Counter Attack

Most retailers want you to come to their checkout lines with as much merchandise as you can carry. Not Abercrombie & Fitch. The $3.75 billion apparel retailer actually limits the number of items customers can buy to 20, bumping it up to 50 only during the Christmas and back-to-school shopping seasons. Why the restriction? Unauthorized resellers, the company learned a few years ago, were buying its goods in bulk at retail, shipping them to fake A&F storefronts in Asia, and mixing the real goods with counterfeits to lend their operations an air of authenticity.

New Balance Athletic Shoe Inc. wages a similar battle against counterfeiters, one that also leads to some seemingly counterintuitive behaviors. For example, while most manufacturers want to draw as many potential customers as they can to their trade-show booths, New Balance carefully monitors access to its displays. "Too many people were coming in and taking samples and pictures of our products," explains Ed Haddad, vice president of intellectual property and licensed products for the $1.3 billion Boston-based shoemaker. "Sometimes counterfeit versions would be on the street before our real products."

Once an annoying distraction, counterfeiting has become a global scourge. The International Anti-Counterfeiting Coalition, a global trade group, estimates that counterfeiting — defined as willfully violating trademark laws by making a product designed to mimic, in appearance, a branded product — has grown more than 10,000 percent over the past two decades. According to the World Customs Organization, knockoffs now account for 7 percent, or $600 billion, of all goods sold globally. The U.S. Customs and Border Protection agency blames counterfeit merchandise for the loss of more than 750,000 American jobs. Last year, the agency seized counterfeit and pirated goods valued at $196.7 million, up from $155.3 million in fiscal 2006.

"Counterfeiting has taken an even more insidious turn in the past few years," says Howard E. Japlon Sr., senior vice president and general counsel for the North American division of Schneider Electric SA, an $18.1 billion French electrical-equipment manufacturer whose brands include Merlin Gerin and Square D. "We've discovered counterfeit medicines, counterfeit automotive products, and, in our case, counterfeit electrical components, all of which present substantial safety issues."

The direct economic impact of counterfeiting on individual merchants and manufacturers can be hard to measure; it's entirely possible if not probable that someone who buys a fake Rolex watch for $100 would never purchase the real thing for $10,000. But many companies worry less about the impact on today's sales and more about the long-term ramifications for their brands, which can become fatally diluted if knockoffs, often cheap and inferior, become commonplace. "Any CFO focused on the sustainability of their brand needs to worry about this," says A&F finance chief Michael Kramer.

Footwear leads the list of merchandise seized last year by U.S. Customs officials, with apparel in second place. Other commonly counterfeited goods include consumer electronics, luxury handbags and watches, pharmaceuticals, computer hardware, and designer sunglasses. But the complete list runs the gamut from golf clubs, cigarette lighters, and circuit breakers to automotive components and aerospace parts. Pirated music CDs and movie DVDs, which represent a violation of copyright rather than trademark laws, are another major category.

Made in China, Sold Everywhere
China is widely acknowledged to be ground zero for the production of counterfeit products, accounting for 80 percent of all the items confiscated last year by U.S. Customs authorities. Consumption is less centralized, showing its face on street corners and in storefronts around the world. "Every major city has its locale," says attorney Brian Brokate, a partner with Gibney, Anthony & Flaherty LLP in New York. "In New York City it's Chinatown, in Los Angeles it's Santee Alley, in Houston it's the Harwin District."

And, of course, it's online. "The Internet is the Wild West for counterfeiters and pirates because of the anonymity," says Caroline Joiner, executive director of the Global Intellectual Property Center, an initiative of the U.S. Chamber of Commerce. Even legitimate Web auction sites have been caught up in the issue, as evidenced by the lawsuit that luxury jeweler Tiffany & Co. filed in 2004 against eBay Inc. for trademark violations. The suit, which has yet to be resolved, contends that most of the jewelry being sold on eBay's Website as genuine Tiffany goods is fake.

While law-enforcement authorities fight counterfeiting to varying degrees (an effort that involves everyone from local police departments to the Department of Homeland Security, the Federal Bureau of Investigation, the Justice Department, the Federal Aviation Administration, and the Food & Drug Administration), it's an uphill battle, often lacking sufficient coordination and resources. Federal lawmakers are trying to bring more muscle to the fight, in the form of H.R. 4279, a bill sponsored by Rep. John Conyers Jr. (D–Mich.) and Rep. Howard Berman (D–Calif.). The bill would, among other things, create an intellectual-property enforcement post within the federal executive branch and an IP enforcement division within the Department of Justice.

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