A study by the Government Accountability Office, released in January, observes a shift in sale of counterfeit goods from “underground” or secondary markets, such as flea markets or sidewalk vendors, “to primary markets, including e-commerce websites, corporate and government supply chains, and traditional retail stores.”
Additionally, the physical appearance of counterfeit goods may no longer serve as a red flag that a product is fake, as additional types of bogus products closely resemble genuine goods, according to the GAO report, Agencies Can Improve Efforts to Address Risks Posed by Changing Counterfeits Market.
It’s not the only recent study to include a warning to manufacturers to review their brand protection strategy. “The continuous growth of the global counterfeiting industry is a major cause for concern,” according to a recent report by the United States Chamber of Commerce’s Global Intellectual Property Center (GIPC), Measuring the Magnitude of Global Counterfeiting, 2016. “Fueled by the proliferation of Internet use and social media platforms, the magnitude of global physical counterfeiting is estimated to have increased significantly since the beginning of this century.”
The numbers are staggering. Between 2012 to 2014, according to US Customs and Border Protection, the value of seized counterfeit goods in the US averaged $1,351,067,064 annually. The figure only counts the value from seizures, so it surely fails to adequately capture the full scope of trade-related counterfeiting, according the GIPC. As big as the number is, it has to be considered a “floor,” says the group.
Counterfeiting has a host of negative repercussions. “First and foremost, counterfeit goods jeopardize consumers and pose a serious safety risk,” warns the GIPC. Fake toys, for example, may contain hazardous and prohibited chemicals and detachable small parts. Counterfeit products also take a toll on the overall health of the economy, due to decreased innovation, loss of revenue and taxation, higher unemployment, and slower economic growth. Finally, a growing body of evidence draws a clear link between physical counterfeiting and terrorist groups, according to the GIPC.
A study by the Rand Corporation examined that link. Its review of 14 cases of crime organizations involved in film piracy revealed three cases in which terrorist groups financed their activities from the proceeds of the activity. In one example, an individual known for pirating DVDs and a “global terrorist”—as identified by the US government—transferred $3.5 million to a Hezbollah leader. “These cases, combined with established evidence for the broader category of counterfeiting-terrorism connections, are highly suggestive that intellectual-property theft-a low risk, high-profile enterprise-is attractive not only to organized crime, but also to terrorists, particularly opportunistic members of local terrorist cells,” the Rand report concluded.
Fake products also take a toll on a company’s reputation. “Counterfeit goods, being of generally inferior quality, damage brands in the opinion of those that buy counterfeit versions unwittingly,” notes a report by Perpetuity Research & Consultancy International (PCRI), Organizing for Brand Protection. Purchases of fake goods also cut into company sales and are unfair competition to legitimate retailers. When consumers knowingly buy fake goods, it threatens retailers’ exclusivity and “results in branded goods becoming visible in inappropriate retail settings.” “Brand owners therefore need to be proactive in protecting their brands,” concludes the PCRI study based on interviews with senior brand protection executives at 26 organizations and representing some of the world’s biggest brands.
Case Studies in Brand Protection
A counterfeiting operation should not elicit the image of a few thieves in some small room making cheap, obvious knock-offs. Such operations do exist, but so do sophisticated ones that look and act like any production facility—except that the sale of their goods directly siphons money away from legitimate manufacturer and sellers.
So what security measures have companies taken to successfully fight back? Some retailers are looking to technology as a way to fight fakes. For example, one footwear retailer is reportedly using blockchain and 3D-printed smart tags—that can be scanned by a smartphone—to prove product authenticity. The GIPC has highlighted some of the other strategies used by the world’s leading companies and associations.
One solution employed by many companies is to more aggressively pursue legal action against violators. In February, for example, Montblanc won a $32 million judgment from a Virginia federal judge in its lawsuit against a website operator that the German luxury goods company accused of violating trademark laws by selling counterfeit Montblanc products.
On February 14, Walmart and another retailer were hit with a lawsuit filed in California federal court by Deckers Outdoor, which alleges the companies infringed on its trademark and patent by selling counterfeit versions of its “Bailey Button” boot.
Working with trade partners to make them aware of counterfeit and contraband products—and enforcing company trade policies—is also a popular brand protection strategy. For example, investigators for the brand integrity unit at Altria’s Phillip Morris (PM) USA, regularly purchase PM-branded cigarettes from retail stores, online sellers, and “nontraditional” outlets where tobacco products would typically not be sold. Then they determine their authenticity and origin and take action under its contracts and trade policies against wholesalers and retailers found trading in contraband. In some cases, PM USA has filed suit against retailers, illegal importers, and Internet operators found to be trafficking in contraband.
Like some other firms, Unilever has found success in tackling counterfeiting through a multifunctional steering group. Experts suggest that tackling counterfeiting is best attempted through a joint security effort that includes asset protection, legal and sales, supply chain, communications, public affairs, research and development, safety and environmental, IT, and marketing. There are also security-specific solutions that companies are using successfully. Some ideas for brand protection strategy:
- Since counterfeiters are getting increasingly sophisticated, it’s getting harder to determine fake packaging. To help law enforcement distinguish between real and fake, PM USA’s brand integrity team provides it with a quick guide and other collateral materials that point out the differences.
- True Religion Brand Jeans employed a similar strategy. They developed an anti-counterfeiting “kit,” which includes genuine parts such as button faces, button backs, labels and tags, as well as tips on how to distinguish real True Religion jeans from counterfeits. It then shares kits with local, state, and federal agencies, including the Federal Bureau of Investigation, Immigration and Customs Enforcement, and Customs and Border Protection.
- One manufacturer/retail brand says that it aggressively fights the illegitimate product trade with lobbying, legal enforcement, and improving visibility and physical security of its supply chain. However, the company also admitted that it didn’t have a good grasp of the problem because it wasn’t capturing reports of counterfeits in a consistent manner. Subsequent solutions have been more effective since they formulated a consistent process for identifying and reporting supply chain breaches and instances of bogus product. Similarly, in an effort to learn more about the enemy they’re fighting, one company established a hotline for customers to call if they think that they’ve been approached or victimized by telemarketers posing as company sales reps.
- The National Basketball Association has become a truly global brand, one victimized by hard-goods counterfeiters of popular NBA merchandise such as t-shirts, jerseys, basketballs, and hats. In response, they’ve taken standard anti-counterfeiting strategies such as using holograms to identify authentic NBA merchandise. They’ve also worked on creative partnerships with law enforcement. For example, the NBA participates in a task force in New York City that, “with the help of the NYPD, has succeeded in having fines and other penalties imposed on landlords who repeatedly rent their buildings to counterfeiters,” according to the association’s Ayala Deutsch, who heads up its brand protection effort. The NBA and law enforcement secured the penalties by working closely with city officials, who found building code violations at the buildings that harbored networks of intellectual property criminals.
- New Balance suffers from consumers who knowingly purchase knock-off shoes and those who mistakenly believe they’re buying the real thing when buying a shoe with nearly identical logos. Both actions contribute to the same problem: brand erosion among consumers and retailers. In response, among other measures, the company deployed a full-time team of investigators to constantly monitor Pacific Rim regions known for counterfeit shoemaking and regularly conducts raids on factories and distributors. Additionally, the company supplies its factories with difficult-to-copy labels with an embedded code that are attached to shoes, which can help spot fakes and unauthorized overruns, and it is considering assigning a unique number to every item, which would make it possible to determine where and when every shoe is made.