United States v. Cone
714 F.3d 197 (2013)
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Rule of Law:
Altering a genuine product that bears an authentic, unaltered trademark does not constitute criminal trafficking in counterfeit goods under 18 U.S.C. § 2320. The statute criminalizes the use of a 'spurious mark,' meaning a fake mark, not the modification of the underlying genuine good.
Facts:
- Donald Cone and Chun-Yu Zhao, a married couple, formed JDC Networking, Inc. ('JDC'), a licensed distributor of computer networking equipment from Cisco Systems, Inc. ('Cisco').
- From 2004 to 2010, JDC imported over 200 shipments from Han Tong Technology in Hong Kong, which contained both genuine Cisco products and fake imitations.
- JDC marketed and sold computer equipment bearing a Cisco mark, but several customers complained that some of the products they received were fake or counterfeit.
- In addition to selling pure fakes, Zhao and Cone also modified some authentic Cisco products to make them appear as higher-end, more expensive models, and then resold them.
- After their marriage deteriorated, Cone sent Zhao emails threatening to expose their business practices to authorities, mentioning that customers were returning products because they were counterfeit.
- In 2010, U.S. Customs and Border Patrol (CBP) intercepted a package addressed to Zhao containing over 300 counterfeit Cisco labels.
- A controlled delivery of the package led agents to Zhao's home, where a search uncovered the counterfeit labels, unlabeled equipment, and instructions on how to convert Cisco equipment into different models.
- Agents subsequently discovered a storage unit rented by Zhao that was half-filled with boxes of equipment bearing Cisco marks.
Procedural Posture:
- Donald Cone and Chun-Yu Zhao were indicted by a federal grand jury in the U.S. District Court for the Eastern District of Virginia.
- The indictment included charges for conspiracy to traffic in counterfeit goods, importation of improperly declared goods, and wire fraud.
- At their joint trial, the government presented a 'material alteration' theory, arguing that modifying genuine Cisco products into different models constituted criminal counterfeiting.
- At the close of evidence, both defendants moved for a judgment of acquittal.
- The district court (the trial court) granted the motion as to the wire fraud counts but denied it for the counterfeiting and importation charges, specifically ruling that the material alteration theory was a valid basis for a conviction.
- A jury convicted Cone of conspiracy and convicted Zhao of conspiracy, trafficking in counterfeit goods, importation, and money laundering.
- Cone and Zhao (the appellants) appealed their convictions to the U.S. Court of Appeals for the Fourth Circuit.
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Issue:
Does altering a genuine product bearing an authentic, unaltered trademark, and then reselling it, constitute criminal trafficking in goods using a 'counterfeit mark' under 18 U.S.C. § 2320?
Opinions:
Majority - Judge Agee
No. Altering a genuine product that bears an authentic, unaltered trademark is not a criminal act under 18 U.S.C. § 2320 because the statute requires the use of a 'spurious mark,' which does not include a genuine mark affixed by the original manufacturer. The court's reasoning is based on a strict interpretation of the statute's plain language, which criminalizes the use of a counterfeit mark, not the alteration of the product to which the mark is attached. The statute defines a 'counterfeit mark' as a 'spurious mark,' meaning one that is fake or suggests a false origin. A genuine mark placed on a product by its authorized manufacturer does not become spurious simply because the product is later modified. This interpretation is supported by the statute's 'authorized use' exception (§ 2320(e)(1)(B)), which excludes marks that the original manufacturer was authorized to use at the time of production. The court distinguished this criminal statute from the civil Lanham Act, noting that criminal statutes must be construed more narrowly and that the Lanham Act's focus on 'likelihood of confusion' is broader than § 2320's requirement of an actual counterfeit mark.
Concurring in part and dissenting in part - Judge Wynn
No. The government's 'material alteration' theory is not supported by the plain language of the criminal trademark counterfeiting statute. However, the majority erred in affirming Zhao's conviction on Count 8. This conviction should also be reversed because the government improperly argued its legally incorrect 'material alteration' theory to the jury during closing arguments, and the evidence on whether the products in Count 8 were pure counterfeits or merely altered genuine goods was conflicting. Given the prosecutor's prejudicial remarks and the inadequate jury instructions, it is impossible to determine whether the jury convicted Zhao based on a valid legal theory (that the goods were pure fakes) or the invalid one (that they were altered genuine goods). Therefore, deference to the jury's verdict on that count is unwarranted.
Analysis:
This decision significantly clarifies and narrows the scope of the federal criminal counterfeiting statute, 18 U.S.C. § 2320. It establishes a critical distinction between civil trademark infringement under the Lanham Act, which can be based on consumer confusion from altered goods, and criminal counterfeiting, which requires the use of a physically fake or 'spurious' mark. By rejecting the government's 'material alteration' theory, the court limits the statute's application to cases involving fake marks or fake goods, not genuine goods that have been modified or upgraded. This precedent protects resellers and modifiers of authentic goods from criminal liability under this specific statute, forcing prosecutors to prove the mark itself, not just the product, is counterfeit.
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