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Intellectual Property Technology Law Journal

Intellectual Property Technology Law Journal

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Eight Ways to Minimize the Risk

• f Counterfeiting

By Steven Cooper and Gail M. Eckstein

C

• unterfeiting has been labeled the “Crime of the

T wenty-First Century” by the Federal Bureau of Investigation, and such emphasis is not overstated.

counterfeiting business constitutes a staggering 7 percent

• f world trade, and the global counterfeit market is worth

about $600 billion, including a loss to US businesses of about $250 billion per year.

been linked as a source of funds for terrorism, drug traf- ficking, and organized crime.

Reports of counterfeited US products are constantly in the media, and counterfeiting affects a wide array

• f products. The industries hit hardest are those sell-

ing footwear, clothing, wristwatches, pharmaceuticals, and consumer electronics.

products cause considerable alarm, for example, car brakes, aircraft parts, pharmaceutical products, and baby formula. Companies are well-advised to institute strong pro- grams to prevent and combat the counterfeiting of their

• goods. Although there is no magic bullet that eliminates

counterfeiting altogether, there are a number of impor- tant steps that can and should be taken. Undertaking these steps increases the sales of legitimate products; enhances the public image of the company and its products; and ensures that best practices have been fol- lowed in the event of a later incident that results in bad press or a claim for damages. Implementing the following eight best practices will put companies in a substantially better position to defend themselves against this increasing threat.

• 1. Tighten Supply Chain

The number one goal of counterfeiters is to make their products appear as authentic as possible. This is accomplished by obtaining or copying legitimate pack- aging, cartons, and ingredients that make the counter- feits difficult, if not impossible, to visually distinguish from the real thing. Dishonest suppliers, especially those in more remote areas, will run “night shifts”

• r have products and/or machines exiting “the back

door” to be used or copied by counterfeit operations. Companies must vigilantly monitor their suppliers in

• rder to prevent the misuse or diversion of packag-

ing, cartons, and ingredients from their supply chains. Companies must closely inspect their supply chains for any vulnerabilities to ensure that their vendors do not deal with counterfeiters. This can be accomplished in a number of ways. First, companies should insist that their vendor agree- ments contain language that prohibits such activities; permits random, unannounced audits; and imposes stiff penalties for failure to comply. Second, companies need to undertake random audits, at varying hours, to inspect the workings and their suppliers. Finally, companies should take further steps to comprehensively monitor

• York. The authors, who frequently counsel companies on methods
• f minimizing and combating the counterfeiting of goods, can be

2 Intellectual Property & Technology Law Journal Volume 20 • Number 8 • August 2008 the activities of their suppliers through discussions with competitors, industry executives, trade associations, and law enforcement officials.

• 2. Monitor Distribution Chain

Counterfeiters prey on weaknesses in a company’s legitimate distribution chain. Counterfeiters look to meld their bogus goods in with legitimate ones so that they can pass unnoticed through customs and regular distribution and sales channels. The problem of counterfeit products infiltrating legitimate channels is particularly acute where diverted

• r “gray goods” are on the market. Gray goods open

pathways for the circulation of counterfeits; indeed, counterfeiters are notorious for focusing on companies that do not control the entry of gray goods into the marketplace. Accordingly, companies must institute procedures for authenticating and monitoring the entities that distrib- ute and sell their products. They must be sure to select reputable distributors and retailers and should enter into contractual relationships with these entities that demand that the products be shipped in original and unaltered form. Specifically, the contractual provisions should require that products be shipped in manufacturer cartons or cases and that the original carton case seals remain intact throughout the shipping process. Random audits should also be performed to ensure that the distributors are fulfilling such contractual obligations and living up to the company’s expectations. Finally, companies should train their sales forces to be their eyes and ears and to identify and report any suspi- cious product in transit or on store shelves.

• 3. Investigate Leads Fully

Investigating leads in a thorough and sophisticated manner is an essential component of combating a counterfeiting problem. Companies faced with threat- ened or actual counterfeiting problems should employ seasoned investigators with global contacts and substan- tial counterfeiting experience. Purchasing counterfeit products to remove them from store shelves or stamp- ing out small-time counterfeiting operations will be of limited utility. Investigators will help companies “move up the chain” in order to go after the “big fish” in the

• perations. Such investigative firms have the knowledge

and expertise to identify:

• The manufacturer of the illegitimate product;
• The methods used for distribution;
• The relevant import/export points; and
• The prevalence of the counterfeit goods in retail

stores. Knocking out a manufacturer or distributor is infi- nitely more valuable than eliminating a mere retailer, as these entities are usually supplying their counterfeit product to numerous stores throughout a large geo- graphic area. Such investigations serve as crucial build- ing blocks for civil litigation or criminal prosecutions that may be pursued in the future.

• 4. Establish Excellent Government

Relations Establishing long-term partnerships with govern- mental agencies is another essential way to combat counterfeiting. The Department of Justice, Customs, the Department of Homeland Security, and the Food and Drug Administration, among others, are important allies in the fight against the importation and distribution of illegitimate products. The squeaky wheel theory applies here, as the more a company reaches out to commu- nicate with these federal agencies, the more they will assist in corporate anti-counterfeiting efforts. One fundamental rule is that companies must establish those relationships before an incident occurs. Customs is particularly important in the anti- counterfeiting fight. Companies need to train Customs to differentiate their fake products from their legiti- mate ones. Illegitimate products are more likely to be identified and detained at border crossings when a company has provided easily read dossiers and training cards to Customs officials. Cooperating fully with all governmental investi- gations is also key in that it emphasizes the compa- ny’s dedication to minimizing counterfeiting activity. Companies must be responsive and available to meet and field calls. Finally, sharing with governmental agencies infor- mation obtained from a company’s own private inves- tigations creates a bond with these agencies and makes them more willing to reciprocate.

• 5. Employ Excellent Internal

Recordkeeping Meticulous internal recordkeeping is a fundamental building block in a company’s anti-counterfeiting arse-

• nal. A comprehensive database should be established to
• rganize and maintain such records.

For starters, such records allow a company to accurately understand the extent of its counterfeiting

Volume 20 • Number 8 • August 2008 Intellectual Property & Technology Law Journal 3 problem, which many companies do not recognize. These records also prove invaluable to investigations as they identify distinguishing marks on counterfeit prod- ucts and through what channels the products move. In order to be most efficient and helpful, a database should be searchable by trends, patterns, dates, loca- tions, contaminants or chemicals, and individuals. Only a limited number of employees should be able to input data to ensure consistent input. This database should be integrated among various countries and regions for an international company to ensure that the big picture is understood and analyzed.

• 6. Update Packaging

Numerous technological anti-counterfeiting pack- aging devices are on the market. These devices have essentially two goals: (1) hampering a counterfeiter’s ability to replicate a company’s products and (2) making the product readily identifiable as genuine. Companies seeking to make their products more difficult to copy often seek hidden, covert markings that can be embedded in packaging, which are very difficult to reproduce. Examples of such security mark- ers that are not readily visible include fluorescent inks, which are rendered visible only upon exposure to ultra- violet light, and magnetic tags, whose presence may be detected only in low frequency magnetic fields. In addition, recent breakthroughs in radio frequency identification technology (RFID) offer companies a flexible option that is both convenient and easy to use.

Similar in concept to bar coding, RFID devices, such as a tag or label, can be embedded in a product, and then radio waves are used to transfer data to a reader in

• rder to identify the product as genuine. Providing such

readers to manufacturers, distributors, retailers, and/or employees permits them to easily distinguish legitimate product from fake. Using technology to modify packages and labels unquestionably strengthens product security and creates a disincentive for counterfeiters to make that particular company’s product in light of the increased cost and difficulty involved. The downside is that repackag- ing raises the cost per unit, and this must be balanced against the many advantages.

• 7. Formulate Crisis Management Plan

Formulating a counterfeiting crisis management plan provides important protection for a company should it face a counterfeiting incident. Such a plan should address press inquiries and customer complaints so that the appropriate personnel can spring into action at the time of a crisis. Companies should have preliminary scripts prepared, and should hire adequate numbers of

• perators to field calls.

As another approach, some companies seek to preemptively strike by communicating openly with the public about the increasing counterfeiting problem before an emergency occurs. Specifically, companies have created sections of their Web sites that discuss and educate consumers about the problem and that discour- age consumers from buying suspect products. Informing customers as to how to detect a counterfeit product, as well as detailing the company’s anti- counterfeiting efforts, can lay important groundwork that will pay off in time of crisis.

• 8. Prepare to Litigate

Aggressively pursuing litigation against those that manufacture, distribute, and sell counterfeit goods can have a huge deterrent effect. Such action demonstrates a plaintiff company’s commitment to combating coun- terfeiting activity, and often will cause counterfeiters to look elsewhere. In addition, the discovery obtained through litigation will enable a company to uncover information in order to move “up the ladder” and determine those primarily responsible for the counterfeit product. A host of claims are available under, among other things, the federal Lanham Act, and under state statutes and the common law. Ex parte temporary restraining

• rders, orders of seizure, and asset seizures should be used

whenever possible to shut down the counterfeiting oper- ations while a plaintiff company’s lawsuit is pending. Litigation may also be brought against secondary infringers, such as financiers and landlords, based on theories of contributory and vicarious liability. Conclusion Eliminating a company’s counterfeiting problem altogether may be impossible. However, following these eight steps should greatly reduce the incidents of coun- terfeiting and will deter counterfeiters from selecting a company’s products to counterfeit. Notes

• 1. IACC, “Facts on Fakes,”

http://www.iacc.org/resources/Facts_

• n_ fakes.pdf

, p.2 (quoting George W . Abbott, Jr. and Lee

• S. Sporn, Trademark Counterfeiting § 1.01 (2001)).

2. Id. , p.3 (citing George W . Abbott, Jr. and Lee S. Sporn, Trademark Counterfeiting § 1.03[A][2] (2001)); IACC, “About Counterfeiting,” www.iacc.org/counterfeiting/ counterfeiting.php .

• 3. IACC, “Facts on Fakes,” http://www.iacc.org/resources/

Facts_on_fakes.pdf, p.4.

4 Intellectual Property & Technology Law Journal Volume 20 • Number 8 • August 2008

Reprinted from Intellectual Property & Technology Law Journal August 2008, Volume 20, Number 8, pages 15-17, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New Y

• rk, NY

, 1-800-638-8437, www.aspenpublishers.com

• 4. US Customs and Border Protection Office of International

Trade, 5-9-07, available at http://www.iacc.org/resources/07_ midyr_seizures.pdf .

• 5. “RFID Overview: Introduction to Radio Frequency

Identification,” Intermec Technologies Corporation, available at http://www.rfidsolutionsonline.com/Content/news/article.asp .