Tuesday, May 10, 2011

Accused of Selling Knockoffs: What If I Do Nothing?

Dear Rich: I buy handbags from an importer and resell them online. I advertise them as knockoffs at various sites, including eBay. I never claim they're originals ... I always tell people they're copies. Recently, I got a letter from a lawyer saying I had to stop selling them or I would get sued.  Would I be better off running my business as a corporation so that I won't be personally liable? What will happen if I don't respond to the letter? Sorry, but the Dear Rich Staff has lost its ability to predict the future. (We think it happened when Google implemented Panda One and switched its search algorithm.) In any case, any of the following scenarios are possible after receiving a cease and desist letter:
  • you keep selling the knockoffs, the lawyer files a lawsuit, gets a default judgment and enforces it against you personally (assuming you're not an LLC or incorporated) or against your business
  • you stop selling the knockoffs, the lawyer drops the whole thing
  • you stop selling, the lawyer sends a second letter, gets no response and files a lawsuit and gets a default judgment. 
  • you blow off the letter, keep selling the knockoffs, and the lawyer is impressed with your moxie, and decides to hire you as an investigator of trademark counterfeiting. You do really well in that position, give up your handbag business and eventually write a book about the knockoff industry. 
Actually, the last choice --the Catch Me If You Can approach -- isn't very probable at all. If you continue to sell without either fighting the letter or otherwise responding, the lawyers will most likely pursue you because, as the young people say, that's how they roll.
Does forming an LCC or corporation shield you from these lawsuits? Converting your business to an LLC or corporation can establish limited liability and will shield you from personal liability in some instances -- the lawyers can only go after your business assets. But your liability is likely to be tied to your status at the time of the infringement. So if you're a sole proprietor when you got the letter, then you're probably going to be treated that way (personally liable) in court, as well, even if you later convert to an LLC or corporation. In addition, keep in mind that the LLC/corporate shield also won't protect you from the following:

  • You personally guarantee a loan or lease.
  • You owe federal or state taxes. 
  • You act negligently (people are injured by your handbags).
  • You fail to abide by corporate rules. 
That Said Dept. That said, perhaps you should reconsider your business model (as well as your business entity). First, you need to determine whether the lawyers are right -- that is, are your bags infringing? If yes, you should abandon the infringing items. If you're not infringing, you should consider whether you want to fight or move on. If you fight, you may be able to have some luck fighting takedown notices (we'll talk about them more this week) but keep in mind that if you're dragged into court, you'll be hit hard in your bankroll and the only guaranteed winners will be the lawyers.


Unknown said...

Did they say who (on behalf of which entity) sent the letter?

It might just be another business trying to scare him. Though being in the knock-off business he's really bound to get those notices, especially on eBay.

James @ CPA NJ

DavidAUM said...

I thought a single member LLC or similar styled S Corporation could do little to protect the personal assets of the member/owner if they are found to be the willful moving, active, conscious force behind the copyright or trademark infringement.