Faking it

The global economic and social impacts of counterfeiting and piracy will reach $1.7 trillion by the year 2015 and will put 2.5 million jobs at risk every year, warns a recent report from the International Chamber of Commerce (ICC).

The ICC report states that the total global economic and social impacts of counterfeit and pirated products are as high as $775 billion every year. This includes lost tax revenue and higher government spending on law enforcement and healthcare.

It also concludes that international trade in fakes currently accounts for more than half of all counterfeiting and piracy, and could reach $960 billion by 2015. Domestic production and consumption of fakes will account for between $370 billion and $570 billion.

More fakes in economic downturn
Brand protection consultant Lisa Lovell of Brand Enforcement UK (BEUK) confirms that piracy is on the increase. “Counterfeiting and faking activity increases in an economic downturn because consumers have an eye for a bargain when times are hard,” she told lloyds.com. “But also, product makers (as opposed to the brands themselves) are more likely to place goods into the grey market when times are hard.”

The grey market is where goods are offered for sale in countries that are not authorised by the brand owner. The factory that makes the goods is legitimately handed the patterns, materials and labels to manufacture an item - but sometimes they are used to manufacture unlicensed products.

“We’ve seen cases where a manufacturer orders up a new supply of labels because the others have been ‘lost’ or ‘stolen’, or where the factory makes genuine goods in the day shift and grey market goods on the nightshift,” Lovell says.

Everyday items are a target

Ian Lewis, director of Lloyd’s specialist IP insurer Samian Underwriting Agency, stresses that “knock-offs” are not limited to luxury consumer items such as Rolex watches and Gucci handbags. Everyday items like toothpaste, baby milk, spare parts and electrical goods are all counterfeited.

Where the fakes are of dubious quality underneath the wrapping, there can be danger for consumers and big problems for the genuine manufacturer.

“Take the case of brake pads for a car. It is quite possible that counterfeit parts may be used by unscrupulous or unwitting mechanics,” Lewis says. “The immediate issue for the true owner of the intellectual property rights is a loss of revenue from a lost sale. But should the product prove to be inferior and fail, a potential liability could arise for the company from a product that it did not make.”

Fake goods are everywhere. There have been cases of counterfeit aircraft parts being used in the aviation industry, Lewis says, and instances of fake drugs entering the controlled prescription market - with obvious consequences for patients.

Lisa Lovell’s company, Brand Enforcement UK, helps companies to bring criminal proceedings against traders selling unlicensed and/or fake branded goods. Its clients include Playboy, Oakley, Realtree, Fox Racing and Taj Foods.

BEUK is currently investigating a number of unlicensed ebay traders selling different brands into the UK worth up to £50,000 per month. “Civil litigation is sometimes the only solution available to brand owners, but it is often expensive, she says. “We work with our brand owner clients to bring criminal actions against infringers through the law enforcement agencies.”

Brand owners liable for costs
The financial costs attached to counterfeit goods can go beyond direct lost sales or loss of reputation through shoddy fakes in the market. In the UK, for example, the cost of destruction of seized fake goods is passed on by Customs authorities to brand owners. “It is not unusual to see a £20,000 bill for sending counterfeit goods to landfill,” Lovell says.

Insurance can help take the sting out of brand enforcement, Ian Lewis says, and policies are available to cover the high costs incurred in enforcing brand rights. “Brands are effectively trade marks and either registered or unregistered, they have different burdens of proof required in demonstrating infringement or ‘confusion’ being caused to the end purchaser,” he explains.

An Intellectual Property Rights Insurance policy can cover the often substantial legal and professional fees and expenses incurred in bringing infringement proceedings and defending the often used counterclaim that the rights are invalid or not infringed, Lewis says. 

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