Counterfeit luxury goods
This is an Insight article, written by a selected partner as part of WTR's co-published content. Read more on Insight
Imitation is the sincerest form of flattery
Oscar Wilde once said that “imitation is the sincerest form of flattery that mediocrity can pay to greatness,” but in the IP world, imitation is a matter of scale.
Counterfeiting is not new – IP rights were created to protect our creations. While in the past, unauthorised copying may have been a type of compliment for handmade goods produced in small numbers, technological advances and mass production have made such copying harmful to creators. It is no surprise that the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works were both signed in the 1880s at the beginning of the second industrial revolution.
As a perverse effect of globalisation and the ever-growing rate of internet penetration, the present volume of production and the ease of procuring counterfeit goods is unprecedented. Although manufacturing plants are rapidly moving away from China to even cheaper places of production such as Bangladesh and Indonesia, it is estimated that between 85% and 95% of all counterfeit goods still come from China. Regrettably, this means that there is a high risk that those new plants will soon start adding their counterfeit goods to this already large market.
According to the Global Brand Counterfeiting Report 2018, the volume of international trade in counterfeit goods reached $1.2 trillion in 2017 and is expected to rise to $1.82 trillion in 2020 – and these staggering numbers are expected to keep on growing.
It is all about appearance
In the past, wealth may have been demonstrated by the number of horses that an individual possessed. Now, carrying a purse branded with a famous logo or wearing a pair of sunglasses with a distinctive shape is enough for an individual to appear wealthy or à la mode. People buying such goods are not gullible, they understand that they purchase inexpensive replicas of luxury products that they otherwise cannot afford.
Yuandan goods – fake, unauthorised replicas of luxury products – do exist, there is evidence of that, but the production costs of a high-tier replica will make its selling price too high to compete with the cheap copies that other manufacturers make. Further, there is always the risk of having the counterfeits seized by Customs. While having a container full of fake Ray-Ban glasses seized and destroyed will not hurt their manufacturer, this is not the case for a high-end replica which requires premium materials and sophisticated machinery to produce. It is legally – but more importantly, economically – safer for such manufacturers to sell their products under their own factory brand or even under a white label rather than as high-end replicas.
The luxury goods seized by law enforcement agencies consist mostly of watches, leather goods and branded sunglasses (see the 2019 study ‘Trends in Trade in Counterfeit and Pirated Goods’ by the Organisation for Economic Co-operation and Development and the EUIPO). The most counterfeited luxury brands are Chanel, Louis Vuitton, Prada, Fendi, Gucci and Dior (according to the Global Brand Counterfeiting Report 2018). They are mostly very cheap to produce and infringe on well-known brands, so can therefore be sold in any market on the planet for a quick profit with limited consequences in case of seizure.
Although the Global Brand Protection Report states that losses due to the online sale of counterfeits amounted to $32 billion in 2017, it is difficult to estimate the actual losses for this market. Losses caused by the counterfeiting of luxury goods are different from the losses which affect other products, where each sale to a customer by a counterfeiter is a sale lost for the brand. There is a very high chance that buyers of such products would never have purchased a genuine product. Although that is not to say that counterfeiting does not hurt luxury brands, quite the opposite; its harmful effects are more insidious.
In the luxury industry, originality and scarcity are the main drivers of success. If a luxury good becomes commonplace, it will stop selling, and all the research and development, design, marketing and advertising resources invested in creating something distinctive will be lost.
While sales made by counterfeiters are not direct losses for the infringed brand, they may lead potential customers not to choose genuine products which have lost their lustre and reputation. More than any other market, the luxury market relies on reputation and the feeling of exclusivity that its customers have. The mass selling of counterfeit products enabled by the Internet is a clear danger for luxury brands. The luxury industry is mostly composed of wearable products (eg, sunglasses, clothes, leather goods and perfumes), and the manufacture of such products is highly regulated, even when the goods are not high-end items. Counterfeits do not abide by any safety standards and thus have the potential to put their owners at risk. The risks of using counterfeit sunglasses are high, as they may not provide adequate protection to their wearer. The same goes for perfumes or clothes which have direct contact with the skin and may contain dangerous substances.
The lack of traceability and the long reach of the Internet pose additional risk for luxury brands which may appear liable if the public believe that it is the brands that are selling faulty products.
Long gone is the time where the leading distribution channel of counterfeit luxury goods was a blanket laid on the ground of a tourist village marketplace. Today, manufacturers of counterfeit goods have a direct and constant reach to every potential customer, not just a few tourists. Anyone with internet access can easily find and acquire a counterfeit pair of sunglasses or perfume at any time of the year, at every hour of the day, without leaving home.
Many counterfeiters no longer ship merchandise; they send small parcels directly to the end customer. This phenomenon is so crucial that certain online marketplaces started and grew their businesses mainly by enabling counterfeiters to sell their goods to the public. Fortunately, this is no longer the case, and most marketplaces monitor their merchants’ behaviour. Nonetheless, marketplaces still need to be scrutinised to ensure that they do not fall back on bad habits.
The lack of clear and consistent international regulation is of major significance for the illicit traders who have learned how to play the system by cherry-picking the location of their factories, storage warehouses, shipment services providers, banks and online marketplaces. The main channels through which internet trading takes place are marketplaces, online stores and now, social media networks. Most online marketplaces have an abuse reporting system in place to allow brand owners, at a minimum, to get the counterfeiters’ products removed. The biggest ones (eg, AliExpress, Amazon and eBay) have even taken a proactive stance by setting up monitoring systems that supposedly prevent counterfeits from being listed for sale. However, such systems are not infallible and the burden of protecting a brand cannot be completely shifted to third parties. Brand owners must put into place monitoring measures of their own.
Furthermore, many other marketplaces of varying sizes and resources exist, and should not be ignored or counterfeiters will move their illicit businesses over to them.
Although social media networks are not primarily places for commerce, such platforms are a powerful instrument for marketing products, and they can drive sales to online shops subject to little or no regulation. The most important ones today are YouTube, Facebook, WhatsApp, WeChat, QQ, Qzone, Instagram and TikTok. These platforms have billions of active users and as many potential customers. Studies show that almost one-fifth of the content posted on social media regarding luxury brands is illicit.
Such means of free advertising has an added benefit for counterfeiters. First, they are not dependent on a marketplace and its IP enforcement rules. Second, shop addresses are harder to find for brand owners, as they are either not well ranked or completely unavailable via search engines. Finally, instead of listing one single online shop, counterfeiters can communicate with different web addresses and limit the risk of having all their sales stopped when one site is suspended.
Counterfeiters’ chosen shipping methods are changing. Statistics show that small parcels constitute 63% of all customs seizures, making them more important than large shipments in terms of numbers. In addition to being harder to detect by customs agents, this strategy is also a deterrent to brand owners who regrettably disregard the seizure of small volumes, thereby leaving counterfeiters undisturbed.
Counterfeiters are also very aware of the methods of payment that they can use and, more importantly, how to use them. While cryptocurrencies have made headlines recently, experience shows that counterfeiters typically use more common payment methods such as PayPal or credit cards and, more recently, the payment systems that social media platforms are integrating into their services (eg, WeChat Pay or Instagram Checkout).
Strategies in fighting counterfeit luxury goods
Protection of intellectual property is becoming increasingly important for rights holders. Companies and individuals are more aware of the profits that come from taking proper care of their exclusive rights and are standing side by side with the official authorities and international organisations which aim at IP rights protection.
It is advisable for all entities facing the problems that come with counterfeit and pirated products to act in order to diminish the appearance of such products on the market, whose presence contributes to reducing the luxury brands’ prestige:
- Prepare and introduce an efficient and well-thought through anti-counterfeiting programme that includes strategies for both registration and enforcement of IP rights and for combatting counterfeit and pirated products.
- Properly register and maintain relevant IP rights in all critical locations, especially the registration of IP rights in countries where the manufacturing of counterfeit and pirated products is significant (countries such as China or India have local IP offices – usually official government offices – responsible for the registration of the rights).
- Educate customers and raise awareness of the counterfeit and pirated goods problem and its economic and social consequences; create tools for clients to report suspicious products; and provide benefits to those clients who purchase products within the official chain of distribution.
- Invest in anti-counterfeiting technology and processes that will enable the ability to track the chain of distribution and original products and show where the product was intended to enter the market (eg, parallel import cases). Invest in adequate security means such as tags, labels, markings and serial numbers that will make it impossible to produce identical products.
- Monitor online sales and scrutinise online shops closely – this does not have to be carried out by the company itself, there are many reliable tools for tracking online infringements offered on the market. Several companies offer online platforms that carry out such monitoring and help remove infringing content from auction portals, websites or social media. Investing in anti-counterfeiting technology with proper search engines used by specialised companies ensures comprehensive assistance in the fight against counterfeit and pirated goods.
- Monitor the physical market, take effective actions to discover the production and distribution chains and inform the proper authorities.
- Cooperate closely with the enforcement agencies that specialise in IP crimes, local and international police agencies, customs and border protection offices, and international organisations, as they will prove great allies in the fight against counterfeit products. In some jurisdictions, such agencies and authorities enjoy special legal freedom to act in cases of IP rights infringement (eg, EU Regulation 608/2013 concerning Customs Enforcement of Intellectual Property Rights).
- Investigate each case fully, without ignoring small seizures, as this is how counterfeit products are most often delivered to the countries where they are intended to be sold.
- Start litigation – in many cases, securing a positive judgment in an infringement case will help when acting against other entities that have introduced counterfeit or infringing products into the market. If properly used, this can be a very effective deterrent.
The battle with counterfeiters may seem unfair, but all is not lost – proper planning and execution is required. Counterfeiters make use of continually evolving technology and there is no reason for brand owners not to do the same.