The Business of Fake Goods

Risk & Insurance, April 1, 2001 by Lori Widmer

The problem is so widespread that the cost to businesses is impossible to nail down, says Trainer. "You can't nail down actual losses for a reason. The only thing you can do is tally what's been seized. We're talking about people engaged in illegal activity. They're not going to keep records."

Trainer says that one company he knows has estimated its losses to product counterfeiting in China alone at $50 million. "They also estimate that $100 million more (in counterfeit products) were exported from China to various parts of the world. This is just one company. As you start to add this up, you realize we're talking about billions and billions of dollars."

He says that the process by which companies attain a trademark in a country is expensive and must be done for every country that a company wants to protect its brand name in. Many times as a company is awaiting trademark approval, someone in another country is busy counterfeiting the trademark.

Trademark application is very specific, says Trainer. The manufacturer has to specify where the logo and trademark will be used. He says that fear of monopoly on all products is the reason why companies are not awarded blanket protection for product name and logo. "All these kinds of legal limitations apply to legitimate businesses. Counterfeiters just don't care. They don't play by the rules. They're making money hand over fist as a result."

Limited Options

Solutions exist though none can begin to affect the scope of the problem effectively. For those looking to protect the import of counterfeit goods, security measures are available. Those who provide the security technology are reluctant to share their methods publicly, however.

Companies basically have little, if any, recourse. Because product counterfeiting is a criminal offense, insurance coverage doesn't begin to address it. Legal measures are limited due to the lack of enforcement or lack of regulations in other countries. The IACC says that insufficient involvement by Chinese police, and inadequate provisions in Chinese criminal code and lack of cooperation between the two entities have created an atmosphere for thriving counterfeit businesses.

The regulations are strong enough, suggests Trainer. In fact, the Criminal Code calls for prison sentences up to seven years for trademark counterfeiting and life imprisonment for those held responsible under product quality provisions of the Code. The missing ingredient, according to the experts, is enforcement.

Long sees the problem as a governmental one. "Some of the biggest pirates of computer software are governments. There's an initiative that the United States has been working under for the past few years to try to work with the software industry and foreign governments to get their licensing of software under compliance."

Regulations exist that attempt to impose punishment on offenders. But enforcement is very difficult. "These are different cultures than ours," says Warren. "Their intellectual property laws are not as strict, and they're not enforced as well. In many cases, there's nothing you can do. It's very expensive. For example, Reebok had brought a lawsuit a few years ago for a trademark violation in China for counterfeit shoes. It was the first time that a court in China had actually held up an injunction and put a stop to the counterfeiting. The downside is that they awarded Reebok $25 in damages. They had an injunction, but I guarantee you that the guy opened up another company under a different name within weeks."