New York City’s crackdown on counterfeit goods is costing not just knockoff artists but also their landlords — and the fines they are being slapped with are higher than the price tags for real Prada bags and Rolex watches.
The city’s anti-counterfeit initiative, which was launched by Mayor Michael Bloomberg and Police Commissioner Raymond Kelly in 2003, invokes nuisance laws to sue owners whose buildings house counterfeit clearinghouses.
“The fines they’re handing out are astronomical,” said Eric Anton, an executive managing director at Eastern Consolidated. “We’re talking hundreds of thousands of dollars.”
The mayor’s office of special enforcement, which is charged with handling many of the counterfeit cases, has seized more than $60 million in fake goods since 2003. That figure does not even include seizures conducted exclusively by the New York City police department.
And while landlords are not often trafficking knockoffs, the city has not been shy about taking action against them in cases where they may have turned a blind eye to illicit activity.
Since December 2003, the Bloomberg administration has executed 26 search warrants in connection with counterfeiting of trademarked goods in Manhattan. Those warrants have resulted in 22 civil lawsuits against landlords and property owners in Manhattan and shutdowns in the same 22 buildings, a spokesperson for the mayor, Jason Post, told The Real Deal.
Cumulatively, the city has pulled in more than $3 million in fines and settlements from landlords and property owners related to counterfeit suits. Fines have ranged from $4,500 to more than $200,000 in one case, Post said.
Late last month, the city raided dozens of storefronts at what it dubbed the “counterfeit triangle” in Chinatown and seized fake Rolex, Coach, Fendi, Dolce & Gabbana, Gucci and other name-brand goods that Bloomberg said had a street value of more than $1 million.
In an accompanying lawsuit, the city also won a temporary restraining order to shut down the storefronts on Canal, Baxter and Walker streets that housed the counterfeit rings. The owners of those buildings will have to replace counterfeit vendors with legitimate businesses and pay a “substantial fine” before they can reopen, according to a news release put out by the mayor’s office.
Elsewhere, the city’s crackdown has centered on the stretch of Broadway south of 34th Street, which has been dubbed “counterfeit alley” by NYPD officials.
One operation on the upper floors of 1145 Broadway, near 26th Street, which was busted by the city in August, yielded millions of dollars worth of fake Louis Vuitton, Gucci, Coach, Prada and Nike goods, as well as 20,000 bootleg adult and standard DVDs and CDs.
The case is pending in New York State Supreme Court, but floors two through five of the building are currently shut down, Post said. The rest of the building is functioning normally.
According to Matthew Kasindorf, co-chair of the real estate department at Meister Seelig & Fein, a landlord who is aware of any sort of counterfeit activity and turns a blind eye is considered a perpetrator, not an accomplice.
Kasindorf cited a federal law called the Lanham Act, which deals with anti-counterfeiting and governs national trademark law.
“From the real estate side, a landlord who knows that there are illegal activities going on can be sued as if he were the person manufacturing or selling the illegal goods,” Kasindorf explained. “The statute is pretty clear that a landlord can be held jointly liable with the infringing party.”
But what if a landlord genuinely doesn’t know that a tenant in the building is manufacturing Prada knockoffs?
“If you sign a lease and agree to be a normal office with normal office hours and such — and then, every night, you’re making fake pocketbooks from 3 to 6 a.m. — you’re in violation of your lease,” Anton said. “If a landlord is made aware of this type of situation and doesn’t take action, then the city is going to come down pretty hard.
“But if a landlord is not aware of it, or if he becomes aware and then takes action, the city would likely work with him to solve the problem.”
Anton suggests that landlords draft leases with “as many permutations as possible” to avoid potential problems.
“This [decision to come down on counterfeiters] is a relatively new thing,” he said. “Maybe in the future, these kind of activities will be more at the tip of lawyers’ tongues when they begin negotiating leases.
“If you’re an owner, the last thing you want is a tenant doing things that are illegal.”
Even when certain provisions are included in a lease, they do not always mean a free pass for landlords if law enforcement officials discover a counterfeit operation.
“The fact that a lease says the tenant will not use the space for illegal activities only gives the landlord a right to bring about an action for breach of the lease and, therefore, terminate that lease and evict the tenant,” Kasindorf said.
The statute, he said, further states that if a landlord is aware of the activity, and does nothing about it, he or she can be held jointly liable. “A landlord’s liability cannot be absolved by simply drafting something into the lease,” he said.
Both Anton and Kasindorf noted that the property value of a building that once had a counterfeit operation often depends upon the landlord.
Anton said a building where the owner has cleaned things up would be “looked upon favorably by tenants,” while a building with a landlord who fails to deal with violations would be viewed as negative. Yet he said that in a strong rental market, many tenants will suffer a bad landlord in order to get a discount on rent.
“Leasing is slowing up a bit,” he added, “so there may be more focus on the quality of [a building’s] ownership as we move into 2008.”