KEEP UP THE HEAT
RELENTLESS PURSUIT OF COUNTERFEITERS IS THE WAY LICENSORS AND LICENSEES CAN STRIVE TO MAINTAIN BRAND INTEGRITY.
Byline: Vicki M. Young
NEW YORK — To protect and preserve.
It’s the motto of designers, manufacturers and licensees when it comes to their brands’ identities, and it requires vigorous enforcement of trademark rights and continuous crackdown on counterfeiters.
Apparel companies that are the targets of counterfeiters are fighting back. Even though they’ve made progress, the headache isn’t going away, and it’s still a huge pain in the pocketbook.
As George Abbott, managing director of the International AntiCounterfeiting Coalition Inc., observed, “About 5 to 7 percent of all goods sold worldwide are counterfeit, which represents a worldwide loss of $350 billion.” That amount reflects the loss in tax revenues, profits and in manufacturing and sales jobs. He noted that sales of all types of fakes in the U.S. amount to at least a $200 billion-a-year problem.
Statistics compiled by the Los Angeles Strategic Trade Center place the dollar value of apparel seized by U.S. Customs at $10.6 million in 1997, a 6 percent increase from last year.
Much of the seized apparel has been from Asia. Leading the pack among the Asian countries was Korea. In 1997, 58 percent of all seized goods coming in from Korea was classified as apparel, with a street value of $2.1 million. Apparel made up 35 percent of all seizures from Hong Kong, with a value of $953,424. In the Philippines and China, the percentage was 5 percent for each country, with corresponding values of $126,903 and $673,788.
The seized amount, however, reflects only a fraction of the counterfeited goods that flow into the marketplace.
John Bliss, IACC’s president, estimates illicit goods can cost apparel makers an average of 2 percent of their annual sales.
But it’s not just economics at stake. For consumers bent on snagging a bargain, buying cheap is sometimes akin to courting danger.
When Kings County District Attorney Charles Hynes announced indictments against five individuals in Brooklyn two years ago for producing $200,000 worth of counterfeit apparel under sweatshop conditions, he pointed out that counterfeiters routinely use dye made of a naptha-like substance. Naptha is the active ingredient in lighter fluid. Wearing apparel dyed with this substance, Hynes said, places consumers at an unknown risk.
Rivalries aside, many companies in the apparel industry, where brand name counterfeiting is rampant, have joined forces to fight the problem. And while licensors, which own the trademarks, traditionally carry the major burden, licensees can also play a role in combating the crime. They can help either by teaming up with licensors in lawsuits against counterfeiters or by helping to defray the costs of anti-counterfeiting measures.
Here’s what some of them are doing.
Donna Karan, Tommy Hilfiger, Polo Ralph Lauren, Calvin Klein and Nautica Apparel have banded together to battle individuals and companies engaged in counterfeiting activities by bringing lawsuits against them for violations of trademark law. They’ve also taken advantage of New York City’s nuisance law to file actions against landlords who refuse to evict tenants guilty of the illicit deeds.
“You frequently see the same companies working together because where you see fake Hilfiger T-shirts, you’ll also see fake Polos and fake Kleins right next to each other,” observed Steven Gursky of Gursky & Ederer, a law firm specializing in corporate law with a heavy concentration in intellectual property issues.
The same companies have also worked with law enforcement officials in bringing criminal actions against counterfeiters.
The companies don’t always take part in the same lawsuits. The forged alliances could change, depending on the nature of the bogus goods. For instance, a battle against fake accessories manufacturers may be broadened to include Chanel, Louis Vuitton and Sara Lee Corp., parent of Coach.
The combined efforts of the companies and the IACC also have helped get laws enacted that provide stiffer penalties for wrongdoers. Under federal law, selling counterfeit merchandise is a felony. At least 20 states, including New York, have taken a similar stance. The remaining states still consider the crime a misdemeanor.
Although most brands strive to become the next hot favorite, popularity has its drawbacks.
According to Bliss, “The more popular the brand, the higher the name recognition in the marketplace. The odds then become higher that there will be a counterfeiting problem.”
Bob Holmes of Holmes Hi-Tech, an investigative agency that specializes in ferreting out counterfeiters, observed that the most popular apparel items are those that are easily transported: designer T-shirts and jeans, handbags and watches.
“Jeans come into the U.S. as blanks, or generic jeans without labels, which are sewn onto the garments later on,” he explained.
“Watches come in either with a blank face or a generic name. I’ve seen ‘Billi’ stamped on the face with vegetable dye. The counterfeiters scrape it off with acetone and stamp on the brand logo,” he said, noting one instance in which a factory assembled 7,500 watches a day.
Holmes added that the techniques used by counterfeiters have become more sophisticated, making it harder to fight the crime.
Fakes manufactured 10 years ago were poorly done, he said.
“Back then, for a four-color silk-screen operation, the counterfeiter began by making a drawing of the original. After printing one color, the item would be moved to the next paddle to stamp on the second color,” he explained. “Now the entire process, from a copy of the logo to print time, is one hour. One machine with 16 paddles can make four four-color shirts at a time.”
Compounding the problem is the speed with which bootleggers move the evidence of their illegal acts.
“Workers can be making fakes at night but by next morning, the goods and equipment have been moved out. Instead, you find workers making legitimate ‘I Love New York’ T-shirts,” Holmes said.
Anthony Keats, an intellectual property attorney at Baker & Hostetler, added, “The Internet has made [counterfeiting] faster and more likely to go undetected.” He explained that designs can be digitally transmitted to another part of the world within seconds. That gives counterfeiters a head start on production overseas, as well as decreases the lag time for when the fakes actually hit the marketplace.
Because counterfeiting is a yardstick of a brand’s popularity, it’s not just licensors who own the trademarks that need to be concerned. Licensees have a vested interest in stamping out fakes, too, even if the bogus goods aren’t part of their production line.
“The success of a product on one level helps the success of other products on another level,” noted Gursky.
Licensees that don’t pay attention to counterfeiting problems can find themselves losing value on their investment. That’s because licensees of top brands can pay a king’s ransom just to get the rights to manufacture and sell a product. Doing what they can to insure a brand’s popularity and staying power helps licensees make sure they’ll have profits after paying royalties owed under the licensing agreement.
“In fashion apparel, the trademark is everything,” declared Theodore C. Max, an intellectual property litigator at Phillips Nizer Benjamin Krim & Ballon.
Max noted that licensors tend to be the responsible party in battling counterfeiters because of their expertise in a particular market area. That’s not to say licensees can’t play a role in the battle against fakes.
According to Max, the parties can negotiate in their license agreement a contribution from the licensee for use in fighting the problem.
“Sometimes the licensee is responsible for identifying any problems to the licensor, or there may be a notice provision that allows the licensee to take action if the licensor decides not to act after being notified of an infringement,” he said.
And, according to Keats, some companies are getting sophisticated in their labeling techniques.
“There are companies applying a DNA liquid that help authenticate products when picked up by a scope. Other companies are using special threads to create holograms in the labels,” Keats observed.
Licensors, added Keats, can control the process by requiring licensees to use an approved, sole source for the manufacture of the label.