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Image: TFL

On Friday, the Trump administration released its highly-anticipated report on the massive global trade in counterfeit goods. A 54-page document drafted by the U.S. Department of Homeland Security (“DHS”)’s Office of Strategy, Policy, and Plans, and signed by Acting DHS Secretary Chad Wolf, the report, entitled, “Combating Trafficking in Counterfeit and Pirated Goods,” follows from Donald Trump’s April 2019 memo calling for “action in the U.S. Government’s fight against a massive form of illicit trade that is inflicting significant harm on American consumers and businesses.”

The newly-released report is aimed at helping “develop a deeper understanding of how e-commerce platforms, online third-party marketplaces, and other third-party intermediaries facilitate the importation and sale of massive amounts of counterfeit and pirated goods,” while also identifying “appropriate administrative, statutory, regulatory, and other actions, including enhanced enforcement measures, modernization of legal and liability frameworks, and best practices for private sector stakeholders.”

Ten key takeaways from the report are as follows …

1. E-commerce has contributed to a shift in the sale of counterfeit goods in the U.S. Consumers are increasingly purchasing goods online and counterfeiters are producing a wider variety of goods that may be sold on websites alongside authentic products. While e-commerce has supported the launch of thousands of legitimate businesses, e-commerce platforms, third-party marketplaces, and their supporting intermediaries have also served as powerful stimulants for the trafficking of counterfeit and pirated goods.

The scale of counterfeit activity online is evidenced as well by the significant efforts e-commerce platforms themselves have had to undertake. A major e-commerce platform reports that its proactive efforts prevented over 1 million suspected bad actors from publishing a single product for sale through its platform and blocked over 3 billion suspected counterfeit listings from being published to their marketplace.

It is not just a rise in the volume of counterfeits we are witnessing. The Government Accountability Office notes that counterfeiters are increasingly producing a “wider variety of goods that may be sold on websites alongside authentic products.”

2. Consumer attitudes towards counterfeits are changing. The sale of counterfeits away from so-called “underground” or secondary markets (e.g. street corners, flea markets) to e-commerce platforms is reshaping consumer attitudes and perceptions. Where in the past, consumers could identify products by relying on “red flag” indicators – such as a suspicious location, poor quality packaging, or discount pricing – consumers are now regularly exposed to counterfeit products in settings and under conditions where the articles appear genuine or otherwise more enticing than they would be if presented in other settings.

While the risks of receiving a counterfeit may have been obvious to a consumer purchasing items on street corners, with the rise of online platforms, it is not so obvious anymore. For example, it is unlikely that anyone would set out to purchase a counterfeit bicycle helmet given the potential safety risks; however, such items are readily available to unsuspecting consumers on e-commerce websites.

3. The rise in consumer use of third-party marketplaces significantly increases the risks and uncertainty for U.S. producers when creating new products. It is no longer enough for a small business to develop a product with significant local consumer demand and then use that revenue to grow the business regionally, nationally, and internationally with the brand protection efforts expanding in step. Instead, with the international scope of e-commerce platforms, once a small business exposes itself to the benefits of placing products online – which creates a geographic scope far greater than its more limited brand protection efforts can handle – it begins to face increased foreign infringement threat.

Moreover, as costs to enter the online market have come down, such market entry is happening earlier and earlier in the product cycle, further enhancing risk. If a new product is a success, counterfeiters will attempt, often immediately, to outcompete the original seller with lower-cost counterfeit and pirated versions while avoiding the initial investment into research and design.

In other words, on these platforms, the counterfeit and pirated goods compete unfairly and fraudulently against the genuine items. While counterfeit and pirated goods have been sold for years on street corners, alleys, and from the trunks of cars, these illicit goods are now marketed to consumers in their homes through increasingly mainstream e-commerce platforms and third party online marketplaces.

4. Counterfeiters have taken full advantage of the aura of authenticity and trust that online platforms provide. E-commerce models have enabled counterfeiters to easily establish attractive “store-fronts” to compete with legitimate businesses. In a common scenario, third-party marketplace websites contain photos of the real product, fake reviews of the counterfeit product, and other such disinformation designed to mislead or fool the consumer into believing the legitimacy of the product.

The proliferation of such disinformation is the hallmark of the successful online counterfeiter. Such deception not only provides counterfeiters with an enormous competitive advantage over their brick-and-mortar counterparts; legitimate sellers on the internet are harmed as well.

5. Certain products and brands are more prone to being targets of counterfeiting than others. Apparel and other types of accessories, along with footwear, top the list of intellectual property seizures by U.S. government bodies at 18 percent and 14 percent of seizures, respectively. Commonly counterfeited items in these categories include brand name shoes such as Nike and Adidas, as well as NFL jerseys.

Watches and jewelry follow at 13 percent of total seizures. During one particular operation on August 21, 2019, for example, U.S. Customs and Border Patrol (“CBP”) officers seized counterfeit Rolex watches valued at over $1.4 million. Handbags and wallets represented nearly 11 percent of all seizures, including counterfeits of luxury brands such as Louis Vuitton, Michael Kors, and Gucci. Consumer electronics represented 10 percent of seizures, including products such as iPhones, hover boards, earbuds, microchips, and others.

6. Selling counterfeit and pirated goods through e-commerce is a highly profitable activity. For counterfeiters, production costs are low, millions of potential customers are available online, transactions are convenient, and listing goods on well-known platforms is inexpensive and provides an air of legitimacy. They minimize the need for incurring significant – and costly – research and development expenditures by stealing intellectual property, technologies, and trade secrets. Moreover, the popularity of social media also helps reduce the costs of advertising counterfeit products.

In the case of apparel, such as running shoes, employees from a legitimate branded company may leave the company and set up their own facility. These employees have the expertise to manufacture identical-looking shoes; but they will typically do so with cheaper, inferior components. The result: the shoes may fail during activity, injure the user with an inferior insole, or, at a minimum, wear out faster than the real product. Moreover, technological advances in modeling, printing, and scanning technologies such as 3D printing, have also significantly reduced the barriers for reverse engineering and the costs of manufacturing counterfeit products.

Counterfeiters also benefit from the speed at which they can steal intellectual property through e- commerce, which can be very rapid. If a new product is a success, counterfeiters may attempt to immediately outcompete the original seller with lower-cost counterfeit versions – while avoiding research and development costs. The result: counterfeiters may have a significant competitive advantage in a very short period of time over those who sell trusted brands.

7. The risks associated with selling counterfeit and pirated goods through e-commerce are generally low. Not only do counterfeit sellers benefit from greater anonymity on digital platforms and websites, when sellers of illicit goods are in another country, they are exposed to relatively little risk of criminal prosecution or civil liability under current law enforcement and regulatory practices. In many cases, American enterprises have little recourse aside from initiating legal action against a particular vendor. Such legal action can be extremely difficult. Many e-commerce sellers of infringing products are located outside the jurisdiction of the United States, often in China; existing laws and regulations largely shield foreign counterfeiters from any accountability.

All the while, in many cases, counterfeiters hedge against the risk of being caught and their websites taken down from an e-commerce platform by preemptively establishing multiple virtual store-fronts. The ability to rapidly proliferate third-party online marketplaces greatly complicates enforcement efforts, especially for intellectual property rights holders. Rapid proliferation also allows counterfeiters to hop from one profile to the next even if the original site is taken down or blocked.

The same is true for social media, where counterfeiters promote their products by creating multiple accounts so that if one account is identified and removed, they can simply use another.

8. In 2019, CBP initiated Operation Mega Flex. In response to the alarmingly high rates of contraband uncovered by DHS and a request from the White House Office of Trade and Manufacturing Policy, the CBP operation uses enhanced inspection and monitoring efforts to identify high-risk violators that are shipping and receiving illicit contraband through international mail facilities and express consignment hubs.

Among the discrepancies uncovered by Operation Mega Flex were 1,061 shipments of counterfeit products. These counterfeits range from fake name brand items, like Louis Vuitton bags to sports equipment made with faulty parts. Other contraband included drug paraphernalia, deadly opioids, and counterfeit drivers’ licenses. In all, counterfeits constituted more than one of every three discrepancies uncovered by inspectors.

9. Fakes are slipping through the cracks. Foreign entities that traffic in counterfeits understand how to leverage newer distribution methods better suited to e-commerce than the traditional trade paradigm (i.e., imports arriving via large cargo containers with domestic distribution networks). Today, mail parcel shipments, including through express consignments, account for more than 500 million packages each year. Seizures in the small package environment made up 93 percent of all seizures in 2018, a 6 percent increase over 2017. From 2012 to 2016, the number of seizures from express consignment carriers increased by 105 percent, and the MSRP of those seizures had a 337 percent increase. In contrast, seizures from cargo decreased by 36 percent from FY17 to FY18.

10. Government action alone is not enough. In order to bring about the needed paradigm shift and ultimately stem the tide of counterfeit and pirated goods, all relevant private-sector stakeholders have critical roles to play and must adopt identified best practices, while redoubling efforts to police their own businesses and supply chains.

Foremost among these best practices is the idea that e-commerce platforms, online third-party marketplaces, and other third-party intermediaries such as customs brokers and express consignment carriers must take a more active role in monitoring, detecting, and preventing trafficking in counterfeit and pirated goods.