Supply Chain

Stopping Brand Theft

There are two primary ways to curtail the distribution of counterfeit products.
Vincent RyanMarch 11, 2019
Stopping Brand Theft

Charles Colton famously quipped, “Imitation is the sincerest [form] of flattery.” But pirated brands cannot survive by such flowery platitudes.

Companies carefully guard their brand names because they communicate certain value to the consumer. Building a brand name requires time, money and enormous effort.  Customers trust brands to consistently deliver quality based on their reputations. Callous counterfeiters maliciously co-opt a high-ticket brand name, affix it to an imitation product, and reap substantial profits in the process.  As a result, customers are swindled out of their expectations and thereafter ascribe a lower value to the brand.

Counterfeiters are subversive. Unfortunately, these criminals do not publish statistics on the success of their black markets. However, reputable sources have made educated estimates on the size and scope of the problem.

For example, the 2018 Global Brand Counterfeiting Report estimated that global counterfeiting “has reached $1.2 trillion.” That’s about 1.2% of everything sold worldwide (including services, like doctor visits). It doesn’t seem that bad, until one starts to focus on products alone. According to the 36-member country Organization for Economic Co-operation and Development (OECD), in 2016 about 2.5% of global imports were counterfeits.

Imran F. Vakil

In the United States and European Union, roughly 5% of imports are believed to be fakes. The U.S. Customs and Border Patrol, by some estimates, only captures 1% of all fakes imported (e.g., 34,143 seizures of goods valued at approximately $1.2 billion in 2017).

If counterfeiting is left unmitigated, there is as much as a 1 in 20 chance of a consumer purchasing counterfeited electronics, cosmetics, apparel, medicine, or food and beverages. Fortunately, brand owners do have options to stop this intellectual property theft.

Cut Off the Head

Counterfeiting carries significant civil and criminal penalties. But how does a company go about catching counterfeiters and making them go away? In our experience, there are two major approaches to curtailing the chain of counterfeit distribution. The process is akin to killing a snake. One can either lop-off the metaphorical snake’s head, leading to a quick death. Or one can chop off parts of its body, leaving the head to wither without economic nourishment. There are benefits and drawbacks to both approaches.

To cut off the head, one must identify the manufacturer — most likely located in an Asian or eastern European country — and shut them down.  Manufacturers are often skilled at hiding in plain sight. Occasionally they are protected for jurisdictional or political reasons, sometimes with an organized crime component. Because of that, suppliers must be very carefully approached. Shutting down a manufacturer has the most immediate positive impact in the chain of distribution. Unfortunately, in time, alternate suppliers typically spring up in their place.

Rosemary Coates

Alternatively, cutting the body or tail involves shutting down downstream retailers and distributors, one entity at a time. That requires significantly more time and effort, but it has the best chance of long-term success.

Hub and Spoke

Finding the actual source of counterfeit products is not straightforward. A source will try to mask its involvement by using intermediary companies, such as trading companies, manufacturers’ representatives, and importers. Those entities, in turn, will distribute to other downstream entities, such as wholesalers and distributors. While sales channels are obscured, there are still investigative ways to determine sources.

For example, information on importers into the United States becomes public record and must include manufacturing factory numbers. Once a source is identified, a similar analysis can be performed to figure out to whom that source is selling. If one can find a single spoke in the hub of distribution, it’s often possible to find the other spokes and, potentially, the hub.

Finding and fighting counterfeiters is hard work and may require a relentless focus. But protecting brands and trademarks, and ultimately a company’s revenue, is critical to maintaining a brand’s value. The best anti-counterfeiting strategies will employ technology and a team of multi-discipline professionals, usually led by a legal team.  The best counterfeiting avoidance strategy is tight control and management of the global supply chain. Strategies should be carefully planned and executed based on the unique needs of the brand owner.

Imran F. Vakil is an intellectual property lawyer, business litigator, and managing attorney at Nexio PC. Rosemary Coates is an expert witness for legal cases involving global supply chain matters. She is also the president of Blue Silk Consulting, a global supply chain consulting firm.