OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS Counterfeit Electronic Components Avoidance Workshop March 27, 2008 Laurence E. Pappas © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss A. In general → Title to goods is not controlling. Title does not determine risk of loss, Seller’s right to the sales price, or Buyers right to the goods. What is important? 1. identification 2. insurable interest 3. risk of loss © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I.Allocation of Interest and Risk of Loss B. Identification 1. Identification of specific goods takes place at time contract is made if goods already exist. 2. Identification takes place when goods are shipped, marked, or otherwise designated by Seller as goods to pass under the contract. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss C. Insurable Interest 1. Buyer has insurable interest even before risk of loss passes to him. 2. Seller has insurable interest as long as Seller has title or security interest. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss D. Risk of Loss → Concept that denotes which party will pay for goods that are lost, stolen, damaged or destroyed. Risk of loss starts with Seller but shifts to Buyer at some point during transaction. Risk of loss may shift even before Buyer takes possession of goods. 1. Risk in Absence of Breach a. Carrier cases 1. Contracts not requiring delivery at particular destination → Risk of loss passes to Buyer when goods are delivered to carrier. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss 2. Destination Contracts → Risk of loss passes to Buyer when goods are tendered to Buyer at destination. b. Non-carrier cases; goods held by bailee to be delivered without being moved. 2. Effect of Breach on Risk of Loss a. Defective goods → If defect entitles Buyer to reject, risk of loss does not pass until cure or acceptance in spite of defects. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss b. Revocation of Acceptance → Where Buyer revokes acceptance, risk of loss is treated as having rested on Seller from the beginning to extent of any deficiency in Buyer’s insurance coverage, the risk of loss at issue being that between time of acceptance and time of revocation of acceptance. Revocation must occur being damage to goods. c. Breach by Buyer → Where goods are conforming and Buyer breaches before risk of loss passes, any loss occurring after Seller learns of breach falls on Buyer to extent of deficiency in Seller’s insurance. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS I. Allocation of Interest and Risk of Loss E. Rules for Passage of Title 1. Agreement by parties. 2. If no agreement, title passes when Seller completes his performance with respect to delivery of goods. a. Carrier cases 1. Non-destination contracts → Title passes at time and place of shipment. 2. Destination contracts → Title passes when goods are tendered at destination. b. Non-carrier cases © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS © Equality Services, LLC 2008

B. Cargo Insurance → Coverage for direct physical loss or damage to merchandise in transit. Phrase “lawful merchandise” used often. 1. Lawful Merchandise → Defined as “property which may be legally held, sold, or exported; non contraband property”. 2. Contraband → Defined as “property which is unlawful to produce or possess. Goods exported from or imported into a country against its laws”. OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS C. Cargo Insurance → Coverage for direct physical loss or damage to merchandise in transit. Merchandise in Transit: Defined as not including contraband or other personal property in the course of illegal transportation or trade”. © Equality Services, LLC 2008

OWNERSHIP RISKS IN COUNTERFEIT PARTS TRANSACTIONS III. Risk of Loss in Specific Transactions Scenario 1: Buyer buys chips from Vendor and sells to Customer. Chips damaged in transit to customer. Scenario 2: Same, but chips are found to be counterfeit. © Equality Services, LLC 2008