5-Hour Energy Wins a $20 Million Counterfeit Battle

For most people, the term “counterfeit” brings to mind either fake currency or knockoffs of items such as high-end watches or purses.  However, food and supplement products can also be counterfeited.  While the food/supplement manufacturers face the same risk of financial damage as their counterparts in the fashion and jewelry industries, except for some resulting stomach distress to the buyer, it’s unlikely a $100 “Rolex” ever caused someone physical harm.   Unsuspecting consumers of bogus foods or supplements are not always as fortunate.

The most recent case in a series of cases, brought on by a major player in the energy drink market, shows that mislabeled products are a threat to both consumers and the reputations of legitimate sellers of consumable products.

Energy Shots

Energy drinks account for only a small portion of all U.S. non-alcoholic drink sales.  An estimated $13 billion worth (that’s around 180 million gallons) of these caffeine-infused beverages were sold in 2015.  In recent years, a related product known as “energy shots” have become popular.  While Monster Energy® and Red Bull® are, like sodas and juices, sold in cans of 8 ounces or more, these new concoctions come in a 2 or 3-ounce size that can be downed in a single gulp (hence, a “shot”).  The clear market leader in this niche is 5-Hour Energy®.

Innovation Ventures LLC, maker of the 5-Hour Energy® shot, has been aggressive in pursuing counterfeiters.  In 2012, an extensive undercover investigation conducted by company operatives was able to successfully trace the supply chain of fake “5-Hour Energy” shots being sold all over the country.  Armed with Federal Court Orders, the company seized nearly 2 million bottles of imitation product, along with stocks of ingredients and machinery for producing an additional estimated 1.5 million bogus bottles per month.

What became an international criminal enterprise was originally a legitimate 2009 distribution relationship between Innovation Ventures and Joseph and Adriana Shayota’s company, Baja Trading, LLC.  Baja obtained the right to distribute authentic 5-Hour Energy® shots in Mexico, using approved Spanish language packaging and lower pricing.  Unbeknownst to Living Innovation Ventures, Baja swapped counterfeit and unauthorized English language labels, which closely duplicated the genuine articles, for the approved Spanish counterparts. Baja then sold the genuine product in the altered bottles in the U.S. at U.S. prices.

Soon, however, Baja exhausted its supply of genuine 5-Hour Energy® shots.  Working with several of the other 100-plus defendants, the Shayotas soon expanded the scheme to include manufacturing imitation product as well as fake packaging.

Imitation may be among the sincerest forms of flattery, but for the Shayotas, and several other defendants who elected not to settle, it was also one of the costliest.  In March 2016, a Federal Court in New York found these parties liable for more than $20 million in statutory damages, attorneys’ fees, and costs.

In addition, the Shayotas were convicted of criminal counterfeiting, with several related prosecutions still pending, and the subject of one indictment reportedly remains at large.  The sentencing hearing for the Shoyotas is scheduled for April.  They face up to 15 years in prison and multiple millions in fines, penalties, and restitution.

Policing Your Product as Well as Your Trademarks

Sherman IP regularly counsels its clients regarding the economic damage that can result from a third party’s misuse or misappropriation of registered trademarks or service marks.  Indeed, earlier this year Innovation obtained a $10.6 million trademark infringement judgment against the makers of “6 Hour Power” energy shots.

As illustrated by the 5-Hour cases, the passing off of counterfeit goods is an enormous international phenomenon, and failure to ensure the integrity of one’s product can result in even greater and more permanent damage to your brand.  A federally registered trademark provides certain proofs and benefits that provide statutory abilities, and lower the cost of protecting your brand from counterfeiters.

If you know or suspect that imitations of your products are in the marketplace, it is important to move quickly to identify and close down the source.  At Sherman IP, we have the experience and resources needed to protect your brand and effectively pursue a counterfeit claim.