Return on investment – proving that protection pays

Legal departments frequently struggle with the need to justify the cost of their efforts to curtail counterfeiting to the business department, which tends to see such efforts as a cost rather than an investment in the brand. This chapter discusses how to convey those costs as a return on investment (ROI) which helps to maintain brand value. First, we examine the value of trademarks; then we look at the true cost of counterfeiting; and finally we discuss how to measure the success of a brand protection programme to quantify ROI.

The value of trademarks

Trademarks or brands are meant to evoke positive images or emotions in consumers, which in turn drives sales, profits, jobs and ultimately a company’s value. Thus, it follows that trademarking and branding play a significant part in driving the economy. In fact, according to a pioneering study conducted by the Economics and Statistics Administration and the US Patent and Trademark Office, trademark-intensive industries were found to account for 22.6 million jobs in 2010, comprising approximately 16% of all jobs in the United States and over four times the number of jobs in either patent or copyright-intensive industries. A closely related study conducted by the Office for Harmonisation in the Internal Market, intended to provide comparable results for the European Union, determined that trademark-intensive industries accounted for 21% of all jobs in the European Union during the period between 2008 and 2010, again more than any other constellation of industries as determined by their level of investment in various forms of intellectual property. The legal protection of trademarks provides an incentive to develop and maintain a brand’s distinguishing product features, which then communicate information to the public for the benefit of markets. Creating this information and building up the reputation that the trademark conveys will usually require significant investments in product quality, service and promotion. In the absence of legal protection – and given the minimal costs of simply imitating a competitor’s trademark – there would be limited incentives to incur such quality investments.

The true cost of counterfeiting

Today, counterfeit and pirated products can be found in almost every country in the world and in virtually all sectors of the global economy. The International Chamber of Commerce (ICC) estimates that the global trade in counterfeit goods was worth over $650 billion in 2008, or between 5% and 7% of global trade, and will increase to $1.77 trillion by 2015. To put this number in perspective, the counterfeit trade as of 2008 was almost twice the estimated annual profits from the sale of illegal drugs worldwide ($321 billion) (Thematic Debate of the 66th Session of the UN General Assembly on Drugs and Crime, www.un.org/en/ga/president/66/Issues/drugs/drugs-crime.shtml). The expected trade of counterfeit and pirated goods, as of next year, could surpass the total world military expenditure and correspond to 2.5% of the world’s total current economic output (see Stockholm International Peace Research Institute’s Year Book 2013 summary on military expenditure). What is more, the ICC claims that the cost of lost tax revenue and additional welfare spending due to counterfeit goods was $125 billion in developed countries alone, with 2.5 million jobs lost as a result of fake products.

The cost of this rampant counterfeiting comes directly out of the pockets of legitimate brand owners, with the ICC estimating that multinational brand owners lose approximately 10% of their top-line revenue to counterfeiters.

Revenue loss is due in part to actual loss of sales to counterfeiters and/or a fall in sales because of the perceived loss of value or reputation when counterfeit goods become or appear plentiful. Brands lose representation in their distribution channels when retailers see a reduction in demand or a downward pressure on legitimate brand pricing because of counterfeits. With regard to reputation, consumers of lower-quality counterfeit goods will often attribute defects in those goods to the brand (eg, through online reviews of the legitimate goods), directly threatening the market for them.

Another cost of counterfeiting is a direct result of its prevalence online. Half of all counterfeiting occurs on the Internet, with some estimates stating that counterfeiting and piracy account for approximately 25% of internet bandwidth (eg, reflecting the activities of 327 million unique users in the month of January 2013). Internet-based counterfeiters are adept at designing sophisticated websites, e-commerce platforms and promotional social media profiles that appear to originate from the brand they are infringing. Counterfeiters divert often unknowing consumers to their sites, who then buy goods under the impression that they are genuine. For instance, a study released by MarkMonitor has found that for every shopper searching intentionally for counterfeit goods, 20 are seeking value-priced and sale goods, and one in five of those bargain hunters are intercepted in that process by counterfeiters’ rogue websites. Brand owners are thus robbed of:

• web traffic;
• sales; and
• perceived brand value and reputation, which plummet when counterfeits become or appear to be plentiful.

A brand’s marketing costs rise when illicit sellers bid up paid advertising costs and/or erode legitimate search engine optimisation. Counterfeiting also drives up costs for brand protection and the handling of increased numbers of consumer complaints.

Additionally, lack of quality control over counterfeit goods threatens to harm a brand’s consumers. Counterfeits of products such as semiconductors, aeronautical and automobile parts and pharmaceuticals pose obvious significant risks to consumer health and safety. Even counterfeit consumer electronics products such as headphones and emerging categories of wearable mobile devices might harm consumers if defective.

Measuring success of brand protection

Brand owners measure ROI in order to determine whether brand protection measures are valuable to their enterprises and brands. Individual employees of brand owners, particularly legal personnel, may utilise ROI measurements to validate and internally market their own brand protection initiatives.

By quantifying the value of a brand protection programme, a brand owner can understand what counterfeiting is doing to its bottom line and measure the effect of its anti-counterfeiting and brand protection efforts on stemming losses and pre-emptively neutralising threats to brand value and revenue. Since counterfeiting operates outside the law, estimating the exact level of counterfeiting and the harm it brings is challenging. Nonetheless, metrics tied to the tools or activities in a company’s anti-counterfeiting efforts can help to estimate the activity. To ensure credibility in the use of these metrics over time, it is important to use conservative approaches for reporting results. Bear in mind that the value of measuring your brand protection performance results lies in tracking measures of ROI and showing trends in performance over time.

Anti-counterfeiting efforts can be divided into two categories: recovery from past or current counterfeiting and prevention of future counterfeiting. Recovery from past or current counterfeiting takes place online as well as in the physical world, whereas prevention activities are most often associated with the physical world.

The concept of revenue recovery is based on the presumption that the sale of counterfeit products either replaces legitimate sales or affects legitimate sales through brand erosion. Revenue recovery can be calculated from online and physical-world anti-counterfeiting efforts.

Recovery efforts online involve, in the first instance, requests to proprietors of online businesses – including business-to-business exchanges such as iOffer.com, online marketplaces such as Amazon.com and auction websites such as eBay.com – to deactivate or take down a seller’s listings offering counterfeit goods for sale. By taking down listings, the brand owner prevents that offer from being accepted. Listings on e-commerce websites can be for anything from a single good to hundreds of goods, or open ended (particularly on business-to-business websites). Quantifying the success of these efforts should be tied to the number of unique takedowns of listings, as well as the total units of goods and the market value of those goods listed. While an argument can be made that listings on e-commerce sites do not equate to actual goods because a listing taken down is simply replaced by another for the same goods, the rationale for quantifying the listings is that you have thwarted a unique opportunity to purchase those goods.

Another type of recovery effort in the online world involves criminal or civil actions or administrative proceedings (through the Internet Corporation for Assigned Names and Numbers (ICANN)), resulting in the turning over or takedown of domains for rogue websites, which are clusters of websites commonly owned and operating primarily from China, selling counterfeit and pirated goods to consumers in the United States, Europe and South America. Quantifying success can then be tied to the number of seized domains. However, this is only one way of measuring success. While it is impossible to know the number of goods being offered or sold on any given website, you can often quantify the traffic to the websites or use readily available analytics to determine the number of visits that you deterred based on the total number of rogue websites taken down. For example, it is possible through digital forensic analysis to estimate that a single web of approximately 7,000 websites accounted for over 20 million unique monthly sessions. Disabling these websites through litigation thus leads to significant returns. Often, civil and criminal actions can also result in the seizure of profits received through the sale of counterfeit goods. Damages awards – such as statutory damages, actual damages or infringers’ profits, to the extent recovered by the brand owner – provide another basis on which to measure recovery.

Recovery also occurs in the actual world in the form of customs seizures of actual goods, or seizures or voluntary turnovers of physical goods sold at flea markets, retail stores or from factories. Seizure of actual goods can be quantified by the number of seizures, the number of units as well as the market value of goods seized. If your company pursues civil damages or obtains criminal restitution from counterfeiters, your monetary award can be included in the recovery bucket.

Unlike recovery, which recognises insults to brand integrity after the fact, brand protection preventative measures are derived from estimates of the likelihood of a brand violation if no such actions are taken. Examples of preventative measures include anti-counterfeiting technologies built into products (eg, holograms, serial numbers and signature DNA markers embedded into ink, threads or other materials) and supply chain best practices, such as prescribed treatment of rejected goods, overflow and seconds.

The value of preventative actions is admittedly more difficult to quantify, but remains as valuable. Measuring prevention can be associated with rates of counterfeiting known from aggregate data (eg, customs seizures by market). Alternatively or additionally, you can measure prevention from market surveys (sampling) conducted to determine the size of the problem. You can then extrapolate the size of your company’s problem based on its market share. Another way to determine a baseline is to determine the scope of your problem through market surveys, both online and in the physical world.

In addition to metrics, do not forget the success stories. Measuring the value of brand protection efforts necessitates quantitative and qualitative analysis. Without context, the importance of anti-counterfeiting efforts can be lost. For example, while it is important to quantify that your company seized 30,000 units of goods with a market value of $1.8 million and collected $600,000 in lost profits in a civil action, evidence showing that counterfeiters are avoiding your brand because of that action specifically ties your efforts to deterrence. In our experience, brand owners often find that although the vigorous enforcement of their rights requires an investment, it can result in a qualitative success in reducing counterfeits of their brands in the market more quickly than they expected.

In summary, encouraged by globalised commerce through the Internet, manufacturing in markets at high risk for counterfeiting, the growing profitability of popular brands and the virtual anonymity of the Internet, counterfeiters are experiencing unprecedented success. It is thus incumbent upon brand owners to incorporate brand protection practices into their commercial strategies and to quantify the success of those practices. A successful brand strategy will often bring returns of millions of dollars on an annual basis in terms of recovery, and some multiplier of that number in terms of prevention. Documenting these results in order to gauge the effectiveness of investment in brand protection efforts will galvanise your company with regard to the value of brand protection and align these efforts with the value of your brand.

Davis Wright Tremaine LLP

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New York, NY 10019-6708

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Tel +1 212 489 8230

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Roxanne Elings

Partner

[email protected]

 

Roxanne Elings is a leading trademark and brand management attorney, focusing on protecting brands on a worldwide basis and possessing significant experience in anti-counterfeiting and trademark infringement. She represents clients in the fashion apparel, luxury goods, consumer electronics, beauty and entertainment industries.

Ms Elings is ranked by WTR 1000 – The World’s Leading Trademark Professionals 2012 as one of the top attorneys nationally in trademark prosecution, enforcement/litigation and anti-counterfeiting – the only attorney to receive top rankings in all three categories.

George P Wukoson

Associate

[email protected]

 

George Wukoson focuses his practice on federal trademark, copyright and anti-counterfeiting litigation, trademark prosecution and trademark opposition and cancellation actions. He also counsels clients on issues involving brand management and enforcement, copyrights, domain name disputes, social and digital media and IP licensing. In addition, Mr Wukoson is a commercial litigator with experience representing individuals and corporations in complex commercial and civil litigations, as well as securities cases, government investigations and white collar matters.