A federal appeals court in Virginia has struck down a novel criminal counterfeiting theory in which federal prosecutors argued that modifying a product could turn a genuine trademark into a fake one.

A three-judge panel of the U.S. Court of Appeals for the Fourth Circuit said federal criminal law didn’t support the "material alteration" theory that prosecutors pressed against Donald Cone and Chun-Yu Zhao, whom they charged in a scheme to import and resell Cisco Systems Inc. network equipment.

The appeals court voided certain convictions obtained against Cone and Zhao and ordered the cases returned to the trial court for resentencing. Cone had been sentenced to 30 months in prison and Zhao to five years. A jury found Zhao and Cone guilty in May 2011.

Zhao and Cone created JDC Networking Inc., which distributed products made by, and for, Cisco, the appeals court said. Prosecutors argued on appeal that modifying a Cisco product makes it—and the accompanying trademark—counterfeit.

The government, under counterfeiting law, however, cannot prove Cone and Zhao trafficked in goods that carried a "spurious" trademark, the appeals court said.

"The requirement of a spurious mark is problematic for the government’s ‘material alteration’ theory that Cone and Zhao obtained a genuine Cisco product bearing a genuine mark; modified the product, but not the mark; then sold the modified product bearing the genuine mark," Judge G. Steven Agee wrote.

Congress, Agee said, "can certainly rewrite that statute to cover a material alteration theory, but the statute as now written does not do so."

Defense lawyers heralded the ruling, saying prosecutors had unfairly sought to expand criminal trademark counterfeiting provisions.

"Indeed, the government cites no case, and we can identify none, where a criminal conviction under the counterfeiting statute has been sustained for the type of ‘material alteration’ conduct alleged here," Agee wrote.

Gibson, Dunn & Crutcher litigation associate Justin Torres in Washington and Geremy Kamens of the Alexandria, Va., federal public defender’s office represented Cone. (Gibson served as pro bono counsel.) Lisa Schertler of Washington’s Schertler & Onorato represented Zhao.

"The government’s theory in this case never had a clear stopping point—there was no way for people to tell what was and wasn’t a material alteration," Torres said via email. "This was always a serious due-process issue because people couldn’t know what was prohibited by this crime."

Lindsay Kelly, the assistant U.S. attorney in Alexandria, Va., who argued the case in the appeals court, wasn’t immediately reached for comment.

Mike Scarcella can be contacted at mscarcella@alm.com.