and co-owner of a security and crisis management consulting firm in the Washington, DC area (Integrity Resource Group, Inc.). Previously, I was a manager at a large international security consulting firm and before that a federal criminal investigator for more than 25 years. During my last five years of government service I served as Assistant Director of the Food and Drug Administration's Office of Criminal Investigation (OCI) and had headquarters oversight responsibility for all criminal investigations conducted by the FDA.
As I begin my remarks I would like to acknowledge—and clarify—one very important issue. There is often a mistaken tendency to correlate the term ''diversion'' with criminal activity. I, perhaps, understand that as well as anyone because of my experience with FDA's Office of Criminal Investigations. Certainly, in that role we saw numerous cases where the diversion of regulated products was a key element of a sophisticated criminal enterprise. And it is because of that experience that it was important to remind ourselves, as investigators, that there are very legitimate forms of diversion or parallel trading. However, what I want to talk about here are those cases in which the line between legal trade practices and criminal activity is crossed, often resulting in a risk to the public health.
I would like to share with you a few examples from my years at FDA. These examples highlight how altered product coding is used to disguise criminal activity, and perhaps more importantly, how the safety of American consumer goods can be affected by this conduct. They are also representative of what I believe is a continuing problem.
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Mr. Graham has mentioned the investigation in which counterfeit infant formula was distributed from California. I would like to point out that that case involved the use of fraudulent identification codes and expiration dates sprayed onto the bottom of cans with an ink jet machine to simulate the legitimate manufacturer's coding. Fortunately, the criminals made a mistake and used an identification code for a French-Canadian version of this product that was never distributed in the United States. Since the counterfeit labels used in this scheme were of relatively high quality, it was actually the illicit product code that facilitated identification of the totally counterfeit infant formula and the seizure of these dangerous goods by FDA/OCI.
As an offshoot of the California case involving totally counterfeit infant formula, OCI special agents began looking at other related criminal activity. What we found was a massive ''gray market'' industry involved in counterfeiting registered trademarks on boxes of infant formula and marking those containers with expiration dates sometimes pre-dating the actual expiration date of the products. To give you an idea of the extent of these operations just one indictment charged a Lexington, Kentucky firm with various criminal offenses involving more that $44 million in diverted infant formula sales in one 15 month period.
Food and drug manufacturers often have a very legitimate need to destroy or dispose of their products. These products could be expired, substandard, damaged, produced only for test purposes, adulterated, over production limits, etc. The means used to dispose of these products vary, but if a criminal gets custody of the product prior to destruction you can be sure he will try to divert it for his own economic gain, and most often this will involve tampering with code numbers and expiration dates.
A 1999 indictment in the Southern District of Florida charged multiple defendants in an elaborate scheme to illegally divert food products to unsuspecting food wholesalers around the country. These products were considered unsuitable for human consumption by their manufacturers, and were to be destroyed by being used as ingredients in the manufacture of animal feed. However, the products were diverted from the Missouri animal feed manufacturer through a Canadian distribution firm to another company in Miami. Ultimately, the Miami firm removed product codes and expiration dates on many products by using a solvent. They then re-applied fraudulent codes using their own ink jet equipment. The potential health consequences of this operation were apparent during the execution of a search warrant when OCI special agents seized rodent infested products and realized that the criminals were even re-coding an expired adult nutritional product commonly used to feed comatose hospital patients through nose tubes.
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In another FDA/OCI investigation counterfeit versions of a drug commonly prescribed to AIDS patients was found in commercial distribution channels. The code numbers and packaging were fraudulent and counterfeit, although the drug itself is believed to have been from a long outdated batch rejected years ago by the manufacture for quality reasons. In this case it is believed the criminals ''invented'' fraudulent code numbers for consumer packages. In other cases expensive prescription drugs used for the treatment of AIDS and other serious illnesses frequently surface in packaging bearing fraudulent code numbers. In many cases these drugs have been stolen from pharmacies, hospitals, commercials shippers, and warehouses. In some instances the drugs are believed to have originated in other countries where they are often produced in unknown, unregulated or possibly unsanitary environments. These criminals typically apply bogus code numbers to the packaging to extend the life of the drug and to cover up the true source of the product.
An undercover FDA/OCI investigation in New York involved wholesale purchases of expensive fertility drugs. Fraudulent code numbers appeared on the counterfeit packaging containing these injectible products. Although laboratory analysis indicated the presence of the active ingredient in these products, the FDA was not able to determine the place or conditions of their manufacture largely because of the absence of legitimate batch code data. This case is scheduled for trail in New York in two weeks.
Fraudulent product identification coding has even been used in schemes involving bulk food products such as metric tons of frozen shrimp. For instance, a Florida indictment charged an importer with criminal offenses involving the repeated ''washing, mixing and soaking'' of putrid and decomposed shrimp in a solution containing copper sulfate, chlorine, lemon juice and other chemicals to conceal the inferiority of the product. Central to this scheme was the ''re-coding'' of product lots as they were repeatedly rejected by buyers, chemically treated, and re-sold to others who did not know the products history.
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Reliable product identification code data are critical identifiers used by government investigators and regulators on a daily basis. These identifiers are also used by manufacturers, distributors and consumers to effectively recall defective, unhealthy, or dangerous products. Often these recalls are done only for reasons related to the public health. Sometimes, as in the case of malicious product tampering, recalls also involve criminal activity. In still other instances manufacturers use product identification codes to help consumers verify that they possess legitimate product. For instance, earlier this month an infant formula manufacturer put out a news release asking consumers to double check embossed product identification codes on the cans before feeding the product to babies. This was necessary after the company confirmed reports that some cans of another milk based infant formula were discovered with counterfeit labels falsely indicating the product was their soy based infant formula. Obviously, the possibility of a lactose allergic child consuming this product could produce disastrous results.
I hope these few examples based on my experience at FDA help demonstrate the absolute confidence we must demand in product identification codes. It is true that criminals often violate several laws when they engage in unlawful activity. It should be obvious in the cases I described today that the cited unlawful activity might have been more aggressively prosecuted using HR 2100. What worries me most are the more subtle activities involving code tampering that have gone or will go undetected without the strong consumer protection legislation set forth in HR2100.
Opponents of this bill will argue that its provisions will ''impede free trade'', and interfere with legitimate secondary sales markets. That is not at all the issue. As constructed, the bill will not impede the legitimate sale of consumer goods. What the bill will do is provide law enforcement authorities with a valuable tool to combat complex criminal schemes—schemes that often include the obliteration of the manufacturers' product identification codes and the use of fraudulent or counterfeit codes in their place.
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In conclusion, I can think of no legitimate reason for any person to remove product identification codes or expiration dates from consumer products. I urge your favorable consideration of HR 2100 to help prevent the undocumented, unregulated and potentially life threatening business that may otherwise occur.
Mr. COBLE. Thank you, lady and gentlemen for your testimony today.
As I said at the outset, that a good deal of interest has been generated by this bill, so we will probably have two rounds of questioning. And we try to comply with that red light as well, so let me start off.
Mr. Graham, based upon your experience in law enforcement and corporate security, is it your belief that most diversion cases born of criminal misconduct comprise either public health and safety or product performance?
Mr. GRAHAM. Yes, sir.
Mr. COBLE. Now, some opponents of this bill would say that the bill is a pretext to allow manufacturers to exert greater control over distribution of their products to generate inflamed profits. What would you say to that charge?
Mr. GRAHAM. I would say that is not accurate. The truth is we do want to have control over the distribution of our products to guarantee the safety, efficacy and authenticity of these products. At the end of a day, it is our responsibility to guarantee the consumer that the products that they purchase are safe. The reality is in the consumer good area involving cosmetics and beauty care products, as Mr. DeJoria would tell you, in many cases, when diverted hair care products are purchased in unauthorized retail locations, they are sold at or above manufacturers' suggested retail price.
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So in result, there is no benefit to the consumer to purchase diverted goods from unauthorized retail locations. To the contrary, what they pay for is the bonus of the questionable authenticity and efficacy and safety of these products.
Mr. COBLE. Okay. Mr. Bliss and Mr. DeJoria. Mr. Bliss first. What is wrong with the situation where a distributor with excess inventory sells its products to a discounter? That in and of itself doesn't give you any grief, or does it?
Mr. BLISS. First, I would suggest that the bill doesn't stop sales to discounters, but you are correct, Mr. Chairman, there is nothing inherently wrong with the distributor selling excess inventory to a discounter.
Mr. COBLE. Let me give part B of that question. Would this bill prohibit a distributor from doing this?
Mr. BLISS. Not unless the distributor was distributing goods that he had knowledge were decoded.
Mr. COBLE. That he had knowledge?
Mr. BLISS. Were decoded.
Mr. COBLE. Oh. Mr. DeJoria, do you want to answer?
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Mr. DEJORIA. Sir, with my business and many businesses like me, that is not going to happen. We take back any excess product. If a distributor has an excessive product, we will take it back. If a distributor has product that is old, we will take it back and not let it on the marketplace. This is an issue, sir, of public safety.
Mr. COBLE. Mr. Sandler, this is a hypothetical. Sometimes hypotheticals can become tricky, and I don't mean it to be, but is it illegal or would it be improper for a manufacturer to terminate a business relationship with a retailer or a distributor who indulges in diversion? Can it be done as a matter of commonplace practice?
Mr. SANDLER. As a common practice, I would say no. There may be contractual obligations which were violated, but by and large most of the diversion which takes place in this country into parallel market trade is perfectly legal under our laws. It is not a violation of the contract or any Federal law and doesn't impose any threat or harm to the public.
Mr. COBLE. Now, private agreements between a manufacturer and its distributors could go a long way toward inhibiting the wrong kind of diversion; could it not?
Mr. SANDLER. I agree it could. One of our problems with the legislation is that it doesn't deal with the type of issue that you are addressing, it just deals with the codes. If removal of the codes becomes the criminal violation, then those codes can be used for any reason, whether it is maintaining high prices, retail price maintenance issues that have been addressed before, or the circumvention of the Supreme Court decisions under the copyright and trademark laws that permit the distribution of these goods.
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Mr. COBLE. Mr. Bliss, do you want to be heard on that question?
Mr. BLISS. Sure, Mr. Chairman. I think that we have reached the nub of the issue when Mr. Sandler says the problem of the legislation is that it deals only with codes. Well, that is precisely what the legislation does. Mr. Sandler would like us to debate the merits or lack of merits in engaging in gray market activities. We are here in a legislative hearing to discuss the four corners of a bill that deals only with codes.
I would agree with part of what he said. I think that there are private agreements between manufacturers and distributors. They rely on product codes, though. And that really is the nub of the problem here, because if the codes are changed or removed, then the distributors are free to violate the agreement with the manufacturer, and in our view protecting those codes serves a public interest by supporting legal contracts.
Mr. COBLE. Well, my red light has silenced me for the moment. Let me recognize the gentleman from Michigan Mr. Conyers.
Mr. CONYERS. Thank you, Mr. Chairman.
I was just looking up all of the Federal laws that make what has been complained of here crimes at the present moment. There are quite a few of them. As a matter of fact, all of you have talked about cases in which people were caught and prosecuted.
Ms. Mountford didn't like the way that the judge or the jury dealt with the offenders in a case she cited, which I don't know the facts or what the circumstances were. Maybe I would disagree with you, too, if I knew them. But we are being called upon here to make decoding illegal, a crime, period, and that is a little bit of a far stretch.
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You know, lady and gentlemen, the witnesses, you know if I didn't know about the economic way the system worked, this would all be great. I mean, there isn't any problem; nobody wants to foster crime or counterfeiting or stealing people's products. But let us face it, we are talking about a multibillion-dollar industry that is going to be faced with potential damage in a very large way, and it is going to affect consumers.
Nobody here has once mentioned—I am for safety, and I want to protect children's formula and inflammable baby clothing, but we are saying all codes, and we have mostly criminal law enforcement experts here. But the fact of the matter is that what we are doing is taking the parallel industries into a very serious compromised position, and I am not sure if I am ready to say to all of the millions of people that buy these discounted prices—I mean, it hasn't been really quite conceded yet that—I have one instance where the price went up at a discount store. I don't know how long that discount store could stay in business by raising prices. That is not why people go to discount stores.
So, what gives, friends? I mean, is there a reality factor here that I haven't confronted yet or what? There are all kinds of laws—you know, if you steal something of somebody's in commerce, that is against the law. If it is in interstate commerce, it is against Federal law. We have laws against theft. We have laws against fraud.
Why do we need a law against decoding? Sometimes some of them are not even visible to the naked eye. I mean, we have got a very, very tricky situation here, and I am not sure if I am hearing the whole story.
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Now, Mr. Sandler, why would it be necessary to have legislation appearing—that applies only to batch codes? I mean, what benefit could be gained from that?
Mr. SANDLER. The health and the safety recall issue is truly based upon the batch codes and expiration dates. The subcommittee heard testimony that had to deal with counterfeiting batch codes and expiration dates, and certainly counterfeiting isn't anything that we would support. We certainly would support legislation that dealt with counterfeiting, although I think probably the existing counterfeit legislation already deals with that. If it needs to be strengthened, that is something well worth examining.
Mr. CONYERS. You are suggesting we might separate out the health-related products issue, baby food, drugs, inflammable pajamas, but when we are saying all batch codes, any tampering or removal of them are a crime, this is still quite broad. How can we be sure that manufacturers will not use these new legal rights to terminate distributors who sell into the parallel market?
I hope I am not being too sensitive here, but we have got a consumer issue here, and that is what it seems to me is a bigger problem.
Mr. SANDLER. Should I respond to that?
Mr. CONYERS. Sure.
Mr. SANDLER. I agree with you. In our testimony we make it clear that we regard the batch codes and the expiration dates as very different than the invisible and the hidden codes. My experience is with the fragrance and health and beauty aids. When I look at something like these small numbers that appear on a Mount Blanc pen that a foreign manufacturer places there, I don't know what the health and safety issue might be involved. Certainly these additional hidden and secret codes raise a different issue, unrelated to health and safety, and this bill is so broadly worded as to embrace all of that.
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Mr. CONYERS. Okay, thank you.
Mr. COBLE. The gentleman from Virginia Mr. Goodlate.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Mr. Sandler, I have read your written statement in which you impugn the motives of myself and Ms. Lofgren in terms of our purpose for introducing this legislation. So let me return the favor with regard to my view of the motives of your organization for opposing this legislation.
Can you tell us first who the members are of the American Free Trade Association?
Mr. SANDLER. We can submit that to you, I don't have a list of the members here. We have——
Mr. GOODLATTE. I have got a list here. Let me ask you if these folks are a member. Is Quality King a member?
Mr. SANDLER. Yes, they are.
Mr. GOODLATTE. Allou?
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Mr. SANDLER. I would have to verify that. I cannot tell you.
Mr. GOODLATTE. United? Kingston Wholesale?
Mr. SANDLER. Excuse me?
Mr. GOODLATTE. Let me just focus on Quality King since that is the one you verified as a member. You cite in your testimony a long list of existing laws, and the gentleman from Michigan alluded to them as well related to the battle against counterfeit goods, unsafe goods, recall goods that are unsafe in the marketplace, and I commend you.
That is a good list, because one of the items on that list is the product anticounterfeiting legislation that I introduced which passed the Congress, the Anticounterfeiting Consumer Protection Act of 1996, which I introduced, and which was signed into law by the President. I introduced that in response to a problem that we have in this country that is ongoing that we are attempting to battle dealing with counterfeit goods. One of those goods was a very widely renowned case of counterfeit shampoo, Head & Shoulders shampoo in which Procter & Gamble, the manufacturer of that product, had to take out full-page ads in newspapers all across the country to alert them to products being distributed by your client, Quality King, that were defective. The label looked just exactly like Procter & Gamble's Head & Shoulders label, and everything on it was just absolutely identical.
And we introduced that legislation in response to their actions in a case that I have here listed along with 37 other civil and criminal cases brought against Quality King for violating the very laws that you cited here in your brief, including numerous cases where they were accused of distributing counterfeit Chloe perfume, accused of selling counterfeit cephaclor antibiotic capsules, accused of selling counterfeit Ovulen-21 birth control pills that were found at Quality King's Long Island warehouse, accused of selling counterfeit cephaclor pills again, accused of selling counterfeit hair care products by the gentleman sitting next to you, John Paul DeJoria of John Paul Mitchell Systems. And one of those is accused by Procter & Gamble who brought a suit against Quality King and OmniSource seeking, among other things, a seizure of counterfeit Head & Shoulders shampoo and damages, costs and attorneys' fees when they alleged that Quality King sold counterfeit shampoo that I cited to Kroger.
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Now the problem is ongoing, and here is why it is ongoing. There are only so many things you can do to determine whether or not somebody is selling a counterfeit product, selling a stolen product, which they have also been accused of doing, and one of the ways to do that is with the product codes that are on these products. If your folks are allowed to continue to take the code off the product, then when somebody comes into some store, and they find that it is there, and it is counterfeit, or if it is been stolen, they say, well, you know, we don't know where it came from. If they are prohibited from taking it off of the product, it can be much more easily traced.
So for stolen products or counterfeit products, it seems to me that requiring that these labels from the manufacturer to the consumer stay on the product for that reason, also for the purpose of recalls and also for another matter that we have not talked about here today, and that is unrelated criminal investigations.
There are a number of noteworthy cases which these codes kept on products helped in the investigation of, for example, the Pan Am 103 bombing over Lockerbie, Scotland. The part number found on a microprocessor from the bomb provided the vital clue as to the identity of the Libyan terrorists. Product codes play a critical role in certain criminal investigations such as the Atlanta bombing during the Olympics. The codes found on batteries used in the pipe bomb enabled Federal agents to trace the site of the purchase, and hopefully at some point may lead to the apprehension of the bomber at some point. But if we don't have these codes, there are fewer and fewer clues, resources available to take products found on the site of crimes and take them back to the source.
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So it seems to me that there are a lot of good reasons for keeping these codes on, including following the legitimate behavior and hopefully maintaining the legal behavior of some of the folks who are members of your association.
Do you want to respond to that?
Mr. SANDLER. Yes, I do. First, I will preface this by saying that I am not an attorney representing Quality King, and so I can't comment on any of the specific cases that you have referenced. I would like an opportunity to allow them to respond to those comments about prior cases.
I can tell you as an attorney that has represented many companies on parallel market issues that we are dealing with a highly litigious area. Quality King, I do know, went to the Supreme Court and won a 9–0 decision before the Supreme Court where they were accused of violating the copyright laws, and in point of fact they had not. You might recite trial court and appellate court decisions saying that they were in violation of Federal laws in that instance.
Mr. GOODLATTE. I am always pleased when they are obeying the law, but I am very concerned about these cases cited where they apparently haven't.
Mr. SANDLER. I cannot respond to those specifics, but we have asked for an opportunity to do that. I cannot do that on the record today because I don't know about those cases. I do know about the litigious nature, and I do know that your comments today refer consistently to being accused of this and being accused of that, which is not quite the same as saying that they were found to have counterfeited goods or were found to have——
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Mr. GOODLATTE. They have a remarkably long record of being accused of this and accused of that. I don't have the outcome of all of the cases in front of me.
Mr. SANDLER. I would like to respond, but I can generally say this is a litigious area. It has kept the lawyers busy. I know that we have been more successful than not in defending accusations made against parallel market trade.
Again, I would like to emphasize that our testimony reflects our interest in preservation of genuine batch codes and expiration dates. I think those are the sorts of codes which are the codes that are important for the law enforcement purposes and for health and safety reasons.
Mr. COBLE. The gentleman's time has expired. Just for the purpose of clarification, the record will be kept open so if you can respond to Mr. Goodlatte's questions, that would be in order.
[The information referred to follows:]
| Quality King Distributors, Inc., |
| Ronkonkoma, NY, October 29, 1999. |
Hon. HOWARD COBLE,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
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House of Representatives, Washington, DC.
DEAR REPRESENTATIVE COBLE: We would like to comment about the hearing that occurred on October 21, 1999 in connection with H.R. 2100, the Antitampering Act of 1999. Our purpose is twofold: (1) to respond to the charges levied against our company, Quality King; and (2) to set forth the potential harm that this legislation could cause legitimate businesses and the American consumer.
During the hearing, Congressman Goodlatte alluded to a series of cases brought against Quality King, perhaps creating the impression that Quality King has been an active purveyor of counterfeit goods. We would like to correct that impression. First of all, most of those alluded cases are over 10 years old, and we have settled or won many of the others. We feel it is unfair to create a picture of guilt by the mere fact we have been subject to lawsuits.
In particular, Congressman Goodlatte mentioned lawsuits involving allegations of counterfeit Ceclor (an antibiotic), Chloe perfume and birth control pills. These suits were brought more than 15 years ago, and none of them resulted in a finding or judgment that Quality King deliberately engaged in counterfeit activity. In those cases, Quality King willingly cooperated in the destruction of all counterfeit goods.
In the Procter & Gamble Head & Shoulders case (which, while still pending, has been largely inactive for over a year), Quality King was itself a victim of fraud, having unwittingly brought counterfeit shampoo from another seller in a long chain of transactions. Ironically, the counterfeit shampoo has now been traced to Proctor & Gamble's own plant in Ontario.
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Quality King is the largest parallel market distributor of fragrances and health and beauty aids in the United States. Because of the very nature of the business (taking advantage of opportunities to buy discontinued or promotional merchandise at a discount), Quality King itself is inevitably the occasional victim of unscrupulous middlemen. It is a tribute to Quality King's vigilance that in over 35 years of operation, there have been very few incidents involving counterfeit merchandise. In fact, notwithstanding Mr. Paul deJoira's unsubstantiated statement, Quality King has never been convicted of the crime of counterfeiting.
These days, being sued is simply the price of doing business in America. The fact is that we live in a litigious society, and substantial businesses like ours are frequently subject to legal exposure - for a wide variety of reasons. Hence, being sued should not be construed as evidence of guilt.
Instead of focusing on our lawsuits, we urge you to examine the larger implications of the Antitampering Act. The reality is that this Act will not stop the flow of counterfeit goods or protect the consumer. By imposing new civil and criminal liabilities for distributing products where the manufacturers' codes may have been destroyed or altered (even invisible codes), the legislation places an insurmountable burden on retailers and wholesalers.
This attempt to control the resale of goods will shut out legitimate businesses like ours without addressing the real threat to consumer health and safety: defective counterfeit products. Indeed, by freezing out responsible discount distributors, counterfeit goods may proliferate in the market place as never before.
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We believe the Antitampering Act favors manufacturers who want a monopoly on selling their products at high prices. It is also designed to subvert the copyright law and the Supreme Court decision which gave discount distributors the right to resell consumer products. (In March 1998, the Supreme Court ruled that American manufacturers cannot use the copyright law to block the domestic sale of products originally sold at a discount overseas. Once a product was legally sold - a first sale - the original owner relinquished control of the product's subsequent distribution.) In the name of consumer protection, proponents of the Antitampering Act are attempting to discourage or even eliminate resale of goods at discount prices.
As a company with approximately $2 billion in revenue and over a thirty-five year history, we fully support legislation that can stop the distribution of counterfeit goods. Our reputation and success depend on providing high quality, safe products at competitive prices. However, the proposed legislation, rather than proving a deterrent to criminals, will prove only to be a burden to legitimate businesses which have no reliable means to detect altered or destroyed codes, and to cut off viable sources of competitively priced merchandise for consumers.
Unfortunately, the Antitampering Act in its present form does not accomplish its purported purpose. Ultimately, it is the American consumer who will lose by this legislation. Consumers benefit when retailers and wholesalers can buy freely and resell brand name goods at a discount. As discount distributors, we are fighting to keep our products truly discounted for the American public.
We urge you not to pass H.R. 2100.
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Sincerely,
| Glenn Nussdorf, President. |
Mr. COBLE. Mr. Goodlatte, if you would yield to me, I want to ask you a question regarding the various accusations that you cited. Did any of these charges advance beyond the accusatory stage?
Mr. GOODLATTE. Yes, they did. I don't have all of the details in front of me.
Mr. COBLE. Very well.
The gentlelady from California.
Ms. LOFGREN. Thank you, Mr. Chairman. Let me apologize to Mr. Sandler because I was detained on the floor after the last vote and did not make it back to hear the testimony in person. I read your written testimony, so I believe I know what you had to say.
I want to explore, however, your expressed concern about the breadth of the definition. I'd like you to turn to page 3 of the bill, and consider whether you have any specific suggestions that you would like us to consider for narrowing the definition, either in that section or anywhere else in the bill.
Mr. SANDLER. I appreciate that question very much. We have had a series of meetings to discuss different ways to amend the bill, but I cannot tell you that at this time exactly what language we would support. We have vetted amendment to that particular provision and others, both among the membership of the American Free Trade Association and of the coalition whose statement was filed with ours: the Chain Drugstore Association, the Mass Retail Association, Wal-Mart, Kmart and others, Costco.
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What we have attempted to do with the change in language—which unfortunately I can't give you specific language today—are directed at the batch codes and the expiration dates that are visible. We did, in fact, forward language to Mr. Bliss at the end of the last Congress in which we included a proposal which would make it clear that companies wishing to place codes on their products which would be the codes that could only be removed under penalty of criminal law would be placed in such a way that they would be recognized by distributors, retailers and consumers. They would know these are the codes that are a problem, and that cannot be removed. They could communicate the information down the distribution chain all the way to the consumer. We wouldn't have the situation today, which so offends the retailers in particular, that they have no way of knowing, having received a bottle of cologne, whether or not an invisible code inside the box was, in fact, removed and is now even more invisible.
Ms. LOFGREN. If you don't have it with you today, I think it would be fair of us on the committee to request that you forward a copy of whatever you had sent to Mr. Bliss as well as any other ideas. Nothing is ever perfect, and the legislative process is one where you start and you work through the problems, and, hopefully, by the end of the process you have a good product.
In reading this bill, I think it is pretty good. If there are ways to improve it, however, that are consistent with the intent, I would be eager to do that, and I think Mr. Goodlatte would also be eager to do so. I regret what I said earlier. We are not trying to prevent discounting. I love going to Ross Dress for Less.
I might clarify at this point that clothing is excluded from this bill, as you may have noted on the bottom of page 2 of the bill because flammability is already addressed under Federal law, and as we did not consider clothing.
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Let me just ask Mr. Bliss, would you be willing to review materials sent by people who are concerned about it and share your thoughts with the committee?
Mr. BLISS. The short answer is absolutely.
I want to go back to the point where Mr. Sandler left off. We were approached after the markup to get together, actually after the floor vote, and we worked with them over the weekend on proposed language that they had. We had proposed a counteroffer, and then we received a letter from them summarily dismissing the negotiations. We have always entertained an open door to work with anybody.
Part of our frustration is that there seems to be a moving bar that we are continually faced with. Every group here has sets of questions or concerns or proposed legislative changes. If this subcommittee were able to generate one master list of concerns and questions, we would probably be able to move the process forward for you all much more effectively.
Ms. LOFGREN. Perhaps that is something that we ought to suggest, Mr. Chairman, that while we don't intend to have a series of hearings, that we should ask these witnesses to say their piece and to provide to us specifically the objections and the actual specific language and where they want the changes in the bill and of course why. Then we can sort through these differences and see where we end up.
I speak for myself, although I believe Mr. Goodlatte feels the same way, we are not attempting to disrupt legitimate discount activity.
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Mr. COBLE. If the gentlelady would yield, I would say gentlemen and lady, that the gentleman from Virginia and the gentlelady from California are, as I like to use this term, easy dogs with whom to hunt. They are easy to deal with, and I think you would find it so. It is obvious that we have a long way to go before we can resolve this.
John, did you want to be heard?
Mr. CONYERS. I would ask if she would yield, I wanted to thank her for her constructive suggestion.
You see, we have two converging problems here. One is the crime problem, and one is the health and safety problem. I think that it would be important for us to review, to see where we can really hone this down, and I am—I want to publicly acknowledge that both you and Mr. Goodlatte have been cooperative in seeking any refinements that may be possible to the legislation.
Ms. LOFGREN. Thank you.
Mr. COBLE. I thank the gentleman, and I thank the gentlelady. We are going to have another vote, folks, but let's start a second round of questions because while we are all together—and obviously we have not touched every base yet.
Ms. Mountford, what can be done, if anything, under H.R. 2100 to protect a well-intentioned retailer who offers discounted goods that are slightly repackaged, for example, shrink-wrapped together, and which obscure a product identification code? Can any relief be had in that instance?
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Or Mr. Bliss?
Mr. BLISS. Yes, Mr. Chairman. H.R. 2100 currently contains a provision, a repackaging provision, that was very carefully negotiated between Representative Wexler's office and two of the principal players in this process, Victory Wholesale and Purity Wholesale. It is still intact in the bill, and it allows for the well-intentioned retailer to affix his own product identification code to his combination product, his shrink-wrapped combination product, provided that the code does not obstruct or otherwise interfere with the product labeling requirements.
We understand that Mr. Wexler supported the legislation last year on the condition that that language be in there, and it is still in there.
Mr. COBLE. Mr. Dahl, oftentimes on this hill we are asked why do we need this legislation. If it ain't broke, don't fix it, to use a well-worn term. In your opinion, what value would result from the enactment of H.R. 2100 that would enhance or improve law enforcement's ability to investigate and prosecute unauthorized diversion activity, if any value would ensue?
Mr. DAHL. Mr. Chairman, I think that H.R. 2100 clearly identifies some specific activity that we can all agree on that just should not be happening. To the extent that Congress can pass a law to give law enforcement a tool to use against that specific activity, that just makes their job easier.
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If I can give you an example, we talked about a lot of other crimes here today, a lot of other prosecutions. Frequently criminals commit a series of crimes in their fraud schemes, but it would always be easier to prosecute the specific illegal activity and to deal with the most dangerous activity first.
I worked with a United States attorney one time that used to have a sign on his wall that said, ''If it isn't a crime, it must be mail fraud.'' I don't think that we always want to back-door a prosecution by finding another statute that they might have technically violated. I think if we are able to prove dangerous and illegal activity, the Government ought to be able to charge the defendant with that specific offense.
Mr. COBLE. Mr. DeJoria, do you want to be heard in response to that question?
Mr. DEJORIA. Yes, sir, I definitely do. It is impossible to trace product which has been stolen if they have removed the codes. It is impossible to trace product that is very old if they remove the codes, and it is impossible to recall products which may cause an allergic reaction or that there is a bacterial contact in, if they remove the codes.
Mr. COBLE. Mr. Sandler.
Mr. SANDLER. I again indicate that we expressed adherence to the batch codes, which I think answers this question. On the repackaging issue, the statement filed by the coalition suggested some limitations in that repackaging provision which we felt ought to be revisited. I would hope that would be part of the continuing dialogue.
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Mr. COBLE. Anyone else?
Mr. GRAHAM. Mr. Chairman, in the consumer products and in the professional salon industry, primarily the code that is affixed to the product that we use to recall those products in case of adulteration are batch codes. Those are the codes that we affix. They serve both the purpose of identifying the batch and enabling us to conduct a recall. Thank you.
Mr. COBLE. Ms. Mountford, do you want to add anything to that?
Ms. MOUNTFORD. I think it has been covered.
Mr. COBLE. I think that exhausts my question.
The gentleman from Michigan, Mr. Conyers.
Mr. CONYERS. Thank you, Mr. Chairman.
Has there been in these negotiations any consideration of a transition period before this law goes in with kind of a sweeping effect here? And there will be millions of dollars' worth of commerce which would be in the pipeline.
Mr. Bliss.
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Mr. BLISS. Mr. Conyers, the answer is yes. It occurred about a month ago with a meeting that we had with Senator Schumer's office. As you know, then-Representative Schumer had that concern, and he expressed it in the floor debate in the House.
We then communicated to his counsel that we thought that that was a reasonable provision to add to the bill, and we have provided his counsel with a memorandum that sets forth our views on that concern and a couple of others that Senator Schumer had expressed. So the answer is yes.
Mr. CONYERS. May I be made privy to it, and is there some consideration for getting it into the legislation?
Mr. BLISS. Yes, sir.
Mr. CONYERS. Now, there are a lot of law enforcement people here, and there is no suggestion about the funding, the additional funding for law enforcement that might be required if we were to add yet another law. We are in the process of federalizing a lot of juvenile crimes. This would be a matter that I would like to know has there been any discussion about, what additional resources might be required of the Department of Justice or an appropriate Federal law enforcement agency? Does anyone have any suggestions?
Mr. GRAHAM. If I can begin and then defer to Jim Dahl. As Jim said earlier, if it is not some other crime, let's charge mail fraud.
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What we find ourselves doing in the law enforcement community today is trying to identify some other set of statutes that we can jury-rig together, such as counterfeiting, fraud, mail fraud, wire fraud, or some other combination thereof to regulate this industry and apprehend those people who would put consumers at risk by distributing decoded or potentially counterfeited or adulterated products through alternate channels of distribution.
What in effect this law would do would be to make it easier for law enforcement officials to take action in matters concerning the distribution of decoded goods; not more difficult, nor would it demand more resources, but it would take that Federal agent who is trying to figure out some scheme by which he can prosecute this case with existing laws, he could take a much easier law which is much more specific and germane to the topic, decoding of consumer goods, and take action on that issue.
Mr. CONYERS. That is all quite true, but mail fraud and wire fraud and conspiracy, I would guess that the bulk of many crimes of this nature are those kinds of charges. We don't have to turn our head just because one person has a sign up saying that it must be mail fraud. I don't think that is any reason not to use it.
If there is any criminal activity going on, and there is an existing statute, it should be prosecutable under it. If there isn't any mail fraud, then he should not tear his hair out, just don't bring the case.
Mr. GRAHAM. You make a very valid point. In the real world, however, where you have to meet threshold amounts to get prosecutorial favor and entice them to take these cases, you have to show certain threshold amounts to satisfy mail fraud and wire fraud. Where you can't do that, you don't get that. You wait in line a long time. Where you can show a specific act which has been violated, in this case decoding of the goods——
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Mr. CONYERS. I am not too worried about small amounts that don't even meet the statutory requirements being swept up into this. We have more people in prison—we are privatizing prisons. The Federal Government is paying people, paying States to build more prisons. We are federalizing State laws. We are federalizing juvenile justice laws.
I am not worried about what the threshold amount is. If it is that low, that is not a reason that would encourage me to want to add another statute that carries criminal penalties.
Mr. DAHL. Mr. Conyers, if I may also respond, the elements of the offense in a mail or wire fraud case, to prove an illegal scheme we need to show mailings, or interstate wire transactions. That sort of thing would not necessarily have to be proved in a simple decoding case. I think what Mr. Graham was saying, if that if decoding is a criminal offense, we have a specific crime, to deal with that dangerous activity. I certainly am not against the use of the mail fraud statute. As a matter of fact, I would recommend that it be used as aggressively as possible.
Mr. CONYERS. And it is.
Mr. BLISS. Mr. Conyers, may I take a crack at that question?
Mr. CONYERS. I have the red light on, although I know that Mr. Goodlatte is generously disposed.
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I am the one that tried to get a tag amendment on black powder when the Oklahoma City bombing took place. I am for labeling. I want to trace guns sold at gun shows. I am for tracing, so, let's get our sides straightened out on this as to what we are doing here.
What I am trying to do is separate out in a reasonable way the crime factor that I hear so much about and the health and safety factor. When you lump them all together and say this is a horrible problem that has got to be dealt with, and then—and in the course of it we talk about all kinds of prosecutions that have gone on and are still ongoing, I am not quite so sure if we are demonstrating that there is an absolute need for additional legislation.
Mr. DAHL. Mr. Conyers, I would submit to you that there are less than 150 special agents in FDA's Office of Criminal Investigations, and every single criminal case they work has a health and safety aspect to it, and these include decoding cases. They are not working economic crime. They would not use H.R. 2100 to attack economic crime. This statute would be used to attack (health and safety) criminal violations that are affecting the American public.
Mr. CONYERS. Have they been over to testify about this?
Mr. DAHL. I don't know if they have been invited, but I was the former Assistant Director of FDA OCI, and I would expect that their testimony would be similar to mine.
Mr. CONYERS. I guess that it would probably, but, I mean, we may need to hear it. I am sure your experiences are being accurately portrayed.
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I thank the gentleman for the additional time.
Mr. GOODLATTE. [Presiding.] I thank the gentleman for his good questions.
Mr. DeJoria, I take it that these codes contain all kinds of different types of information. They might contain information about the batch of the particular product that is made. Different manufacturers would have different information contained in the codes. They would have information about the date that the product was made. They would have information about where it was shipped and so on.
For all of the different concerns that we have raised today, different pieces of that information is useful; is it not? For example, if you are trying to determine who stole a product or where it was stolen from, you need the record that shows where it was shipped to. If you are trying to determine whether the product is suitable for a recall, you want to know the batch information about it. If you want to conduct an investigation, or rather you want to recall something or make sure that something is old and may have deteriorated in its quality, you need to have that expiration date.
Are these codes in such a way that somebody who is attempting to deface them or alter them or destroy them will know what part of them is related to the production date, what part is related to where it was shipped, and what part is related to who it was shipped to, and what part of it is related to what batch it is?
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Mr. DEJORIA. They know it is all interwoven, and even if they knew, they would still erase them, and here is why, sir. If I make, for example, a big shipment of awapuhi shampoo, it is more than one batch that I make, maybe 5 or 10 batches. Then I have to register what distributor each batch was sent to. If there was ever a recall, instead of recalling the entire world, and we do about 70 million bottles a year, we know what distributors it went to, so we can recall it. If a batch is stolen, or a truck is hijacked, we instantly know what was shipped out in what batches, evaluate it against that same batch going to any other distributor, and we can immediately identify what is stolen. Thieves know this. They have to remove the entire code so there is no trace of the date it was made and who it was shipped to, otherwise they would be busted.
Mr. GOODLATTE. So this business of splitting the batch code from the other coding information is, A, perhaps very difficult, if not impossible, to do; but B, of only marginal value to those of us who are trying to crack down on thieves and counterfeiters and alterators and so on.
Mr. DEJORIA. That is correct. It also works on counterfeiting. With all due respect on something that was brought up, Quality King Distributors has been prosecuted and found guilty more than once of selling counterfeit goods. Because the laws are so lax, they went back and did it again. I know because we won one of the cases against them. The laws are so lax, so they go back and do it again.
With all due respect, a Federal law is needed to protect the people. It is definitely necessarily. And you have to have the codes in place, because if you don't, you can't recall product. You don't know what is going out. And a Federal law is necessary because existing laws are not working, or I would not take my time and effort from my family to be working this as hard as I am. I am a family man, too. I have grandkids and children, and I am looking out for their welfare, too.
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This is an issue that deals with consumers, not just with codes. It is about consumers and the end result affects them.
Mr. GOODLATTE. Mr. Graham, the witness for AFTA, Mr. Sandler, stated in the testimony that he submitted that parallel marketers do not remove batch codes or expiration dates because these markings are important in the event of consumer product recalls. Based on your experience as a Federal law enforcement agent with the FDA, OCI and in your current capacity, would you say that statement is true?
Mr. GRAHAM. It is not true. Short of Mr. Sandler identifying each and every member of AFTA, I can tell you that Matrix products and other professional salon products are in distribution today in unauthorized retail locations with the batch codes removed.
Mr. GOODLATTE. And can you cite any additional value to law enforcement to these product identification codes as opposed to the batch codes?
Mr. GRAHAM. That is a good question, Mr. Goodlatte. And I would add in the example that I gave where we had the truck hijacking in Los Angeles, we had product that was recovered similar to that which had been stolen, but had been completely decoded. As you know, in any criminal investigation, if you have apprehended somebody for the felony charge of receiving stolen property, the likelihood of moving up the food chain and identifying the thieves is much greater. Where you cannot apprehend those who are in possession of stolen property, the investigation is stalled. If the batch codes are intact, and we can demonstrate factually that product that they are in possession of is, in fact, the same product stolen from that truck, then there is a felony act which has been committed, and people will be in custody.
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Mr. GOODLATTE. Ms. Mountford, why on earth would anybody remove these kinds of important informational codes from infant formula?
Ms. MOUNTFORD. I don't know why anyone would need to remove these codes.
Mr. GOODLATTE. Is there any legitimate reason for doing that?
Ms. MOUNTFORD. There is no legitimate reason, and the reason they do it is so when it is repackaged, they can change the expiration date then sell expired product which appears genuine.
Mr. GOODLATTE. What are the risks to children of drinking expired infant formula?
Ms. MOUNTFORD. Consumers don't know what they are getting. We can guarantee the nutrient level in products to a certain point in time, and beyond that time there are certain nutrients that we can't guarantee at the level listed on the label, and those nutrient levels are determined to be needed for the infant's growth and development.
Mr. GOODLATTE. If your manufacturers have somebody go into a store, and they find a product on the shelves, and the coding information has been obliterated, they have no way of knowing whether or not that is because the expiration date has expired, if that is indeed what has been covered up? So if they are attempting to promote the quality of their product and make sure that people selling the product don't sell defective, expired or, in another area, counterfeit product, which I know has also been a problem in your area, if it is legal to go ahead and do that, then you have no way of verifying or checking the quality of the product in the stores; is that correct?
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Ms. MOUNTFORD. That is correct. And there is no reason for those products to be on the shelves, because the manufacturers all have a very generous reimbursement policy.
Mr. GOODLATTE. Mr. Bliss, several times AFTA states in their written testimony that the value of the secondary market is that authentic products are being distributed to people who otherwise may not have access to them. I wonder if you agree with that statement?
Mr. BLISS. No, I don't. In fact, I wanted to raise this earlier in a response to Mr. Conyers.
Mr. Conyers, if you recall, we had a meeting some time ago where we had in attendance the American Health and Beauty Aids Association, which is the largest manufacturer of ethnic hair care products in the United States, and during that meeting a representative for the head of that operation, Geri Duncan Jones, suggested that one of the problems that they face in selling low-cost ethnic products into low-income neighborhoods is that they are seeing those products diverted, decoded, and dumped into low-income neighborhoods, and Ms. Jones' representative indicated in that meeting that a lot of times the people buying them don't have transportation to get to the outlet stores that we are talking about where they can get the legitimate products. That presents a concern.
I also quickly want to respond to Mr. Conyers' last point about resources. I don't disagree with my colleagues on the law enforcement response, but we were sensitive to that when the bill was originally drafted, and we realized that there were scarce resources. That is why we have a private civil right of action in this bill, so that we can take matters effectively in our own hands, reducing some of that resource problem that the law enforcement agencies face.
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Mr. CONYERS. Would the chairman yield?
Mr. GOODLATTE. I would yield on my expired time.
Mr. CONYERS. I looked at the statement of Mr. Sandler on page 3, and I would like him to review it and see if we can't make a modification in the spirit of comity here. Would you take a look at that last paragraph?
Mr. SANDLER. Yes. I appreciate your calling that to my attention. When I was responding to Mr. Goodlatte, I intended to make a comment on that, and I neglected to do that.
I can assure you, sir, that neither I nor the members of AFTA had intended by our statement to suggest that we questioned your motives or Ms. Lofgren's motives at all.
What this language was intended to address was our concern that the characterization of it as an anticounterfeiting or antitampering act may be misleading as to the more complex issue which we were hoping would be addressed in the Congress with respect to the impact on the economy, on the parallel market and on the legitimate distribution of discounted goods throughout the United States.
An antiparallel market bill is our concern. If this bill were labeled ''Anti-Parrelled Market,'' then that issue would be front and center for discussion. Our concern was that in evaluating the bill, looking at it in a cursory fashion, folks would not understand that issue.
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That is one of the reasons that we have gone out of the way to try to meet with all of the members of the subcommittee to discuss our concerns. It is certainly not because we question the motives of any member of this committee, particularly Congressmen Goodlatte and Lofgren. That is not what is intended by that statement.
Mr. CONYERS. I ask unanimous consent that whatever changes you want to make, Mr. Sandler, in your submitted statement be permitted.
Mr. COBLE. [Presiding.] Without objection.
The gentlelady from California is recognized.
Ms. LOFGREN. I will be brief because I think we have had a good hearing, and more information will be forthcoming which will also help us.
I did have a question for Mr. Sandler in reading through your testimony. At the conclusion of it, there is something called statement of opposition, and the second page, 2 of 3, talks about retailer and reseller liability, item 3, and says something to the effect that—I don't want to oversummarize it, but indicates concern that there could be liability when a business operator had no actual knowledge.
I thought that we had adequately dealt with that in section (b)(4) on page 4 requiring an intent or knowledge standard. I am wondering why you think that that is insufficient, and do you have suggestions for improving that language if you feel that the intent requirement in the bill is insufficient?
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Mr. SANDLER. Thank you. I am having trouble finding the statement in our statement, but I can address the issue, and we will submit language to the committee with respect to that provision.
The language as included in the bill permits this to be a mitigating factor for the innocent violator as opposed to making it a complete defense.
Ms. LOFGREN. Actually not. On page 4 it requires that the person know to commit a prohibited act on line 20, line 20 and 21. Anyhow, if you want to submit later comments, that is fine, too. I am 50 minutes late to a fusion funding meeting anyhow, so I look forward to your comments.
Mr. SANDLER. That is language that we have been working on among the members of our coalition.
Ms. LOFGREN. I yield back the balance of my time.
Mr. COBLE. I think this has been a good hearing. We have more of the field to plow, but I feel good about this hearing. I thank you all for being here. Again, I apologize for the delay.
Ms. Lofgren, if you and Mr. Goodlatte in particular would be receptive and accessible, as will all of us, but this concludes the legislative hearing on H.R. 2100, the Antitampering Act of 1999. The record will remain open for 1 week. Thank you for your cooperation and attendance, and the subcommittee stands adjourned.
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[The prepared statement of Mr. Kocot follows:]
PREPARED STATEMENT OF S. LAWRENCE KOCOT, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS AND GENERAL COUNSEL ON BEHALF OF NACDS, NATIONAL ASSOCIATION OF CHAIN DRUG STORES
The National Association of Chain Drug Stores (NACDS) is pleased to present this statement of our views on HR 2100, the proposed Antitampering Act of 1999.
The National Association of Chain Drug Stores (NACDS) membership consists of 135 retail chain community pharmacy companies. The chain community pharmacy industry consists of more than 19,000 traditional chain drug stores, 7,000 supermarket pharmacies and nearly 5,000 mass merchant pharmacies. The NACDS membership base operates more than 31,000 retail community pharmacies with annual sales totaling over $158 billion including prescription drugs, over-the-counter (OTC) medications and health and beauty aids (HBA).
NACDS members are among America's most respected retailers. Our members provide goods and services to millions of consumers each day in stores located in almost every community. NACDS members are committed to responding to consumer demand for quality products. Their business is based on consumer satisfaction.
THE PROPOSED LEGISLATION
The proposed Antitampering Act (HR 2100) would amend the Trademark Act of 1946 to prohibit the ''unauthorized destruction, modification, or alteration of product identification codes placed on consumer goods by their manufacturers.'' It would prohibit the act of altering codes, as well as the importation, re-importation, distribution, or sale of any good bearing an altered code, without the authorization of the product's manufacturer. The bill would impose civil and criminal penalties for violations and would permit impoundment of goods bearing altered codes.
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Advocates of HR 2100 say the legislation is needed to protect consumers from counterfeit, illicit or harmful goods. It would do so by criminalizing many current, legitimate practices of the free marketplace.
NACDS would like to point out concerns that would affect the retail marketplace:
THE MARKET REALITIES
Retailers purchase products from a variety of sources, including directly from manufacturers, from wholesalers and distributors, from brokers and from a range of other suppliers. These different sources of supply enhance the competitive marketplace, which in turn enables retailers to offer goods at a low price to their consumers.
The secondary market is a well-established and legitimate method of distribution that has been upheld by the U.S. Supreme Court (Quality King Distributors Inc. v. L'anza Research International, Inc.). The Court has consistently held that once a manufacturer places an item into the chain of commerce, the manufacturer no longer is able to control its future use, distribution or sale.
Manufacturers often attempt to control distribution by limiting the source of supply to ''authorized'' buyers. On occasion, these authorized buyers find themselves with excess inventory or goods that are out of style or otherwise unsellable. In these situations, the original purchaser may sell the products to distributors in the secondary market. These entities then offer the goods to retailers at discounted prices that are subsequently passed along to consumers. These products are genuine goods, not counterfeit.
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In some instances, product manufacturers, themselves, utilize the secondary market to dispose of excess products. They sell the unneeded products to distributors or brokers who contact retail businesses with special deals on consumer products. In such circumstances, manufacturers benefit by disposing of unneeded merchandise, retailers are able to purchase the product at discounted prices and consumers pay less for the product.
Manufacturers use product codes on consumer products for a variety of other reasons, such as inventory control and health and safety reasons. No one would object to protecting codes that help consumers identify harmful products.
Chain drug stores are diligent in assisting manufacturers who need to recall products that have been identified as a threat to safety. However, HR 2100's approach to facilitating these recalls intrudes on legitimate commercial practices that could ultimately put many product distributors and retailers at risk of civil and criminal penalties.
HR 2100 does not distinguish between ''health and safety recall codes'' and the invisible codes used by manufacturers to restrict secondary sales and the competition that accompanies them. Protected product identification codes should be relevant only to product recalls and other consumer safety communications.
Protection of all product identification codes, especially the ''invisible'' codes used to track products distributed in the secondary market, would enable manufacturers to retaliate against any original purchaser who may have altered a code for whatever reason. Once a manufacturer has traced a secondary market product back to its original purchaser, the manufacturer will refuse to sell other products to that original buyer. This retaliation deprives retailers of a source of products and deprives the consumer of the ability to purchase the product at discounted prices.
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We believe that it is not the role of federal law to assist product manufacturers in their attempts to reduce competition and maintain control of prices or in their desire to enforce contracts that they may have with original purchasers and to which retailers are not party.
UNFAIR RETAILER LIABILITY
As noted above, the bill will impose civil and criminal penalties on a wide range of current business practices.
Congress should recognize that retailers sell millions of individual products each day. They cannot inspect every bottle of shampoo or package of hairspray to determine if a code is not on a product. It is neither economically feasible nor physically possible for retailers to inspect each individual product as it is uncrated and placed on the store shelves. But even if retailers in some way could monitor each product, the common practice of manufacturers to place hidden or ''invisible'' codes on products makes it unlikely that the average stock clerk would be able to recognize that a code is, or more importantly, is not, on a product.
Retailers who purchase products from wholesalers or distributors are at even greater risk. They have no way to determine whether manufacturers' codes are on the products that they purchase from these intermediaries, who may, for whatever reason, have removed a code. Nevertheless, retailers could be severely punished if they offer for sale any product that does not bear the manufacturers' code. How would a retailer be able to determine if a code has been removed from the product, particularly if it was unknown to the retailer in the first place?
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Retailers should not be subject to civil or criminal penalties for selling genuine products bearing, or not bearing, ambiguous or invisible codes that may have been altered without their knowledge. And, certainly, the stock clerk who ''knowingly'' places an item on the shelf for sale should not be subject to criminal penalties for failing to discover that an invisible code has been removed from the product.
INNOCENT VIOLATIONS
Advocates of the legislation contend that innocent violations would be exempted from prosecution. Nevertheless, any retailer could be accused in civil or criminal actions of such a violation and the retailer would suffer economic loses as a result of defending against the lawsuit or criminal action. Further, retailers in such circumstances would bear additional economic penalties from the loss of business resulting from the seizure of products.
CODES FOR HEALTH AND SAFETY RECALLS
HR 2100 uses the possibility of health and safety recalls as a justification for imposing liability on retailers to insure that codes are present on consumer products. However, it neither adequately defines what constitutes a covered product code, nor does it specify how or where the code should be affixed to the product.
If retailers find it difficult to determine what constitutes a covered product code, consumers would be even more hard-pressed to identify many of the codes placed on products.
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The codes used in product recalls are rarely removed from consumer products, making it unnecessary to protect ''invisible'' codes that consumers would be unable to locate or decipher. In addition, many codes are placed on product containers that are discarded when consumers use the product and subsequently would be unavailable to consumers.
REPACKAGED PRODUCTS
Retailers frequently obtain products that have been repackaged for sale to the ultimate consumer. These goods are often combination packages of items that provide additional economy or value to the consumer. These products may be ''shrink-wrapped'' packages of aspirin, hairspray, or shampoo. However, under the provisions of HR 2100, if manufacturers' codes are obscured (even temporarily) by the wrapping or by other codes affixed by the repackager, retailers could be subject to penalty for selling this product bearing a code that has been ''tampered with.'' These penalties could be imposed even if the retailer has no knowledge that the product code had been altered.
If retailers were required to abandon this marketing technique, consumers would be deprived of this type of combination product. They will see higher prices for high quality products that will become necessary to cover the additional costs of HR 2100's nominal benefits.
UNIFORM FEDERAL LAWS
NACDS is also concerned that HR 2100 incorporates by reference several state statutes related to product code tampering. In a marketplace that transcends state borders, it is important to companies operating in multiple jurisdictions that any laws or regulations affecting their business are uniform. Consequently, we recommend that any provisions of HR 2100 that may be enacted preempt any similar state law or regulation. This will facilitate uniform compliance with such laws and ensure consistent enforcement.
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CONCLUSION
No legitimate retailer wants to sell counterfeit products or goods that will cause harm to consumers and, ultimately, to the retailer's good reputation. Chain drug store companies are diligent in their efforts to ensure that the wide range of products sold in their facilities are of high quality and meet the consumers expectations. Otherwise, shoppers would take their business elsewhere in their search for satisfaction. The marketplace works.
In conclusion, NACDS believes that HR 2100, as currently drafted, is fundamentally flawed. HR 2100 will not accomplish the stated goals of its advocates. It is anti-competitive and will disrupt legitimate commerce in legitimate markets; it will result in higher costs to consumers; and it will impose unreasonable liability on retailers whose business is to provide the public with a wide choice of low cost, quality products.
NACDS is willing to work with the Committee, consumers, manufacturers, repackagers and distributors to attempt to craft appropriate legislation to address legitimate concerns regarding consumer products. However, we believe that HR 2100 is not the way to accomplish these goals.
[The prepared statement of Mr. Muller follows:]
PREPARED STATEMENT OF KIM MULLER, PRESIDENT, INTERNATIONAL TRADEMARK ASSOCIATION
INTRODUCTION
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Mr. Chairman, the International Trademark Association (''INTA'') is grateful for the opportunity to submit a statement in connection with H.R. 2100, the ''Anti-Tampering Act of 1999.'' INTA is a 121 year old not-for-profit organization representing over 3,600 corporations, law firms and professional associations in over 120 countries. The Association's membership, which crosses all industry lines and includes both manufacturers and retailers, recognizes the essential role trademarks play in promoting effective commerce, protecting the interests of consumers, and encouraging free and fair competition.
THE DIFFERENCES BETWEEN PRODUCT ID CODES AND THE REGISTRATION AND PROTECTION OF TRADEMARKS
For both consumers and producers of goods, product identification codes perform an indispensable function. Numbers, letters, symbols, markings, and dates—all of which are forms of product identification codes—furnish the consumer with essential facts concerning the origin of products (company), warranties, addresses for submitting complaints and/or compliments, and, most importantly, information concerning health and safety. As for the producers of goods, product identification codes help to safeguard the integrity of the distribution process by enhancing the ability to track a product as it moves through the market to ensure quality control, to fulfill product warranties, and ultimately to maintain a high level of customer satisfaction.
Given this critical role, appropriate efforts to enact or increase civil and criminal penalties for tampering with product identification codes are beneficial and should be advanced. This is especially true in light of the growth of the gray market, the complexity of counterfeiting operations, and the sheer volume of goods (both gray and counterfeit) which have flooded the global marketplace in recent years. INTA therefore offers its support for the intent of H.R. 2100.
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We cannot however, Mr. Chairman, offer our endorsement of the bill as it is presently drafted. The bill seeks to amend the Lanham Act by adding a new §43A. Simply stated, the Lanham Act is the wrong place for the type of provisions contained in this bill.
The purpose of a product identification code is to allow the manufacturer and the consumer to ''trace a product back to a particular product lot or batch or date of removal.''(see footnote 3) The tampering and alteration of these codes lie at the heart of H.R. 2100. This, in our opinion, does not relate to the registration and protection of trademarks and the prevention of unfair competition—the purposes of the Lanham Act.
What this issue is really about, Mr. Chairman, is control of the distribution process. That is what product identification codes are meant for—tracking goods as they move through commercial channels. The issue here is helping manufacturers and consumers trace lot numbers, ensure that expiration dates are not violated, and that the products get to their ultimate destination. While these are certainly important goals, to be most effective and at the same time the least disruptive to other areas of the law (specifically trademark law), the provisions of this bill belong somewhere else—perhaps in another area of Title 15 of the U.S. Code which is not related to the Lanham Act.
THE PROBLEMS ASSOCIATED WITH THE PROPOSED §43A IN H.R. 2100
We are concerned that incorporating the proposed §43A into the Lanham Act would only lead to confusion, given the very different purposes that this bill and the Lanham Act address. For example, the definition of ''product identification code'' in H.R. 2100 includes the terms ''marking,'' ''number,'' ''letter'' and ''symbol.'' Section 45 of the Lanham Act already includes a definition for the term ''mark,'' and that definition, by reference to the definition of ''trademark'' in the Lanham Act, includes any ''word, name, symbol or device'' used to identify or distinguish the goods or services of a particular source from those of others. More than 50 years worth of opinions construing this language have made clear that numbers, colors and sounds can all function as trademarks. Given the close (but not identical) overlap between the types of words, names, symbols or devices that can function as trademarks and the more limited set of markings, numbers, letters and symbols that can function as product identification codes, we are concerned that attempting to incorporate both concepts into the same statute would inevitably lead to confusion. Returning to the earlier example, the trend in recent judicial decisions has been to construe the term ''mark'' quite broadly, including things such as color and sounds that serve to distinguish goods or services to consumers.
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Yet, because violations of the proposed §43A would incur criminal provisions,(see footnote 4) its language should be appropriately construed much more narrowly. Placing these provisions in the Lanham Act, however, could well lead a judge addressing the definition of ''product identification code'' or its components ''marking'' or ''symbol'' to turn to prior decisions interpreting similar or identical terms under the Lanham Act. This could lead to an inappropriately broad reading of §43A or, conversely, could have the effect of leading to more restrictive readings of the Lanham Act, thereby depriving certain types of trademarks from protection.
Finally, we note that H.R. 2100, because it seeks to address a unique problem, carries its own set of civil remedies that do not exactly match the remedies already included in the Lanham Act. Incorporating the proposed §43A into the Lanham Act would lead to further confusion with regard to the appropriate showing required for certain types of remedies. For example, under the Lanham Act, attorneys fees are available to a prevailing party only in exceptional cases.(see footnote 5) H.R. 2100 provides for attorneys fees to the prevailing party in the discretion of the court.(see footnote 6) If H.R. 2100 were to become part of the Lanham Act, however, courts might be likely to apply the Lanham Act's existing standard of only awarding attorney's fees in exceptional cases, rather than exercising the broader discretion than appears to be intended under this legislation.
CONCLUSION
In short, because the goals of the Lanham Act and H.R. 2100 are different, but because both measures deal with very similar concepts (i.e., the use of symbols, numbers and letters), we are concerned that attempting to incorporate H.R. 2100 into the Lanham Act presents many opportunities for confusion. Although we support the goals of H.R. 2100, we are convinced that those goals can best be served by codifying this measure independent of the Lanham Act. We would be happy to work with the Congress and other interested parties in exploring the alternatives.
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Thank you again for this opportunity.
[The prepared statement of Purity Wholesale Grocers and Victory Wholesale Grocers follows:]
PREPARED STATEMENT OF PURITY WHOLESALE GROCERS, INC. AND VICTORY WHOLESALE GROCERS
| Stephen F. Sims |
| & Associates, |
| Washington, DC, October 19, 1999. |
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts and
Intellectual Property,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: Enclosed is written testimony from Purity Wholesale Grocers, Inc. and Victory Wholesale Grocers relative to H.R. 2100, the Anti-Tampering Act of 1999. Purity and Victory ask that this testimony be placed in the record of the Subcommittee's October 21 hearing.
Purity and Victory are strongly opposed to H.R. 2100 as introduced, but have provided suggested changes which they believe would achieve the stated purpose of the bill without disrupting current commercial practices.
Please do not hesitate to contact me if you or your staff have any questions about the concerns of Purity and Victory or their proposed changes.
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Sincerely
STATEMENT
Purity Wholesale Grocers, Inc. and Victory Wholesale Grocers, a division of Brothers Trading Co., Inc., are long-established national wholesale distributors of foods, drugs, health and beauty care and general merchandise products. We are licensed and inspected by Federal and state authorities. Our reputations and commercial success depend on providing a quality product at a competitive price. We are hurt by product counterfeiting just as much as consumers and manufacturers, and we strongly support the stated intent of H.R. 2100, the Antitampering Act of 1999, to combat such counterfeiting.
In seeking to address the counterfeiting issue, however, this bill interferes with the normal, reasonable and heretofore legal competitive business practices of our and many other wholesale and retail companies. We hope that it is not your intent to seriously disrupt these activities (which ultimately redound to the great benefit of consumers), and suspect this result arises from the lack of understanding of the great complexities of today's commercial marketplace.
This testimony, therefore, is an attempt to point out what we trust are the unintended consequences of your laudable desire to combat product counterfeiting We are providing detailed commentary on specific problems in the bill and have attached a line by fine revision of H.R. 2 100 as introduced. These suggested changes would focus the bill on potentially serious health and safety problems which might result from the permanent alteration of product identification codes, but would prevent the use of the criminal code to undermine competition by supporting retail price maintenance. We wish to emphasize our desire to work with you, your staff and other interested parties to combat product counterfeiting but, until and unless we are able to resolve any ambiguities, inconsistencies and any other issues which may be detrimental to our respective businesses in a satisfactory manner, we must express our strong opposition to H.R. 2100.
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A. The Problem As We See It
Before offering suggested changes to specific portions of the bill, we would like to make some general comments about repackaging.(see footnote 7) Under current law and commercial practice, wholesalers may obtain genuine goods, which they repackage and sell to retailers for ultimate sale to consumers. Wholesalers at the request of retailers (and retailers themselves) may often put two or more of the same items, such as breakfast cereal or dish soap, into multiunit configurations using shrink wrap, thereby combining the individual packages for retail sale. Wholesalers also help retailers with product promotions by combining two different products, such as a toothbrush and toothpaste, using shrink wrap just as in the multiunit arrangement. Such combinations usually come with a specially reduced price, which benefits consumers. In addition, the shipping containers typically contain language which expressly states that the authentic product is being repackaged by the repackager in a manner which is sufficient to avoid any likelihood of confusion with the manufacturer.
When these operations are performed, neither the goods nor the primary packaging in which they are placed by the manufacturer are altered in any way save possibly for the attachment of a new Universal Product Code (UPC). The reason a new UPC is placed on the multiunit or combination package is that the original UPC—unintelligible to the consumer and not used in product recaffs—identifies the single can or carton. The new UPC permits proper identification of the multiunit package by the scanner at checkout, differentiating it from single packages of the same product. The goods are then placed in new shipping containers, which can be either cardboard boxes or a cardboard tray covered with plastic shrinkwrap. Trademarks, product identification codes, expiration dates or other information relevant to consumer saf6ty or to a product recall are not permanently removed, obliterated, concealed or otherwise affected by such repackaging.
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This bill, while allowing a manufacturer to produce combination and multiunit packages, would prohibit any other person or entity from doing so. In addition, the bill, while allowing a distributor to change the number of packages in a shipping container, would prohibit a retailer or other person from doing so. Finally, the bill would prohibit a wholesaler from placing or consolidating different products in a new shipping container, a practice now widely followed when shipping to small convenience stores not having the demand or shelf space for larger lots of these products.
The following comments and suggested changes relative to H.R. 2100 are intended to deter the deliberate removal, alteration or permanent obscuring of product identification information directly relevant to health, safety and the ability to recall without interfering with normal, legitimate and pro-competitive commercial activities. All references are to the bin as introduced on June 9, 1999.
B. Changes Which Will Make the Bill More Responsive to the Counterfeiting Problem
1. in Section 2(a)(2), the definition of the term ''good'' confuses shipping containers and shrink wrapped goods with the packages in which the goods are intended to be sold to consumers. Current law, including the rules promulgated under 21 C.F.R. of the Federal Food, Drug and Cosmetic Act (see paragraph 1.20), distinguishes shipping containers from product packaging, fully recognizing that such containers are used only for transportation purposes and, therefore, are not subject to labeling and other requirements.
2. The definition of '''product identification code!'' in Section 2(aX4) is so broad as to include markings that are not required to recall a production lot or to provide expiration dates or other important health or safety information. It is not even possible to dearly determine what the terms ''software or other technology'' may refer to. Likewise, the reference to ''other comparable critical date is mysterious. While this phrase must have some intended meaning, this subpart is drafted so that it cannot refer to numbers, letters and symbols which can be used by the manufacturer for tracing or recall purposes. Because no other legitimate purpose is served by the phrase ''. . . or other comparable critical data,'' we believe it should be deleted.
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3. The term ''product identification code'' should also be modified by requiring that markings be visible. Manufacturers should be free to place non-visible markings on their products or packaging but the wholesaler or retailer should have no liability if such non-visible markings are covered, altered or removed. Non-visible markings have no consumer health, safety or recall value and cannot be justifiably included in a criminal counterfeiting bill.
4. The definition of product identification code must also specifically exclude Universal Product Codes, which are bar codes designed to be read by electronic scanners at retail establishments.
5. The term ''Universal Product Code'' in Section 2 (a)(5) needs to be more precisely defined. A UPC is a 10 digit code, the first five digits of which identify the manufacturer and the last five relate to the product and its price. While each manufacturer is given a unique five digit identity code by the Uniform Code Council, it is not copyright protected intellectual property nor are UPCs typically used in product recalls. Moreover, all bar codes are not UPCs, and manufacturers, wholesalers or retailers may put non-UPC bar codes on shipping containers for product tracing purposes.
6. Section 2(b)(1) must be changed to prohibit the permanent removal or concealment of a product identification code. This will allow a repackager or other person to combine two or more products using shrink wrapping without fear of covering legitimate product identification code information, which would remain, unaltered, on the manufacturer's original package and could be read by simply removing the shrink wrap. The manufacturer is not required to put product identification code information in a particular place on the primary package, and such codes are not required at all on most consumer goods. It is thus impossible for the repackager to produce combination product packages in shrink wrapping with the certainty that product identification codes will not be temporarily obscured.
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7. Section 2(d)(1) should be revised to allow the removal obliteration or transfer of original UPCs in repackaged goods by retailers or wholesalers. Repackers, who are wholesalers and self distributing retailers, put new UPCs on combination products as part of the repackaging service for retailers. New UPCs must replace old UPCs on such goods to allow proper scanning at the checkout counter.
8. The references to state laws in Section 2(d)(2)(ii) and (iii) create a problem. The International Anti-Counterfeiting Coalition has actively encouraged the enactment of anticounterfeiting statutes in a number of states. These laws are based on the IACC model code, which we understand was also the basis for H.R. 3891 in the last Congress. These state laws can be read to prohibit the kind of repackaging that H.R. 3891 as modified by the Judiciary Committee and even H.R. 2100 explicitly allows. We believe that the effect of the modifications suggested in this testimony, and any further modifications to H.R. 2100 which may ultimately be acceptable, will be effectively nullified by any provision which makes the violation of sweeping and poorly drafted state laws a violation of the civil and criminal sections of H.R. 2100. We therefore strongly advocate a Federal preemption provision to create consistency between Federal and state anti-counterfeiting laws.
9. Section 2(f)(1) should be changed by deleting the words ''or threatened with such injury.'' This would invite the filing to lawsuits designed to harass and intimidate resellers. Persons who can show that they may be injured can obtain injunctive relief under current law.
10. In Section 2(f)(2), we believe that balance needs to be restored between the rights of the plaintiff and those of the defendant by adding a requirement that a plaintiff post a bond equal to three times the value of the alleged violative or impounded goods.
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11. In Section 2(f)(2)(C), we believe that a court should find that goods are unsafe or a hazard to health before destruction of the goods is mandated. Otherwise, it is good public policy to provide the goods to an appropriate charity.
12. A fine of up to $1,000,000 for each type of goods involved in a violation, which is called for in Section 2(f)(3)(B), is excessive. The penalty should be leveed on each violative transaction, which might contain several different types of goods.
13. Section 2(f)(4)(A) would allow the plaintiff but not the defendant to recover costs and attorneys fees. This is obviously one sided, and should be changed to allow ''the prevailing party'' to recover such costs.
14. Section 2(f)(6) would allow a claimant to commence a civil action up to three years after the date on which the claimant discovers the violation. This is excessive and should be reduced to a period of no more than one year.
15. Section 2(f)(7) on innocent violations needs to be modified by requiring a standard of ''purposeful conduct'' on the part of the violator. This would prevent a court from inferring knowledge and intent of a violation.
16. A new Section 2(f)(8) should be added allowing a person who is damaged by a wrongful injunction or impoundment of goods to pursue a counterclaim against the party who sought the wrongful injunction or impoundment. This will in no way discourage a meritorious action against a counterfeiter, but will deter harassing or nuisance suits.
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17. Language has been added to Section 3 (a) to clarify that criminal penalties win only be imposed on violators who know that consumers will obtain goods lacking accurate product identification codes.
18. Section 3(a)(2), which imposes a fine and up to five years in prison for a violation whose total retail value exceeds $5,000 is excessive.- A more reasonable standard for such a harsh criminal penalty would be that the value of the goods exceed $1,000,000.
C. Conclusion
Thank you for your attention to these changes, which we believe will achieve the bill's anti-counterfeiting objectives without interfering with legitimate commerce. We will be pleased to explain these concerns in more detail if the Members or the staff desire.
We also urge the Subcommittee to proceed slowly on this bill while its many technical flaws are being addressed. There are already a host of Federal and state anti-counterfeiting laws on the books to deter such activity. For example, a ''partial fist'' of laws applicable to intellectual property crimes on the web site of the International Anti-Counterfeiting Coalition cites 14 ''major Federal statutes'' and 8 specific state laws.
62497c.eps
62497d.eps
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62497e.eps
62497f.eps
62497g.eps
62497h.eps
62497i.eps
62497j.eps
[Whereupon, at 4:55 p.m., the subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
| O'Connor & Hannan, L.L.P., |
| Attorneys at Law, |
| Washington, DC, October 29, 1999. |
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts
and Intellectual Property,
Committee on the Judiciary,
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House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: In our role as counsel to the American Free Trade Association (AFTA), and per representations made at the October 21, 1999 hearing on H.R. 2100, I'm enclosing a letter from Glenn Nussdorf, President of Quality King Distributors, Inc in response to certain allegations raised by Rep. Goodlatte during the testimony of Mr. Lee Sandler who was testifying on behalf of AFTA. We do not represent Quality King but are simply assisting them in getting this document in the appropriate hands. We trust this response will be made part of the record and distributed to Members of the Committee.
As stated at the hearing, we will make every effort to assist proponents of the bill in attacking many of the problems they described, short of eliminating the fully legitimate role served by the parallel market as it strives to give consumers a more competitive price for their dollar. Please advise if we can assist in any way as the Committee approaches the decision making process.
Warm personal regards,
Sincerely,
cc:
The Honorable Robert Goodlatte
The Honorable John Conyers
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Blaine Merritt, Counsel
PREPARED STATEMENT OF THE BEAUTY AND BARBER SUPPLY INSTITUTE, INC. AND THE AMERICAN BEAUTY ASSOCIATION
The Beauty and Barber Supply Institute, Inc. (''BBSI''), and the American Beauty Association (''ABA'') submit this statement in strong support of H.R. 2100, the ''Antitampering Act of 1999.'' BBSI and ABA are trade associations in the professional salon industry operating under Section 501c(6) of the Internal Revenue Code. The organizations jointly represent the interests of distributors, manufacturers and manufacturers' representatives serving the professional salon industry.
At the outset, we would like to thank Representatives Goodlatte and Lofgren for sponsoring this narrowly tailored legislation designed to stop the serious problem of intentional tampering with product identification codes (''codes'') that manufacturers affix to consumer products. These product identification codes enable a manufacturer of a consumer product to trace that product back to a particular production lot or batch, and convey information such as batch numbers, expiration dates, dates and places of manufacture, shipment destinations, and other critical data.
This bill is based on the premise that there is no legitimate reason to decode or tamper with these codes. The opponents of this bill have proliferated all manner of arguments to obscure the fact that they have no legitimate answer to this point. However, there are many illegitimate reasons to decode. For example, decoding helps to hide the source of stolen, adulterated, contaminated, outdated, or counterfeit goods. Decoding also abets distributors in violating their distribution contracts with manufacturers.
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Decoding creates public health and safety problems, undermines law enforcement, and imposes economic costs on manufacturers and by extension consumers. Codes give manufacturers the ability to monitor distribution of their products. If a product is found to be defective, whether through adulteration, tampering or performance issues, these codes enable the manufacturer to expedite the removal or recall of these products. If the codes have been removed or tampered with, defective products could stay in the marketplace, endangering public health and safety. These safety and health concerns are particularly acute in our industry, because almost without exception, professional beauty products are applied directly to the body.
Decoding creates an alternate and unauthorized channel of distribution which is completely unmonitored for good manufacturing practices or safe handling procedures. Once this unmonitored unauthorized distribution channel is established, counterfeit, stolen, outdated or adulterated products are placed into the stream. At the final point of sale, the consumer is virtually unprotected. As the two witnesses with direct law enforcement experience testified before the Subcommittee, decoding, product tampering, adulteration, counterfeiting, and outright theft of consumer products are in many cases interrelated and symbiotic activities between unscrupulous diverters and counterfeit rings.
Decoding undermines effective law enforcement investigations by obliterating critical forensic evidence. For example, the codes on the batteries in the Atlanta Olympics bomb were used to determine the purchase site of the batteries, which helped to exonerate Richard Jewell. In the Pan Am bombing, the code on the microprocessor from the radio used to house the bomb, linked the bombing to Libyan terrorists. If these products had been decoded, these and other law enforcement successes would not have occurred.
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Decoding also imposes economic costs on manufacturers. Widespread decoding, which hides adulterated, contaminated, expired and counterfeit product, dilutes the manufacturer's brand name and adversely affects the integrity of the product's mark. Decoding also limits the ability of manufacturers to maintain the integrity of their distribution system by undermining relationships with authorized distributors and resellers, who have made significant investments *in time and money to sell and support a manufacturer's products.
Decoding can also undermine product recalls, which beyond the obvious public health risk, can impose significant economic costs on manufacturers. Once the codes are removed or tampered with, it is virtually Impossible to recall only those batches of a consumer product where the problem exists. As a consequence, to ensure consumer safety, manufacturers may be faced with recalling an entire brand's stock. This exercise would cause a huge waste of time and money for the manufacturer. Faced with this type of expense, manufacturers could cut jobs. For smaller manufacturers, a general product recall could also pose the risk of bankruptcy.
In addition, decoding can also expose manufacturers to increased liability. Product recalls or removals could Miss a product because it was decoded. An innocent consumer injured by that product could bring a legal action against that manufacturer notwithstanding a good faith effort to remove the product. Even if the manufacturer is completely innocent, the defense costs can be considerable. These types of litigation expenses waste corporate resources, impede business efficiency, and potentially threaten manufacturing jobs.
Opponents of this bill have claimed that it would criminalize the gray market and prohibit diversion. They are wrong on both counts. This bill does not affect the legality of the gray market. The bill does not prohibit unauthorized diversion. What the bill does is simply prohibit the decoding or tampering with product identification codes.
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Opponents have also made the more general argument that H.R. 2100 would deny consumers access to discounted goods by threatening discount retailers. In making this specious argument, they have attempted to convey the impression that discounted goods can only be found in the parallel market. Once again incorrect. Manufacturers and their authorized distributors and resellers sell to a variety of discount retailers such as department stores, catalogue merchandisers, discount houses, and small businesses. A cover story in the August, 1998, Consumer Reports relates that the number of manufacturer outlet malls have tripled 'in the last 10 years from 100 to 300. In Virginia, the top visitor attraction was not Colonial Williamsburg or Busch Gardens, it was Potomac Mills. Vacationers to the Delmarva peninsula pack the outlet malls at Queenstown and Rehoboth. Consumers clearly have access to discounted products. Additionally, gray market goods are often no bargain. In the professional beauty products industry, we have seen many instances where discount stores charge more for hair salon products than authorized salons.
In summary, product identification codes provide health and safety, law enforcement, and economic benefits for consumers and manufacturers. Furthermore, there is no legitimate reason to allow decoding. Decoding helps to hide the source of stolen, contaminated, expired, or counterfeit goods, and abets distributors in violating legally enforceable contracts with manufacturers. As law enforcement officials have testified, decoding and the placement in alternative distribution channels of contaminated, adulterated, expired, or counterfeit goods are often interrelated activities of diverters and counterfeit rings. Given the tremendous benefits created by product identification codes, and the absence of any legitimate justification to allow decoding, we urge the Subcommittee to give prompt and favorable consideration to H.R. 2100, the ''Antitampering Act of 1990.''
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(Footnote 1 return)
IFC members are Ross Products Division, Abbott Laboratories; Nestlé USA, Inc., Nutrition Division; and Novartis Nutrition Corporation.
(Footnote 2 return)
The legislation defines a ''product identification code'' as ''any number, letter, symbol, marking, date (including an expiration date), code, software or other technology that is affixed to or embedded in any good, by which the manufacturer of the good may trace the good back to a particular production lot or batch or date of removal, or otherwise identify the date of manufacture, the date of expiration, or other comparable critical data.'' It specifically excludes ''copyright management information conveyed in connection with copies or phonorecords of a copyrighted work or any performance or display of a copyrighted work.''
(Footnote 3 return)
H.R. 2100, proposed §43A(a)(4), the definition of the term ''product identification code''.
(Footnote 4 return)
H.R. 2100, proposed §43A (e).
(Footnote 5 return)
15 U.S.C. Sec. 1117(a).
(Footnote 6 return)
H.R. 2100, proposed §43A(f)(4).
(Footnote 7 return)
We are using the word ''repackaging'' in its broadest sense. In the context of the activities of wholesalers and retailers described in this statement, it does not mean putting product in new consumer packages (such as cans or cartons) different from those in which the manufacturer placed the product. Here, ''repackaging'' means putting the manufacturer's original cans or cartons in different shipping containers or in combination or multiunit configurations.