Knock-Offs Just Won’t Quit

Counterfeiting Problems a Complex Issue for Customs Officials

Brent Felgner, Marvin Lazaro, November 28, 2005

New York — More than 20 years ago, the U.S. Customs warehouse in Long Beach, Calif., was piled high with counterfeit goods — mostly consumer electronics and Levis jeans, at the time — that had been interdicted at nearby ports of entry. Officials then admitted they represented only a small percentage of the phony goods that made it through undetected.

Since then, it’s only become worse, striking virtually every brand that holds significant market value. By every standard, the problems confronting law enforcement and industries seeking to protect intellectual property rights from pirates and counterfeiters seem insurmountable. Control, to the degree it can be achieved, will most likely come only through coordinated efforts of governments and industries committed to aggressive enforcement at both points of manufacturing and sale, according to speakers at “Knock It Off,” a two-day conference sponsored by the American Apparel and Footwear Association.

A simple stroll along Manhattan’s Canal Street, West 28th Street or even parts of Fifth Avenue is more telling: counterfeit goods are sold on the sidewalk, with apparent impunity. Occasional raids result in high visibility arrests and seizures — but within days, often hours, business resumes. Profits drive the business, and its sheer size and scope make it nearly impossible to control, many at the conference said.

“Any brand that’s hot is going to get copied — that’s just the way it is,” offered Barbara Kolsun, senior vice president and general counsel, Seven for All Mankind. “I used to tell Kate (Spade) when I was there to stop saying to the press that imitation is flattering — it’s not.”

Kolsun formerly held the same position at Kate Spade. She was also assistant general counsel at WestPoint Stevens (now WestPoint Home) and at Calvin Klein Jeanswear.

Consider the scope. According to conference speakers:

• U.S. companies lose between $150 and $300 billion to counterfeiting each year.

• Counterfeit drugs account for 10 percent of all pharmaceuticals in the marketplace; in some countries the figures go as high as 60 percent.

• Between 5 percent and 7 percent of world trade is counterfeit.

• Counterfeiting accounts for 15 percent to 20 percent of China’s GNP, figures that might be higher by some accounts.

• More than a third of all software installed on computers is pirated or counterfeit.

The problem overwhelms the resources of the U.S. government and the companies trying to protect their intellectual property rights. At the same time, many foreign governments appear less than committed to controlling counterfeiting, often applying only the minimum standards of enforcement required under free trade agreements, speakers said.

China is a primary player, they explained. Partly arising from a culture with a tenuous understanding of private property, much less private intellectual property, magistrates and government officials have routinely resisted aggressive enforcement.

For example, in China, international law requires that injunctions be issued within 48 hours after an IP application has been made, noted Harley Lewin, chairman of trademark at law firm Greenberg Traurig.

“The part they don’t tell you is that no judge will issue it unless the counterfeit is a 100 percent identical copy,” he explained. “If there is the slightest variation between the counterfeit and the genuine article, the (Chinese) court will not issue the injunction until it reaches a final decision.”

That necessarily costs the IP owner, as the goods continue to flood markets around the world. Even if they are held at various ports, the legitimate owner of the trademarks must often post a bond.

Lewin, who has represented Cartier, cited instances of watch parts being imported into China from various points, assembled and then exported to the United States without any trademark in order to make it through Customs. The Cartier trademarks were added in backroom operations along Canal St. in New York. The landed cost of those watches was $1.82.

“That same watch sold on Canal St. for $20 to $50,” he said. “That same watch sold on the Internet for between $100 and $200. Nobody in that chain pays taxes on that. Nobody.”

Lewin said that one bank laundering the funds recorded transactions of $8 million per month and that one of the four rings broken up posted net profits of $50 million since 1997.

The problem isn’t controlled in China. Penalties amount to little more than a $100 fine, he said. Worse, counterfeiting is no longer just occurring on goods entering the United States. With 1.3 billion consumers in China, local and international counterfeiters are finding new and lucrative markets.

Further, solving the problem on U.S. streets simply isn’t practical.

“In general, most crimes in America don’t get (solved),” offered Joseph DeMarco, assistant U.S. Attorney for the Southern District of New York. “In general, most criminals don’t get prosecuted ... that’s just the way it is.”

Instead, the experts offered a patchwork of solutions ranging from aggressive registration and recordation of copyrights and trademarks, to aggressive enforcement, to continuous training of government officials and Customs officers.

But just as troubling, many speakers agreed, is the recognition that most consumers, while opposing the idea of counterfeiting, simultaneously seem to have no difficulty supporting it through their own purchases.

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