The Real Cost of Counterfeit Goods
Justin Wickersham | August 30, 2018
How Did Counterfeits Become a Problem?
The counterfeit industry has grown so much over the years that counterfeit goods are no longer the only type of inauthentic good that can be found in the marketplace. Knockoff and replica goods are also very prevalent. While all three types of goods are inauthentic, there are some key differences between the three as explained below.
A counterfeit good is a product that is illegal because it is an inferior product sold under another company’s trademark, trading off of that company’s brand. Almost everything about the product is identical to the authentic good. In the United States, it is illegal to knowingly traffic counterfeit goods which includes the production, selling, and distributing of the goods.
Knockoffs are goods that are not necessarily illegal like counterfeits. Knockoffs typically imitate the appearance of other products, but unlike counterfeits, do not use others’ logos or brand names. Knockoffs can be illegal if a brand can prove that the resemblance is so close that the consumer would be misled.
Replica is a newer term and is used by counterfeiters in order to promote or sell different goods specifically online. By using the term replica, the seller is acknowledging the product’s inauthenticity. Replicas can be illegal if they utilize existing brand names or logos.
Before the internet, counterfeit goods were mostly purchased in person and consumers could inspect the item to see if it was fake. They would be able to see the good in person and point out the inauthentic features and the price of the goods would often be much less than their authentic counterparts. The internet has changed all of that. Rather than consumers knowing what they are buying is fake, consumers have no idea what they are actually purchasing. Online vendors can sell counterfeit goods for almost the same price as authentic goods, and the goods look authentic because there is no way for the consumer to reasonably inspect the good in person at the point of sale.
In a recent report created by the U.S. Government Accountability Office (GAO) in January 2018, the office took a deeper look into the counterfeit industry by conducting a study with certain types of goods posted on five of the biggest e-commerce websites. The websites included Amazon, Walmart, Sears Marketplace, Newegg, and eBay. The report discusses that the office used “investigative tools and techniques” to conduct undercover purchases of goods from third-party sellers. After purchasing the goods, they were then sent to rights holders who then tested to see if the goods were fake or authentic. The Government Accountability Office purchased 47 different items that were advertised as new, brand name items, and had a low purchase price. The items purchased included Nike Air Jordan shoes, Yeti brand travel mugs, Urban Decay cosmetics, and UL-certified phone chargers. These goods were selected because the GAO believed that it represented a wide range of goods that are frequently counterfeited. Of the 47 different items purchased, 20 of them were deemed to be fake or counterfeit.
At the Border
In 2017, the United States Department of Homeland Security made 34,143 seizures of counterfeit goods at the border. This is approximately 3,000 more seizures than 2016 which indicates that the amount of counterfeit goods being imported into the United States is on the rise. The table below is from a DHS statistics report that highlights the type of products that are frequently counterfeited and brought into the United States based on the number of seizures.
What is the e-commerce Industry Doing to Combat Counterfeiting?
With the increase of counterfeiting and e-commerce, major e-commerce companies have developed policies that help eliminate counterfeit products from their respective sites. Even with these policies in place, counterfeit goods can still be frequently found in these marketplaces.
Amazon’s website has an Anti-Counterfeiting policy which states that “products offered for sale on Amazon must be authentic.” Anyone who fails to abide with the policy, according to Amazon, may result in the “loss of selling privileges, funds being withheld, and destruction of inventory in our possession.” Some other highlights of the policy include:
- Amazon will not pay sellers until they are confident that customers received authentic products.
- Amazon has the right to withhold payments if an account has been used to sell inauthentic goods, commit fraud, or engage in other illegal activity.
- Constantly monitoring and reviewing suspect listings and removing them accordingly.
- Working with rights holders and law enforcement to take legal action.
Along with their Anti-Counterfeiting policy, Amazon also has a Brand Registry which is designed to “create an accurate and trusted experience for customers.” To be eligible for the registry, brands must have a registered trademark in either a standard or stylized form. The mark must also match the brand name that is printed on products or packaging. Enrolling in the Amazon Brand Registry provides benefits to trademark owners including:
- Prioritizing registered brand name information on Amazon
- Adding enhanced brand content
- Quicker advertisement approvals
- Trademark and brand protection
While the Brand Registry provides some great benefits to those with trademark rights, it also creates some difficulties. The major problem for trademark owners is that the Brand Registry currently only accepts trademark registrations that have a text component. This means that companies and brands who may have only registered their logo without text would not be able to sign up for the registry. Companies who would want to comply with the registry requirements would have to apply for a new trademark protecting the text of the brand. This adds cost and other issues for brand owners looking to keep their brand protected through Amazon.
eBay has a similar counterfeit policy to Amazon’s and it encourages both users and brand owners to report potential intellectual property violations involving counterfeit items. eBay’s policy is informative because it also contains a non-exhaustive list of items that can and cannot be sold. eBay encourages brand and rights owners to report IP violations through their Verified Rights Owner Program. The program is a way for rights holders to further enforce and protect their trademark registrations, copyrights, or patents.
Once a rights owner registers for the program they are entitled to fill out a Notice of Claimed Infringement (NOCI) anytime they find an infringing product. Typically the item will be removed from eBay within 24 hours after receiving the notice. Sellers whose items are removed from eBay due to an NOCI are allowed to get in touch with the Verified Rights Owner and suggest that their product removal was invalid. The Verified Rights Owner is allowed to retract their initial report for these reasons. Additionally, if the seller is not able to get in touch with the Verified Rights Owner they can contact eBay to inquire about getting their product back on the marketplace. Each Verified Rights Owner on eBay has their own profile which details and highlights all of their intellectual property rights.
While the program has overall been a success, it’s not perfect. eBay encourages rights owners to monitor and report intellectual property violations, but it seems as though eBay doesn’t proactively monitor for the various intellectual property violations. Some rights owners think eBay should be doing more, which is one of the arguments Tiffany presented in the 2010 case Tiffany, Inc. v. eBay, Inc. Another issue with the eBay Verified Rights Owner Program is that it removes some sellers’ right of first sale. Some sellers actually buy authentic products from certain brands and resell/auction these items online, only to have them taken down due to an NOCI.
Why Do We Care?
There are several consequences that arise due to the increased number of counterfeit goods. These issues affect more than just the people who purchase counterfeit goods, but also the different brands who spend the time and money to make authentic products.
Health and Safety Hazards
Explosions, skin irritations, and sickness can all be caused by counterfeit goods. Just recently, the Los Angeles Police seized over one-million dollars worth of fake cosmetics including those from Kylie Cosmetics, Urban Decay, and MAC. After running tests on the goods it turned out that they had traces of fecal matter, bacteria, and lead in them. The two year investigation leading up to the seizure was prompted by customers complaining about getting rashes and other skin irritations. Similarly in 2016, Customs and Border Protection seized over sixteen thousand counterfeit hoverboards which used registered logos as well as unauthorized batteries. These batteries were the subject of numerous reports because they would frequently explode or catch fire while charging, causing damage and injuries across the country.
Economic and Legal Issues
Anytime a counterfeit good is purchased the brand that makes the authentic product devalues. This is especially a problem with luxury/designer goods because the quality of designer counterfeits has gotten much better and it’s becoming more and more difficult to distinguish the authentic products from the fake ones. Most brands won’t necessarily feel immediate effects from counterfeiting, however more and more companies have to spend their money unnecessarily to protect their brands from counterfeit goods including excessive legal fees, enforcement of their own, and investigations. Along with the health and economic issues, the counterfeit goods industry poses many legal issues as well.
While not necessarily an issue for those who buy counterfeit goods for personal use, if caught, sellers face criminal penalties in almost every country in the world. Despite the harsh criminal penalties, sellers continue to carry on their illegal business especially on the internet. Various counterfeit selling websites get targeted all the time by legitimate brands, and sometimes these brands are successful at taking them down. But as soon as a website goes down, another one quickly pops up and most of the people who register these websites do so with fake names and other fake information. This makes it extremely difficult for brands to hold anyone accountable in court. This has led some brands to go after the major e-commerce sites and include them on the complaints for various infringement claims. We saw this occur with Tiffany and eBay in 2010, and more recently with Milo & Gabby and Amazon. Both of these cases show that the courts have been reluctant to hold sites like Amazon and eBay accountable as well. So what is the solution? If the large e-commerce companies are not going to be held accountable as sellers then how can authentic brands effectively protect their goods from being counterfeited?
Protecting the Brands
Because the court system isn’t always the most effective way to combat counterfeit goods, many brands come up with creative ways to protect their products and their brand name. One such way is working with different law enforcement agencies such as the United Kingdom’s Police Intellectual Property Crime Unit (PIPCU). PIPCU is the only law enforcement group in the world that deals solely with intellectual property crimes. One company that works closely with PIPCU and other enforcement groups internationally is Ugg. Ugg has taken action against 60,000 websites and works with law enforcement agencies to conduct raids against various sellers. Additionally, Ugg educates customers on what to look out for and provides a URL checker on their website to determine if the online store carries authentic Ugg products or not.
Other companies have begun to incorporate different security measures in their products. For example, for the past four years Salvatore Ferragamo has been putting RFID microchips in the soles of their shoes as well as some of their luggage and other leather goods. The RFID chips act as a tracking device, and makes it easier for customers and consumers to identify the real Ferragamo goods from the fake ones. The RFID chips also help increase resale value if someone wanted to sell their old Ferragamo products on eBay or other similar site. Hermes, another luxury designer brand, distinguishes their authentic goods from the fakes through their stitching. Most Hermes counterfeiters are not able to replicate the beeswax coated mouline linen thread used to stitch together all Hermes bags. While not as high tech as Ferragamo, this technique is enough for consumers to know the difference between a real and fake Hermes product.
Some companies are even embracing the counterfeit/knockoff industry by creating knockoff clothing of their own. Recently, Diesel, an Italian clothing company, set up a pop up shop on Canal Street in New York City (a hub for fake goods) selling “Deisel” products. All the clothes in the pop-up were authentic Diesel clothing, but labeled with the incorrect spelling. Diesel did this in conjunction with an ad campaign about “celebrating flaws.”
Link to video: https://www.youtube.com/watch?v=3pqRgD5Dg4c
While the e-commerce sites like Amazon and eBay have their own policies surrounding counterfeit goods, these are not always the most effective way to reducing counterfeit sales and can create additional problems for good faith sellers. Major brands have had to either litigate these matters in the court or come up with creative ways to hold these inauthentic sellers accountable for their actions. Some companies like Diesel have embraced the counterfeit issue, but others like Ugg see it as a major problem and are attempting to eliminate counterfeits. The counterfeit industry will likely never go away completely, but if major brands continue to inform consumers of the dangers and harms that counterfeits pose then maybe the industry won’t nearly cause as much damage as it is doing now.