UAE: New proposals to combat trade in counterfeit goods

Combating Commercial Fraud in the UAE

The UAE is one of the world’s premier trading hubs. Located centrally between East and West, North and South, billions of Dihrams of good pass through the UAE on an annual basis for domestic consumption and for re-export. In the first half of 2012 alone, the UAE imported in excess of AED321billion worth of goods, of which over AED100billion was for re-export. This represents a ten-fold increase in a ten-year period, and it appears the trend is set to continue.

The type of goods range from the high end luxury products (with which the UAE has become synonymous) through to every-day FMCG, clothes and pharmaceuticals. However, where there are luxury goods, recognized brands and “family favourites”, counterfeiters are never too far behind to offer a cheaper imitation.

An effective regime guarding against counterfeit products is one of the essential tools for the UAE to protect local consumers (particularly in the FMCG and pharmaceuticals sectors), brand owners’ rights, and the UAE’s reputation as a jurisdiction which take the rights of brand owners seriously.

Despite the Abu Dhabi Department of Economic Development alone seizing more than AED35 million in counterfeit products in 2013, brand owners arte concerns that under the current legal regime, the local authorities do not have sufficient power to deter those intent on importing and selling counterfeit products.

In response to these concerns, a new draft bill concerning combating commercial fraud (the “New Law”) has been proposed. Whilst the New Law has sought to address a number of key concerns of brand owners under the existing regime, it may need further consideration, as it leaves brand owners and consumers exposed in other areas.

This article provides a brief overview of both the existing regime and the pros and cons of the New Law.

The Existing Regime

As a UAE-brand owner you have different choices to protect your brand when it is threatened by counterfeiting; namely (1) the law on Suppression of Fraud and Deception in Commercial Transactions and its Executive Regulations (commonly known as the Commercial Fraud Law, or “CFL”), (2) the Trademarks Law, and (3) the UAE Civil Code.

The Trademarks Law sets out a comprehensive regime governing trademarks for goods and services, granting trademark owners the benefit from a renewable 10-year term of registration. It also provides a mechanism for the registration and transfer of trademarks, and sets out consequences for those infringing registered trademarks. Infringement covers any person who knowingly possesses, sells or offers for sale goods or services bearing an illegitimate or imitation trademark or “look-a-like” goods or services. Breach of the Trademarks Law can result in a fine of not less than AED5,000 and a prison sentence of up to one year. The guilty party will also risk having the relevant goods confiscated and destroyed and the trademark owner will still have a civil claim against the offending party for compensation under the UAE Civil Code. However, the Trademarks Law only applies to registered trademarks, not unregistered trademarks, and the penalties set out above are generally perceived to be too lenient for their purpose.

The more popular source of protection for most brand owners in the UAE, is the CFL. The CFL is worded in much broader terms, dealing with counterfeit products and fraudulent trading, and can be construed to cover counterfeit goods and services which may infringe both registered and unregistered trademarks – extending beyond the reach of the Trademarks Law. Offenders may be fined up to AED20,000, may have a prison sentence of up to 3 years imposed on them, may have their place of business closed down and if they are non-UAE nationals, and non-UAE nationals also risk deportation.

The main attraction with bringing action under the CFL is that local authorities can take swift and cost-effective action against offenders, by seizing and impounding offending products. The local authorities can also order importers to export offending counterfeit products back to their place of origin or (preferably, for the reasons described below) have them destroyed at the importer’s expense.

Re-exportation of products bears relevance to the UAE’s obligations as a party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPs”), which restricts the circumstances in which counterfeit goods can be re-exported. As a member of the WTO since 1996, TRIPs applies to the UAE and in terms of the protection of trademarks, Article 59 of TRIPs states:

"In regard to counterfeit trademark goods, the authorities shall not allow the re-exportation of the infringing goods in an unaltered state or subject them to a different customs procedure, other than in exceptional circumstances."

Although the CFL pre-dates the UAE’s obligations under TRIPs, clearly there remains a mismatch between the CFL and TRIPs on this point which has yet to be addressed.

Spot the gap

Whilst the Trademarks Law and CFL do offer some degree of protection to consumer and brand owners, there are still obvious gaps which required addressing. The main areas of concern for brand owners under the existing regime include:

• the penalties under the Trademarks Law and CFL are insufficient to deter those involved in the trade of counterfeit goods;
• re-exporting counterfeit goods merely serves to transfer the problem to another jurisdiction, and does not deal with the problem “at source”. It is also contrary to the provisions of TRIPs and causes difficulties for brand owners. The problems of re-exportation are well known to the industry: if the goods are shipped to their origin, the brand owner must follow the goods and initiate anti-counterfeiting procedures in that jurisdiction, which takes time and money. If no trademark rights exist in that jurisdiction, the brand owner is left without remedy. Either way, re-export of counterfeit goods from the UAE is clearly not beneficial to brand owners;
• intervening with one batch of counterfeit imports often does not reveal the extent of the counterfeiting operation. The authorities often are not presented with the “full picture”, and therefore do not have the justification for imposing maximum penalties on offenders - currently the local authorities have no legal means of forcing importers to disclose their records, contacts or other information which might expose this;
• there is no single Federal authority - different authorities in each of the seven Emirates in the UAE govern counterfeiting in their respective Emirate; and
• it is not always possible to identify the importer.

The New Law

The New Law, which is expected to repeal and replace the CFL, takes welcome positive steps to address some of the concerns noted above. However, it risks falling short on other areas.

Looking at the positives first:

• A Centralized Authority: The New Law provides for a Federal structure with one supervising authority – the Higher Committee for Combating Commercial Fraud (the “Higher Committee”). The Higher Committee will delegate supervision to sub-committees for each Emirate, but they will together form one authority tasked with combating commercial fraud. Centralized enforcement is expected to speed up enforcement procedures and simplify enforcement overall. It would be a significant advantage for a UAE-brand owner as it will no longer be required to initiate separate, independent proceedings in different Emirates, which could lead to different results and requires extra time and cost.
• Increased Penalties: The penalties for dealing with counterfeit goods will be increased considerably. The fines imposed under the CFL and Trademarks law ranged from AED500 to AED20,000. Under the new law these have been increased substantially to between AED250,000 and AED1,000,000 for any crime of commercial fraud or deception relating to food or pharmaceuticals products, AED250,000 for other goods, AED100,000 for commencing commercial fraud or deception and AED150,000 for possessing counterfeit goods for the purposes of commerce.
• Increased Scope: The scope of the New Law appears to go beyond that of the CFL. The New Law provides different regulations for the various stages of counterfeiting, and expressly prohibits “the import, export, re-export, manufacturing, display, storage, renting, marketing, sale, trade or possession of fraudulent, corrupted, or imitated commodities or advertising them”, as well as “advertisements…or the promise of provision thereof for the misleading promotion or incorrect publicity of the promotion of fraudulent, corrupted or imitated commodities” and disposing of counterfeit goods.
• Access to Records: Distributors of counterfeit goods are required to provide the competent authorities with all books and data relating to counterfeit goods owned or possessed by that person/company, and the value of such goods, together with all other supporting documents and invoices. This is a new tool for brand owners to identify the importer to pass on any costs related to confiscation or destruction of the relevant goods. The information may also lead to investigations of further infringements and lead to higher fines/greater penalties. Furthermore, business licenses in case of repeated counterfeit violations may be revoked.
• Partial closing of outlets:Previously the authorities had the power to close down an outlet if it was found to be stocking counterfeit goods. However, in the case of large outlets where only a small fraction of the good sold might be counterfeit, seeking closure of that outlet may be deemed to be a disproportionate response and may not be successful. Under the New Law, the authorities will have the power to close specific offending sections of outlets to circumvent this issue making the punishment more relative to the violation. This, coupled with the authorities’ abilities to fully discover the extent of counterfeiting (see Access to Records above), means the authorities will have a better understanding of the scale of the violations and will have a more flexible set of powers to counteract them. It is hoped that this will facilitate swifter action to be taken on a more regular basis and should help to motivate traders to take greater precautions to ensure they only stock genuine items. However, it will be important that swift partial closures are used in conjunction with the right to access all records to identify the true scale of the counterfeiting operation, and not instead of that more thorough investigation.

And the negatives:

• Do the penalties go far enough? Although the current sanctions will be substantially increased, there is a concern that they do not go far enough. The scale and value of the counterfeit goods in question, particularly on the luxury goods market, is likely to be vast in comparison to the size of the potential fines, and in practice it is unlikely that maximum fines will ever be issued.
• Re-export issue not addressed: The re-export problem has not been addressed. In fact, it has arguably been increased, as the New Law suggests (albeit not conclusively) that the authorities’ primary course of action should be to order the importer to re-export the goods (which is itself a prohibited action). As noted above, this not only contravenes TRIPs, but also prejudices brand owners. We expect that this issue will be considered further before the New Law is finalized.
• Decreased scope? Although the drafting of the latest version available to us is not completely clear, the New Law appears to only protect registered trademarks, not un-registered, and does not cover “look-a-like” products. In this regard, the New Law may offer less protection than the CFL (although remedy under the Trademarks Law may still be available).

Future perspective

Brand owners will be encouraged that the authorities are taking steps to better protect the value of their brands under the New Law. However there remain a number of key issues which brand owners are clearly concerned about. Brand owners will be keen to learn whether the final draft of the New Law, once amended, will address these concerns.

It will also be interesting to find out how the new tools granted to the UAE authorities to combat counterfeit goods will impact the way manufacturers, importers and distributors of goods do business, if the authorities show willing to close offending parts of major retail outlets. The risk of this occurring has the potential to impact all aspects of the supply chain of genuine products which may suffer as a result of a partial closure.