Strategy and Operations

Catching Counterfeiters & Their Fakes

BagsStarts with Broad Online Awareness

It’s estimated that in 2015, the total value of global trade in counterfeit and pirated goods will be a whopping $1.77 trillion (U.S.). But the most recently consolidated figures we have, are for 2013. Back then, the U.S. seized almost 10,000 shipments of counterfeit apparel and accessories, by far the most of any counterfeited commodity, in terms of volume.

These seizures represented about $116 million worth of such items by manufacturer’s suggested retail price (MSRP). That was up 26.8 percent from the prior year. In that same year, for handbags and wallets, a different classification than apparel and for that year. Most such counterfeits originate in mainland China, which alone accounted for more than half a billion dollars in fake purses seized in 2013.

Moving ahead in time, in one incident which was reported in November 2014, an estimated $1.8 million worth of Hermès bags were seized in the port in Savannah, Ga. We don’t yet have broad statistics for 2014, but given the year-over-year rise in value of goods from 2012 to 2013, we can only assume a continuing trend. By one estimate reported in USA Today, the economic damage caused by counterfeiting is as much as $250 billion a year. In other estimates, it’s as much as $650 billion. There’s hardly an area of retail not seriously affected. U.S. Customs’ 2013 intellectual Property Rights Seizure Statistics reported 24,631 seized shipments of fake products for 2013; of these, 35 percent were the abovementioned counterfeit handbags. Similarly with fake watches, a total estimated MSRP of $502 million was seized, accounting for 29 percent of the total value and 20 percent of the seizures. China and Hong Kong were pinned with 93 percent of the estimated MSRP of all confiscated goods, for a jaw-dropping $1.6 billion in total. This is just on-the-ground seizures, for one year.

And it’s not just financial damage. To examine just one example of how much harm can come from fake products, we only need to look as far as the cosmetic counter. Counterfeit beauty products have become a growing problem, and not just for the brand devaluation and reputational risk that inevitably accompany knock-offs. They can pose a real and serious health threat. Last June, ABC’s David Muir investigated fake MAC brand eyeshadow being sold in a dollar store in Manhattan, and found that it contained five times the acceptable amount of lead and 20 times the amount of copper the human organism can sustain, as well as beryllium, a known carcinogen.

JeansTurning the brand protection focus toward the Internet

As much as retailers know about on-the-ground counterfeit goods, the broader threat is coming from the Internet. The runaway growth of ecommerce has meant that shoppers go online and willingly or unwittingly buy counterfeit goods, simply because they are low cost, and they have unprecedented access to them. Retailers need to understand the online environment and how it affects their brand and trademarks, and be aware that there is recourse for brand infringements, both online and off.

No discussion of the selling of counterfeit products online would be complete without mentioning Alibaba. Although the U.S. Trade Representative dropped the online platform from its “notorious marketplace” list as far back as 2012, well before its 2014 U.S. public offering, complaints continue to mount that Alibaba is an enabler for sellers of fraudulent goods. In September 2014, CNN Money headlined a story, “Alibaba has a major counterfeit problem,” indicating that in the two years that had passed since they were dropped from the watch list, the perception hadn’t shifted.

In an effort to provide a market for high-end brands, Alibaba set up an officially sanctioned brand owner channel called Tmall.com. Alibaba is able to monitor everything on every one of its marketplaces by keyword—hence you don’t see dangerous things like guns and explosives traded, because they monitor for those words and proactively take listings down. There are also cases where they have reached agreement with trade bodies to proactively monitor and enforce anti-counterfeiting standards—for example in 2011, at the urging of the Motion Picture Association of America (MPAA), Alibaba agreed to prevent the sale of copyrighted DVDs—and the action was successful.

But Alibaba’s problems with counterfeits persist. On Friday, May 15, a lawsuit was filed in Manhattan federal court by a group of luxury brands, including Gucci and Yves Saint Laurent, owned by Paris-based Kering—alleging that the Chinese online shopping giant had knowingly made it possible for counterfeiters to sell their products throughout the world.

In my opinion, there’s much work Alibaba still has to do to overcome both the actual problem as well as the reputation it has earned for enabling counterfeiters. It seems to be that Alibaba has the ability to quickly take down counterfeiters, but cases where they do it proactively, as for MPAA, are rare. Generally, the onus is on the brand owner to identify IP infringements on Alibaba’s marketplaces and request delisting. The challenge for brands trying to protect themselves is the scale of Alibaba’s—or for that matter, Amazon’s—operation, when the onus is on them to identify counterfeits and make individual requests for delisting.

SunglassesIn that regard, there are several ways companies can be proactive about protecting their brand name and image. One major clothing brand, faced with online counterfeiting threatening its global growth, has made it its business to find, prioritize and take action against the distribution of counterfeit goods online. The numbers were such that they had to stand up and take notice. The risk of doing nothing meant a slowdown in their exponential growth, and a loss of revenue to the cyber criminals selling knock-offs of their products. This global apparel company now takes the threat of intellectual property infringement so seriously that the statistics driven by their online brand protection program are reported monthly to its board. These figures form an integral part of their business risk analysis.

Across companies at large, there’s a fair amount of denial going on about the ubiquity of the problem: Our recent research shows that, while 93 percent of executives indicated that protecting their online assets will be as or more important in the next year, ironically 60 percent of those same executives told us that they have no system in place to protect their intellectual property online.

Then there’s social media…and mobile.

Some brand owners have commented that social media platforms are the world’s biggest free advertising networks. Counterfeiters advertise their products online, of course—and especially through social media. Once a Facebook user has “liked” a product, the door opens for fraudsters to post ads for very similar-looking products, usually priced 20–25 percent lower than retail; these will often come up looking like an actual post by one of the target’s friends. The reality of all that free advertising for illegitimate goods, services and uses of their brand should be enough of a wake up call for retailers to gain an understanding of this mushrooming landscape.

As if “normal” ecommerce hasn’t shaken things up enough, retailers now have an even shakier platform through which to reach customers and simultaneously try to protect their brands—one that also is in no danger of disappearing anytime soon. By January 2014, mobile devices accounted for 55 percent of Internet usage in the United States, and apps made up 47 percent of Internet traffic, reports Comscore.

Counterfeiters advertise their products online, of course—and especially through social media.

Many different brand infringements have been tagged on numerous mobile app sites. For example, the inclusion of brand imagery or trademarks that make it appear that the brand is endorsing unauthorized apps; apps that impersonate brands in order to offer counterfeit goods to consumers or businesses; and even apps that offer software to hack into third-party security systems—going after personal data such as bank or credit card details. And because the majority of apps are accessed on smartphones, it’s much easier to miss badly replicated trademark details because the screens are so tiny.

Infringers also exploit mobile app stores as an ideal shop front; again, users are less likely to question the legitimacy of an app than a phony website they accessed on their home computer. Though civilian anti-fraud reporting apps like uFaker have begun to spring up, mobile apps overall are considered to have lightweight protection in place compared with online websites—presenting a further challenge to the consumer as well as to the brand owner.

So what can a retailer or brand owner do?

There’s actually quite a lot that retailers can do, and the proof is in the fact that many thousands of brand and trademark infringements are removed from these platforms every day, and hundreds of cyber criminals are brought to justice. The global clothing brand we’ve been talking about has had tremendous success removing online threats to its brand’s integrity, by eliminating fake websites selling counterfeit products, and counteracting many of the other infringements we’ve discussed here.

How do you get there? Smart retailers begin by putting a strategic plan in place, starting with surveying the activity on their social media platforms and mobile app stores. Basically, this is an audit, and it should focus on the key issues that are most likely to affect their individual brands and trademarks. For example, a luxury goods brand like Burberry might focus on activity that promotes the distribution of counterfeit goods.

Next, a retailer needs to prioritize—ranking the most important brands, and possible infringements and other attacks on them, will enable strategic decisions based on activity seen in real time. This process also guides your organization toward the enforcement that really matters. Is taking down fake websites most important? Finding who’s making knock-offs of your high-end line, and putting them behind bars? Or simply protecting your brand from insult, or further injury?

Once a brand owner has figured out what they most need to do, they can get down to business taking the fraudulent websites down. At this point, it’s still the retailer’s responsibility to detect and prioritize action against individual instances of brand infringement, but even here, a number of remedial actions are available to remove or disrupt fraudulent material squatting on social media platforms. Though they’re not that glamorous, these actions include requesting suspension of the account, or the fraudulent content, using the platform’s own reporting mechanism. Search engines like Google have mechanisms that can remove links, thus disrupting traffic to the fraudulent content. Then there’s always contacting the fraudster directly to ask them to take down the illegal content. There’s always the “incentive” to offer that, as a felony, serious acts of cyber crime are punishable by up to 20 years in prison and fines of hundreds of thousands of dollars. So at the outset, the brand owner can use these tactics in combination for an effective outcome.

It’s important to note that, in the wild west of Internet regulation, the development of rights holder programs within social media platforms and mobile apps stores is still patchy. The main platforms, much like online marketplaces, now have effective measures in place and are responsive to requests that follow their stated procedures. Emerging markets and unregulated app sources most often don’t have these programs in place, and therefore present more of a challenge.

Taking a cue from the power that consumers are gaining, experience shows that lobbying by brand owners and their representatives can have a positive effect on the policies of individual sites.

What’s to gain through all of this effort? The potential return on investment from an online brand protection strategy can actually be monetized. With fewer opportunities for consumers to buy counterfeit goods, retailers will see an increase in the quality and quantity of their online traffic to legitimate sites—and improved margins along with it.

Smart retailers begin by putting a strategic plan in place, starting with surveying the activity on their social media platforms and mobile app stores.

Over time, a reduced number of brand infringements will set up a longer-term cycle of keeping fraudsters at bay. Finally, there’s the satisfaction of knowing that you’ve been on the “good guy” side of successful enforcement actions that can actually put cybercriminals behind bars.

While intuition already tells us this, academic research further confirms that counterfeiting distorts brand loyalty and destroys brand equity, resulting in revenue loss. It encourages the growth of underground economies, and impacts hundreds of thousands of jobs. And as we’ve discussed, consumer health and security are also under threat. Brand owners must take action, or risk a serious decline in the value that they have worked to legitimately build.

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