In March 2012 the New York Times reported  that FBI agents arrested a leading wine merchant on charges that he had sold more than $1.3 million in counterfeit wine. He was charged with mail and wire fraud.
As FBI assistant director Janice Fedarcyk explained, “the bad faith sale of any commodity you know to be a counterfeit, fake or forgery is a felony. Whether you are peddling a Picasso or a Petrus, a Botticelli or a Burgundy, unless it is what you say it is, the sale is a fraud.”
Obviously, no reputable restaurant would ever risk its reputation by knowingly serving counterfeit wine or other food products to guests. But the fact remains that food manufacturers and federal agents devote considerable resources to combating counterfeit products in the marketplace. Vanity Fair reported this summer on fraudulent high-end Burgundies sold to wine connoisseurs. Coca-Cola’s battle against restaurants passing off the wrong product is so well known that it spawned a Saturday Night Live skit.
While the willful sale of counterfeit products may lead to criminal charges, a restaurant’s potential liability on this issue is not limited to those charges alone. In fact, restaurateurs are potentially liable for infringement if they “knew or should have known” that they were selling counterfeit and mislabeled products.
Civil liability arises under various laws, including the federal laws protecting intellectual property. Willful violation of intellectual property rights through the sale of counterfeit products carries a hefty civil penalty with statutory fines as high as $2 million.
Yet another consideration is the irreparable damage to the restaurant’s reputation.
Counterfeit food products are turning up in the marketplace more frequently. Consider these recent examples:
• Interpol investigators have uncovered counterfeit candy bars, tomato sauce, fish and cheese bound for the U.S.
• Food and Drug Administration agents are seizing counterfeit olive oil and wine.
• Garden-variety tomatoes are being marketed as expensive heirloom tomatoes.
• Inexpensive farm-raised salmon is being passed off as more expensive wild salmon, and tilapia is being substituted for high-priced red snapper.
• The World Customs Organization estimates that the counterfeit food industry is worth about $49 billion a year.
Some counterfeit food products incorporate adulterated ingredients that may be threatening the health of consumers. Counterfeit vodka sold in England, for example, contained high levels of methanol, also used to make antifreeze, which can cause blindness, vomiting and breathing difficulties.
Following are several areas of potential problems and some tips on how to avoid liability:
How restaurants can avoid legal liabilities
Trademarks. A retailer that sells counterfeit products with a spurious brand name may be violating the counterfeiting provisions of U.S. trademark laws. Liability includes the possibility of statutory damages or up to $2 million per infringement. Liability is not limited to the manufacturer of the product, but also extends to resellers who “knew or should have known” that the product was counterfeit. Thus, a restaurateur who lists vodka or wine on a menu could be liable if the beverage is counterfeit. Lack of knowledge may not be a defense. The courts can apply the “flea market” rule to impose liability on the operator who had reason to know that counterfeit products were being sold on the premises it controls.
Solution: Know your sources. Buy only from reputable vendors. If the price is too good to be true, it may not be legitimate product. Inspect labels and packaging. Do they appear to be original and authentic? When in doubt, confirm validity with the original source.
False advertising. A restaurant that advertises red snapper on its menu, but substitutes tilapia, could be liable for false advertising, which is a violation of U.S. trademark laws as well. Last year, a woman in California brought a class action suit against Taco Bell for falsely claiming that its products contained “seasoned ground beef,” when instead the products allegedly contained a substantial amount of substances other than beef. A restaurant that engages in these practices could be sued by competitors as well as consumers. False claims over food products have regularly been the subject of legal actions for false advertising in the federal courts as well as before the National Advertising Division of the Better Business Bureau.
Solution: Ensure that your advertising and product claims are accurate. Specific statements in advertising and on menus should be true.
Passing off. A restaurant that substitutes Pepsi when a diner orders Coke may be liable to Coca-Cola for unlawful misrepresentation. Coca-Cola has successfully pursued many restaurants for this practice. Red Bull faced similar problems with bars and restaurants that allegedly substituted other beverages on orders for Red Bull. As part of a settlement, the restaurants and bars reportedly paid compensation and attorneys’ fees. In a separate proceeding, Red Bull won a judgment against a Chicago nightclub for $679,827. Restaurant operators must take care to educate employees and create policies that avoid the passing off of products on orders for others.
Even having a posted policy may not be enough. In one case brought by Coca-Cola, the restaurant had posted signs and placed disclosures on menus advising customers that it only sold Pepsi products. The court found this insufficient. “The customer must be informed orally that the beverage is not available and be given the opportunity to accept or reject the substituted process,” the ruling advised.
Solution: Train employees to fill orders with the requested product. If the requested product is not available, instruct employees to inform customers and get informed consent. Consider affirmative statements on menus about the brands you “proudly serve.” Retain knowledgeable attorneys to conduct a compliance review to insure that your business is meeting best practices in your industry.
The risks of counterfeiting, false advertising and secretly substituting one product for another are high. Verification of sources, proper use of brand names and accurate statements on menus and promotional materials are all best practices to help keep your reputation and business intact and to avoid liability and legal fees.
Mark Partridge is the founder of Partridge IP Law , a Chicago-based law and IP strategy firm. He has worked in intellectual property law for more than 30 years and was named one of the top trademark lawyers in the 2012 edition of The International Who’s Who of Trademark Lawyers.