05.09.08
Covert and overt technologies—and online monitoring—can help keep your company’s revenues and reputation intact.
By Christine Esposito, Contributing Editor
Just a few years ago, the idea of counterfeit goods conjured up an image of a shifty-eyed character on the seedy side of town with a small table full of “designer” pocketbooks and watches. Today, counterfeit goods range from Abercrombie & Fitch jeans to Viagra and they can be found nearly everywhere from dollar stores to national pharmacy chains to online auction sites.
Statistics on the value of counterfeit goods vary. According to groups such as the Organization for Economic Cooperation and Development (OECD) and the International Anti-counterfeiting Coalition (IACC), counterfeit goods costs U.S. businesses $200 to $250 billion annually. Some experts contend the actual value of counterfeit goods globally could be as high as $650 billion per year.
For some, knockoffs may seem like a harmless and less expensive means to achieve a lifestyle or look they desire. But for consumers and personal care companies alike, the consequences of counterfeit goods are greater than ever.
| Optically Variable Devices (OVDs) like the one below are easily recognized by consumers and difficult to duplicate. (Photo: OpSecs). |
More Than Perfume
For many years, the most commonly targeted beauty products were perfumes and high-end skin care products that provided higher margins for counterfeiters. However, it has become much more common for consumers to encounter fake shampoo and toothpaste—hardly luxury goods by anyone’s standards.
For example, in 2006, nearly 600 bottles of counterfeit Head & Shoulders shampoo, a P&G brand, was confiscated near Chicago. Inside the falsely labelled bottles was contaminated product containing gram-negative bacteria. Last May, counterfeit Colgate toothpaste—which possibly contained the toxic chemical diethylene glycol—made its way into discount stores in four
U.S. states.
While it is difficult to estimate the exact amount of counterfeit beauty and personal care products being sold worldwide, there is evidence that it is on the rise. In 2006, more than 1.6 million counterfeit cosmetics/personal care products were seized at the EU’s external border, an increase of 128%. In 2007, at just one U.S. seaport (Newark, NJ), U.S. Customs and Border Protection (CBP) officers confiscated toiletries, including toothpaste, shampoo and soap, valued at more than $310,000. At that same port, CBP officials also confiscated 20,208 bottles of counterfeit Ralph Lauren perfume.
| Registering trademarks and trade names with U.S. Customs and Border Protection (CBP) is an easy and inexpensive step that can lead to government interdiction at the border. (Photo: James R. Tourtellotte). |
What’s fuelling the influx of counterfeit cosmetics and personal care items? Experts point to the Internet and globalization.
“Counterfeiting is a substantial issue driven by globalization,” says Jeffrey Unger, president, brand protection, with OpSec Security, Inc., a provider of anti-counterfeiting and brand protection management solutions with a client list that includes several leading cosmetic companies. “When a manufacturer outsources everything to global third parties, it is in a way, teaching a third party how to make its products.”
While it is common to think that the infamous third-shift is making those counterfeit products, more often subcontractors are the cause for concern. Companies need to make sure their products don’t end up in the wrong hands when a far-away supplier turns to another vendor.
“You may find that the packaging company you are working with isn’t as reputable as you thought it was,” warns Unger.
The Internet has also changed the counterfeit market considerably. While the worldwide Web has improved distribution efforts, it has also brought increased risk.
“So many companies use the Internet for international distribution, it has also become a means for international distribution of counterfeit products,” says Rick Van Arnam, a partner with legal firm Barnes, Richardson & Colburn in New York City.
Tools and Technologies
So what’s a marketer to do? Unfortunately, “there’s no silver bullet,” according to Unger. He and other protection experts suggest companies employ a multi-faceted strategy that combines overt and covert technologies for authentication and traceability with vigilant online monitoring to thwart counterfeiters and decrease diversion.
Overt technologies, in theory, are those that use consumers as a level of protection. Tamper-evident and specialty labels, color-shifting inks and optical variable devices, such as holograms, are those most easily recognized by consumers.
Holograms—which became synonymous with authenticity when MasterCard and Visa began using them on their credit cards in the early 1980s—provide effective brand protection because they are also difficult to duplicate. According to Ian Lancaster, general secretary of the International Hologram Manufacturers Association, the telltale sign of fake or counterfeit items is often a poorly copied hologram.
But IHMA and others point out that a successful anti-counterfeiting campaign shouldn’t rely solely on a consumer’s ability to recognize a fake hologram, substandard label or flimsy packaging. As savvy as consumers have become, simple misspellings—a common occurrence on counterfeit packaging—often go undetected. For example, the packaging used on the fraudulent Colgate toothpaste stated that it was manufactured in South “AFRLCA.”
More stealthy brand protection mechanisms include specialty inks, taggants and forensic tracers. These covert technologies are embedded into labels and inks or directly into packaging components, providing a means to track diverted products and deter counterfeiters via invisible serial numbers, bar codes and so-called digital license plates that can be uncovered only with special readers or light sources. (Taking it further, forensic markers can also be embedded directly into the product itself, allowing companies to test samples of finished formulations for authenticity.)
Most experts say a combination of overt and covert technologies is the best weapon in the fight against counterfeiters. But companies also need to monitor the Web, which has become a mecca for counterfeits, diversion and piracy.
L’Oréal has taken legal measures to combat what it called an “increasing volume of illicit trade in fake fragrances and fake cosmetic products on some online auction sites.” Last fall, the company filed suit against eBay in France, Germany, Britain, Belgium and Spain for allegedly allowing sales of counterfeit cosmetics and perfume through the online auction giant’s
website.
In many ways, the Web has proved to be a double-edged sword. While it can quickly grow a brand’s cache among aspirational, always-connected consumers, a meteoric rise in popularity (and sales figures) can attract crooks looking to make a quick buck by knocking-off a popular product.
“The Internet makes products’ brand names more transparent to those who are thousands of miles away from where it is being made or sold. This transparency brings more brands to light for counterfeiters who can stake claims to a brand name in countries where a brand owner didn’t think of obtaining that protection first,” notes Van Arnam.
In addition, diverted and counterfeit products can more quickly infiltrate the marketplace, leaving a company’s sales strategy vulnerable.
“You can erode your pricing strategy if you don’t protect your brand. You can erode it almost overnight. There goes your price, there goes your margin, and there goes the brand,” notes Unger of OpSec, which was recently tapped by Peter Thomas Roth and June Jacobs to provide online brand protection. OpSec will reportedly automate the skin and spa care brands’ Internet monitoring activities and identify, track and take action against unauthorized distributors.
International Alliances
Clearly, China has become a focus of attention in the counterfeit struggle. But the issue is more widespread.
“The Chinese have become the poster boy, but it is just as bad, if not worse in other parts of the world too, like Eastern Europe and all parts of Asia,” says Unger.
With counterfeit trade and piracy siphoning millions of dollars in tax revenue, there is increased interest by government in international alliances aimed at curtailing illegal operations.
In October 2007, the U.S. and some key trading partners began negotiations on the Anti-Counterfeiting Trade Agreement (ACTA). The envisioned agreement will include commitments in three areas: strengthening international cooperation, improving enforcement practices and providing a strong legal framework for IPR enforcement.
According to Van Arnam, if enacted, ACTA will be different from other efforts because it is a freestanding agreement with several countries that is not developed within an international governmental organization such as the World Trade Organization (WTO) or World Intellectual Property Organization (WIPO). Participants include Canada, the 27 member states of the European Union, Japan, Korea, Mexico, New Zealand and Switzerland.
“They are trying to plug the perceived gaps in other international trademark and copyright regimes,” adds Van Arnam.
Proactive Protection
The costs of anti-counterfeiting technologies range from pennies per package for specialty inks to thousands of dollars per month for online monitoring. But with risks increasing for CPG companies, especially those manufacturing beauty and personal care items, experts insist every firm needs to be proactive in its brand protection efforts. Otherwise, “you can end up with something akin to identity theft,” says Van Arnam.
There’s another factor that could make run-ins with counterfeit products more common. “As [the economy] gets worse, we will see more people look for brand names and lower prices and take the risk,” says Taylor, suggesting shoppers may purchase branded products from less than reliable sources.
Experts suggest companies need to go the extra mile when it comes to anti-counterfeit efforts. Along with incorporating smart packaging, companies need to be implicit with their contracts and work with government agencies that enforce intellectual property and
monitor the movement of
merchandise.
“Scrutinize new and unknown suppliers, for example by checking if their designs are registered,” suggests Dieter Bakic, president of DieterBakicEnterpises. “Every contract should include clauses that guarantee that a product is the intellectual property of the seller, combined with penalties for breach of contract. It is also very important to include all parties involved in a contract, which includes possible sales agents and subcontractors.“
Van Arnam echoes the need for setting specific guidelines for suppliers. “In contracts with vendors, build in some strong language that would deter a vendor from making extra runs and selling them outside your channel of distribution,” he says. “This can help reign in where your products are being moved.”
In addition, Van Arnam suggests that smaller firms and start-ups go beyond the U.S. Patent and Trademark Office for brand protection. “If you are going to market a brand, and you are going to get your trademarks filed at USPTO, think about Customs for border protection. “It’s not an expensive process. Take the time to do this,” he says.
Unfortunately, even the best anti-counterfeit/diversion programs can be cracked as criminals constantly improve their skills. But the goal is to protect your assets (and consumers) by incorporating new and more sophisticated tools.
“You can’t stop someone from counterfeiting,” says Unger, “but you can make it so difficult so they counterfeit someone else.”
8 Steps to Safeguard Your IP and Protect Your Brand
What steps can a company take to help safeguard its valuable intellectual property and protect valuable brands? According to Rick Van Arnam, a partner with Barnes, Richardson & Colburn, New York, NY, there are eight, straightforward and effective measures a company can employ:
1. Register all your trademarks and patents in all the countries in which you do business, plan to do business, or could conceivably do business – either selling or sourcing. This should be a standard counterfeit prevention practice. The trademark laws of each nation are territorial, so merely filing in the U.S. or the EU will not safeguard you in other countries. You can help prevent trademark pirates from beating you to the trademark office in a country you now decide to do business in by using foresight as to which markets you could potentially enter and registering your marks in those countries.
2. Register your trademarks and trade names with U.S. Customs and Border Protection (CBP). This is an easy and inexpensive step that can lead to government interdiction at the border—but one which lots of companies fail to take. If counterfeit merchandise is seized, CBP will advise you of the names and addresses of the exporter and importer, allowing you the possibility of taking additional steps directly against the offending party. Take the additional step of educating Customs on how to distinguish your legitimate product from knock-offs.
3. Know your vendors and manufacturers. They are making your product, and you need to be sure that they are not making additional units of your merchandise on the side.
4. Identify websites, especially auction sites, selling counterfeit merchandise. Become familiar with the auction house policies allowing legitimate rights holders to identify themselves and to have the auction house remove offending auctions. For example, on eBay this is called Verified Rights Owner Program; on Sell.com, it is called the Rights Owner Compliance System.
5. Educate your employees on these issues. Make sure they understand the importance of protecting your company’s valuable rights. Your employees need to know that counterfeiting damages the company’s
reputation.
6. On your website, allow your customers to report if they believe they have purchased a counterfeit product, and to report instances where they have come across bogus products for sale be it on the Web, a street or in a store.
7. Work with trade associations and competitors to combine resources. Law enforcement might get more involved if several companies present a united front.
8. Be aggressive with the law. While litigation can be expensive and time-consuming when compared to the prevention steps mentioned above, many remedies exist, both in civil and criminal law, and at both the federal and state court levels. Under the right circumstances, these remedies can be effective. m, always send cease and desist letters.
