Viewed as “one of the most pressing issues of economic and national security facing our country,” intellectual property theft, particularly counterfeiting, has been characterized as a “tremendous and ever-increasing global threat,” according to the U.S. Department of Commerce and The Commission on the Theft of American Intellectual Property.
Although no industry is safe from counterfeiting, the fashion industry is unfortunately one of the biggest targets. In 2016, more than 50 percent of the seizures conducted by U.S. Customs and Border Protection, or CBP, were from the fashion industry.
The Magnitude of the Problem
Although difficult to quantify, there have been a number of recent attempts to determine the impact that counterfeiting has on society, both locally and globally.
For example, the Commission on the Theft of American Intellectual Property issued an updated report that conservatively estimates “that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software and theft of trade secrets and could be as high as $600 billion.” Similarly, the Frontier Report has presented a comparable view of the magnitude of the problem, estimating that the total domestic production and consumption of counterfeit and pirated goods ranges from $249 billion to $456 billion for 2013.
What is more disturbing than these estimates is that global counterfeiting is expected to grow to $524 billion to $959 billion by 2022. Furthermore, China, including Hong Kong, remains the main IP offender, accounting for 87 percent of the counterfeit goods seized entering the U.S.
These reports can only estimate the magnitude of the counterfeiting problem based on relevant yet incomplete data. For example, some of these estimates are based in part upon the seizure data from CBP. In fiscal year 2016, the number of intellectual property right seizures increased 9 percent to 31,560, as compared to 28,865 in FY 2015. In view of the sheer volume of goods imported into the U.S. by various means of transportation, the CBP officials can intercept only a small percentage of the counterfeit goods.
Nevertheless, the available data does highlight the impact of counterfeiting on the fashion industry. Of the 2016 seizures conducted by CBP, wearing apparel/accessories comprised 20 percent of the commodities seized; footwear, 12 percent; fashion/jewelry, 11 percent, and handbags/wallets, 10 percent. Had the goods seized in 2016 been genuine, the total estimated manufacturer’s suggested retail price, or MSRP, would be $1,382,903,001. Of that total, an overwhelming proportion — $1,049,706,107 or almost 76 percent — were from the fashion industry.
The Negative Impact of Counterfeiting
Consumers often fail to appreciate all the downsides associated with counterfeit products. Simply put, counterfeiting is a crime — it is a theft of “the greatest asset a designer has…creativity. That is their main asset, their main product,” Ashlee Froese, partner at Fogler, Rubinoff LLP, noted in a report. Because fake products are substandard, the reputation of the brand owners is damaged and “consumer confidence and the value of branding may suffer,” stated the International Trademark Association.
Besides harm to the brand, counterfeiting has an irreparable economic impact. As imagined, the fashion industry is losing a tremendous amount of sales due to counterfeiting. But this industrial harm has greater ramifications. Specifically, counterfeiting in the U.S. results “in decreased innovation, loss of trade revenues, higher rates of unemployment and overall slower economic growth,” noted the U.S. Chamber of Commerce in a recent report. On the global scale, counterfeiting is estimated to have resulted in the loss of 2.5 million jobs and of more than 60 billion euros in tax revenue among the G20 economies. Further, the lost tax revenue typically associated with the manufacture and sale of the counterfeit products results in fewer resources to fund local services such as police and fire departments, schools and libraries.
Aside from the economic impact, the sale of counterfeit products is problematic in that it attracts criminals and organized crime groups because the risk involved is less than that associated with the sale of drugs, according to the United Nations Office on Drugs and Crime. It provides a means for criminals to launder money and has been linked to other serious crimes such as the smuggling of drugs, firearms and people, the U.N. noted. But the illegal activities tied to counterfeiting are not limited to organized crime. Because counterfeit producers operate without any government oversight and are unregulated, they are free to disregard environmental safeguards and labor laws, it added.
The Action Steps
The Trump administration’s comments indicate a willingness to pay increased attention to this issue. Specifically, in the president’s 2017 Trade Policy Agenda, one of the key objectives is “ensuring that U.S. owners of intellectual property have a full and fair opportunity to use and profit from their IP.” One of the identified priorities of administration is “to use all possible sources of leverage to encourage other countries to open their markets to U.S. exports of goods and services, and provide adequate and effective protection and enforcement of U.S. intellectual property rights.” Further details from the administration can be expected once the new USTR has an opportunity to further develop the policy.
Besides action by the administration, brand owners can continue their own efforts to combat the counterfeiting problem. For example, protecting the supply chain remains very important. Particularly for companies that do not own the factories that manufacture their goods, frequent site visits are recommended to protect against unauthorized manufacture of substandard products that may be sold as counterfeits. Further, by registering trademarks with CBP, brand owners can obtain the assistance of CBP in stopping counterfeit products from entering the country for a relatively low cost. Moreover, providing training for CBP officers to better identify counterfeit goods has been correlated to an increase in the number of counterfeit products seized.
Ultimately, counterfeiting, at the most basic level, is a supply and demand problem. As long as there is a demand, some entity will supply the products. The challenge to all consumers, including those of the fashion industry, is to eliminate the demand, perhaps by giving serious consideration to the broader impact and cost that the counterfeits have had — and continue to have — on society.
Anthoula Pomrening is a partner with McDonnell Boehnen Hulbert & Berghoff LLP and serves as Chair of the firm’s Mechanical & Materials Practice Group.
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