North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

The Enforcement Against Counterfeit Luxury Goods

By: Izzy Vaughan-Jones

Abstract:

Historically, luxury designer brands agreed to allow law enforcement to protect the trademark to their intellectual property and did not publicly confront fraudulent manufacturers. However, as consumer demand for luxury goods rises, counterfeiters are emerging through social media and e-commerce sites promising to provide similar looking products but at a fraction of the price.  To deter the counterfeiters, designer brands are changing their approach by tacking an aggressive approach through lawsuits.

As the global economy improves, the appetite for luxury products continues to spread amongst consumers.[1]

Manufacturing “knock off” products and infringing on high-end brands’ trademarks is a lucrative business that is becoming easier to exploit through the use of e-commerce sites.[2]  In the past, luxury brands debated how to handle counterfeits, but maintained a passive approach toward the black-market industry through search and seizure raids of manufacturers and sellers.[3]

However, these brands admittedly can no longer turn a blind eye to the issue, as the production and sales of counterfeit goods is no longer a “homemade industry.[4]” Today, the counterfeit industry is “a well-oiled industry, often financed by funds raised through drug trafficking, terrorism, and other criminal organizations.[5]” In order for luxury brands to defend themselves against China,[6] the top counterfeit good manufacturer, and the Chinese government, which largely overlooks trademark infringements,[7] designers are no longer implementing a passive approach but are exercising a new tactic: targeting counterfeit owners and manufactures through legal action.[8]

History

Counterfeiting is a global business creating economic impacts in every industry not just fraudulent luxury designer products.[9]  Each year, the imports of counterfeit products cost legitimate businesses nearly half a trillion dollars, with the United States, France, and Italy facing the greatest economic impact from other countries stealing their intellectual property.[10] There is a misconception that “counterfeiters only hurt big companies and luxury goods manufacturers. They take advantage of our trust in trademarks and brand names to undermine economies and endanger lives” said the Organization for Economic Co-operation and Development (OECD) Deputy Secretary-General Doug Frantz.[11] The counterfeiting industry threatens consumer health and touches various industries including pharmaceuticals, auto, infant formula, medical equipment, and children’s toys.[12] Not only does the counterfeit industry create health and safety concerns, but the manufactures are tied to criminal organizations who finance the fraudulent businesses through drug trafficking and terrorism.[13]

Fraudulent businesses have branched into luxury designer products as the economy grows and the demand for luxury products surges.[14] Counterfeiters seek to play on the consumers’ interest in owning a “designer” product while saving hundreds of dollars.[15]  Designer brands are bothered that “counterfeit products will hurt global brands’ reputation,” and that higher-quality counterfeits will distract consumers from buying authentic goods.[16]  The rapid expansion of the counterfeit market, in addition to its link to organized crime,[17]  has made luxury brands reconstruct their strategy towards taking alleged counterfeiter to court.[18]  In the past, brands took a “back-seat approach” and undertook search and seizure raids to shut down known abusers.[19] However, the counterfeiting industry has exploded with “independent websites, online marketplaces, and social media websites offering to sell cheap, fake goods.”[20]  Ultimately, luxury brands have sought legal consultation and reconstructed their strategies.[21]  The nonverbal approach proved ineffective, so luxury brands are taking counterfeiters to court. Designer brands are getting more aggressive” about taking infringers to court.[22]  For instance, the luxury brand, Alexander Wang, won a $90 million judgment in New York district court against the owners of 459 websites, believed to originate in China, offering to sell knock-off Wang goods.[23]

The China Problem

While China, the top manufacturer of counterfeit designer products, has a strong economy, it is weak in its response, enforcement, and capacity to effectively tackle frauds.[24] Experts report that China is responsible for 80 to 90% of worldwide counterfeits manufactured, but the Chinese government often ignores the issue.[25] The Chinese laws concerning regulation of infringements of IP rights “have not been strong enough and there is no robust enforcement mechanism.”  [26]  Without a healthy prosecution mechanism, criminal gangs are able to escape persecution.[27]  In order to control the issue, the Chinese government will need to increase its involvement.[28]

Though China produces the greatest amount of knock-offs, there are nevertheless limited protective and reactive measures in place to discourage trademark infringements and to report suspected counterfeit products.[29]  In response to criticism, in 2012, the Supreme Court of the Chinese Republic of China issued a release on the intellectual property infringement issue.[30]  The Court recognized the importance in protecting intellectual property rights to improve the Chinese economy.[31]  The Chinese government is working with law enforcement to enforce and protect intellectual property.[32]  Also, brands have been encouraged to come forward to the government with intellectual property infringements.[33]  However, the infringement problem in China remains widespread, and designers are often left without the help of the Chinese government and must pursue outside counsel.[34]

The Response

  1. International Response

Being that France is one of the top countries affected by infringements on luxury designer products, France passed the first counterfeit legislation, the Longuet law, in 1994, which makes counterfeiting a “criminal offense, widening the scope of action of customs officials at French borders and extending the cases in which the confiscation of counterfeit products was possible.[35]” In 2004, France approved a law to set the punishment for counterfeiting as two to three years imprisonment and a fine of 150,000 to 300,000 euros.[36]  However, under the same law, a more serious counterfeiter could face up to five years in prison and a 500,000 euro fine.[37]

The French government likewise provides efficient ways for brands to seek relief from counterfeiters.[38]  The French judicial system has reconstructed the injunction process so brands can easily file claims against alleged counterfeiters without having incontestable evidence.[39]  The summary judgments allow French courts to forbid the counterfeiters from circulating the products back into the stream of commerce.[40]  In addition, brands are allowed to apply for a “request for intervention,” which allows companies to confirm to customs officials whether seized suspected counterfeit products are counterfeits or genuine products of the brand.[41] Further, the courts are entitled to “block access to counterfeiters’ websites on French soil or force Google and other research engines to de-reference and de-rank internet sites belonging to counterfeiters.[42]

At the greater European level, there is more concern for the consumers’ health and safety.[43]   As a result, European Union (EU) countries are cooperating to collectively stop counterfeiting.[44] For instance, in 2014 the EU regulated custom officials’ guide when intervening suspected counterfeit products. This regulation broadens the rights of customs officials to better protect against counterfeiting.[45]  Specifically, the law “widens the scope of protected intellectual property rights, as well as the right of information of companies or individuals requesting the confiscation of these counterfeit products.”  [46]

 

  1. Brands Response

Luxury brands cannot rely solely on the government to pursue action against counterfeiters, and instead must lead the investigations themselves.[47]  As a result, their in-house lawyers have constructed a strategy to handle counterfeits.[48]  Often, luxury conglomerates will adopt a standard approach, but each brand has its own customized portfolio with contacts to external legal advisers, enforcement and customs officials, “with whom they work with directly in order to organize raids and confiscate counterfeiters, and in order to assess the progress of the fight against counterfeits.[49]

For instance, LVMH, the owner of luxury brand Louis Vuitton, maintains a zero-tolerance policy “against counterfeiters and employs a large team of in-house and private practice lawyers to monitor, scrutinize and police the wholesale and retail markets, online and offline.[50]” In addition, brands can protect their intellectual property by registering their products with the European Observatory Enforcement Database and national databases.[51] Ultimately, designer Alexander Wang explained, brands must maintain “constant vigilance on a global scale.[52]

Awareness and Preventive Measures:

Technology has become a useful tool in helping one determine between a fraudulent and a genuine designer product.  Three applications, “Asly, a text- based solution to combat counterfeiting in the Middle East, as well as Envisional and Netnames, two companies specialized in online counterfeiting and piracy,” are leading the protest against fighting counterfeiting.[53] Another technological technique used to stop counterfeiting is authentication.[54] Authentication can be enforced through: terahertz spectroscopy, or taggant fingerprinting, the use of uniquely coded microscopic materials that are verified from a database, encrypted micro-particles (unpredictably placed markings, such as numbers, layers and colors, not visible to the human eye), serialized barcodes, as well as track and trace systems, which use codes to link products to database tracking systems.[55] The final important tool for preventing trademark infringements is awareness campaigns.[56] Luxury brands as well as governmental enforcement task teams are lobbying to better inform and educate the public of the dangers of buying counterfeit products.[57]

 

[1] Kathy Chu, Luxury Brands Get Tough With Counterfeiters, Wall St. J. (last visited Oct. 21, 2017) https://blogs.wsj.com/chinarealtime/2016/08/16/luxury-brands-get-tough-with-counterfeiters/.

[2] Id.

[3] Annabelle Gauberti, How To Efficiently Fight Against Counterfeiting In The Fashion and Luxury Sectors, Crefori (last visited Oct. 20, 2017) http://crefovi.com/articles/fashion-law/efficiently-fight-counterfeiting-fashion-luxury-sectors/.

[4] Id. at para. 1.

[5] Id.

[6] Id. at para. 12.

[7] Id.

[8] Chu, supra note 1 at para. 5.

[9] Anna Biernart, Global Trade In Trade Goods Worth Nearly A Trillion Dollars A Year- OECD & EUIPO, OECD, (last visited Oct. 20, 2017) http://www.oecd.org/industry/global-trade-in-fake-goods-worth-nearly-half-a-trillion-dollars-a-year.htm.

[10] Id.

[11] Id. at para. 5.

[12] Id.

[13] Id.

[14] Chu, supra note 1.

[15] Biernart, supra note 9.

[16] Chu, supra note 1.

[17] Id.

[18] Id.

[19] Fredericka Argent, Online Enforecement of Counterfeit Luxury Goods: The China Problem, The Luxury Legal Post (last visited Oct. 21, 2017) https://www.cov.com/-/media/files/corporate/publications/2014/12/online_enforcement_of_counterfeit_luxury_goods_the-china_problem.pdf

[20] Chu, supra note 1

[21] Id.

[22] Id.

[23] Id.

[24] Gauberti, supra note 2.

[25] Argent, supra note 9.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Argent, supra note 20.

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Gauberti, supra note 2. http://crefovi.com/articles/fashion-law/efficiently-fight-counterfeiting-fashion-luxury-sectors/

[38] Id.

[39] Id.

[40] Id.

[41] Id.

[42] Id.

[43] Annabelle Gauberti, How To Efficiently Fight Against Counterfeiting In The Fashion and Luxury Sectors, Crefori (last visited Oct. 20, 2017) http://crefovi.com/articles/fashion-law/efficiently-fight-counterfeiting-fashion-luxury-sectors/.

[44] Id.

[45] Id.

[46] Id.

[47] Id.

[48] Id.

[49] Fredericka Argent, Online Enforecement of Counterfeit Luxury Goods: The China Problem, The Luxury Legal Post (last visited Oct. 21, 2017) https://www.cov.com/-/media/files/corporate/publications/2014/12/online_enforcement_of_counterfeit_luxury_goods_the-china_problem.pdf

[50] Id.

[51] Id.

[52] Id.

[53] Id.

[54] Id.

[55] Argent, supra note 20.

[56] Id.

[57] Id.

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