Earlier this month it was reported that an €18 million ($22 million) counterfeiting ring had been smashed by French police and Hermès, the luxury goods brand whose products were being faked by the gang. According to Women’s Wear Daily, two Hermès employees were dismissed in connection with the investigation, with a number of other current employees also suspected of involvement. As previously reported in WTR, Hermès has suffered from counterfeiting at the hands of former employees before, but it is far from alone. Such ‘insider counterfeiting’ is a problem for many brands – but there are some positive learnings to be taken from Hermès’ response.

While the case grabbed headlines, it is not that unusual to find current and former employees - or other business partners such as distributors and contract manufacturers - playing a key role in counterfeiting, according to Geoffrey Potter, a partner at Patterson Belknap Webb & Tyler who specialises in anti-counterfeiting, including cases of employee malfeasance:  “From my experience, they do it because they are dishonest and they know the business well, so counterfeiting is easier for them than other potential crimes. One would readily expect a dishonest bank employee to steal from his bank rather than stealing automobiles, for instance. Thieves tend to stick to what they know.”

When insider counterfeiting becomes public knowledge, it can negatively impact consumer perception of the brand. While the potential for such fallout varies depending on brand and product category, luxury brands are dependent on the customer’s perception of prestige and exclusivity, and those values are at risk of erosion when news breaks that low-cost – but almost identical – fake versions of the product have flooded the market. Therefore, trademark owners need to handle the issue appropriately to maintain consumers’ trust and confidence in the brand. A proactive and aggressive anti-counterfeiting strategy will send out a clear message to anyone – externally or internally – who is thinking of copying the brand’s products.

In this respect, Hermès has shown how this can be achieved – its statement “welcoming” the national gendarmerie’s dismantling of the criminal network, and reiteration of its “relentless commitment to fighting counterfeiting” gaining widespread coverage.

While implementing such a strategy is crucial, brands will be particularly concerned about the prospect of their own employees being involved in counterfeiting, taking advantage of their employer’s trust by stealing company knowhow and using it to create highly convincing replicas.

Potentially, that raises the risk that consumers – and, in some cases, the brand owners themselves – might not be able to distinguish between the genuine product and the ‘in-house’ fake. Therefore, says Potter, trademark owners should try to integrate a variety of features into their products that enable authentication.  “These authentication features should have multiple levels of security,” he suggests. “One level can be shared with business partners and employees, while a higher level is disclosed only on a strict need-to-know basis.”

Hermès’ investigations into certain members of its own workforce appear to be ongoing, so we do not know the full extent of the problem or details of the individuals suspected to be involved. However, the operation was mounted after the company observed “clues and abnormal behaviour identified through [its] internal monitoring systems”, highlighting the need for brands to keep a close eye on internal indicators.

While some employees may turn to counterfeiting during their time working for a brand, is there the potential for individuals to join companies solely for the purpose of stealing knowhow to manufacture fakes? Potter thinks it unlikely:  “Simply put, it’s too much work. Nowadays, anyone with relatively little capital, ingenuity or ambition can have virtually anything counterfeited. The difficult part of the counterfeiting scheme is distribution. The actual manufacturing side is the easiest part to outsource.”

That will come as some relief for trademark owners but it remains important for counsel to link up with their company’s human resources function to vet potential employees as diligently as possible. Furthermore, all employees need to be educated on the issue and the brand’s attitudes to counterfeiting and relevant policies should be made clear to those both outside and inside the organisation. Importantly, where such illicit activity is found, the right response – as demonstrated by Hermès – will ensure that the brand receives recognition for its efforts and will send a strong message to potential infringers.