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The Real Deal

By Amy Radishofski, Staff Reporter, Manufacturing.netCounterfeit products cause problems for companies and consumers alike. It’s a greed-driven industry that businesses need to be mindful of when managing their supply chain.

Counterfeiting is a $250 billion problem for the global economy. That’s right — $250 billion.
And it’s a problem that the government is taking seriously.
“We have been given the authority to put the counterfeiters in prison (10 years for the first offense), destroy the fake products, and seize the profits from the sale of those goods. Plus, the companies that hold trademarks on those products can receive victim’s compensation,” said Dave Faulkner, Director of the U.S. Immigration and Customs Enforcement (ICE) Intellectual Property Rights Coordination Center.
ICE, working with Customs and Border Protection (CBP) stopped over $750 million worth of counterfeit goods from reaching consumers between 1998 and 2006. In fiscal year 2006, CBP and ICE recorded 14,675 seizures of counterfeit goods worth $155 million, and ICE investigations led to 219 arrests, 134 indictments and 170 convictions for intellectual property rights violations.
“With counterfeiting, there is no research and development and no return costs because the products are returned to the companies that hold the trademark. There is also no advertising costs — just production,” Faulkner added. “These counterfeiters end up paying the lowest production costs for maximum return on investment.”
Faulkner gives the example of cigarettes to explain the draw and ROI for counterfeiters. Cigarettes are heavily taxed in the U.S. Counterfeiters can manufacture a load of fake products and bring them to the U.S. for a $100,000 investment. Those products, depending on the State they are sold in, could bring in $6 million in profits.
But not everyone in the supply chain can be fooled by counterfeiters.
“Sophisticated distributors are those who know the difference between going to a jeweler to buy a Rolex and buying one at a flea market,” said Brian Lewis, litigation partner, Wildman Harrold LLP.
Lewis says problems arise when neither the societies nor the governments in counterfeit producing areas are willing to respect a company’s intellectual property rights. And while the foreign governments say they are cracking down on counterfeiters, companies have yet to feel the effects of their efforts.
“China is one of the major sources of counterfeit goods, but it is also one of our biggest partners,” Faulkner said.
While consumers might assume that pirated music and movies are probably the most ubiquitous, just about anything can be subject to counterfeiters.
“Historically, the majority of counterfeit products were what we consider luxury goods, but we’ve been seeing a shift to pharmaceutical products and other consumables,” said Faulkner.
“No industry is immune to it,” Lewis added. “If you’ve got a well-known brand and trademark, people will try to copy it.”
Lewis had worked with a company, Square D, which makes circuit breakers. Square D had found that there were counterfeit products being sold as their brand.
“To put it in perspective, the average electronics distributor has profit margins in the single-digits. Circuit breakers would normally be produced at a cost between $5 and $28,” Lewis noted. “Imports from China could be produced as cheaply as 54 cents to $2.50, which is a substantial profit margin.”
In addition to being potentially damaging for the company, the counterfeit products posed a significant risk to the consumers.
“The circuit breakers are designed to trip and stop current. If the counterfeit products malfunctioned, it would create a very serious problem for the customer,” Lewis said.
In response, Square D brought lawsuits, had the sale of counterfeit products halted, and had the previously sold counterfeits recalled.
“It’s a big problem. Not only does it hurt the company’s bottom line, but these counterfeit products often lack the quality of the authentic products. When you’re talking about lithium batteries or electronics, that poses a very big problem,” Lewis said.
To combat the problem, Lewis suggests companies monitor the global market, monitor their channels of distribution and practice good supply chain management — including the usage of quality assurance provisions in contracts.
The U.S. Patent and Trademark Office cautions companies doing business overseas to register their trademark in other countries. U.S. trademarks, for example, will not protect a company in China, and a competitor can actually prevent you from selling your own products in the country if they register your mark first.
To help protect companies, ICE and CBP stop goods at the ports and investigate the smuggling routes and flow of proceeds behind them. They also work with foreign governments to shut down the operations.
And although no counterfeit products are acceptable, some take higher priority than others.
“Right now, we are targeting products that pose a risk to the health and safety of the general public,” Faulkner noted.
In addition to CBP and ICE, companies can also turn to the Commerce Department for protection. The Commerce Department has its Strategy Targeting Organized Piracy (STOP) initiative to inform companies on matters of intellectual property rights.
Some other useful resources for companies include: the International Intellectual Property Alliance, International Intellectual Property Rights Training Database, and the American Intellectual Property Law Association, among others. (Click here for additional sources.) The Commerce Department also has a downloadable tool kit for companies to help them protect their supply chains.