WWD.com/fashion-news/fashion-features/battling-counterfeiters-divulging-the-dangers-of-500b-global-industry-585680/
government-trade
government-trade

Battling Counterfeiters: Divulging the Dangers Of $500B Global Industry

Luxury firms joined forces with New York's Finest in reeducating the public about the negative impact of counterfeit goods.

View Slideshow

NEW YORK — Compagnie Financière Richemont SA’s Frederick Mostert set out Tuesday to epitomize the $500 billion global counterfeit market — and stress how buying counterfeit goods fuels child labor and terrorism worldwide.

“This is a fake Armani suit,” said Mostert, rising from his chair and opening his jacket. “This is a fake Dunhill shirt, a fake Yves Saint Laurent tie and a fake Ferragamo belt.”

For a finale, Mostert reached under his chair, pulled out a fake Prada briefcase, placed it on the table in front of him and removed fake Tiffany jewelry, which he said was for his wife.

Mostert, Richemont’s chief intellectual property council and executive director, who also is chairman of the Intellectual Property Committee of the Walpole Group, was part of a panel that included executives from Gucci, LVMH Moët Hennessy Louis Vuitton and the International AntiCounterfeiting Coalition set to launch a marketing campaign aimed at reeducating consumers. Raymond Kelly, New York City’s police commissioner, was the keynote speaker.

Changing consumer attitudes toward buying counterfeit goods is a major task for luxury and fashion companies and one that hinges on linking those purchases to the funding of criminal activities — from terrorism to child labor.

“This is a major growth industry,” said Kelly at the event, which was sponsored by Harper’s Bazaar and the coalition. The increasing criminal attraction, he said, is natural considering the relatively low costs for entering the market and for manufacturing goods. Profits are high, and getting caught carries far fewer penalties than most criminal activities.

Kelly in particular is aware of the prominent role the U.S. and New York City play in the global counterfeit market. According to a November 2004 report issued by William C. Thompson Jr., New York comptroller, an estimated $456 billion was spent on counterfeit goods in 2003 worldwide — from pharmaceuticals to handbags. The U.S. accounted for $286.8 billion, or 62.9 percent, of that. New York state alone garnered an estimated $34.4 billion, while New York City’s take was estimated at $22.9 billion — from the corners of Fifth Avenue to the traders in Canal Street.

“It’s a dark and gathering threat,” said Kelly.

This story first appeared in the February 2, 2005 issue of WWD.  Subscribe Today.

According to Kelly, the city of New York loses an estimated $1 billion in tax revenue annually due to counterfeiters. Counterfeit or fake goods are items that are duplicates of existing brands and products, while knockoffs are generally items that resemble well-known brands or products and tend to be fought over in intellectual property rather than criminal cases.

“The more players that get into the game, the cheaper the costs and the deadlier the game becomes,” Kelly added.

During his presentation, the police commissioner said investigations revealed that counterfeiters were donating portions of their profits to known terrorist groups like Hamas and Hezbollah. However, Kelly explained the donations diminished over the years as the counterfeiters spent more time in the U.S., and became more interested in filling their own coffers.

“The age of terror has met the world of illicit finance,” explained Juan C. Zarate, assistant secretary for terrorist financing and financial crime at the Treasury Department.

According to an IACC report, the Federal Bureau of Investigation “compiled strong evidence that the terrorists who bombed the World Trade Center in 1993 financed their activities with counterfeit textile sales from a store located” in Manhattan.

Jonathan H. Moss, legal counsel and director of real estate for Gucci America, said there’s a disconnect in regard to how counterfeiting is perceived.

“Much more money is lost on account of counterfeiting than bank robbery,” Moss said, adding that the “criminality is different,” and carries vastly different punishments. Moss said most law enforcement agencies were already overburdened by the daily grind of fighting crime.

“It’s a long process to investigate, seize and ultimately arrest,” said Moss.

“It’s a painstaking process,” agreed Kelly. “We often make dozens if not hundreds of buys before making an arrest.”

Kelly said the NYPD Trademark Infringement unit is made up of a lieutenant, a sergeant and six detectives. Despite the seemingly small size, the unit has met with success recently. In December, it was responsible for shutting down what was described as a mall for counterfeit goods located on Broadway and 27th Street in Manhattan. According to Kelly, the NYPD recovered more than $12 million in counterfeit goods, including The North Face, Rocawear, Louis Vuitton and Timberland items from the 48 shops retailing in the four-story building.

Most recently, the division shut down an operation capable of manufacturing between 50,000 and 60,000 Duracell batteries a day, according to Kelly.

Gucci’s Moss said the pharmaceutical industry tends to do a better job of prosecuting counterfeiters than other segments, such as the luxury goods sector.

The panelists generally agreed that the best chance to sway consumer opinion was to connect the problem to human suffering and crime.

“It’s important to convey the stigma that someone else has suffered,” said Moss in regard to child labor.

In his dealings with child labor issues, Mostert developed a profile of the types of children forced into manufacturing. In China, he said, children in this situation are generally between the ages of 13 and 15, and come from single-parent families living in the country. If that single parent becomes ill, they are forced to send the children to cities in order to survive. “[People] have never heard that child labor is behind [counterfeiting],” said Mostert.

Bertrand Stalla-Bourdillon, general manager of Louis Vuitton and president of Berluti, said one of the most effective ways of reaching consumers on the counterfeiting issue is to make purchasing the items a crime at the consumer level, and to stress that purchasing the goods supports child labor, money laundering and terrorists.

In France, consumers found with counterfeit goods are now subject to steep fines along with potential jail time, making France one of the only countries with consumer criminal liability.

Timothy Trainer, president of the International AntiCounterfeiting Coalition, said U.S. lawmakers were extremely reluctant to propose, much less institute, similar consumer liability laws. “To criminalize the act of buying is extremely difficult.” Trainer insists the battle for consumers’ minds will be won by keeping the message as simple as possible. “Use common-sense notions,” he said.

For Trainer, the simplest tactic is asking consumers if they understand where their money is going when they purchase counterfeit goods. “Most people are predisposed to try and do the right thing,” he said.

One strategy that has failed to resonate with consumers, explained Stalla-Bourdillon, is in arguing the superior quality of authentic goods. Armando Branchini, executive director of the Italian Luxury Goods Association in Milan, echoed this sentiment.

“Counterfeits have even become a chic fashion statement,” said Branchini. “It’s not easy to communicate with the consumer.”

In the meantime, federal judges in New York seem to be increasingly supportive of trademark holders’ rights. In a recent decision, Cartier International was awarded a $594 million judgment against Chinatown counterfeiters. It was in court for more than two years, and is ongoing.

U.S. District Court Judge Thomas Griesa of the Southern District of New York ordered 33 named defendants to each pay Cartier $18 million in statutory damages plus reimbursement of legal fees. The judge also issued a permanent injunction barring the use or sale of any goods bearing the Cartier trademarks.

According to the order, none of the defendants responded to the complaint.

The seemingly oversized award is the latest of several similar decisions in which Griesa sided heavily in the favor of luxury-goods firms. On Aug. 4, 2004, he ordered 29 Chinatown retailers selling counterfeit Louis Vuitton and Fendi merchandise to each pay LVMH Moët Hennessy Louis Vuitton $16 million in statutory damages plus legal fees — an award of more than $464 million. Griesa found in favor of Rolex on the same day in a separate case, ordering three Chinatown retailers to each pay Rolex $10 million plus legal fees, or more than $30 million. None of the defendants were identified in either case. However, LVMH and Rolex are continuing to pursue action against the retailers’ landlords.

In December 2004, Polo Ralph Lauren subsidiary PRL USA Holdings Inc. found success in its case against Broadway retailers selling counterfeit Polo shirts when another federal judge awarded the company damages totaling $1 million.

U.S. District Court Judge Naomi Reice Buchwald in November issued two judgments, each against unrelated companies operating on Broadway in Manhattan. Both judgments were reached on consent between the parties. Buchwald signed the first consent judgment on Nov. 10, 2004, ordering a permanent injunction against Global Designer Apparel Ltd. and its principals, Fred Marashi and Ali Rafiei-Tehrani, barring the sale of counterfeit Polo shirts.

Real Numbers on Fakes

  • Estimated annual sales of counterfeit goods: $500 billion
  • Estimated annual sales of counterfeit goods in Manhattan: $23 billion
  • Estimated domestic value of all counterfeit goods seized by U.S. Customs in 2004: $139 million
  • Number of fake watches reportedly seized by Cartier in a recent Chinatown raid: 550,000
  • Average amount paid by Chinatown wholesalers to import a fake blank watch, according to Cartier investigators: $1.69

Source: Harper’s Bazaar/IACC Anticounterfeiting Summit

View Slideshow