Croc Counterfeiters in China get Jail Time

Crocs, Inc. (NASDAQ: CROX) announced earlier today that Chinese courts have sentenced 18 individuals to a total of more than 46 years in prison for producing and selling counterfeit Crocs goods. Seventeen individuals were convicted of counterfeiting, and two of the 17 also were convicted of offering bribes. Another individual also was convicted on bribery charges in connection with production of counterfeit Crocs™ shoes. In addition to prison sentences, the above men together face fines totaling RMB 2,832,500 (approximately $450,896).

These cases were originally tried by the Shanghai Yangpu District Court and the Dongguan City No. 1 District Court. Decisions were made between March 13 and September 27, 2012.  Some 128,752 pairs counterfeit Crocs products valued at roughly RMB 60,000,000 (approximately $9,550,690) been seized as a part of these recent investigations.

Throughout China, however, the amount of counterfeit trading involve Crocs is much greater. Through September 2012, more than 600,000 pairs of counterfeit Crocs shoes have been confiscated through factory raids and customs seizures, mainly in Guangdong, Shanghai and Fujiang Province. Typically the number of products confiscated is only the tip of the iceberg.  Counterfeiting is a terrible problem for companies who must constantly remain vigilant.

“If you attempt to produce or sell infringing Crocs products, we are going to find you and take definitive action to protect our intellectual property,” said Dan Hart, chief legal and administrative officer for Crocs. “The lengthy prison terms and heavy fines handed down in these cases show that Chinese authorities are very serious about assisting us to eradicate the production of counterfeit Crocs products in China, and so are we. We will not tolerate counterfeiters compromising our brand, and will continue to work with the authorities to hunt down and prosecute anyone who uses Crocs’ name, design or other intellectual property without permission.”

“The sentences and fines associated with these cases are encouraging and reflect the vigor with which the authorities prosecuted these matters,” said Sara Hoverstock, Crocs regional general counsel for Asia. “As we continue to monitor and take action against counterfeit activity, we recognize the important role of the Chinese authorities and appreciate their support.”

Counterfeiting is a much bigger problem than most people are willing to admit, and it is a tremendous drag on our economy. According to a report of the National Security Council titled Strategy to Combat Transnational Organized Crime:

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.

The U.S. Customs and Border Protection (CBP) reports the total number of counterfeit goods increased dramatically in FY 2011 by 24% compared to FY 2012, and has increased 325% over the past decade.

If this level of counterfeit goods are seized each year what is the true magnitude of the problem? It is inconceivable that 100% of counterfeits entering the U.S. are seized. It is virtually certain that only a very small percent of counterfeits are actually seized, otherwise there wouldn’t be any interest in entering the counterfeit marketplace. Although there are critics who will choose to firmly plant their head in the sand, any fair-minded individual appreciates how and why it is estimated that counterfeiting costs hundreds of billions of dollars a year. Indeed, the International Quality & Productivity Center says: “The counterfeit and gray market luxury goods trade is so big that experts estimate it to be anywhere from $300 – $600 billion globally.”

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, in 2011, 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…”

Given this backdrop, those with protectable intellectual property must take matters into their own hands and vigorously search for unauthorized activities and do whatever possible to put an end to counterfeiting and other intellectual property theft.  It is absolutely essential for intellectual property owners to police their goods and services.  Attorney Michelle Miller of Brinks Hofer Gilson & Lione wrote in 7 tips to policing trademarks, “[t]he key to a cost-efficient and effective trademark enforcement program is early detection.”  Miller offers excellent advice in the article, such as monitoring the Internet, subscribing to “watch” services, monitoring media use, monitoring social networks and more.

There is always going to be an opportunistic criminal who will be willing to try and make a few bucks or more at the expense of creators.  Intellectual property owners need to be vigilant.  If you have a product that others will purchase you have a product that counterfeiters will be willing to copy for profit.  Sadly many consumers are only going to care that they get something that approximates the original at a heavily discounted price. Those consumers are not interested in quality, they are not interested in the fact that criminal organizations are funding themselves via counterfeit sales. But those customers who never bought from you will think poorly of your product when they buy a counterfeit that isn’t up to par, which will always be the case. Thus IP owners must develop a strategy to protect themselves or they will see their hard work go to benefit unscrupulous actors who may take more than lost sales.  They may destroy your brand!


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