Intellectual Property Intellectual Property & Technology Law Journal Technology Law Journal Edited by the Technology and Proprietary Rights Group of Weil, Gotshal & Manges LLP VOLUME 20 • NUMBER 8 • AUGUST 2008 Eight Ways to Minimize the Risk of Counterfeiting By Steven Cooper and Gail M. Eckstein C ounterfeiting has been labeled the “Crime of the products; and ensures that best practices have been fol- T wenty-First Century” by the Federal Bureau of lowed in the event of a later incident that results in bad Investigation, and such emphasis is not overstated. 1 The press or a claim for damages. counterfeiting business constitutes a staggering 7 percent Implementing the following eight best practices of world trade, and the global counterfeit market is worth will put companies in a substantially better position to about $600 billion, including a loss to US businesses of defend themselves against this increasing threat. about $250 billion per year. 2 Counterfeiting has even been linked as a source of funds for terrorism, drug traf- 1. Tighten Supply Chain ficking, and organized crime. 3 The number one goal of counterfeiters is to make Reports of counterfeited US products are constantly their products appear as authentic as possible. This is in the media, and counterfeiting affects a wide array accomplished by obtaining or copying legitimate pack- of products. The industries hit hardest are those sell- aging, cartons, and ingredients that make the counter- ing footwear, clothing, wristwatches, pharmaceuticals, feits difficult, if not impossible, to visually distinguish and consumer electronics. 4 Many of the knocked-off from the real thing. Dishonest suppliers, especially products cause considerable alarm, for example, car those in more remote areas, will run “night shifts” brakes, aircraft parts, pharmaceutical products, and baby or have products and/or machines exiting “the back formula. door” to be used or copied by counterfeit operations. Companies are well-advised to institute strong pro- Companies must vigilantly monitor their suppliers in grams to prevent and combat the counterfeiting of their order to prevent the misuse or diversion of packag- goods. Although there is no magic bullet that eliminates ing, cartons, and ingredients from their supply chains. counterfeiting altogether, there are a number of impor- Companies must closely inspect their supply chains for tant steps that can and should be taken. Undertaking any vulnerabilities to ensure that their vendors do not these steps increases the sales of legitimate products; deal with counterfeiters. This can be accomplished in a enhances the public image of the company and its number of ways. First, companies should insist that their vendor agree- ments contain language that prohibits such activities; Steven Cooper is a partner and Gail M. Eckstein is an permits random, unannounced audits; and imposes stiff associate, in Reed Smith’s Commercial Litigation Group in New penalties for failure to comply. Second, companies need York. The authors, who frequently counsel companies on methods to undertake random audits, at varying hours, to inspect of minimizing and combating the counterfeiting of goods, can be the workings and their suppliers. Finally, companies reached at scooper@reedsmith.com and geckstein@reedsmith.com , should take further steps to comprehensively monitor respectively.
the activities of their suppliers through discussions with • The relevant import/export points; and competitors, industry executives, trade associations, and law enforcement officials. • The prevalence of the counterfeit goods in retail stores. 2. Monitor Distribution Chain Counterfeiters prey on weaknesses in a company’s Knocking out a manufacturer or distributor is infi- legitimate distribution chain. Counterfeiters look to nitely more valuable than eliminating a mere retailer, meld their bogus goods in with legitimate ones so that as these entities are usually supplying their counterfeit they can pass unnoticed through customs and regular product to numerous stores throughout a large geo- distribution and sales channels. graphic area. Such investigations serve as crucial build- The problem of counterfeit products infiltrating ing blocks for civil litigation or criminal prosecutions legitimate channels is particularly acute where diverted that may be pursued in the future. or “gray goods” are on the market. Gray goods open pathways for the circulation of counterfeits; indeed, 4. Establish Excellent Government counterfeiters are notorious for focusing on companies Relations that do not control the entry of gray goods into the Establishing long-term partnerships with govern- marketplace. mental agencies is another essential way to combat Accordingly, companies must institute procedures for counterfeiting. The Department of Justice, Customs, the authenticating and monitoring the entities that distrib- Department of Homeland Security, and the Food and ute and sell their products. They must be sure to select Drug Administration, among others, are important allies reputable distributors and retailers and should enter in the fight against the importation and distribution of into contractual relationships with these entities that illegitimate products. The squeaky wheel theory applies demand that the products be shipped in original and here, as the more a company reaches out to commu- unaltered form. nicate with these federal agencies, the more they will Specifically, the contractual provisions should require assist in corporate anti-counterfeiting efforts. that products be shipped in manufacturer cartons or One fundamental rule is that companies must cases and that the original carton case seals remain establish those relationships before an incident occurs. intact throughout the shipping process. Random audits Customs is particularly important in the anti- should also be performed to ensure that the distributors counterfeiting fight. Companies need to train Customs are fulfilling such contractual obligations and living up to differentiate their fake products from their legiti- to the company’s expectations. mate ones. Illegitimate products are more likely to Finally, companies should train their sales forces to be be identified and detained at border crossings when a their eyes and ears and to identify and report any suspi- company has provided easily read dossiers and training cious product in transit or on store shelves. cards to Customs officials. Cooperating fully with all governmental investi- 3. Investigate Leads Fully gations is also key in that it emphasizes the compa- Investigating leads in a thorough and sophisticated ny’s dedication to minimizing counterfeiting activity. manner is an essential component of combating a Companies must be responsive and available to meet counterfeiting problem. Companies faced with threat- and field calls. ened or actual counterfeiting problems should employ Finally, sharing with governmental agencies infor- seasoned investigators with global contacts and substan- mation obtained from a company’s own private inves- tial counterfeiting experience. Purchasing counterfeit tigations creates a bond with these agencies and makes products to remove them from store shelves or stamp- them more willing to reciprocate. ing out small-time counterfeiting operations will be of limited utility. Investigators will help companies “move 5. Employ Excellent Internal up the chain” in order to go after the “big fish” in the Recordkeeping operations. Such investigative firms have the knowledge Meticulous internal recordkeeping is a fundamental and expertise to identify: building block in a company’s anti-counterfeiting arse- nal. A comprehensive database should be established to • The manufacturer of the illegitimate product; organize and maintain such records. For starters, such records allow a company to • The methods used for distribution; accurately understand the extent of its counterfeiting 2 Intellectual Property & Technology Law Journal Volume 20 • Number 8 • August 2008
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