Just as the dismal economy has severely impacted discretionary spending for legitimate product at retail, so too has it shrunk demand for counterfeit goods that are also seen as unnecessary and superfluous.
At the same time, illegal Internet outlets selling counterfeit goods are flourishing, adding a new and elusive distribution channel for fraudulent products.
“The realities of business is that even if you’re producing counterfeit goods, demand is down,” said Matt Priest, president of the Footwear Distributors and Retailers of America.
Brian Brokate, a partner at Gibney, Anthony & Flaherty, a law firm specializing in intellectual property protection and anti-counterfeiting, said that when the economy went into freefall a year ago, he expected the demand for counterfeit goods to surge, but he found the opposite to be true.
“The purchase of a counterfeit good is a frivolous one,” Brokate said. “The average consumer is saying, ‘If I’m going to spend money, I’m going to spend it on things I need.’”
In fact, Brokate said that in his 25 years in practice, he’s never seen such a precipitous decline in street-level activity in places such as New York’s Canal Street, a notorious hotspot for the illegal sale of counterfeit goods. “I’ve seen the ebbs and flows, but I’ve never seen a drop like this one,” he said.
While applauding the stepped-up law enforcement efforts in New York and Los Angeles, Brokate said the decline in street-level sales was so sudden and so severe that it is probably not a result of seizure efforts. “I would love to say we’re really cracking down and seeing the end of this, but it happened so suddenly and there wasn’t a surge in enforcement. Most of our clients [usually] see an increase in activity late in the year and it drops off in January, then in February it picks up. This year, that didn’t happen. And it didn’t happen throughout the summer.”
However, Bob Barchiesi, president of the International Anticounterfeiting Coalition, said that illegal goods are still just as accessible as they have always been, though sellers are more discrete in their sales practices.
“When you go to Canal Street, the goods are still available, but maybe they’ll show you catalogs, or they’ll take you down to a basement somewhere, or a van will pull up,” he said. “My judgment is that product is just as readily available, but they’ve changed the way they do business.”
One such change that poses the greatest threat to brands — and increases the difficulty of prosecution — is illegal Internet operations.
“It’s on the increase, for sure,” said Barchiesi. “It’s much more difficult to track the source of those goods. They’re drop-shipped direct from China, and it makes it difficult to prosecute people on the other end. It’s on the rise and it’s a trend of grave concern.”
Coach, which has long been a target of counterfeiters, is currently engaged in its largest anti-counterfeiting effort to date, which may be the broadest effort of any luxury label, said SVP and general council Todd Kahn, who added that over the past year, the company has successfully pursued 80 separate lawsuits.
Internet counterfeiters pose a unique challenge that requires even more awareness and creativity, Kahn said. “It takes what was a local problem and makes it a national and international problem [because] a lot of the Internet sites are based outside the U.S.,” he said.
“The Internet has no boundary, no anchor point or tangible locale,” added Ed Haddad, VP of intellectual property at New Balance. “Enforcement has historically involved tangible goods, their confiscation and the ultimate prosecution of the sellers.”
To illustrate just how pervasive the problem is, at press time, a simple Google search for fake Christian Louboutin shoes revealed dozens of fraudulent sites. Louboutin executives have been engaged in a battle with Internet sellers to stop the illegal sale of counterfeit designer shoes, a company spokesperson said.
Kahn said Coach has developed a multipronged strategy to pursue Internet counterfeiters. When the impostor can be identified, the company will sue them directly. He also alerts Web-hosting providers that they’re enabling the sale of counterfeit products and can therefore be liable if they don’t remove the sites. Kahn has also been effective at disrupting the payment mechanism used to carry out many illicit transactions by working with PayPal to close accounts linked to illegal sales.
At New Balance, Haddad said the company was using software to scour the Internet in search of fraudulent sellers. “There are many new software programs available to search out these Internet sites, and they work with internet service providers to shut them down,” he said.
Still, the sheer number of counterfeit sites can be overwhelming. “We have tracked down some ISPs in China and have shut them down, but I have hundreds of sites to deal with,” said Kahn.
Jeff Swartz, president and CEO of Timberland Co., said his company regularly works with a variety of government organizations to monitor and stop counterfeit activity. “Counterfeiting has always been a problem for us at Timberland,” he said. “The Internet has made it easier for the counterfeiter, so we diligently watch that world because we want to defend our rights.”
Ultimately, experts said that the only real way to combat counterfeiting is to more effectively educate consumers.
“Counterfeiting is fueled by demand, and consumers who believe that it’s a victimless crime,” said Haddad. “As a result, people who are respectable, law-abiding citizens are fueling the demand that keeps counterfeiters in business.”
That’s why the IACC has an ongoing consumer awareness campaign, which last ran on billboards in New York’s Times Square on June 11, the World Anti Counterfeiting Day. The goal is to make consumers aware of the effects of buying counterfeit goods, and the criminal organizations that are behind the transactions. So far, the initial feedback seems encouraging.
Similarly, Kahn said Coach, too, was actively trying to inform consumers about the implications of buying counterfeit merchandise in its stores. “The only way you can really change the paradigm is to go after the demand side and educate the consumer,” he said. “When you buy a counterfeit product, you have no idea of the conditions it was made in, and you have no knowledge of the people who make it. They could be organized crime or terrorist organizations.”
Barchiesi said he hoped to launch another anti-counterfeiting campaign during the 2010 World Cup in South Africa. He also said the organization is exploring ways to get the message to online consumers. However, the downturn in the economy has cut into the funds of many firms’ brand-protection budgets. “The economy is in recession, and companies have laid people off. Their businesses are shrinking,” he said. “It’s tough to say we want to launch another campaign right now.”
Coach’s Kahn said one of his goals is to reach the point where his firm’s anti-counterfeiting operations are self-funded by monies awarded during litigation. “People have to look at this like a business,” he said. “Spending money in this area is wise, and if you can self-fund it, even better.”
American Sporting Goods Corp. CEO Jerry Turner agreed that brands need to remain vigilant, but he noted that there are signs the Chinese government has a vested interest in halting counterfeit operations. “China today is all about brands,” he said. “They used to manufacture brands; now they own brands. It’s in their interest to look after intellectual property.”