Snippets
13 minute read

The Status of Counterfeiting

George "Trey" Lyons, IIISpring 2017 (snippets)

Viewed as “one of the most pressing issues of economic and national security facing our country,” intellectual property (IP) theft, particularly counterfeiting, has been characterized as a “tremendous and ever-increasing global threat.”[1] And, while some industries have been affected to a greater extent than others, no industry is safe from counterfeiting. To the point, counterfeiting is not a problem limited to items such as luxury handbags or designer sunglasses, but one that extends to many industries—from pharmaceuticals to automotive parts, consumer electronics to cosmetics, computers to personal care products. Thus, the problems imposed on society by counterfeiting are far-reaching, and, according to recent studies, only growing.

The Magnitude of the Problem

Although difficult to quantify, there have been a number of recent, thoughtful attempts to determine the exact impact that counterfeiting has on society, both locally and globally.

For example, the Commission on the Theft of American Intellectual Property recently issued an update to its original 2013 report that conservatively estimates “that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software and theft of trade secrets and could be as high as $600 billion.”[2]

Similarly, the Frontier Report has recently presented a comparable view of the magnitude of the counterfeiting problem, estimating that the total domestic production and consumption of counterfeit and pirated goods ranges from $249 to $456 billion in 2013.[3]

What is more disturbing than either of these estimates, however, is that this global counterfeiting problem is expected to grow, increasing to $524 to $959 billion by 2022.[4] Furthermore, China, including Hong Kong, remains the main IP offender, accounting for 87% of the counterfeit goods that are seized as they enter the United States.[5]

But, these reports (and others like them) can only estimate the magnitude of the counterfeit problem based on relevant, but incomplete, statistical data.[6] For example, some of these estimates are based in part upon the seizure data from U.S. Customs and Border Protection (CBP). In Fiscal Year (FY) 2016, the number of intellectual property right seizures conducted by CBP increased 9 percent to 31,560, as compared to 28,865 in FY 2015. Had the seized goods been genuine, the total estimated manufacturer’s suggested retail price of the goods seized in FY 2016 would be $1,382,903,001 (as compared to $1,352,495,341 in FY 2015).[7] In view of the sheer volume of goods imported in the United States by various means of transportation, however, the CBP officials can intercept only a small percentage of the counterfeit goods that enter the country.

Even so, the fundamental question remains: Why does counterfeiting remain such a problem—and worse yet, why is it only forecasted to grow moving forward? Ultimately, the answer is simple. The risk associated with IP theft is low when viewed against the potential upside; but the nuances of this reality are worth exploring further.

Isn’t This Somebody Else’s Problem?

As a preliminary matter, when faced with this question, people often respond: Don’t we have policing agencies monitoring and controlling the import of counterfeit goods? The answer is of course, yes; but as the second largest importer of goods in the world, there is an almost unascertainable amount of oversight to achieve.[8] And, with this amount of imported products comes the “threat to American IP-intensive industries stem[ing] from the difficulty in enforcing protections against advanced and persistent foreign threats,” as “[l]aw enforcement lacks the capacity to patrol and protect the vast U.S. business community.”[9]

Moreover, even when a foreign company or individual is implicated in IP theft, the chances of being brought before a U.S. court are low. Finally, this problem is exacerbated by the reality that the policies of some foreign countries “rely on securing new technologies cheaply to catch up with developed economies.”[10]

Thus, in analyzing the most beneficial next steps to combating this international problem, one strategy might be to look inward and attempt to appreciate its impact on the day-to-day lives of people not typically associated with counterfeiting, as well as the impact those people have on the global counterfeiting market.

The Negative Impact of Counterfeiting

On the whole, consumers often fail to appreciate all the downside associated with counterfeit products. For example, many may wonder “how bad could purchasing a counterfeit sports jersey or a fake watch really be?” In addition to the negative implications for brand owners who have worked tirelessly to protect their intellectual property, the more stark, but often overlooked, reality is that counterfeiting threatens the health and safety of consumers, as well as having serious ramifications on society as a whole.

First, counterfeit products may be harmful to the well-being and safety of consumers. For example, counterfeit pharmaceuticals may not have the same effect as the corresponding branded products. Instead, they could cause unexpected side effects or not provide the therapeutic benefit expected, thereby harming the consumer who ingests it, in some instances leading to death.[11] As a further example, counterfeit phone chargers likely use substandard parts and do not meet government safety requirements. Knockoff chargers run the risk of putting too much power into the battery, which may result in the battery overheating and potentially causing a fire or ruining the telephone.[12] Because fake products do not undergo the same testing and do not have to meet the same government standards as branded products, they put the health and safety of consumers at risk.

Second, although the impact of counterfeit products on the brand owners is readily understood, the trickle-down impact to future consumers goes often unappreciated. In one aspect, lost sales by missed sales opportunities result in lower profits. Further, because fake products are substandard and do not perform as expected, the reputation of the brand owners is damaged and “[c]onsumer confidence and the value of branding may suffer.”[13] But this industrial harm has greater ramifications.

Specifically, in addition to risking consumers’ safety and health, counterfeiting in the United States results “in decreased innovation, loss of trade revenues, higher rates of unemployment, and overall slower economic growth.”[14] On the global scale, counterfeiting is estimated to have resulted in the loss of 2.5 million jobs and of more than 60 billion euros in tax revenue among the G20 economies.[15] Further, none of the taxes typically associated with the manufacture and sale of a fake product are paid by the manufacturer, the seller or the purchaser. Thus, the tax revenue that normally would go to local communities to fund schools, parks, and public services such as the police and fire department is lost.

Third, and finally, counterfeiting breeds crime and funds illegal activities. To the point, because knockoffs are produced inexpensively (due in large part to not meeting the same quality standards as branded products), the profit margins are higher. This business model has become increasingly attractive to criminals and organized crime groups, especially since the risk involved is less than that associated with the sale of drugs.[16] Further, the sale of counterfeit goods provides a means for criminals to launder money and has been linked to other serious crimes such as the smuggling of drugs, firearms, and people.[17]

But not all illegal activities tied to counterfeiting are directed at organized crime. Particularly, because counterfeit producers operate without any government oversight and are not regulated, they are free to disregard the environmental safeguards in place and can dispose of hazardous chemicals in an unlawful manner.[18] Similarly, there is no reason for following local labor laws, including those in place to protect children, often leading to unsafe working conditions and labor abuses.[19]

Thus, as is apparent from the above synopsis, the effects of counterfeiting are wide-spread, should be of concern to all, and may be directly affected by actions taken globally and locally.

The Action Steps

The 2013 IP Commission Report outlined suggestions to combat the counterfeiting problem. Although the Obama administration implemented some of the recommendations of the 2013 report, the Commission expressed its disappointment that the administration had not taken more action.[20] The 2017 IP commission report also includes a number of recommendations ranging from short-term to long-term solutions, which include the following:

  1. Strengthen the International Trade Commission’s 337 process to sequester goods containing stolen IP;
  2. Empower the secretary of the Treasury […] to deny the use of the U.S. banking system to foreign companies that repeatedly use or benefit from the theft of American IP;
  3. Instruct the Federal Trade Commission to obtain meaningful sanctions against foreign companies using stolen IP;
  4. Develop a program that encourages technological innovation to improve the ability to detect counterfeit goods; and
  5. Ensure that top U.S. officials from all agencies push to move China beyond a policy of indigenous innovation toward becoming a self-innovating economy.[21]

 

The Trump administration’s recent comments indicate a willingness to pay increased attention to this issue. Specifically, in the President’s 2017 Trade Policy Agenda, one of the key objectives of the administration’s trade policy is “ensuring that U.S. owners of intellectual property (IP) have a full and fair opportunity to use and profit from their IP.”[22] One of the major identified priorities of administration is “to use all possible sources of leverage to encourage other countries to open their markets to U.S. exports of goods and services, and provide adequate and effective protection and enforcement of U.S. intellectual property rights.”[23] Further details from the administration can be expected once the new USTR has an opportunity to further develop the policy.[24]

In line with this recent proposal, perhaps the new administration will implement more of the recommendations offered by the IP Commission and work with other nations to combat this serious threat. Ultimately, however, counterfeiting, at the most basic level, is a supply and demand problem. As long as there is a demand, some entity will supply the products. The challenge to consumers is to eliminate the demand, perhaps by giving serious consideration to the broader impact and cost that the supply has had, and continues to have, on society.



[1] The Commission on the Theft of American Intellectual Property, Update to the IP Commission Report acknowledgements (2017), available at http://www.ipcommission.org/report/
IP_Commission_Report_Update_2017.pdf
.

[2] Id. at 1.

[3] Frontier Economics, The Economic Impacts of Counterfeiting and Piracy 7 (2017), available at http://www.inta.org/Communications/
Documents/2017_Frontier_Report.pdf
.

[4] Id.

[5] The Commission on the Theft of American Intellectual Property, supra note 1, at 3.

[6] See, e.g., id. at 8–9.

[7] U.S. Dep’t of Homeland Sec., Intellectual Property Rights Seizure Statistics Fiscal Year 2016 2, available at https://www.cbp.gov/sites/default/files/assets/
documents/2017-Jan/FY%2016%20IPR%20Stats%20FINAL%201.25.pdf
.

[8] See Kimberly Amadeo, U.S. Imports and Exports: Components and Statistics, THE BALANCE (Apr. 11, 2017),
https://www.thebalance.com/u-s-imports-and-exports-components-and-statistics-3306270.  

[9] The Commission on the Theft of American Intellectual Property, supra note 1, at 8.

[10] Id.

[11] Counterfeit Products Brochure, Pfizer, available at www.pfizer.com/files/products/CounterfeitBrochure.pdf.

[12] See Global Intellectual Property Center, Measuring The Magnitude Of Global Counterfeiting 5, available at http://image.uschamber.com/lib/fee913797d6303/m/1/
Measuring+the+Magnitude+of+Global+Counterfeiting.pdf
.

[13]INTA Fact Sheets Protecting a Trademark, Counterfeiting, Updated April 2015.

[14] Global Intellectual Property Center, supra note 12, at 5.

[15] Id.

[16] United Nations Office on Drugs and Crime, The Illicit Trafficking of Counterfeit Goods and Transnational Organized Crime 2 available at https://www.unodc.org/documents/counterfeit/
FocusSheet/Counterfeit_focussheet_EN_HIRES.pdf
.

[17] Id.

[18] Id. at 4.

[19] Id.

[20] The Commission on the Theft of American Intellectual Property, supra note 1, at 3.

[21] Id. at 18–19.

[22] Office of the United States Trade Representative, 2017 Trade Policy Agenda and 2016 Annual Report 1–2 (2017), available at https://ustr.gov/sites/default/files/files/reports/
2017/AnnualReport/AnnualReport2017.pdf
.

[23] Id. at 2.

[24] Id. at 1.

 

© 2017 McDonnell Boehnen Hulbert & Berghoff LLP

snippets is a trademark of McDonnell Boehnen Hulbert & Berghoff LLP. All rights reserved. The information contained in this newsletter reflects the understanding and opinions of the author(s) and is provided to you for informational purposes only. It is not intended to and does not represent legal advice. MBHB LLP does not intend to create an attorney–client relationship by providing this information to you. The information in this publication is not a substitute for obtaining legal advice from an attorney licensed in your particular state. snippets may be considered attorney advertising in some states.