A Primer on Counterfeit Products: What Should A Company Consider?

Companies are acutely aware of their duties with respect to the safety of the products they manufacture, and most have intricate frameworks in place to ensure that their products are manufactured in a safe and consistent manner. Given the recent explosion of product safety issues tied to products manufactured in China, companies are under even more scrutiny to ensure the safety of their products. The intense media scrutiny surrounding the rash of recalls of Chinese-made products (e.g., pet food, toys, toothpaste) has only increased the pressure on companies to make their products safe for consumers. However, what do companies do when consumers are injured by counterfeits of popular, brand-name products? What duty, if any, do companies have to police the marketplace and protect consumers against dangers arising from counterfeits? These counterfeits, a number of which are manufactured in China, are generally of a much lower quality and are manufactured without appropriate QA/QC mechanisms that many large companies have in place. Outside of any legal duty ' whether in courts or regulatory directives ' what must a company do to protect its brand name? Even if companies escape legal liability arising out of injuries to consumers caused by counterfeit products, the effect on a company's reputation may be just as disastrous.

This article presents a brief overview of the current state of the law regarding manufacturers' responsibilities with respect to counterfeit products, highlights some of the policy considerations a court is likely to take into account in determining whether or not to impose some duty upon manufacturers, and then provides some practical recommendations for companies to consider going forward.

Primer on Law Regarding Counterfeit Products

There is scant case law regarding the potential liability of a manufacturer for injuries resulting from the use of counterfeit products. Courts have generally held in such cases that manufacturers do not have a duty to anticipate and protect against criminal conduct committed by third parties. See, e.g., Fagan v. AmerisourceBergen Corp., 356 F.Supp. 2d 198, 207 (E.D.N.Y. 2004); Elsroth v. Johnson & Johnson, 700 F. Supp. 151, 163-64 (S.D.N.Y. 1988). Moreover, there is no case law discussing whether a company somehow undertakes a duty to consumers by identifying and testing known counterfeit products.

Nor have courts imposed a duty on manufacturers to inspect known counterfeit products or take any action with regard to such products. This is not surprising, given that courts do not place any duty on manufacturers to protect consumers against injuries resulting from counterfeit products. In Schoenbaum v. Procter & Gamble Co., No. 05-21646, an unreported case out of the Southern District of Florida, the plaintiffs filed a class action seeking to hold Procter & Gamble ('P&G') liable for injuries resulting from consumers' use of counterfeit hair care products. See Mark N. Mutterperl & Jennifer McIntosh, Weighed Down By Counterfeiting, GC NEW YORK, Feb. 13, 2006. (There is no published opinion in the Schoenbaum case, and no opinion appears on the docket, but the judge made comments on the record regarding the grounds for dismissal.)

In Schoenbaum, the plaintiffs claimed that P&G should be liable for any harm caused by counterfeits of its Head & Shoulders and Pantene hair care products. According to the complaint, P&G was aware of the existence of counterfeits in the market and was aware that these counterfeits may be harmful to consumers. The plaintiffs argued that by continuing to market its product without warning consumers of the potential risks of harm from counterfeits, P&G engaged in false and misleading business practices, unconscionable acts or practices, and/or deceptive acts or practices. Plaintiffs also alleged causes of action for negligence, fraud, breach of warranty, RICO, and violation of Florida's consumer protection statute.

The court found that a company is not under any duty to protect against the actions of third parties, particularly criminal conduct that results in the production of counterfeit products. The court stated that the law does not impose a duty to notify that someone else is counterfeiting your product. This position follows the general proposition that parties do not generally owe a duty to protect against harm by a third party. This case, although not reported, would appear to be the most analogous to the situation involving counterfeit toothpaste.

Most of the law in this area deals with adulterated pharmaceuticals, either counterfeits or authentic drugs that have been tampered with. For example, in Fagan, the plaintiff brought suit against Amgen, Inc. for injuries he sustained as a result of using counterfeit Epogen following a liver transplant. 356 F. Supp. 2d at 204. According to the factual allegations, Amgen posted information on its Web site informing customers that counterfeit Epogen was available in the marketplace. Amgen also advised consumers how to recognize these counterfeits by the information appearing on the label and posted specific lot numbers that were known to be counterfeits. At the time plaintiff took one round of Epogen, it was not listed as one of the known counterfeit lot numbers on Amgen's Web site, but later, after the plaintiff had already taken that particular batch, Amgen listed that lot number as a known counterfeit. Plaintiff sued Amgen for injuries he allegedly sustained from taking the counterfeit Epogen, based primarily on theories of negligence and breach of warranty. Id. (The plaintiff also sued Amgen on theories of negligent misrepresentation and fraudulent concealment. However, those claims were dismissed against Amgen for failure to plead with specificity as required by FED. R. CIV. P. 9(b). 356 F.Supp. 2d at 218. The plaintiff also sued the distributor of the Epogen and the pharmacy where the prescription was filled. Based on the relationship between these parties and the plaintiff, some of the plaintiff's claims survived.)

In support of his negligence claim, plaintiff claimed that Amgen owed its customers a duty to ensure the safety of its drugs, which included protecting its customers against counterfeits and making its products tamperproof. Id. at 205. Plaintiff also made several policy arguments stating that drug manufacturers were in the best position to protect against the risks associated with counterfeit drugs, and that holding manufacturers liable for injuries resulting from counterfeits would not open them up to unreasonable liability. Id. (Some scholars have argued that it would be appropriate to place on manufacturers the duty to ensure that consumers are not injured by counterfeit products. See, e.g., Arthur Best: Manufacturer's Responsibility for Harms Suffered By Victims of Counterfeiters: A Modern Elaboration of Causation Rules and Fundamental Tort Law. 8-Sum Currents: Int'l Trade L.J. 43 (1999) (equating manufacturers' duty to protect against foreseeable counterfeits to landowner's duty to protect against foreseeable criminal activity on its premises).) Amgen argued that it did not owe a duty to consumers to make its product tamperproof, and it argued that once the product left its control, it did not have a duty to monitor the product continuously or to protect the public from criminal misuse of its product, even if such misuse was foreseeable. Id.

The court noted that, in New York, the existence of a duty of care is a 'legal, policy-laden declaration reserved for judges.' Id. at 206 (quoting In re September 11 Litigation, 280 F. Supp. 2d 579, 611 (S.D.N.Y. 2003)). New York courts use a five-factor balancing test to determine whether a duty exists: 1) the reasonable expectations of the parties and society in general; 2) proliferation of claims; 3) the likelihood of unlimited liability; 4) disproportionate risk and reparation allocation; and 5) public policies affecting the expansion or limitation of new channels of liability. 356 F.Supp. 2d at 205; see also Palka v. Servicemaster Mgmt. Servs. Corp., 83 N.Y.2d 579, 611 N.Y.S.2d 817 (1994) (in cases where products are substantially altered after leaving the manufacturers' hands, and alteration is the proximate cause of plaintiff's injuries, the manufacturer cannot be held liable).

The court also held that a manufacturer does not have a duty to anticipate and protect against criminal conduct by third parties, or to design its product to anticipate and frustrate criminal tampering. 356 F.Supp. 2d at 207 (citing Elsroth, 700 F. Supp. at 163-64). To create such a duty based on the conduct of third parties would create a new source of liability and would greatly increase manufacturers' cost of doing business, and would be an 'unprecedented extension' of the common law. Id. Finally, the court held that 'a manufacturer does not have a duty to warn consumers of potential criminal misuse of its product,' and that 'a manufacturer does not have a duty to warn that its product may be more susceptible to tampering than others.' Id. Because the court held that there was no support for imposing a duty upon Amgen for injuries sustained as a result of the counterfeit Epogen, it dismissed the claims against Amgen.

Similarly, in Ashworth v. Albers Medical, Inc., 410 F. Supp. 2d 471 (S.D. W.Va. 2005), the plaintiff sued Pfizer, among others, after she consumed counterfeit Lipitor, Pfizer's cholesterol-reducing medication. Pfizer sought dismissal of all of the claims against it, claiming that it was not responsible for the manufacture, distribution, or sale of the counterfeit Lipitor. Id. at 475. Pfizer also contended that it was under no legal duty to prevent counterfeit Lipitor from entering the market. Id. The plaintiff claimed that whether Pfizer owed a duty to consumers or not was dependent upon whether the risk of harm was foreseeable and that Pfizer had a duty to 'safeguard the chain of distribution to combat the dangers of counterfeiting.' Id.

The court held that the plaintiff did not have standing for any of her claims against Pfizer because she could not show that Pfizer was the manufacturer of, or in the distribution chain of the counterfeit Lipitor. Id. at 476. The court thus dismissed the plaintiff's strict liability, breach of warranty, and consumer protection statute claims. Id. As with the New York court in Fagan, the Ashworth court noted that whether a duty existed or not was a question of law based on public policy considerations, and noted that the existence of a duty was tied to the foreseeability that harm may occur in the absence of the use of due care. Id. at 478. Based on the notion that parties do not have a duty to protect others from the deliberate criminal conduct of third parties, as well as the failure of the plaintiff to identify any regulation or statute requiring manufacturers to monitor distribution channels for potential counterfeits, the court refused to impose a duty on Pfizer. Id. at 479-80.

Analysis and Application to Manufacturers

In evaluating a manufacturer's potential duty to consumers, if any, with respect to counterfeit products, there are a number of issues to consider. One is the extent to which manufacturers owe a duty to protect consumers from counterfeit products generally. Courts have routinely held that manufacturers do not owe consumers any duty with respect to counterfeit products based on the notion that a party is not responsible for the criminal actions of third parties. In fact, it does not appear that any court has yet placed such a duty on a manufacturer. Because this area is so policy driven, however, it is always possible that a court in the future might impose some duty on manufacturers with respect to counterfeit products, depending upon the particular circumstances.

Another issue the courts have not directly addressed, and which presents a gray area of law, is whether or not a company assumes some duty to consumers to protect against harm caused by counterfeit products where the company has a procedure in place for identifying and testing such products. No court appears to have held that by taking action to protect against the dangers presented by counterfeit products ' such as testing the counterfeits for efficacy or contaminants ' a company thereby undertakes or assumes a duty to consumers it would not otherwise have. Given the types of policy considerations that go into the determination of whether a duty exists, however, it is possible that some court will look to the company's actions and hold that, by taking such action, it did assume a duty. (This situation is similar to 'Good Samaritan' rules that exist in many jurisdictions, which state that while a person may not be under a duty to rescue someone from a particular dangerous situation, once they begin to attempt a rescue, they must do so non-negligently. These rules are based on the policy consideration that by attempting to rescue someone, one is preventing others from rescuing the distressed individual, and, therefore, the rescuer is held to a standard of reasonableness in his or her efforts. However, absent some special relationship e.g., lifeguards on duty, the attempt to rescue in a particular situation does not obligate one to perform similar rescues in the future.) In fact, in the Fagan case, discussed supra, the court was presented with a situation where Amgen took preventative measures to protect against potential harm resulting from counterfeit Epogen. Although it did not discuss the impact of these actions, the court refused to hold that, by taking action, Amgen somehow undertook a duty to consumers with respect to the counterfeits.

With all of the recent attention surrounding counterfeit or tainted products being imported into the United States from China, however, it is possible that courts could begin to view this issue in a different light. Although it appears unlikely, it is possible that a court, in balancing the facts and policy considerations, may determine that it would be equitable to place some duty on manufacturers to protect consumers against the dangers presented by such counterfeits. In undertaking this balancing, a court would likely consider:

• The relative toxicity and risk of harm presented by the counterfeit;
• The relative ease of identifying and testing counterfeit products for the presence of harmful ingredients;
• The potential societal impact of expanding the liability of companies by placing duties on them to protect against counterfeit products;
• The likelihood that another entity ' such as the FDA or local health authorities ' will protect consumers against dangers posed by counterfeits, and the relative fairness of shifting some of this burden to manufacturers; and
• The prevailing industry practice in identifying and testing counterfeits (i.e., what other similarly situated companies are doing).

If a court were to decide to impose a duty upon manufacturers, the question then becomes how one discharges that duty. This determination would depend heavily upon the facts and would be driven by a host of policy considerations. It is possible that any duty imposed may be discharged by informing the appropriate authorities ' either the FDA or local regulatory authorities. This might also turn on whether that authority is likely to take any action to protect consumers. It may be that under the circumstances the company has to take additional steps to inform consumers of the potential danger, such as posting information on its Web site or possibly undertaking some form of recall. This discussion is not intended to suggest that it is likely that courts will place this duty on manufacturers to protect against counterfeits, but rather, it presents an illustration of the factors a court may consider under certain factual circumstances.

Additionally, as referenced above, the existence of a potential duty may be based on industry practice. In this case, if it is determined that an industry standard has developed for protecting against counterfeits, it is possible that a court would hold that a manufacturer has a duty to take certain steps ' such as testing for known contaminants ' to protect consumers. For a discussion of potential liability arising out of an industry standard for protecting against counterfeit products, see Nicholas D. Capiello: Counterfeit-Resistant Technology: An Essential Investment to Protect Consumers and to Avoid Liability. 2 J. Health & Biomedical L. 277 (2006). Capiello argues that it may be sufficient to attribute liability to the manufacturer when the manufacturer has 'already undertaken to conduct and finance numerous studies in order to reduce the dangers of counterfeit and adulterated products' because these actions are sufficient to develop a higher industry standard. Id. at 302.

Conclusion and Recommendations

While it appears unlikely that a court would impose a duty upon a manufacturer to protect consumers against potential harm from counterfeit products, because the court's analysis is fact dependent and policy driven, a company should consider the possibility that a court may find that such a duty exists in the future, particularly for companies dealing with products that may be consumed by and could pose risks to consumers. In particular, a gray area in the law is whether a company that has identified and tested counterfeit products in the past somehow undertakes or assumes a duty (at least with respect to identifiable counterfeits) to continue to do so in the future. This question has not been answered by a court yet, and while it would certainly be an extension of the general rule that a company has no duty to protect consumers from harm by counterfeit products, given the policy considerations that underlie the duty analysis, it is conceivable that a court may find some duty has been undertaken in the future. As stated above, this determination will turn on the specific facts of the case and the policy considerations identified in this article, among others. With respect to counterfeit products, the existence of a duty may turn on the extent to which a court finds that a manufacturer has somehow voluntarily undertaken to inspect and test counterfeit products, the extent to which such testing reveals a health risk to consumers, and the feasibility of alerting consumers and/or authorities.

In addition to the legal analysis of whether a manufacturer owes any duty to consumers with respect to counterfeit products, there are practical considerations that may inform manufacturers' strategy going forward, including:

• Apart from the legal issues surrounding counterfeit products, there are business considerations that need to be taken into account, such as the impact on goodwill and the potential negative effect on company reputation that may attach to products that have been counterfeited.
• The actions being taken in the industry to combat counterfeiting should be considered, as it may affect a company's reputation if that company is seen as implementing inferior measures to protect consumers relative to other companies in the industry.

It appears from the literature surrounding the recent rise in concern from counterfeit products and Chinese products of inferior quality (i.e., pet food, seafood, toys, toothpaste, etc.) that a number of major players in the plaintiffs' bar ' Mark Lanier, Michael Hausfeld, etc. ' are getting involved in or investigating suits related to injuries from counterfeit products. This means that companies may be litigating against very sophisticated plaintiffs' counsel in the event injuries occur. A company may want to consider how it would respond to such litigation.

Companies should continue monitoring the theories of liability being asserted by claimants in this area. They should also monitor appropriate regulatory standards to see how they deal with counterfeit products and what steps are being taken by regulatory agencies to combat counterfeit products.

Because this area of law is so policy driven, the burden and cost of testing, and ease of identification of potential contaminants, may be a relevant factor in the analysis.

Arvin Maskin, a member of this newsletter's Board of Editors, is a partner in the New York office of Weil, Gotshal & Manges LLP. Mr. Maskin specializes in the defense of product liability actions, mass tort matters, and class actions, and other complex litigations. B. Keith Gibson is an associate in the same office.

Companies are acutely aware of their duties with respect to the safety of the products they manufacture, and most have intricate frameworks in place to ensure that their products are manufactured in a safe and consistent manner. Given the recent explosion of product safety issues tied to products manufactured in China, companies are under even more scrutiny to ensure the safety of their products. The intense media scrutiny surrounding the rash of recalls of Chinese-made products (e.g., pet food, toys, toothpaste) has only increased the pressure on companies to make their products safe for consumers. However, what do companies do when consumers are injured by counterfeits of popular, brand-name products? What duty, if any, do companies have to police the marketplace and protect consumers against dangers arising from counterfeits? These counterfeits, a number of which are manufactured in China, are generally of a much lower quality and are manufactured without appropriate QA/QC mechanisms that many large companies have in place. Outside of any legal duty ' whether in courts or regulatory directives ' what must a company do to protect its brand name? Even if companies escape legal liability arising out of injuries to consumers caused by counterfeit products, the effect on a company's reputation may be just as disastrous.

This article presents a brief overview of the current state of the law regarding manufacturers' responsibilities with respect to counterfeit products, highlights some of the policy considerations a court is likely to take into account in determining whether or not to impose some duty upon manufacturers, and then provides some practical recommendations for companies to consider going forward.

Primer on Law Regarding Counterfeit Products

There is scant case law regarding the potential liability of a manufacturer for injuries resulting from the use of counterfeit products. Courts have generally held in such cases that manufacturers do not have a duty to anticipate and protect against criminal conduct committed by third parties. See, e.g., Fagan v. AmerisourceBergen Corp. , 356 F.Supp. 2d 198, 207 (E.D.N.Y. 2004); Elsroth v. Johnson & Johnson , 700 F. Supp. 151, 163-64 (S.D.N.Y. 1988). Moreover, there is no case law discussing whether a company somehow undertakes a duty to consumers by identifying and testing known counterfeit products.

Nor have courts imposed a duty on manufacturers to inspect known counterfeit products or take any action with regard to such products. This is not surprising, given that courts do not place any duty on manufacturers to protect consumers against injuries resulting from counterfeit products. In Schoenbaum v. Procter & Gamble Co., No. 05-21646, an unreported case out of the Southern District of Florida, the plaintiffs filed a class action seeking to hold Procter & Gamble ('P&G') liable for injuries resulting from consumers' use of counterfeit hair care products. See Mark N. Mutterperl & Jennifer McIntosh, Weighed Down By Counterfeiting, GC NEW YORK, Feb. 13, 2006. (There is no published opinion in the Schoenbaum case, and no opinion appears on the docket, but the judge made comments on the record regarding the grounds for dismissal.)

In Schoenbaum, the plaintiffs claimed that P&G should be liable for any harm caused by counterfeits of its Head & Shoulders and Pantene hair care products. According to the complaint, P&G was aware of the existence of counterfeits in the market and was aware that these counterfeits may be harmful to consumers. The plaintiffs argued that by continuing to market its product without warning consumers of the potential risks of harm from counterfeits, P&G engaged in false and misleading business practices, unconscionable acts or practices, and/or deceptive acts or practices. Plaintiffs also alleged causes of action for negligence, fraud, breach of warranty, RICO, and violation of Florida's consumer protection statute.

The court found that a company is not under any duty to protect against the actions of third parties, particularly criminal conduct that results in the production of counterfeit products. The court stated that the law does not impose a duty to notify that someone else is counterfeiting your product. This position follows the general proposition that parties do not generally owe a duty to protect against harm by a third party. This case, although not reported, would appear to be the most analogous to the situation involving counterfeit toothpaste.

Most of the law in this area deals with adulterated pharmaceuticals, either counterfeits or authentic drugs that have been tampered with. For example, in Fagan, the plaintiff brought suit against Amgen, Inc. for injuries he sustained as a result of using counterfeit Epogen following a liver transplant. 356 F. Supp. 2d at 204. According to the factual allegations, Amgen posted information on its Web site informing customers that counterfeit Epogen was available in the marketplace. Amgen also advised consumers how to recognize these counterfeits by the information appearing on the label and posted specific lot numbers that were known to be counterfeits. At the time plaintiff took one round of Epogen, it was not listed as one of the known counterfeit lot numbers on Amgen's Web site, but later, after the plaintiff had already taken that particular batch, Amgen listed that lot number as a known counterfeit. Plaintiff sued Amgen for injuries he allegedly sustained from taking the counterfeit Epogen, based primarily on theories of negligence and breach of warranty. Id. (The plaintiff also sued Amgen on theories of negligent misrepresentation and fraudulent concealment. However, those claims were dismissed against Amgen for failure to plead with specificity as required by FED. R. CIV. P. 9(b). 356 F.Supp. 2d at 218. The plaintiff also sued the distributor of the Epogen and the pharmacy where the prescription was filled. Based on the relationship between these parties and the plaintiff, some of the plaintiff's claims survived.)

In support of his negligence claim, plaintiff claimed that Amgen owed its customers a duty to ensure the safety of its drugs, which included protecting its customers against counterfeits and making its products tamperproof. Id. at 205. Plaintiff also made several policy arguments stating that drug manufacturers were in the best position to protect against the risks associated with counterfeit drugs, and that holding manufacturers liable for injuries resulting from counterfeits would not open them up to unreasonable liability. Id. (Some scholars have argued that it would be appropriate to place on manufacturers the duty to ensure that consumers are not injured by counterfeit products. See, e.g., Arthur Best: Manufacturer's Responsibility for Harms Suffered By Victims of Counterfeiters: A Modern Elaboration of Causation Rules and Fundamental Tort Law. 8-Sum Currents: Int'l Trade L.J. 43 (1999) (equating manufacturers' duty to protect against foreseeable counterfeits to landowner's duty to protect against foreseeable criminal activity on its premises).) Amgen argued that it did not owe a duty to consumers to make its product tamperproof, and it argued that once the product left its control, it did not have a duty to monitor the product continuously or to protect the public from criminal misuse of its product, even if such misuse was foreseeable. Id.

The court noted that, in New York, the existence of a duty of care is a 'legal, policy-laden declaration reserved for judges.' Id. at 206 (quoting In re September 11 Litigation, 280 F. Supp. 2d 579, 611 (S.D.N.Y. 2003)). New York courts use a five-factor balancing test to determine whether a duty exists: 1) the reasonable expectations of the parties and society in general; 2) proliferation of claims; 3) the likelihood of unlimited liability; 4) disproportionate risk and reparation allocation; and 5) public policies affecting the expansion or limitation of new channels of liability. 356 F.Supp. 2d at 205; see also Palka v. Servicemaster Mgmt. Servs. Corp. , 83 N.Y.2d 579, 611 N.Y.S.2d 817 (1994) (in cases where products are substantially altered after leaving the manufacturers' hands, and alteration is the proximate cause of plaintiff's injuries, the manufacturer cannot be held liable).

The court also held that a manufacturer does not have a duty to anticipate and protect against criminal conduct by third parties, or to design its product to anticipate and frustrate criminal tampering. 356 F.Supp. 2d at 207 (citing Elsroth, 700 F. Supp. at 163-64). To create such a duty based on the conduct of third parties would create a new source of liability and would greatly increase manufacturers' cost of doing business, and would be an 'unprecedented extension' of the common law. Id. Finally, the court held that 'a manufacturer does not have a duty to warn consumers of potential criminal misuse of its product,' and that 'a manufacturer does not have a duty to warn that its product may be more susceptible to tampering than others.' Id. Because the court held that there was no support for imposing a duty upon Amgen for injuries sustained as a result of the counterfeit Epogen, it dismissed the claims against Amgen.

Similarly, in Ashworth v. Albers Medical, Inc. , 410 F. Supp. 2d 471 (S.D. W.Va. 2005), the plaintiff sued Pfizer, among others, after she consumed counterfeit Lipitor, Pfizer's cholesterol-reducing medication. Pfizer sought dismissal of all of the claims against it, claiming that it was not responsible for the manufacture, distribution, or sale of the counterfeit Lipitor. Id. at 475. Pfizer also contended that it was under no legal duty to prevent counterfeit Lipitor from entering the market. Id. The plaintiff claimed that whether Pfizer owed a duty to consumers or not was dependent upon whether the risk of harm was foreseeable and that Pfizer had a duty to 'safeguard the chain of distribution to combat the dangers of counterfeiting.' Id.

The court held that the plaintiff did not have standing for any of her claims against Pfizer because she could not show that Pfizer was the manufacturer of, or in the distribution chain of the counterfeit Lipitor. Id. at 476. The court thus dismissed the plaintiff's strict liability, breach of warranty, and consumer protection statute claims. Id. As with the New York court in Fagan, the Ashworth court noted that whether a duty existed or not was a question of law based on public policy considerations, and noted that the existence of a duty was tied to the foreseeability that harm may occur in the absence of the use of due care. Id. at 478. Based on the notion that parties do not have a duty to protect others from the deliberate criminal conduct of third parties, as well as the failure of the plaintiff to identify any regulation or statute requiring manufacturers to monitor distribution channels for potential counterfeits, the court refused to impose a duty on Pfizer. Id. at 479-80.

Analysis and Application to Manufacturers

In evaluating a manufacturer's potential duty to consumers, if any, with respect to counterfeit products, there are a number of issues to consider. One is the extent to which manufacturers owe a duty to protect consumers from counterfeit products generally. Courts have routinely held that manufacturers do not owe consumers any duty with respect to counterfeit products based on the notion that a party is not responsible for the criminal actions of third parties. In fact, it does not appear that any court has yet placed such a duty on a manufacturer. Because this area is so policy driven, however, it is always possible that a court in the future might impose some duty on manufacturers with respect to counterfeit products, depending upon the particular circumstances.

Another issue the courts have not directly addressed, and which presents a gray area of law, is whether or not a company assumes some duty to consumers to protect against harm caused by counterfeit products where the company has a procedure in place for identifying and testing such products. No court appears to have held that by taking action to protect against the dangers presented by counterfeit products ' such as testing the counterfeits for efficacy or contaminants ' a company thereby undertakes or assumes a duty to consumers it would not otherwise have. Given the types of policy considerations that go into the determination of whether a duty exists, however, it is possible that some court will look to the company's actions and hold that, by taking such action, it did assume a duty. (This situation is similar to 'Good Samaritan' rules that exist in many jurisdictions, which state that while a person may not be under a duty to rescue someone from a particular dangerous situation, once they begin to attempt a rescue, they must do so non-negligently. These rules are based on the policy consideration that by attempting to rescue someone, one is preventing others from rescuing the distressed individual, and, therefore, the rescuer is held to a standard of reasonableness in his or her efforts. However, absent some special relationship e.g., lifeguards on duty, the attempt to rescue in a particular situation does not obligate one to perform similar rescues in the future.) In fact, in the Fagan case, discussed supra, the court was presented with a situation where Amgen took preventative measures to protect against potential harm resulting from counterfeit Epogen. Although it did not discuss the impact of these actions, the court refused to hold that, by taking action, Amgen somehow undertook a duty to consumers with respect to the counterfeits.

With all of the recent attention surrounding counterfeit or tainted products being imported into the United States from China, however, it is possible that courts could begin to view this issue in a different light. Although it appears unlikely, it is possible that a court, in balancing the facts and policy considerations, may determine that it would be equitable to place some duty on manufacturers to protect consumers against the dangers presented by such counterfeits. In undertaking this balancing, a court would likely consider:

• The relative toxicity and risk of harm presented by the counterfeit;
• The relative ease of identifying and testing counterfeit products for the presence of harmful ingredients;
• The potential societal impact of expanding the liability of companies by placing duties on them to protect against counterfeit products;
• The likelihood that another entity ' such as the FDA or local health authorities ' will protect consumers against dangers posed by counterfeits, and the relative fairness of shifting some of this burden to manufacturers; and
• The prevailing industry practice in identifying and testing counterfeits (i.e., what other similarly situated companies are doing).

If a court were to decide to impose a duty upon manufacturers, the question then becomes how one discharges that duty. This determination would depend heavily upon the facts and would be driven by a host of policy considerations. It is possible that any duty imposed may be discharged by informing the appropriate authorities ' either the FDA or local regulatory authorities. This might also turn on whether that authority is likely to take any action to protect consumers. It may be that under the circumstances the company has to take additional steps to inform consumers of the potential danger, such as posting information on its Web site or possibly undertaking some form of recall. This discussion is not intended to suggest that it is likely that courts will place this duty on manufacturers to protect against counterfeits, but rather, it presents an illustration of the factors a court may consider under certain factual circumstances.

Additionally, as referenced above, the existence of a potential duty may be based on industry practice. In this case, if it is determined that an industry standard has developed for protecting against counterfeits, it is possible that a court would hold that a manufacturer has a duty to take certain steps ' such as testing for known contaminants ' to protect consumers. For a discussion of potential liability arising out of an industry standard for protecting against counterfeit products, see Nicholas D. Capiello: Counterfeit-Resistant Technology: An Essential Investment to Protect Consumers and to Avoid Liability. 2 J. Health & Biomedical L. 277 (2006). Capiello argues that it may be sufficient to attribute liability to the manufacturer when the manufacturer has 'already undertaken to conduct and finance numerous studies in order to reduce the dangers of counterfeit and adulterated products' because these actions are sufficient to develop a higher industry standard. Id. at 302.

Conclusion and Recommendations

While it appears unlikely that a court would impose a duty upon a manufacturer to protect consumers against potential harm from counterfeit products, because the court's analysis is fact dependent and policy driven, a company should consider the possibility that a court may find that such a duty exists in the future, particularly for companies dealing with products that may be consumed by and could pose risks to consumers. In particular, a gray area in the law is whether a company that has identified and tested counterfeit products in the past somehow undertakes or assumes a duty (at least with respect to identifiable counterfeits) to continue to do so in the future. This question has not been answered by a court yet, and while it would certainly be an extension of the general rule that a company has no duty to protect consumers from harm by counterfeit products, given the policy considerations that underlie the duty analysis, it is conceivable that a court may find some duty has been undertaken in the future. As stated above, this determination will turn on the specific facts of the case and the policy considerations identified in this article, among others. With respect to counterfeit products, the existence of a duty may turn on the extent to which a court finds that a manufacturer has somehow voluntarily undertaken to inspect and test counterfeit products, the extent to which such testing reveals a health risk to consumers, and the feasibility of alerting consumers and/or authorities.

In addition to the legal analysis of whether a manufacturer owes any duty to consumers with respect to counterfeit products, there are practical considerations that may inform manufacturers' strategy going forward, including:

• Apart from the legal issues surrounding counterfeit products, there are business considerations that need to be taken into account, such as the impact on goodwill and the potential negative effect on company reputation that may attach to products that have been counterfeited.
• The actions being taken in the industry to combat counterfeiting should be considered, as it may affect a company's reputation if that company is seen as implementing inferior measures to protect consumers relative to other companies in the industry.

It appears from the literature surrounding the recent rise in concern from counterfeit products and Chinese products of inferior quality (i.e., pet food, seafood, toys, toothpaste, etc.) that a number of major players in the plaintiffs' bar ' Mark Lanier, Michael Hausfeld, etc. ' are getting involved in or investigating suits related to injuries from counterfeit products. This means that companies may be litigating against very sophisticated plaintiffs' counsel in the event injuries occur. A company may want to consider how it would respond to such litigation.

Companies should continue monitoring the theories of liability being asserted by claimants in this area. They should also monitor appropriate regulatory standards to see how they deal with counterfeit products and what steps are being taken by regulatory agencies to combat counterfeit products.

Because this area of law is so policy driven, the burden and cost of testing, and ease of identification of potential contaminants, may be a relevant factor in the analysis.

Arvin Maskin, a member of this newsletter's Board of Editors, is a partner in the New York office of Weil, Gotshal & Manges LLP. Mr. Maskin specializes in the defense of product liability actions, mass tort matters, and class actions, and other complex litigations. B. Keith Gibson is an associate in the same office.