NEW YORK — When it comes to the global fight against counterfeit goods, luxury goods vendors know the best defense is a strong offense.
Now governments are beginning to see the wisdom of offensive strikes against the megabillion dollar, global counterfeit trade — especially after realizing that billions are being lost in tax revenues. Local municipalities and law enforcement officials are also working closer with vendors and designers of luxury and branded goods. It’s been a tough fight.
Counterfeiting has become pandemic, accounting for an estimated $456 billion, or 7 percent of global trade, in 2003, according to the World Trade Organization. U.S. Customs and Border Protection said $138.8 million in goods were seized in 2004. Apparel accounted for $51.7 million, or 37 percent of that. Watches and footwear accounted for $2.5 million and $2.3 million, respectively. Not surprisingly, China is the counterfeit linchpin. But that is changing. Seized goods from China accounted for $87.3 million, or 63 percent of the total. Next on the list was Russia, which accounted for $7.3 million, or 5 percent, of the total.
“Our seizure value has tripled over the course of five years,” said Lisa Fong, an International Trade Specialist with Customs and Border Protection. “Most of the times the countries involved have been China, Hong Kong, Taiwan and Korea. However, in recent years things have been shifting. In 2004, countries that popped up were Russia, Vietnam and South Africa.”
Although the battlefield in the war against counterfeits has expanded, enlisting the help of local governments is slowly paying off. For example, Beijing’s infamous Silk Alley — China’s best-known counterfeiting spot — was shut down in early January with the Chinese government citing it as a fire hazard. A new mall opened in March, called Silk Street market, located near the old Silk Alley. According to a March 31 report from the newspaper China Daily, more than 300 items were seized there by municipal investigators. About 80 handbags and 220 garments with Boss, Gucci and Chanel logos were taken by officers from the Chaoyang District Branch of the Beijing Municipal Administration for Industry and Commerce.
Joseph Simone, a partner with Baker & McKenzie in China, said crackdowns on counterfeiting in China are mainly handled on a ministry-by-ministry basis. A new State Council task force of leaders from different ministries was established last year to increase coordination and brainstorming on enforcement, but its effectiveness remains unclear. “The newest statistics suggest increases in arrests of counterfeiters have gone up about 50 percent in the last six months. This is an improvement, but in absolute terms, it is still way too low to make a serious dent in the [counterfeiting] problem,” said Simone in a recent e-mail interview with WWD. “The number of administrative raid actions has also gone up somewhat, which suggests a higher amount of enforcement activity. But if history is any guide, this administrative enforcement will not likely have much of a deterrent impact, as the penalties imposed by the authorities are ultimately limited to fines, and still too few cases are seriously investigated and referred to the police for criminal prosecution.”
Penalties for counterfeiting in most countries usually consist of suspended sentences and fines, Simone said, and “it is difficult to get jail sentences or very high fines from the courts almost anywhere in cases involving first offenders.” But according to Simone, “the biggest question globally is not so much the level of penalties, but the amount of police resources that governments are willing to invest to deal with counterfeiting cases.”
Manufacturers are reluctant to reveal how much capital is invested in fighting counterfeiting, but intellectual property lawyers believe some of the larger companies, such as LVMH or Nike, could spend up to $10 million a year.
“The goal is to set up enforcement programs as soon as a problem is identified in a particular country or region,” said Carole Sadler, senior vice president and general counsel at Coach.
Burberry has a global intellectual property department made up of 15 full-time staff members that works with lawyers, investigators and law enforcement to prosecute counterfeiters whenever possible. “In China, we frequently see counterfeit goods being manufactured through the night by a different workforce from the daytime shift,” said Stuart Lockyear, Burberry Group’s director of intellectual property. “But in China and elsewhere, we also frequently find goods being made in small sweatshops with no regulation on working conditions to prevent child labor.”
Louis Vuitton’s intellectual property team is based in Paris, with satellite offices in Tokyo, Seoul, Hong Kong, Shanghai, Milan, New York and Buenos Aires. Along with the in-house department, the company employs a network of 250 trademark agents, investigators and lawyers. According to a statement from the company, in 2004 Vuitton conducted 6,000 raids worldwide. More than 1,000 counterfeiters were arrested, resulting in 1,162 months, or 96 years, of jail time.
New York City is the front line in domestic counterfeiting, accounting for $22.9 billion, or 5 percent of the global counterfeiting industry. Coach’s Sadler cited a March 23 raid conducted by the New York Police Department’s Trademark Infringement Unit at two locations in Manhattan where multiple brands were seized. “At one location, stamping machines and dies were seized. At the second location, thousands of counterfeit Coach handbags, wallets and belts were seized,” she said.
The NYPD’s trademark infringement unit was created in 1994. “To our knowledge, ours is the only police department in the country which devotes resources to investigations specifically targeting trademark violations,” said Deputy Inspector Brian O’Neill, commanding officer of the NYPD Organized Crime Investigation Division, during a New York State Senate hearing held in March. O’Neill went on to say that the unit, run by one lieutenant, one sergeant and six detectives, carried out 41 search warrants, seized more than $19 million in goods and made 44 felony arrests in 2004.
Burberry also works with Mayor Bloomberg’s office, the Shanghai Administration of Industry and Commerce in China and trading standards authorities in the U.K. “We have teams working with police and local authorities throughout the world. These teams carry out regular training of customs officers and local law enforcement officials by attending their offices and training them in the recognition of counterfeit Burberry goods,” Lockyear said.
Use of technology has been an underutilized element that vendors can employ to help thwart counterfeiting. For instance, radio frequency identification tags can be used and are widely available, yet few vendors are using them. “One of the real benefits of [using RFID tags] is when goods are coming into the U.S., it’s so difficult for customs officials to do an inspection of all the goods coming in, maybe just 2 percent or just a sampling of crates or containers are opened,” said David Hopkins, co-author of the book “Counterfeiting Exposed: How to Protect Your Brand and Market Share” (Wiley, 2003). “The RFID tags allow them to inspect a container without ever opening it, which is a real advantage.”
According to information technology and consulting firm Unisys, global tracking solutions are vital. According to the company, international shipping containers change hands an average 17 times during a journey that can take more than two months. By comparison, domestic containers change hands only eight times on average. And, believe it or not, modern-day pirates still troll the high seas and are getting increasingly active. According to Unisys, 445 “seaborne piracy attacks” occurred in 2003, up more than 56 percent from the 285 reported in 1999.
Customs officials at domestic ports would also be hard-pressed to catch a majority of counterfeit goods. Of the 15 million containers flooding U.S. ports, only 5 percent, or 750,000 containers, undergo a physical inspection.
— With contributions from Fahmida Y. Rashid