Friday, June 17, 2022

Is that the Real McCoy?

Counterfeit products are fake goods designed, packaged, and branded to look like the real thing. They were historically of a lesser quality. For many years, the counterfeit market was considered a problem primarily for manufacturers of well-known luxury or high-end consumer goods such as name-brand clothing, shoes, purses, shoes, watches, jewelry, and electronics.

The fake items were sold by street vendors to persons who might not be likely customers for the genuine products, so actual “lost sales” to the brand owner were questionable. In most of these situations, purchasers would have (or should have) a fairly good idea that they were not purchasing a genuine product, so lack of quality would not be a surprise or blamed on the brand owner.

Over the last couple of decades, however, technological advances, growth in e-commerce, transportation and delivery options, increased outsourcing of manufacturing, supply chain disruptions, social media, and other factors have made the production, transport, marketing, and sale of fake goods easier and more profitable. While consumer goods (clothing, shoes, jewelry, electronics) continue to be a significant source of fake products, counterfeit goods appear in nearly every industry including pharmaceuticals, food, cosmetics and personal care products, toys, chemicals, equipment, and spare parts.

Substantial outsourcing of manufacturing has enabled contract manufacturers to duplicate authentic goods and use existing equipment and facilities to manufacture cheaper knock-offs. Consider the contract manufacturer that does an “extra” run of authentic goods that are sent out the back door with simply a fake serial number and copied label. These goods are physically indistinguishable from the authorized products absent specific production and tracking records. These same contractors can easily substitute cheaper raw materials or take production short-cuts to create a less costly reproduction of an authorized product or under competitive brands.

Easily duplicated packaging and labels can make it easy to hide (and more difficult to spot) lower quality or adulterated items even on physical inspection, particularly with goods such as pharmaceuticals, cosmetics, food, and chemicals (pesticides, fertilizers, cleaning solutions, etc.). The unauthorized duplication of copyrighted works such as movies, music, books, and art (pirated goods) are easily created with readily available technology.

The improved quality of many of today’s counterfeit goods makes it harder for both consumers and enforcement authorities to detect fake products, and less likely to be reported by consumers.

Fake products originate from nearly all countries, but according to a 2020 report issued by the European Union Intellectual Property Report (EUIPO) based on a cooperative study with the Organisation for Economic Co-Operation and Development (OECD), China is the leading producer of counterfeit goods, followed by India and Turkey. Such goods are shipped by all types of transport via trading routes that take advantage of free trade zones or important international trade hubs (e.g., Hong Kong, Singapore, Panama, and the United Arab Emirates) with less regulatory oversight as intermediary transit points. Counterfeiters frequently evade detection with falsified documents and the use of corrupt brokers or other facilitators. Others have figured out that they can avoid seizure of their counterfeit goods by shipping non-labelled products across borders, and separately smuggling parts, labels and/or packaging for final production or assembly within the target country or another country along the transportation route.

A newer practice has involved transporting goods in small parcels using postal and express mail services making the detection of counterfeit goods much more difficult by customs and other enforcement officials. The OECD-EUIPO report noted that at the time of its report, small parcels (10 items or less) accounted for the greatest number of seizures, but goods transported by container ships still accounted for the greatest value of seized counterfeit goods.

Counterfeit pharmaceuticals, however, topped the list of small parcel seizures in both number and value. While imported counterfeit goods transported in bulk still dominate the overall fake market, studies note a steady increase in domestic production of counterfeit products where there is a substantially reduced risk of detection and seizure because of the avoidance of border crossings.

The growth in e-commerce has clearly enabled some counterfeiters and enhanced opportunities for all. At its most basic, counterfeiters can easily and inexpensively market and sell any fake goods, but the internet is particularly useful to purveyors of sub-quality products that can be misrepresented by a flattering image or a photograph of the genuine product. Counterfeiters can direct sell through websites that can be set up and taken down overnight – a low bar for market entry and an immense protection from legal or financial risk. Marketers such as Amazon admittedly do not thoroughly vet the authenticity of third-party sellers or their products sold through it, and historically have not actively policed counterfeit activity, leaving the brand owners and consumers to identify and call attention to such occurrences.

The OECD-EUIPO report and International Chamber of Commerce's "Intellectual Property Roadmap 2020" address the significance of pre-COVID and early COVID growth in e-commerce sales and impact on trade in counterfeit goods, noting the opportunities created by product and materials shortages, disruptions in transportation and supply chains, business closings, and, most importantly, the explosive growth in online purchases. It has been estimated that since the onset of COVID-19, e-commerce retail sales have tripled. It is still too early to tell what overall effects the pandemic may have had on counterfeiting, but it will likely not be positive.

Existing information already shows that counterfeiters were nimble in taking advantage of specific COVID-19 opportunities to sell fake protective goods, disinfectants, and pharmaceuticals, and rapidly made entrance to and expanded sales of common consumables as well as a wide variety of consumer and business items that were otherwise hard to get because of traditional manufacturing, transportation, and distribution disruptions. The high profit/low risk benefits of counterfeiting combined with easier access to the consumers suggests that counterfeiting will remain a problem for some time. Unfortunately, there is no simple answer for dealing with the problem.

Counterfeiting has long been given nominal attention by businesses and consumers. Methods of deterring, detecting, and halting the movement of counterfeit goods can vary substantially among industries and specific products. Historically it has been viewed primarily as a problem for those businesses directly impacted by lost sales and the more ambiguous negative impact on their brand value, and the cost-benefit analysis for any enforcement activity is complicated. Consumers either knew or should have known that that they might be buying fake goods and so must accept the risk of a lower-quality product (and no warranties) in exchange for a favorable price, and what is the risk anyway from an obscenely low-priced Chanel knock-off handbag?

This is no longer the landscape.

Counterfeiting has rapidly infiltrated multiple industries and markets affecting big and small businesses, consumers of all types of goods and the public in general. Besides the obvious direct economic impact of the sheer increase in volume of counterfeit goods, consumers face real and not insubstantial health and safety risks of counterfeit products such as pharmaceuticals, food, cosmetics, chemicals, toys, and equipment that are all but indistinguishable from authentic goods either physically or because they are misrepresented and sold side-by-side in markets regularly populated with authentic goods. Both the OECD-EUIPO and ICC reports referenced above cite evidence that the low-risk/high-profit opportunities offered by counterfeiting have attracted organized crime—not as an alternative to, but in support of, their more nefarious criminal activities.

Truly tackling the problems of counterfeit goods will require the efforts of governments, regulatory agencies, industry organizations, trade associations, brand owners, and retailers. Businesses desiring to protect their own revenues and reputations should seek protection for their intellectual property, be fully familiar with their supply and distribution networks, establish policies and procedures for the inspection and testing of raw materials and parts used in manufacturing and/or finished goods manufactured by others, and monitor the market (at a minimum, scan the internet including social media) to detect counterfeit goods or other unauthorized distribution. Blockchain and artificial intelligence technologies are likely useful in tracking/tracing and monitoring efforts but may, as yet, be cost prohibitive for smaller companies.

Something all companies can do is alert their customers to risks associated with counterfeit versions of their products, educate them about how to identify fake goods and unauthorized sellers, and make it easy for them to report suspected counterfeiting or unauthorized activity. As a start, organizations should be familiar with, and advise customers of, the Notorious Markets for Counterfeiting and Piracy list published by the Office of United States Trade Representative identifying online and physical markets that reportedly engage in or facilitate substantial trademark counterfeiting or copyright piracy.

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