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Authentic Parts Classified as Counterfeit and Seized by CBP Highlight Financial Risks for Importers and Exporters

Kristal Snider
ERAI, Inc

 Authentic Parts Classified as Countfeit & Seized by CBP Highlight Financial Risks for Importers and Exporters 
 
  By: Kristal Snider 
 
 For more than a year, beginning in January 2014, a distributor in the U.S. placed eleven (11) orders for more than 16,000 pieces of Texas Instruments part number TMS320VC5416ZGU160 from an Israeli distributor and subcontractor servicing the defense, medical and communications industries in Israel. No nonconformities were ever detected during the inspection of these shipments. No complaints or concerns were raised by the U.S. distributor’s end user and sole recipient of all prior shipments. For all intents and purposes, the Israeli and American companies enjoyed a mutually beneficial relationship and no one, including the end user, had reason to suspect the goods in question were anything other than genuine Texas Instruments parts. That is, until May 4, 2015, when one of the final three scheduled deliveries containing 4,000 pieces of the aforementioned part worth $46,435.00 was detained and subsequently seized by CBP under Title 19, United States Code, Section (USC) 1595a(C) for bearing a counterfeit trademark. The initial detention notice triggered a flurry of activity that would slow to a crawl, then drag on for ten costly, labor-intensive months and ultimately conclude with the release of the goods. This distributor’s experience captures the significance of goods being correctly classified as authentic or counterfeit, highlights the importance of an open line of communication between CBP and industry, and personifies the struggles business owners are facing that could result in substantial financial loss. 
 
 The Initial Detention Notice 
 
 It was while checking the delivery status of the shipment using Federal Express’ online tracking system that the U.S. distributor first learned the parts they had paid for wire transfer in advance had been held by U.S. Customs and Border Protection (CBP) and, shortly thereafter, on May 5, 2015, the standard “Detention Notice and Custody Receipt for Detained Property” was received. The distributor was given seven days to provide evidence to demonstrate the authenticity of the parts. The Israeli supplier was asked to provide supply chain traceability to assist in this process but subsequently refused to cooperate. A representative of the Israeli supplier later revealed the reason they were not able to provide this documentation is that doing so would have jeopardized their relationship with their supplier and supplier’s relationship with Texas Instruments due to the fact these parts were allegedly sold in violation of the supplier’s distribution agreement with Texas Instruments. 
 
 Sans the necessary supply chain traceability, the U.S. distributor then contacted its customer, the recipient of all prior shipments, to make them aware of the situation and to see if they could return samples from past shipments for reevaluation and comparison to a known good sample. This effort was successful; the U.S. distributor was confident they could produce the evidence necessary to prove the parts being detained were authentic. 
 
 Part Comparison and Findings 
 
 The U.S. distributor purchased three (3) golden samples from an authorized TI distributor in the U.S. and compared these parts to samples they were able to retrieve from their customer that were representative of prior shipments. Using various inspection methods, the parts were examined both externally and internally and no evidence of tampering was observed. The general appearance, physical construction, and die markings are consistent. The results of the comparison analysis were presented to CBP but did not result in the release of the goods. 
 
 Photo Comparison of Known Golden Sample vs Samples Representative of Prior Shipments 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 Notice of Seizure 
 
 On August 25, 2015, after receiving the above noted findings twenty days earlier, the U.S. distributor received formal notification from CBP that the goods in question had been seized for bearing a counterfeit trademark. The appraised domestic value of the property was assessed at $99,000.00. The U.S. distributor immediately exercised its right to “petition” the seizure and sought remission of the forfeiture in accordance with CBP’s “Election of Proceedings”. 
 
 The Petition Process 
 
 The U.S. distributor’s attorney initiated contact with CBP on September 22, 2015 and again on October 12, 2015 in an effort to obtain two (2) samples of the seized parts for inspection and comparison to the known golden sample and representative sample previously analyzed. The release of the samples was finally granted on or about October 27, 2015. 
 
 On November 4, 2015 the U.S. distributor received a cease and desist letter from Texas Instruments which included, but is not limited to, the following statements: 
 
 
 “TI learned that you have been importing counterfeit TI semiconductor products.” 
 
 “As you are no doubt aware, obtaining TI products from sources that are not expressly authorized by TI presents a substantial risk that such products are counterfeit. Indicators that a seller may be offering counterfeit products include unusually low prices, prior seizures of counterfeit goods by Customs officials, and poor or missing chain of custody documentation to TI or an authorized source.” 
 
 “We hereby demand that you immediately cease and desist any importation, offers to sell, sales, or other transactions involving counterfeit TI products.” 
 
 
 The U.S. distributor was given five (5) business days to confirm they agreed to discontinue the purchase and sale of counterfeit TI products; they responded to TI, as they had responded to CBP, asserting that the parts are original and not counterfeit. 
 
 On November 17, 2015, more than six months after receiving the original notice of detention, the U.S. distributor was finally able to compare the inspection results of the seized parts against the previous comparison involving the known golden sample and representative sample provided by the U.S. distributor’s customer: the seized parts were consistent with the other two lots. 
 
 Photo Comparison of Known Gold Sample vs Samples Seized by CBP 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 In addition to the results of the part comparison and after tremendous pressure, on December 31, 2015, the Israeli supplier provided a copy of a packing list as evidence the goods in question were purchased from Arrow Seed (Hong Kong) Limited, a division of Arrow Electronics, Inc. and an authorized Texas Instruments distributor. While the quantity and dates align with the goods purchased by the U.S. distributor, the identity of the recipient and the ship to address had been redacted. This new information, albeit not complete, was also submitted to CBP for consideration. 
 
 Notice of Release from CBP 
 
 On January 25, 2016 the U.S. distributor received written notification from CBP the goods would be released after concluding the burden of proof had been met to support its assertion that the goods are not counterfeit. Prior to initiating the return of the shipment, CBP required the U.S. distributor to sign, notarize and return a “Hold Harmless Agreement” releasing and forever discharging the United States and its officers from any and all action, suits, lawsuits, proceedings, costs, expenses, debts, dues, contracts, judgments, damages, claims and/or demands whatsoever in connection with the detention, seizure and/or release of the goods. 
 
 On March 1, 2016, the partially damaged and improperly packaged goods were delivered to the U.S. distributor’s facility marking an end to this lengthy and costly ordeal. 
 
 Financial Risks for Importers 
 
 As briefly mentioned early on, the payment terms for all orders referenced herein were wire transfer in advance. To offset their financial risk, the U.S. distributor’s purchase order contract specifically designated “FOB Destination” in its shipping terms which means the Israeli supplier was responsible for the goods until they reached the U.S. distributor’s location. Despite the fact these terms were in the agreement, the Israeli supplier refused to refund the U.S. distributor’s advanced payment totaling $46,435.00 when the goods were detained and subsequently seized. Had the U.S. distributor not been successful in meeting the burden of proof that the goods were not counterfeit and securing their release from CBP, it is unlikely they would have received reimbursement without incurring additional legal expenses. 
 
 Conversely, this exporter and all others face equal risks and must openly communicate with international trading partners relative to the availability of supply chain traceability and testing, inspection and counterfeit risk mitigation requirements prior to shipping goods. Had the parts been shipped on an open account, it is unlikely the U.S. distributor would have fought as hard as it did to secure the release of the goods and the Israeli supplier would have had no hope of retrieving the goods or receiving payment for goods that were not delivered in accordance with the purchase order contract or not at all. 
 
 Caveat Emptor 
 
 U.S. citizens and business owners have no constitutional right to import or conduct international trade. Importers must constantly measure risk and be on the lookout for emerging risks such as goods being damaged, detained or seized by CBP. 
 
 Conclusion 
 
 There is no question in my mind that CBP is doing what it can to prevent counterfeit electronic parts from entering the supply chain and is doing so while facing tremendous challenges and pressure from brand owners and others. The takeaway from this article should not be that CBP is doing a poor job; it should be that industry and CBP desperately need a more open line of communication and must work together to educate agents and policy makers. 
 
 When authentic parts are inadvertently removed from the supply chain, or are damaged due to improper handling and repackaging, an opportunity for a counterfeit part to enter in their place is created. 
 
 
 

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