A new strategy for protecting luxury and fashion brands in the digital space
This is an Insight article, written by a selected partner as part of WTR's co-published content. Read more on Insight
Fuelled by the increasing advances of the Internet for online sales and advertising, as well as by social media, brand cachet and corresponding demand for products have allowed companies to expand rapidly into new territories worldwide. Unfortunately, new growth opportunities for brands have given rise to new opportunities for counterfeiters which try to profit from the value of brands and owners’ efforts to build brand equity.
Technology, like fashion, is always changing. For fashion and luxury brands, this means that traditional geographic boundaries for marketing, distribution and sales have been rendered largely meaningless. Fuelled by the increasing advances of the Internet for online sales and advertising, as well as by social media, brand cachet and corresponding demand for products have allowed companies to expand rapidly into new territories worldwide. Unfortunately, new growth opportunities for brands have given rise to new opportunities for counterfeiters which try to profit from the value of brands and owners’ efforts to build brand equity.
While redress is available against unauthorised sellers in the United States and Europe (as well as in other trademark-friendly jurisdictions), enforcement in many countries is fraught with pitfalls and obstacles. Enforcement is particularly problematic in countries where a brand has attained high visibility and consumer demand well ahead of advances in IP laws.
As the digital space has opened the door to a truly global economy, tech-savvy counterfeiters continue to flourish. They often operate in countries that provide the technological infrastructure to sustain an e-commerce business, but have little to no legal structure for protecting IP rights. Despite concerted and ongoing efforts by fashion and luxury brands, counterfeiting continues to increase. Although the problem can never be completely eradicated, the trick is to create major disincentives to website operators, thereby reducing visibility and sales volume.
Existing enforcement methods are limited because they ultimately do not seek to hold individual sellers directly responsible. Instead, the focus is on removing the offending online offers or websites. Because there is little to no risk associated with their bad behaviour, perpetrators simply create new sites and continue to operate. A new strategy is required − one that holds the sellers personally accountable.
We live in a digital world. Normal distribution channels have evolved from brick-and-mortar stores to online shops to social media and special apps for personal mobile devices. Thousands of miles now separate vendors and consumers, and business is conducted through electronic transmissions with no direct personal interaction.
Nowhere is this paradigm shift as evident as in China, where 600 million people now use the Internet. By 2022, 75% of urban consumers are expected to be in the middle class, which will drive up demand for luxury goods. Internet behemoth Alibaba, along with Tmall and Taobao (Alibaba’s answer to eBay), commands 80% of the e-commerce market. On November 11 2013 Taobao alone sold a record-breaking Rmb35 billion ($5.77 billion) worth of merchandise in a single day. With this swiftly increasing demand for designer, luxury and consumer goods, the reciprocal online sale of counterfeits has become so rampant that websites offering counterfeit products are estimated to receive tens of millions of visits per year and to generate over $135 billion in annual online sales. In an effort simultaneously to seize the opportunity presented by this burgeoning market and to try to stem the tide of counterfeits, major US and European brands are opening dedicated online shops on Tmall. Despite this, brands remain confronted by the scourge of counterfeits sales on Alibaba’s other website, Taobao, as well as through social media platform WeChat (boasting 400 million active users) in conjunction with JD.com – the second largest e-commerce site.
Well-known brands are faced with thousands of websites offering bogus products on a daily basis. While many counterfeits are still of the low quality traditionally found everywhere from the streets of New York and Los Angeles to China, of particular concern is the rise of high-quality fakes, including those that are so well made that they can be passed off as authentic. Brand owners themselves are finding it increasingly difficult to differentiate between these bogus goods and authentic ones.
Ineffective enforcement methods
Current methods for worldwide brand enforcement in the digital arena include auction site takedowns and Uniform Domain Name Dispute Resolution Policy (UDRP) proceedings. Further relief can be obtained through litigation that targets numerous URLs in a single lawsuit. However, while each method has its benefits, there are also inherent limitations.
The most common enforcement tools are:
- takedown (ie, removal of offending sales from online auction platforms); and
- the use of UDRP proceedings to disable websites using trademarks in the domain name.
Brands have issued takedown notices to owners of auction sites to achieve the former and have filed UDRP proceedings with the World Intellectual Property Organisation and other organisations to achieve the latter. While these efforts remain useful in policing the market and reducing the visibility of online infringements generally, they are also subject to inherent limitations. Individuals can simply create new seller identities for the auction sites or start new websites using different domain names, servers and email addresses.
Another enforcement mechanism used by brand owners against rogue website operators is mass URL litigation, which allows brands to include hundreds of defendants/websites in a single lawsuit. As widely reported, various well-known brands have availed of this type of federal lawsuit in the United States in order to obtain a broad scope of remedies, including temporary restraining orders, asset restraints prohibiting third-party payment processors from transferring funds to website owners, and orders disabling URLs and transferring them to plaintiffs. While certainly effective for shutting down sites, disabling URLs and freezing assets (if any) to pay off resulting judgments, this mechanism is limited by jurisdictional constraints (ie, one needs to establish that the defendant is selling counterfeit products into the United States and be able to physically reach the defendant).
Moreover, the success of the above methodologies often largely depends on whether the website or third-party platform is operated and based in a favourable jurisdiction, and whether counterfeit goods are sold into that jurisdiction. Not every auction platform has a policy (or an effective policy) for shutting down offending sellers on its site. Not every website domain name infringes a trademark. Further, not every website ships goods into a favourable jurisdiction for mass URL purposes. Even where such actions are available, it is highly likely that, once removed, the same individuals will continue their illicit activities under different aliases and on different websites.
It is axiomatic that the best way to change unwanted behaviour is to hold the perpetrator personally accountable. In order to do that, the perpetrator must be identified. Yet by their very nature, counterfeiters work to conceal their identities. As most trademark owners are aware, the information provided in registration databases cannot be relied on.
Counterfeiters in many countries enjoy the relative freedom provided by the lack of IP laws and unwillingness of third-party platforms to be proactive. However, one of the most important factors for their success is their ability to exploit the anonymity of the Internet. Counterfeiters go to great lengths to conceal their identities. They register infringing websites with fraudulent, incomplete or hidden information. These actions fly in the face of the regulations and policies of the Internet Corporation for Assigned Names and Numbers (ICANN), the global governing body for regulating domain names. However, while the purpose of ICANN may be to create transparency, counterfeiters are not law-abiding citizens.
Identifying high-value targets
For long as counterfeiters have been plying their illicit trade, trademark owners and counsel have been developing new methodologies to combat the problem. As copycats change to embrace the digital space, enforcement strategies must change as well. Strategies are now being employed to focus on web-based vendors, rather than manufacturers (which are themselves becoming harder to find), in order to stop production. Brands have begun to use forensic tools and analysis, combined with more traditional on-the-ground investigators, in order to counter this subterfuge. Pursuing sellers is necessary in the fight to reduce the volume of fakes being offered on the Internet and to have a serious effect on vendors in counterfeiters’ locations (eg, China) that are very visible and cater to consumers around the world.
To the extent that enforcement is taken against individuals, brands mainly focus on removing factories and warehouses. While it is always beneficial to locate and raid a factory or warehouse containing counterfeit goods, this tactic in and of itself does not go far enough. As long as demand remains, another factory will simply take its place. In addition, counterfeiters have become adept at hiding manufacturing facilities and storing smaller quantities of goods. The manufacturing process is often broken down into smaller tasks or sections performed in different locations or even in different cities or countries. The assembly process is purposely structured to have counterfeit tags or logos affixed at the final stage, in a location far removed from the main production facility. Labels and tags bearing logos are relatively small and easy to transport and hide, which creates greater difficulty in locating operations and finding goods that actually bear the counterfeit marks. Civil and criminal remedies are largely useless where generic goods are found in an obviously temporary state before having trademarks affixed.
The first prong of a new enforcement programme requires the identification of actual high-value targets. Various trademark research and investigative companies have developed software tools to locate offending websites and gather web traffic analytical data. While effective at highlighting the scope of the problem, the sheer volume of data provided by these companies can be overwhelming. As the problem grows, the information contained in these databases increases exponentially, until there are thousands of listed sites, all of which may appear to be of equal significance to the brand owner. How does one identify the best targets for individual follow-up and pursuit? Given that these counterfeit website reports often rely on vendor-provided information for sales volumes and profits, selecting the worst offenders can be very difficult.
As a result, proprietary forensic technology and strategies have recently been developed to identify those sites that are truly conducting significant business (as compared with relying on self-serving vendor claims) or otherwise worthy of further enforcement efforts. This technology is used to locate, gather and analyse valuable data and, with experience and effort, to refine the results in order to narrow the focus from thousands of sites to a few dozen that require action. Brands can thereby focus on the targets worth pursuing and disregard those that are less significant, despite initial appearances.
Once target sites are identified, the task necessarily shifts to confirming that the goods are counterfeit and verifying the identities of the sellers. For this step, in addition to reviewing available analytical information, brands must retain experienced local investigators. Counterfeiters often refuse to meet prospective purchasers or work through intermediaries. Experienced investigators are skilled in overcoming a counterfeiter’s potential unease. In addition, they understand and are familiar with the local laws and evidentiary requirements needed for civil and criminal enforcement. However, just like brand owners and their counsel, investigators must be adept at changing their methods as warranted by the situation. The focus must be on actual identification of the counterfeiters, not simply the purchase of counterfeit goods.
It is not enough to identify the actual counterfeiter; brand owners must ultimately take action. In this vein, it is vital to retain sophisticated local counsel to assist in analysing evidence, potential defendants and appropriate remedies, whether civil or criminal.
In China, for example, where the overwhelming majority of the world’s counterfeits are manufactured and sold, civil litigation can be very effective. Given that litigation in China is relatively inexpensive, brands can pursue targets while managing costs. Successful litigation is also beneficial insofar as outcomes can be published in order to educate both the general public and the counterfeiting community about the brand’s commitment to enforcement.
If the target is significant enough and the evidence is presented appropriately, law enforcement agencies (eg, the China Public Security Bureau) may be willing to pursue a criminal case. Law enforcement involvement requires a sound evidentiary predicate and coordination among brand owners, experienced counsel and investigators to ensure the desired results. Of course, a successful criminal action presents the ultimate deterrent and even greater publicity to spread the brand’s enforcement message to other and would-be counterfeiters.
Although anti-counterfeiting efforts are largely focused on China, the tactics are universal. As new strategies with which local authorities may be unfamiliar are implemented, brands need to work with experienced counsel to devise the basis for both law enforcement and courts to act. Success ultimately lies in their willingness and ability to act to protect trademark owners.
McCarter & English LLP
245 Park Ave, 27th Flr
New York, NY 10167
Tel +1 212 609 6800
Fax +1 212 609 6921
Stephanie J Cohen
Stephanie Cohen is an experienced trial attorney with over 18 years’ litigation experience. Her global practice consists of counselling clients – from small start-ups to multinational corporations – in connection with the creation, development and protection of their intellectual property. She represents industries including apparel, footwear, accessory, finance and biotechnology. Ms Cohen prosecutes and defends trademark, trade dress, unfair competition, trade secret and copyright litigation, and advocates on her clients’ behalf in numerous state and federal courts as well as in International Chamber of Commerce arbitration proceedings throughout the United States and abroad. A significant part of her practice concerns anti-counterfeiting. Through relationships with law enforcement officials, investigators and counsel, Ms Cohen helps her clients to strategise best methods for brand protection.
James H Donoian
James Donoian has counselled clients for over 23 years on global IP and brand management issues, including enforcement and litigation throughout the United States; expedited equitable relief through trial; worldwide branding and IP strategies; trademarks, trade dress and copyright; advertising; licensing and distribution agreements; and management of international trademark portfolios. He has handled cases involving luxury and fashion, sports/entertainment, nutritional products, and toys and consumer goods. Mr Donoian is also responsible for global anti-counterfeiting programmes, successfully implementing strategies combining various IP claims and equitable remedies to obtain seizure orders, asset restraints and other novel forms of equitable relief against domestic and foreign companies, often concurrent with criminal actions in the United States and/or civil or criminal actions in foreign jurisdictions.
Harley I Lewin
Harley Lewin has 40 years’ experience protecting clients’ trademarks, designs, ideas and businesses. He develops global brand protection strategies – including groundbreaking efforts to track and stop the flow of fake or infringing goods around the world – working directly with governments, law enforcement agencies, courts and Customs in over 75 countries. Mr Lewin helps to implement global licensing programmes and has pioneered comprehensive documentation programmes which take account of manufacturing, supply, distribution, import, export, marketing and advertising, as well as the selection, application and registration of trademarks. He has conducted cutting-edge litigation, acting for plaintiffs where the use of a colour mark on luxury shoes was at issue (Louboutin v YSL).