How to Avoid Liability for Retail Tenant's Sale of Counterfeit Goods
We’ll give you seven lease protections against liability for “contributory infringement.”
Big fashion houses and producers of luxury goods have found a new and effective way to combat counterfeiting: Rather than chase after the small-potatoes vendors that sell counterfeit goods, sue the deep-pocket landlord of the property where the sales occur. And even if landlords had no direct involvement in the illicit sales, they could end up paying millions of dollars in damages for what’s called “contributory infringement.”
If you lease to retail tenants, you must be aware of contributory infringement liability risk and implement the right lease protections to guard against it.
Contributory Infringement Liability of Landlords
Under a federal law called the Lanham Act, deliberately selling counterfeit goods can result in damages of up to $2 million per trademark infringed. In addition to the actual seller (the direct infringer), the Lanham Act enables trademark owners to sue a third party “providing goods or services necessary” to the direct infringer, with the intent that such goods or services would be used to counterfeit. To make out a case for “contributory infringement,” the trademark owner need only prove that the landlord:
- Intentionally induced the direct infringer to commit infringement; and
- Had either actual or constructive knowledge of the infringement.
The Louis Vuitton Case
Court cases make it very clear that a landlord who allows a tenant to sell counterfeit goods on the property can be liable for contributory infringement. The seminal moment came in 2005 when Louis Vuitton sued the landlord of seven downtown New York City shops selling fakes of its famous LV-branded handbags. While the landlord had nothing to do with the sales, it knew they were taking place, having received no fewer than five written notices from Louis Vuitton. In ignoring the notices and letting the tenants keep selling the knockoffs, the landlord was found liable for contributory infringement.
Soon after, the floodgates opened. Following Louis Vuitton’s lead, luxury leather goods maker Coach sued the owner of the Swap Shop flea market for not preventing vendors from selling counterfeit goods on its premises. Rather than risk a trial, Swap Shop paid $5.5 million to settle. Today, contributory infringement lawsuits against owners of malls, flea markets, and commercial retail buildings have become commonplace. (See “By the Numbers," below.)
GET SEVEN LEASE PROTECTIONS
Getting the right lease protections is the key to insulating yourself against risk of contributory infringement liability. Specifically, you need provisions both to prevent tenants from selling counterfeit goods to begin with and to limit your own liability in the event prevention fails. Here are seven clauses that can help you accomplish both objectives. Show them to your attorney before using them in your leases.
1. Inclusion of Counterfeit Sales in Use Restriction
Most commercial leases have a “Use Restriction” clause dictating what the premises can and can’t be used for. And typically, the non-permissible uses listed in that clause include illegal activities. Just be sure that list includes the sale and storage of counterfeit goods.
Model Lease Language
Tenant shall not conduct or permit to be conducted any activity on the Premises that involves or results in the sale or storage of counterfeit goods or merchandise.
2. Confirmation of Tenant’s Right to Sell Trademark Goods
Counterfeiting is a problem only when tenants don’t have a valid license to sell trademark goods (assuming, of course, the tenant isn’t the trademark owner). So, if tenants do intend to sell such goods, require them to state in the lease that they have the appropriate legal authority and provide you a copy of the licensing agreement before engaging in sales.
Model Lease Language
Representation. Tenant hereby represents and covenants that it currently has, and at all times throughout the term of Lease will have, full legal authority to sell all of the goods and merchandise it sells and that the sale of such goods and merchandise will in no way violate any other person’s trademark, copyright, or other intellectual property rights. Tenant shall provide Landlord a copy of its licensing agreement to sell such goods and merchandise before engaging in sales on the Premises.
3. Tenant’s Duty to Maintain Right to Sell Trademark Goods
Require the tenant to take all steps necessary to maintain its licensing rights or authority to sell trademark goods and stop such sales when and if its authority ends.
Model Lease Language
Tenant, at its sole expense, shall take all immediate actions necessary to protect its authority to sell all goods and merchandise subject to trademark, copyright, or other intellectual property rights throughout the term of the Lease and hereby covenants to stop such sales in the event that authority ends during the Lease term.
4. Sales of Counterfeit Goods Trigger for Default & Lease Termination
Specify that any violations of the above provisions trigger the default clause allowing you to immediately terminate the lease and repossess the premises and that the tenant’s right to cure doesn’t apply to such violations.
Model Lease Language
Tenant hereby acknowledges and agrees that conducting or permitting to be conducted any activity on the Premises that involves or results in the sale or storage of counterfeit goods or merchandise will be considered a default under Section [X] of the Lease giving Landlord the right to immediately terminate the Lease and repossess the Premises, and that such default shall not be subject to Tenant’s right to cure under Section [X] herein.
5. Right of Reentry to Police Ban
To avoid contributory infringement liability, you must be able to take steps to police the ban on sales of counterfeit goods. So make sure your lease empowers you to monitor the tenant’s activities, starting with the clause giving you the right to reenter the premises for specific purposes, such as maintenance or showing the property to rental prospects. That list should include site visits to ensure tenant compliance with the ban, both on a regularly scheduled basis and immediately in response to indications that counterfeit sales are ongoing (that is, where the trademark owner notifies you of such sales).
Model Lease Language
Reentry. Landlord and its authorized representatives may at all reasonable times and upon reasonable notice to Tenant enter the Premises to . . . (x) inspect to verify that Tenant is complying with its covenant under Section [X] not to conduct or permit to be conducted on the Premises any activity involving or resulting in the storage or sale of counterfeit goods or merchandise. Landlord shall have the right to conduct such inspections at intervals and at times set forth in the Counterfeit Goods Inspection Schedule, or more frequently and within 24 hours of receiving notice, reports, or other reliable indications that counterfeit goods or merchandise is, in fact, being sold or stored on the Premises.
6. Release of Liability for Disrupting Counterfeiting Tenant’s Business
You also need the power to act if you discover that the tenant is, in fact, selling counterfeit goods. Normally, trying to stop or interrupt a tenant from carrying out business on the property is a serious breach of the lease. That’s why you need language specifying these rights don’t apply to actions taken to prevent the tenant from using the property to sell counterfeit goods.
Model Lease Language
Tenant hereby acknowledges that its rights to quiet enjoyment and use of the Premises for conducting business under Section [X] does not include any activity involving or resulting in the sale of counterfeit goods or merchandise, and waives any and all recourse against the Landlord that Tenant might otherwise have for the financial harm or other losses Tenant incurs in the event Tenant is ordered to immediately stop said activity or vacate the Premises.
7. Tenant Duty to Indemnify
The lease should also include an indemnity clause making the tenant strictly liable and holding you harmless for any counterfeit sales conducted on the property.
Model Lease Language
To the fullest extent permitted by law, Tenant shall indemnify, defend, and hold Landlord harmless from all costs and expenses related to any suit, claim, or proceeding brought against Landlord based on a claim that any goods or merchandise sold or stored on the Premises constitutes an infringement of any trademark, trade secret, copyright, patent, or other intellectual property right of any third party. Tenant shall promptly notify Landlord of any such suit, claim, or proceeding and give Landlord authority, information, and assistance (at Tenant’s expense) for the defense of same, and Tenant shall pay all damages and costs awarded therein.
By the Numbers: Landlord Liability for Contributory Infringement
$5 million: Damages awarded to Coach against Memphis flea market (upheld on appeal) [Coach, Inc. v. Goodfellow, 717 F.3d 498 (6th Cir. 2013)]
$1.9 million: Jury award against owners of a Georgia shopping center for allowing tenant and subtenant sales of knockoff Ray-Ban and Oakley eyewear [Luxottica Group, S.p.A. and Oakley, Inc. v. Airport Mini Mall, Inc., Case No. 18-10157 (11th Cir. 2019)]
$1.1 million: Jury award against NYC landlord to Omega for tenant’s sale of counterfeit watches [Omega SA v. 375 Canal LLC, 2019 U.S. Dist. LEXIS 98780]
2: Number of years’ prison sentence for a St. Louis flea market operator for trafficking in counterfeit goods [U.S. v. Frison, 825 F.3d 437 (8th Cir. 2016)]