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Guilty verdict in 5-hour counterfeiting case seen as potent deterrent

By Hank Schultz

02-Dec-2016
Last updated on 06-Dec-2016 at 00:53 GMT2016-12-06T00:53:05Z

© iStock / memoriesarecaptured
© iStock / memoriesarecaptured

The guilty verdict handed down this week in the 5-hour Energy product counterfeiting case is a milestone within the nutritional products sphere that could serve an important deterrent function, said a lawyer serving the plaintiff.

Attorney Geoffrey Potter leads the anti-counterfeiting practice at the law firm Patterson Webb & Tyler LLP and represented Living Essentials, owners of the 5-hour Energy brand in the case. He said counterfeiting is rife across many product and it’s rarely prosecuted, making the guilty verdicts in this case significant. And that jury decision also came with a $20 million monetary judgement against the perpetrators .

Guilty verdict

In the case, the defendants, Joseph Shayota and his wife Adriana Shayota, were found guilty by a jury in the Northern District of California of manufacturing counterfeit 5-hour Energy products and selling them in the United States. The defendants at one time had a distribution deal to sell the product in Mexico, but then went far beyond that contract to put fake English-label according those bottles and then to outright counterfeiting of the entire products, according to the court filings. Potter said his firm’s investigation revealed the products were being made in an unlicensed facility in San Diego that didn’t approach food-grade sanitary standards.

Potter said the law governing these kinds of counterfeiting cases accords unusual police-type powers to the plaintiffs if they can convince a judge of reasonable certainty that the activity is going on.  The plaintiffs can, unannounced, inspect facilities, seize products, and take possession of records.  Potter said this avoids all the back-and-forth wrangling that might accompany the discovery process in a more typical type of business case, such as a breach-of-contract lawsuit. 

The investigation showed that the defendants had manufactured more than 4 million counterfeit bottles with basically perfectly duplicated labels. But it’s anybody’s guess as to what was inside the bottles, he said. 

“We did more than a dozen seizures. The court order in this type of case gives us the authority to open any door, break any lock, and seize things like computers. Within less than a month of starting the investigation we worked our way all the way back to the factory, which was a clandestine facility in San Diego. They had two shifts of workers a day working at the plant and they had a peak capacity of about 1.5 million bottles a month,” Potter told NutraIngredients-USA.

Potter said the counterfeit product issue is huge and growing all the time. The concern with dietary supplements is grave, and the picture is even more dire when counterfeit pharmaceuticals and medical devices are thrown into the mix.

Labeling defense

Harry Shulman, CEO of Jenda Tag, a startup which is offering an anti-counterfeit labeling solution, agreed the problem is vast.  

“The problem is growing significantly. Just looking at the international picture, at the cross-border issue, the problem is pegged at just under $500 billion,” he said.

Jenda Tag’s solution is a QR code covered by a sticker that offers the first line of counterfeiting defense. But Shulman said he’s under no illusions counterfeiter would be unable to duplicate the QR code.

“A lot of these counterfeiters are very skilled. Our special sauce is to combine the QR code the consumer scans with a back end algorithm that takes into account the history of the product. Is the consumer buying it at a place where that lot number could be expected to be found?” Shulman said.

Deterrent effect

Potter said while the problem is vast, he hopes the guilty verdicts in this case will serve as a significant deterrent. The ultimate sentences are up to the judge, but he said the pernicious nature of the crime means the defendants could be facing jail terms of as much as 10 years (the sentencing hearing is set at this moment for April of next year). And statute covering counterfeiting makes it a strict liability crime, meaning ignorance is no defense, which stretches the effect of this case out into those outlets that sell counterfeit products.

“There is no such thing as an innocent seller of counterfeits. A retailer might say they truly believed this product to be authentic, and that statement might be 100% true. But the duty is on the merchants to sell authentic merchandise. If they bought from a reliable source and they ended up with counterfeit merchandise they are going to be made whole from that source. But if they bought it from just some guy, then they chose to run that risk,” he said.

Attorneys representing the Shayotas could not be reached for comment.

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