Counterfeiting, A Growing Worldwide Problem

Victoria Espinel, White House IP Enforcement Coordinator

Counterfeiting is an enormous problem for businesses all over the world. Counterfeiters rip off name brand products, making cheap knock-offs, easily (and conservatively) costing many hundreds of millions of dollars each year.  According to the International Quality & Productivity Center: “The counterfeit and gray market luxury goods trade is so big that experts estimate it to be anywhere from $300 – $600 billion globally.”

There are always those who will dispute whatever estimates are made about the level of counterfeiting present in the global marketplace, and $300 to $600 billion does seem quite high. The trouble with those who challenge the estimates is that they have absolutely no proof of their own, just suspicions.  Those who claim to have proof only engage in the totally disingenuous charade of pretending that a $10 name brand product sold for $1 is properly characterized as a $1 loss because that was what the counterfeit consumer paid.  Such intellectually dishonest and near deceitful conclusions do nothing other than excuse criminal activity and ignore the obvious.  When someone purchases a knock-off for $1 there is no need for that person to spend $10 for the name brand product.  Calling this a $1 loss makes taking anything the counterfeit apologists say almost impossible to take seriously.

According to a recent report of the National Security Council titled Strategy to Combat Transnational Organized Crime, “The World Bank estimates about $1 trillion is spent each year to bribe public officials, causing an array of economic distortions and damage to legitimate economic activity.”  The world is indeed corrupt, but that is hardly a surprise.  But what might come as a surprise is just how much counterfeit merchandise is actually seized as it enters the United States.  The National Security Council Report explains:

[Transnational Organized Crime] networks are engaged in the theft of critical U.S. intellectual property, including through intrusions into corporate and proprietary computer networks. Theft of intellectual property ranges from movies, music, and video games to imitations of popular and trusted brand names, to proprietary designs of high-tech devices and manufacturing processes. This intellectual property theft causes significant business losses, erodes U.S. competitiveness in the world marketplace, and in many cases threatens public health and safety. Between FY 2003 and FY 2010, the yearly domestic value of customs seizures at U.S. port and mail facilities related to intellectual property right (IPR) violations leaped from $94 million to $188 million. Products originating in China accounted for 66% of these IPR seizures in FY 2010.

If this level of counterfeit goods are seized each year what is the true magnitude of the problem? Despite best efforts does anyone believe U.S. Officials catch 100% of counterfeits entering the United States?

Regardless of the estimates associated with the damage caused by counterfeiting, everyone — including the counterfeit apologists — admit that counterfeiting is a crime and it costs real businesses money.  That means decreased profits and lost jobs.

Counterfeiting is a far bigger story than loses to big companies and the associated loss of downstream economic activity.  Those that support counterfeiters by buying knock-off goods are also increasingly supporting organized crime, including drug cartels, who are increasingly looking to the generous profits that can be earned and exceptionally low jail terms even if they do get caught.

In fact, just recently President Obama signed an Executive Order giving the United States Department of Treasury more authority in the fight against transnational criminal organizations. In the fact sheet released contemporaneously by the Treasury Department explained that the largest Italian organized crime group, the Camorra, operates internationally and is involved in serious criminal activity such as counterfeiting and narcotics trafficking. “The Camorra may earn more than 10 percent of its roughly $25 billion annual profit through the sale of counterfeit and pirated goods – such as luxury clothing, power tools, CDs, DVDs, and software…”

Still further, Los Zetas, the violent criminal organization based primarily in Mexico and responsible for mass murders in Mexico and Guatemala, are also turning to intellectual property crimes for funding. Los Zetas is likely most known for drug trafficking into the United States, but according to the Treasury Department: “In addition to drug trafficking, Los Zetas is involved in extortion, money laundering, intellectual property and human smuggling.”

The trend is clear. If there is money to be made organized criminal enterprises will exploit the opportunity. With short jail sentences even upon conviction, a lack of cooperation in certain parts of the world and consumers who fuel demand, intellectual property crimes associated with counterfeiting are unfortunately here to stay for the foreseeable future.

The increase of counterfeiting is also a concern for the Federal Government apart from any damage to businesses and citizens because, after all, the Government is also a consumer. Recent reports issued by the Department of Commerce and the Government Accountability Office have found that counterfeits have infiltrated many sectors of the U.S. Government supply chain and have the potential to cause serious disruptions in national defense, critical infrastructure and other vital applications. As a result, the Federal Government is currently undertaking a significant effort to eliminate counterfeit products from the U.S. Government supply chain. In fact, the Office of Management and Budget, by and through the White House Intellectual Property Enforcement Coordinator, Victoria Espinel, is seeking comments and recommendations on best practices for ultimately eliminating counterfeits from Federal Government supply chains. See Federal Register Notice issued August 9, 2011.

The problem facing the Federal Government and companies fighting counterfeiting is that the counterfeiting industry is an evolving industry.  “Our big problem now is the counterfeit industry is changing… It’s moving to the Internet, and that is becoming much more challenging for brand owners because the Internet is just vast and unknown, there are no borders, there is no jurisdiction, there are no laws that manage the Internet today,’  notes Ed Haddad, Vice President of Intellectual Property at New Balance.   Haddad will discuss this, as well as how to develop strategies while taking a business approach to fighting counterfeits at the 7th Anti-Counterfeiting & Brand Protection Summit – East Coast, September 26 to 28, 2011 in New York City.  As an aside, even a cursory review of the speakers presenting at the anti-counterfeiting summit, who come from large law firms and companies like Google, Hewlett Packard, Bayer, Bose Corporation and even the NFL, demonstrates the level of concern businesses have.

The White House wants us all to share the responsibility for combating Transnational Organized Crime.  The aforementioned National Security Council Report says: “In addition to the greater vigilance required by our governmental institutions, American businesses and individuals need to inform law enforcement about criminal activity and reduce their vulnerability to fraud schemes, intellectual property theft, and identity theft. ”  Indeed, every business should monitor their competition and protect their brands, and today that includes monitoring and protecting against the criminal activity of counterfeiters.

eBay (NASDAQ:EBAY), the world’s largest online marketplace, and the Council of Fashion Designers of America (CFDA), recently launched a new campaign — dubbed YOU CAN’T FAKE FASHION — to raise awareness against counterfeit goods and celebrate original design. eBay and the CFDA have collaborated to produce a collection of original canvas tote bags bearing the tagline YOU CAN’T FAKE FASHION, hoping to spark a conversation about counterfeiting in the broader public discourse. The collection, which includes totes customized by 50 designers, is available exclusively at eBay Fashion Vault.

“Counterfeits are a critical issue to CFDA, eBay and the fashion industry at large,” said Steven Kolb, CFDA Executive Director. “We’re excited to collaborate on this important campaign to educate consumers on the dangers of counterfeits and emphasize the importance of original design.”

“We hope broader awareness will help fight counterfeits and the harm they cause, and eBay is proud to partner with CFDA on this thought-provoking campaign,” said Alan Marks, eBay’s Senior Vice President of Global Communications. “Counterfeits not only are illegal, they also damage brand owners, frustrate shoppers and undermine consumer confidence. eBay invests substantial resources to help provide millions of consumers a trusted, confident marketplace experience when shopping for authentic new, used and vintage merchandise, and this campaign is another example of our commitment to being a leading industry voice in the fight against counterfeits.”

Other companies such as Rosetta Stone (NYSE: RST) have been aggressively protecting themselves against counterfeiters (see Culture of Indifference and One Grave Problem). There are also new technologies aimed at helping industry fight counterfeiting, for example see Wine & Spirit Industry Fight Chinese Counterfeiting.  But until individuals who purchase counterfeits cease their fueling of the industry the problems will only continue to grow.  That is why all businesses need to take this issue seriously and invest appropriate resources toward protecting themselves.

The fight goes on!


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