August 1, 2005, 12:00 AM

Bogus Brands and the Internet

No longer are counterfeiters limited to selling goods at flea markets, on the street or in other venues outside the retail mainstream. The web has extended counterfeiters’ reach around the world—and made them harder than ever to find

The FBI launched Operation Site Down last month to fight Internet piracy of movies, games and software with the arrest of four people and the seizure of hundreds of computers and servers that it claims were distributing counterfeit goods.

But, while a necessary step in the fight against online sales of counterfeit merchandise, the action will hardly put a dent in the flood of bogus merchandise that the Internet makes possible. “The demand is still there, so it’s just going to be fulfilled by someone else,” says Joseph Loomis, vice president of sales and marketing, Net Enforcers Inc., a company that specializes in tracking down counterfeit fraud on the Internet. “They wouldn’t be counterfeiting things unless they knew everybody wanted them.”

While counterfeiting may be as old as commerce, the Internet has raised sales of counterfeit goods to new heights-or taken the practice to new depths. No longer are counterfeiters limited to selling goods at flea markets, on the street or in other venues outside the retail mainstream. Now they have a global reach, peddling their wares through online auction sites, web sites and spam. And their potential customers now number in the millions, rather than in the hundreds.

No one really knows what percentage of counterfeit fraud comes from online sales, but observers say it is accounting for an increasingly larger share of losses. “It exists everyday on eBay with almost every major brand you can be aware of,” Loomis says.

And it’s widespread even outside of eBay. “There’s a tremendous number of Internet retailers who are peddling counterfeit goods-some that don’t realize the goods are counterfeit and others that do know,” says Glen Gieschen of the Gieschen Consultancy, which tracks counterfeiting and intellectual piracy activity.

In fact, the online environment is well-suited for the sale of fake goods. The anonymity afforded by the web allows counterfeiters to operate with little chance of being detected. “They set the sites up in a matter of minutes, and then take them down and move them within 24 or 48 hours,” Gieschen says. “It’s extremely difficult to track those individuals-it’s the Wild West in terms of enforcement.”

Counterfeiting accounts for about $500 billion annually in the global economy, representing about 7% of global trade, according to the International Chamber of Commerce. Compared to the size of the problem, efforts to stem it are pitiful. During the first quarter of this year, authorities worldwide seized about $1.1 billion in counterfeit and pirated goods, Gieschen says. In May, counterfeit and piracy seizures and losses worldwide totaled $103 million, up 193% from April but still not even a drop in the ocean of counterfeit goods.

Tremendous growth

Gieschen says that over the past three to six months, more anti-counterfeiting activity has moved to the Internet. “There’s been just tremendous growth in the amount of counterfeit and pirated goods that are now available through auction sites,” he says.

With the avalanche of fake items being sold online, a mini-industry has sprung up of companies that specialize in tracking down counterfeiters. These companies monitor the use of brand owners’ trade names, logos, and images on web sites and in chat rooms.

Net Enforcers, for example, uses sophisticated software to locate sites using photos, product descriptions, and trademarks of brand owners. The software can check for name variations and will search both visible and invisible text for evidence of counterfeiting.

Once a site is identified as fraudulent, Net Enforcers will buy a product from the site then attempt to locate the source of the counterfeit product. It then works with the companies to shut down the counterfeiting operations.

In addition, law firms have opened practices that perform similar services, then advise clients on a legal strategy for closing them down. Many of the companies also work directly with law enforcement agencies, including local police departments, the FBI and U.S. Customs Service.

Other companies, such as Gieschen, gather intelligence that brand name owners can use to identify counterfeiters. Gieschen issues daily, weekly and monthly reports on the number of counterfeiters arrested or convicted globally, the value of counterfeit goods seized, the types and brands of products counterfeited and other information. It also offers an intellectual property protection service and a document security service.

But brand name companies and retailers often are frustrated in their efforts to shut down counterfeiters. That’s because, unless the case involves large sums of money and a large operation, counterfeiting falls low on the list of priorities of most law enforcement agencies, Loomis says. “If you have someone big on eBay selling fraudulent items, it might be in your best interest to report it to a law enforcement agency because it’s obviously going to happen more than once,” he says. “But for a small, fly-by-night place, the FBI isn’t going to go after one guy.”

The scope of the problem is so big, that most victims can’t fight it all. “Obviously, nobody has unlimited resources so they have to choose their battles wisely,” Gieschen says.

Fertile ground

Auction sites appear to be the most fertile ground for counterfeiting. That’s because the sheer quantity of items on those sites makes it extremely hard for the brand name owner or others to monitor for counterfeit products. Auction giant eBay.com, for example, hosts 50 million listings at any given time. “Auction sites are a huge challenge for brand owners and for consumers trying to verify the authenticity of the goods,” Gieschen says.

EBay acknowledges that counterfeit items turn up on its site, but insists that they account for only a small percentage of listings. “Given the total volume of trade that happens on the site, it is an incredibly small problem,” a spokesman says.

Tiffany & Co. thinks otherwise. The upscale jewelry designer and retailer in June 2004 filed suit against the auction site, charging it with “direct and contributory” trademark counterfeiting and infringement. The lawsuit is in the discovery stage and isn’t expected to come to trial any time soon.

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