Is Brazil poised to seize China’s counterfeit crown?

As the Chinese economy grows and the country comes under increasing international pressure to boost IP protection, Brazil looks set to overtake it as the world capital of counterfeits. Rights holders need to act now to protect their brands

The next few decades are likely to see a big change in the fields of counterfeiting and piracy. Although China is still the number one producer of counterfeit goods in the world, the predictions are that other countries will soon catch up. At the same time as coordinated global actions have resulted in counterfeiters in China suffering big losses, there has been a surge in counterfeiting in other countries – including Brazil.

Over the last 10 years, there has been a significant rise in the number of factories in Brazil that are capable of the large-scale manufacture of counterfeit goods. In certain sectors, Brazilian factories are already exporting counterfeit products to the Americas and other countries across the world.

This situation is being exacerbated by various social, political and economic crises. Local companies that were previously surfing the wave of Brazilian economic acceleration are now experiencing hard times, with many facing closure.

Surviving factories, which have good manufacturing facilities and know-how about the legitimate products they manufacture, are having to find new ways to keep afloat, even if this means breaking the law.

Over the past five years there has been a boom in the illegal manufacture of well-known branded products, especially clothing, luxury goods, accessories, shoes, school supplies, auto parts, beverages and pharmaceuticals.

Whole new concentrations of illegal manufacturing have emerged, while established centres have become major hubs for the manufacture and distribution of illegal goods.

Over the past five years there has been a boom in local counterfeiting and Brazilian factories are now exporting counterfeit products for the Americas and other countries across the globe

Picture: donvictorio/shutterstock

Affected industries

Luxury goods

There are many different areas throughout Brazil dedicated to producing counterfeit luxury goods, but the interior of Sao Paulo – notably Franca and the surrounding cities – stands out due to the high concentration of factories producing counterfeits, as opposed to those engaged in legal activities.

The area was targeted over 20 times by a well-known Brazilian producer of handbags and shoes over the course of 2011 and 2012. Astoundingly, levels of counterfeiting involving this particular brand fell from 75% to under 15% within this two-year period.

Rights holders should be reminded that concentrated action can have an appreciable effect on counterfeiting levels. While Brazilian counterfeiters are tireless and persistent, they are also likely to follow the path of least resistance and focus on brands which are not so committed to detecting and taking action against illegal factories.

Immediately after the conclusion of this particular anti-counterfeiting campaign, a well-known French producer of luxury goods began to see an exponential increase in the number of counterfeit handbags bearing its trademarks. Years later, the number of counterfeit products bearing this brand is still rising.

Counterfeiting activity in the interior of Sao Paulo has been the focus of attention by luxury goods manufacturers, with local infringers targeting other brands if they notice particular IP owners clamping down

Picture: Maciej Bledowski/shutterstock

Headwear

Apucarana is located in the interior of Parana State and is known as the ‘cap capital’ of Brazil. Of an estimated 500 factories actively operating in the city, 95% are involved in the production of counterfeit caps.

Various enforcement actions have been carried out over the past two years by the world’s largest manufacturer of caps, including a series of raids in August 2015. These targeted over 22 illegal factories and resulted in the seizure of over 3 million counterfeit caps as well as raw material used in the production process. Among the challenges that the rights holder faced in protecting its brand was the involvement of organised criminals, local millionaires and state police officers (including the head of the local state police department). The counterfeiters also had strong ties with three other Brazilian states.

However, despite these difficulties, enforcement efforts are already paying off – levels of piracy have now fallen to around 15%. Migration to other brands is also apparent, as counterfeiters choose softer targets.

While police raids are technically an administrative act, as part of an investigation aimed at confirming a crime, it becomes appropriate to define it as a criminal procedure

Picture: lazyllama/Shutterstock.com

Footwear

Those looking to buy cheap or fake footwear head to Nova Serrana, in the interior of Minas Gerais State.

While other regions in Brazil also produce counterfeit footwear – including Franca in Sao Paulo, which focuses on leather shoes – for several years factories in Nova Serrana have taken the lead in the illegal production of counterfeit trainers.

This business is far from amateur. The latest set of raids identified several multi-state illegal organisations, indicating the presence of strong distribution networks, since the resulting counterfeits are sold throughout Brazil.

In a city where 80% of the factories are involved in illegal activities at some level, specific strategies are needed to enforce IP rights. Informants can destroy an entire investigation by leaking intelligence to the counterfeiters as soon as a complaint is addressed to the city enforcement authorities.

Clothing

The southern region of Brazil – mainly Rio Grande do Sul and Santa Catarina States – are hotspots for the manufacture of counterfeit clothing.

Even though they are located a long way from the most important Brazilian cities, these two regions have the capacity to produce millions of high-quality illegal products, which can then be distributed throughout Brazil and sold at fiercely competitive prices.

Strong police authorities and dedicated public prosecutors mean that IP laws are enforced effectively. However, raids are directly affected by innovative – although not necessarily welcome – incentives which include reduced penalties, curtailed prison sentences and the suspension of criminal procedures.

Car and motorcycle parts

Several states in Southeast and Central Brazil are dedicated to producing replacement parts for the car and motorcycle industries.

Not only trademarks but also industrial designs are reproduced or copied through this type of counterfeiting. Some of these unauthorised parts are extremely well made and are not only distributed on the Brazilian market, but also exported throughout South America and other foreign countries.

Consumer products

A vast category of products – from stationery to backpacks, key rings, costumes and party items – are being counterfeited on a large scale while the rights holders try to sell their legitimate products through legal licensing agreements with local companies.

Since the 1990s, the entertainment industry has been seriously affected by consumer product counterfeiting. The anti-counterfeiting and piracy programmes put in place by the entertainment industry are still the largest in Brazil and have resulted in the seizure of tonnes of counterfeit and pirated products.

Pharmaceuticals

Despite the severe penalties – including up to 15 years’ imprisonment – which apply to the counterfeiting of pharmaceuticals in Brazil, it continues unabated.

Factories which specialise in counterfeit pharmaceuticals are mostly located in the backyards or cellars of family houses, using rudimentary methods to produce illegal pharmaceutical products. In most cases, active ingredients are imported from Paraguay, China and India, and pharmaceuticals are then finished in Brazil for local distribution.

Cosmetics and sanitary products

Cosmetics and sanitary products are subject to the same harsh penalties that apply to pharmaceuticals. Despite this, a steady flow of counterfeits is being produced in these categories.

The modus operandi is practically the same as that for counterfeit pharmaceuticals (ie, small scale, often taking place illicitly in family houses and often using simple methods).

Beverages

Northeast Brazil has the highest incidence of illegally produced alcoholic beverages, notably whisky and vodka. The high concentration in this region is due to the fact that the northeast is also the largest consumer market for such drinks.

The factories refill discarded original bottles with unknown liquids and sell them as genuine branded drinks.

Again, this activity is considered a serious crime in Brazil and is subject to up to 15 years’ imprisonment. Even so, there is no indication that counterfeiting in this area is losing momentum.

Raw materials

The Brazilian real has depreciated by over 60% over the last two years, prompting counterfeiters to try to source raw material from local companies. As a result, some recent raids have focused on identifying and taking action against factories which produce the raw materials which are then used to manufacture counterfeits.

Many producers of raw materials are already closely linked to manufacturers of counterfeit goods, exposing them to charges of criminal association.

Software

Entire malls in Brazil are devoted to software piracy, with hundreds of different stores selling both hardware and illegal software. New permutations of the crime (eg, cloud storage, links and other remote applications) will present further challenges for rights holders to identify and tackle.

Music

Although music piracy has declined as a result of the general slump in CD sales, recent efforts in Sao Paulo on behalf of a gospel music producer identified several factories which are still burning millions of CDs illegally.

Locating potential targets

The most important thing that rights holders can do to protect their rights is to invest in intelligence, especially investigations which can gather information about potentially infringing factories. As the counterfeiting landscape continues to evolve, many offenders will no longer be in the public eye or under scrutiny by the authorities, but instead will be cloistered in their factories and illegal laboratories.

Therefore, it is more important than ever to engage in intelligence work so that offenders can be identified and located, and the appropriate legal penalties applied.

On-site intelligence and investigation

The use of investigators is necessary to make trap purchases and identify where counterfeits are being manufactured and distributed.

Identifying potential targets is the number one priority for rights holders where they are formulating an effective anti-counterfeiting plan. However, complex cases such as those detailed above demand more than simple trap purchases to be successfully concluded. Total immersion is necessary, with the investigator living in the targeted area in order to identify the individuals involved, obtain addresses and learn about the infringers’ logistical operations.

Some Brazilian law firms have their own in-house investigation teams. The benefit of this arrangement is that the investigators are supervised by lawyers who are regulated by the Brazilian Bar and who have ethical and fiduciary obligations to their clients.

As information on importers and exporters, as well as possible manufacturers and distributors of counterfeit products, is not readily available, preliminary raids are often necessary to shake up the market and uncover valuable information about factories and distributors.

While this might seem daunting, the mere presence of an enforcement team in the marketplace is often sufficient to identify leads on manufacturers, warehouses, distributors and importers.

In addition, evidence from market surveys can be used to plan seizures, allowing rights holders to launch a targeted, effective response against infringers.

Online intelligence and investigation

As well as on-site investigations, rights holders should investigate potential targets and organised criminals online. In order for such research to be worthwhile, investigators need to know what they are looking for and be able to filter the information so as not to miss any crucial details

One of the main goals of internet intelligence is to identify where IP rights are being infringed online, so that takedown notices can then be issued.

A thorough online investigation can also feed into an on-site case by physically identifying targets which can subsequently be tackled through regular enforcement initiatives.

Criminal prosecution

Criminal remedies are much less time consuming and less expensive than civil injunctions and civil actions.

Depending on the IP right involved, criminal proceedings can be used as the basis for most anti-counterfeiting and anti-piracy campaigns.

Police raids

During police raids, search and seizure procedures are conducted as part of a police inquiry. Thus, technically, a raid is an administrative act conducted by the police.

However, as it forms part of an investigation procedure and aims to confirm that a crime has taken place, a raid can more appropriately be defined as a criminal procedure.

For the purpose of investigating IP crimes, the main goals of a police inquiry are to seize any counterfeit products (including all instruments or equipment relating to the criminal activity), identify the individuals responsible for the crime and conduct a forensic examination of samples in order to confirm the existence of criminal activity.

The inquiry can be concluded after all evidence has been collected. The entire procedure is thus very fast and is the best option for handling most counterfeiting programmes, as well as isolated actions.

Criminal injunctions

A variation of search and seizure, criminal injunctions are issued by a judge. In principle, only material that is strictly necessary to prove that a crime is taking place can be seized. However, the Industrial Property Law allows the rights holder to request the seizure of all counterfeit products (including all instruments or equipment relating to the criminal activity).

A criminal injunction has the same goals as a police inquiry (ie, to identify the individuals responsible for the crime and produce forensic expert evidence to confirm the criminal activity).

Unlike a police inquiry, in which raids can be conducted against many different targets under a single complaint, criminal injunctions are limited to one or two targets.

The role of forensic experts in such cases is crucial, as they are appointed by the judge; in police inquiries, experts are generally from the State Forensic Institute.

Public prosecutor complaints

Rights holders can address complaints to the public prosecutor, especially if the police authority is unreliable or corrupt.

In addition, state public prosecutors have special units dedicated to tackling crime, which can be a useful option in particularly complex and sensitive cases.

Civil litigation

Civil litigation is the only legal remedy available in Brazil under which rights holders can seek damages for counterfeiting.

Civil judges will grant restraining orders where the rights holder is likely to prevail on the merits and can demonstrate a risk of irreparable harm. Ex parte injunctions are also available and are commonly applied. The courts often award actual and statutory damages.

Rights holders can petition for damages to cover:

  • profits lost as a direct result of the counterfeiting;
  • profits accrued by the counterfeiter; or
  • the amount that the counterfeiter should have paid for a licence. 
Jose Henrique Vasi Werner is a partner at Dannemann Siemsen Advogados  
[email protected]

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