Counterfeiting in the Wine Industry on the Rise; Potential Liability for Manufacturers

Rummaging through an assortment of handbags from the trunk of a car in a New York City alleyway, there’s really no expectation from the consumer that she’s purchasing anything other than a counterfeit product. Counterfeit products are not, however, sold exclusively in alleyways, and makers of counterfeit products are becoming more sophisticated as industry effects to stop them become more widespread.

One industry that has seen an uptick in counterfeiting in recent years, and one that has garnered some significant attention in the press (see here, here), is the wine industry. Wine fraud caught the attention of the media with the 2006 lawsuit of wealthy American businessman William Koch, who alleged that bottles of wine he purchased at auction for approximately $500,000, which were held out to be wines originally owned by Thomas Jefferson, were frauds. Litigation of his claim is ongoing.

Several Freakonomics blog articles in The New York Times highlight some of the issues presented by wine-industry fraud. First, one of the articles examines a study of eBay auctions of empty wine bottles. The sale prices for empty, high-end wine bottles at the online auction site are often the prices full bottles of the wine would fetch in the marketplace. This presents “powerful” evidence that the empty bottles are being purchased to be filled and resold. The second of the articles discusses the fact that while high-end frauds like that alleged by William Koch garner significant attention and likely result in lawsuits, counterfeiting in the low-to-midrange wine market is much easier to get away with. This is true for several reasons, most notably that there’s little incentive for consumers to sue for fraud over what would likely be very little damages.

So how does this translate into manufacturers’ or sellers’ liability? A 2009 legal advisory published by the National Association of Wholesale-Distributors (NAW) notes that wholesalers selling counterfeit products face significant product liability exposure for any injury, business interruption, or other loss in connection with sale of counterfeit products. It notes that the wholesaler is likely the one ultimately to be held liable for the damages, as the “manufacturer” of the counterfeit product may be impossible to find, may be insolvent and/or uninsured.

Finally, a Wine Business Monthly article recently discussed the potential liability of legitimate wine manufacturers, as toxic materials are sometimes incorporated into the counterfeit products. While a company cannot be held liable for a counterfeit product, the articles notes, it can be open to liability if it knew about “an existing health threat to the consumer” and did not actively seek to “inform and protect the public.” An example, it notes, was the recent Colgate toothpaste recall by the manufacturer, where counterfeit tubes containing chemicals used in antifreeze had made it onto store shelves in the United States and South America, causing significant health issues and even death. The author argues that the wine industry would benefit from its trade and professional associations developing shared industry standards and techniques in fighting the fraud, rather than undertaking hundreds of uncoordinated approaches that would be less effective and more expensive.

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