Every time I give a talk on the luxury business today and I get to the subject of counterfeiting, the same thing happens. The room grows absolutely silent as I put forth the facts: It is estimated that up to 7 percent of our annual world trade — $600 billion worth — is counterfeit or pirated; that fakes are believed to be directly responsible for the loss of more than 750,000 American jobs; that everything from baby formula to medicine is counterfeited, with tragic results; that counterfeiters and the crime syndicates they work with deal in human trafficking, child labor and gang warfare; and that counterfeiting is used to launder money, and the money has been linked to truly sinister deeds such as terrorism.
No one utters a word, not a sound, as I recall the raid I went on with Chinese police in a tenement in Guangzhou and what we discovered when we walked in: two dozen sad, tired, dirty children, ages 8 to 14, making fake Dunhill, Versace and Hugo Boss handbags on old, rusty sewing machines. It was like something out of Dickens, “Oliver Twist” in the 21st century.
Then I read the following passage from my book, “Deluxe: How Luxury Lost Its Luster.” “ ‘I remember walking into an assembly plant in Thailand a couple of years ago and seeing six or seven little children, all under 10 years old, sitting on the floor assembling counterfeit leather handbags,’ an investigator told me … ‘The owners had broken the children’s legs and tied the lower leg to the thigh so the bones wouldn’t mend. [They] did it because the children said they wanted to go outside and play.’ ”
The audience gasps. From time to time, I see tears too. And afterward, I always hear the same response: “I had no idea.” Always. Most consumers believe that buying fake goods is harmless, that it’s a victimless crime. But it’s not. It’s not at all.
In the five years that I have been writing about this issue, I have seen two things happen: The illegal enterprise is getting stronger and more professional, and the consumer is slowly but surely becoming more aware.
Cracking down on counterfeiters
In the past year, there have been some victories in the battle. Among the most prominent was Louis Vuitton’s win against eBay in court in Paris this past June. (Counterfeiters have long used the Internet, particularly eBay, to sell their phony goods.) According to LVMH, the luxury-goods group that includes Vuitton, Givenchy and Celine, 90 percent of the Vuitton and Dior items offered on eBay in the first half of 2006 were counterfeits. That’s right: Nine out of 10 were fake. Most consumers have no idea. How would you know? (See “How to Spot a Fake” below.)
Vuitton pursued eBay over several major issues, including allowing vendors who flagrantly advertised that they were selling “replica Louis Vuitton” to hold auctions, misleading key words (e.g., when vendors stick the words “Louis Vuitton” in their listings to get more traffic on the post, though they aren’t selling anything Vuitton related), and eBay’s inaction against repeat offenders who were promoted as PowerSellers on the site. “We had a case where we had 930 shut-down requests on a vendor, and this vendor was a PowerSeller,” Louis Vuitton’s intellectual-property director, Nathalie Moullé-Berteaux, says. “It was a sign of eBay’s unwillingness to take measures against repeat offenders.”
The French court agreed and ordered eBay to pay 38.7 million euros (approximately $63 million) in damages to Louis Vuitton, Christian Dior Couture and other LVMH companies, calling eBay’s behavior “culpable negligence.” EBay, a California-based company, is appealing the ruling. The luxury industry, especially brands such as Tiffany & Co., which has a similar case against eBay on appeal, is watching the case closely.
Law and order
The battle against phony goods smuggled into the United States is getting more intensive. Inspector Brian O’Neill, who has overseen the Trademark Infringement Unit of the New York Police Department’s Organized Crime Investigation Division since 2002, has more resources and manpower than ever.
“We have patrol precincts and field intelligence units assisting us in this kind of work, and my trademark unit coordinates the efforts to make sure we are all working together,” O’Neill says. The joint effort is proving effective. “There are certainly more search warrants and a large number of arrests in the past five years.”
Last May, a patrol unit saw suspicious activity in a warehouse in Brooklyn and reported it to O’Neill’s unit. The result was the biggest seizure ever in New York City: 19 tractor trailers filled with counterfeit clothing and footwear with an approximate street value of $10 million. “The warehouse was a distribution center where merchandise was brought from shipping containers and then distributed,” O’Neill explains.
In September 2007, authorities had another major success when they confiscated close to 160,000 pairs of fake Nike sneakers with an estimated street value of $7.1 million from various locations in Queens, Brooklyn and Staten Island after an extensive two-year undercover operation. Yue F. Huang and his wife, He Bin Huang-Wang, were arrested, and each faces up to 15 years in prison if convicted of trademark counterfeiting.
New laws stand to make things even tougher for those selling fakes. In October, President Bush signed the PRO-IP Act, which establishes increased penalties for counterfeiters and strengthens those for sellers of fake goods that cause physical harm or death (such as bogus medicines and auto parts or cell-phone batteries that explode). It also grants up to $25 million annually for the next five years to state and local law enforcement to help develop anti-counterfeiting programs. An intellectual-property coordinator will be appointed to oversee efforts from the White House.
In the same month, U.S. Customs and Border Protection officials announced that they had experienced a 50 percent increase in seizures of counterfeit and pirated goods at the Los Angeles–Long Beach seaport complex in the preceding year. Altogether, CBI officials intercepted 357 shipments of fake goods worth $71.4 million at the seaport. Among the articles seized were Christmas lights that could catch fire, food items that may have contained harmful ingredients, and handbags and shoes.
“No one should think of piracy and counterfeiting as minor crimes,” said Robert Sachet, special agent in charge of the U.S. Immigration and Customs Enforcement office of investigations in Los Angeles. “In today’s world, [they] pose a serious threat to public safety and the economy.”
The battle continuesThough laws and enforcement are getting more effective, criminals are getting wilier. Investigators see an increase in “finishing” in the U.S. — the practice of legally shipping in generic items, then having workers, many of them illegal immigrants, stamp, embroider or attach the logo or other identifying details.
“Anything that can be brought in blank is being brought in blank,” says Heather McDonald, a partner in the intellectual-property group at the law firm of Baker Hostler in New York. “They can attach a Pride tag or interlocking GAG on demand. And they are very indiscriminate. It doesn’t matter if the design is from the brand or not. They put the logo on whatever they think will sell.”
Another new strategy is dealing on wheels. Some counterfeit wholesalers no longer keep goods in stockrooms, but in vans parked a few blocks away. They lead buyers to the vans to shop there. Sometimes vendors will have customers stand on a street corner and wait for the vehicle to drive up. If law enforcement arrives, they speed off.
“The harder everyone works to stop the sale of counterfeit goods, the more inventive counterfeiters have to get,” says McDonald. “But no matter what we do, as long as there is a demand, there is always going to be a supply.”