On Guard Against Counterfeit Goods

As the exploding market for ?counterfeit goods has proven, ?authenticity isn’t everything – ?even if you can spot it. The pale, hairless leg nudges mine again and my annoyance turns in an instant to excitement at the first glimpse of the bare skin above the sock. Another nudge and I lean in closer, mesmerized.?

Karen MacDonald is among lawyers fighting to protect clients’ intellectual property. If only merchants and consumers did the same.

As the exploding market for 
counterfeit goods has proven, 
authenticity isn’t everything – 
even if you can spot it.

The pale, hairless leg nudges mine again and my annoyance turns in an instant to excitement at the first glimpse of the bare skin above the sock. Another nudge and I lean in closer, mesmerized.

There’s nothing amorous going on here. The guy sitting next to me in the cramped row of seats keeps dozing off, and every time he jerks awake, his foot slips and touches my leg. What I’m trying to discern is the extra letter I think is stitched on his beige sock. I’ve made out clearly the first four letters, but there’s one more on that logo. At long last, the remaining i becomes visible to reveal his “Levii” socks.

I’m sitting in a banquet hall in Richmond with about 150 vendors, only three of whom are not Asian, listening to a presentation about counterfeiting and the reasons why merchants shouldn’t sell fake goods at their Richmond Summer Night Market booths. The presenter is Karen MacDonald, a lawyer with the Vancouver branch of Smart & Biggar/Fetherstonhaugh, a law firm specializing in intellectual property. Among the clients her firm represents: Chanel SA, Levi Strauss and Co. and Burberry Group PLC. It is with some amusement, then, that I notice, in addition to the man on my right with the Levii socks, that the woman on my left is digging through her “Guggi” bag searching for a pen to take notes, and just metres in front of MacDonald, another woman is listening attentively with what looks like a knock-off Burberry scarf knotted elegantly around her neck.

Counterfeits aren’t just in fake Louis Vuitton bags or knock-off scarves with the plaid Burberry designs, MacDonald informs the crowd. She rhymes off the evidence: knock-off drugs were linked in 2001 to at least 192,000 documented deaths in China; counterfeit car brakes made of sawdust were recovered from a bus crash in 1987 in which seven children were killed; and two per cent of airplane parts are estimated to be fakes. “There are safety issues involved. You can’t think of it as hurting big bad corporations. The economy hurts when you sell counterfeit goods. It results in lost jobs, lost taxes and decreases in investments.”

When MacDonald finishes, an official from the Summer Night Market steps up to the microphone, warning the crowd in Cantonese that the RCMP and private investigators will be watching the booths this summer. Enforcement is up, she says. Ignorance is no longer an excuse.

“So don’t sell counterfeit items. You’ll be caught,” she tells the crowd, before putting in a plug for one of the event’s sponsors: “And please, don’t sell counterfeit Pepsi!”


Image: Robert Kenney
Jasper Smith, director of investigations for a private
Vancouver security consultant, shows off recently
seized knock-offs.

The counterfeit goods effect

So, what’s wrong with adding g’s where the c’s should be on a knock-off Gucci handbag? While the guy sitting next to me may have paid half the price on his Levii socks as he would have for the real deal, IP lawyers, the RCMP and the big brands themselves see the cost much differently. The Canadian Anti-Counterfeiting Network, a lobby group of industries, lawyers, insurance companies and private investigators pushing for tougher punishments on offenders, estimates knock-offs cost Canadian manufacturers as much as $30 billion annually, with the loss of tax revenue adding up to hundreds of millions of dollars (though that number has been disputed by some, including University of Ottawa law professor Michael Geist, who says the actual figure is closer to $4 billion in losses to Canadian manufacturers each year). A report published by the Canadian Motion Picture Distributors Association earlier this year estimates that more than $1.8 billion and 12,600 full-time equivalent jobs were lost across the Canadian economy in 2009-10 as a result of movie piracy alone. Tax losses there amounted to $294 million. 

According to Sgt. Dany Bernier, regional coordinator for B.C. with the RCMP’s intellectual property program, most of the counterfeit goods coming into Canada and into North America arrive via Vancouver’s porous ports, with the majority of those knock-offs coming from China. The People’s Republic is to blame on another level too, as Chinese buyers are fast becoming significant consumers of luxury goods. The more demand generated from the legitimate side leads to more demand for the counterfeits, with fakes overwhelming the real stuff. According to research by Global Industry Analysts Inc., the global market for luxury goods is expected to rise to US$307 billion by 2015, while law enforcement agencies such as the RCMP and anti-counterfeit networks estimate the counterfeit luxury brand market worldwide ranges from US$300 billion to US$600 billion. 

According to IP lawyer David Wotherspoon, a partner with Fasken Martineau Dumoulin LLP, Canada is a “cesspool of counterfeits, and by and large there’s not a lot of concern about it on the part of the general public.” Indeed, the problem of counterfeiting here is so serious that the Office of the U.S. Trade Representative has consistently put Canada on a watch list alongside China, Russia and India, citing us for not having an adequate level of protection and enforcement. Wotherspoon points to one figure that illustrates the stark differences between Canada and the U.S.: in 2004 U.S. border guards identified 30,000 inbound shipments of counterfeit goods; that same year, Canada nabbed just six.

Major takedowns of counterfeiters usually result in fines, which are difficult to collect, or in a house arrest for repeat offenders. Because jail terms are rare, a lawyer’s only recourse is a civil claim, and even then a successful suit rarely results in significant damages being recovered, as assets are easy to hide. But lawyers and major companies are watching closely a civil suit brought to Federal Court in Vancouver by luxury brands Louis Vuitton and Burberry against three Canadian corporations caught selling knock-offs. The plaintiffs are seeking more than $2 million in damages. If that case succeeds, it would be the largest anti-counterfeiting judgment in Canadian history.

There are even signs that China, under mounting international pressure from the U.S. and big-brand companies, is becoming more vigilant on the counterfeiting front – or at least giving the appearance of moving away from blatant copyright infringements. The Chinese government has promised that, by this fall, all local government offices will use only legal software and no more pirated editions. In April the government brought in truckloads of counterfeit DVDs and video games and destroyed them in front of invited western media. A senior Chinese official, Yan Xiaohong, was quoted as saying, “Intellectual property rights protection in China is only 30 years old. The public is only just beginning to realize its importance.” A decade from now, the government promised, China hopes to surpass the west in protecting intellectual property rights. 

The RCMP’s Bernier says catching counterfeiters in this country and retrieving counterfeit goods takes a co-ordinated effort involving not just the RCMP but also the Canadian Border Services Agency, Health Canada and outside agencies including Interpol and the FBI. “Counterfeit is very high on the priority list because it affects the health and safety of Canadians,” says Bernier. But many of the investigations, for reasons of staffing, are by necessity conducted by private firms hired by the brands, he adds. “For us, obviously, if someone is taken down by them, it helps us as well.”


The counterfeit spectrum

But as IP lawyer Karen MacDonald explained to her Richmond audience, the problem is far more expansive – and expensive – than just luxury goods. Over the last 20 years, the flow of counterfeit goods worldwide has grown 100-fold, she said, most notably in pharmaceuticals, which have become among the most commonly counterfeited items. One estimate from the World Health Organization put global counterfeit medicine sales at US$75 billion in 2010, a 90 per cent increase in just five years. The agency’s own studies show that 10 per cent of medication purchased globally are fakes, with the figure rising to 50 per cent in some countries of Southeast Asia and Africa. 

Closer to home, Port Metro Vancouver has in the past few years uncovered everything from fake Viagra pills to counterfeit cigarettes, toothpaste containing antifreeze and phony automotive bearings with logos of brand-name manufacturers. And while the port is a major entry point for counterfeit items, home-grown counterfeiters are also sending things the other way, producing and distributing DVDs, software and video games for shipment to all parts of the globe.

Brian Isaac, past chair of the Canadian Anti-Counterfeiting Network, says that enforcement and the current laws are too lax: “Our laws aren’t that effective, and given that we have good infrastructure for high-speed Internet, which allows people to download stuff effectively, and the tendency to believe it’s not ethically wrong to steal copyright work, that all combines to give us higher piracy rates than most developed nations.”

One factor making enforcement so hard, according to investigators such as Bernier and lawyers pursuing claims in court, is the existence of unregulated digital marketplaces such as Craigslist or Kijiji. Space no larger than the backroom of a store in a strip mall can now be a high-volume production centre copying thousands of video games or DVDs in a week, each rapidly dispersed via the relative anonymity of the Internet. Other counterfeiters store their products in convenient, legitimate workspaces, at home, or even in the back of a car, as I recently discovered.

My mission, earlier this spring, was to buy a pair of those Australian sheepskin Ugg boots on the cheap; authenticity was not a priority. And so I went on Craigslist, looked up Ugg and found lots of them available, brand new and in various sizes. Some were to be found in Mission, many came from downtown Vancouver, while others were scattered throughout Metro Vancouver.

I contacted the seller who had the shoes I wanted. He told me that he worked as a computer technician at a storefront on No. 3 Road across from Richmond Centre and had a few pairs of Uggs at his workplace. When I asked for a different colour than what he had, he told me he had to go home to pick it up a few blocks away. A few minutes later, he called back and we arranged to meet at the Bridgeport SkyTrain station near his store. 

The seller, a youthful-looking 20-something Chinese guy with scraggly facial growth on his chin and a black knit cap, pulled up in a black Toyota Celica. Beads hung from his rear-view window, and I spotted two other Ugg boxes in his back seat. He took the box from his passenger side and handed it over. As I examined the soles of the boots, he informed me that his girlfriend had received them for Christmas.

“But don’t you have at least five pairs in two different sizes?” I asked, leaning into the open side of the passenger window.

“Are you a cop?” he replied. When I shook my head no, he insisted the boots were real. “Look at the box; the tags are all there,” he said when I express skepticism about the boots, which retail for nearly $200. I negotiated $15 off his $85 asking price. 

Jasper Smith, the director of investigations for IPSA International Inc., a Vancouver firm that conducts undercover investigations for many big brands, says that while items may look real, the most obvious signs of fakes include price and packaging. Plastic bags on what should be expensive items are an indicator. Another is the waxy feel of purses and rough texture on clothing or shoes. Among the goods his investigators have retrieved recently are jewelry cases in Burberry designs, Samsung Mobile football jerseys, children’s clothing with Olympic logos and Puma duffel bags with a tag that says $38. The real Puma duffel bags retail from $55 to $100. 

“If the general public didn’t purchase these items, then there wouldn’t be a demand for them,” says Smith.

Markups on these counterfeit items are huge, and selling counterfeit goods is a profitable way for counterfeiters and their merchants to make money, with fewer risks than trafficking marijuana or other drugs, according to IP lawyer Karen MacDonald. “There are established links with criminal organizations, Asian triads. It’s high profit, low risk for them,” she says. “With drugs, they can get 100 per cent markup; with counterfeits, they can get 900 per cent markup.” 

But the fakes have got so real that it takes effort to identify them. Sgt. Bernier says it drives his wife crazy when he goes shopping because he reads all the labels and, as a native French speaker, has found the French translations so good on some fake products that they could pass as authentic.

Even companies themselves sometimes have trouble telling if their own products have been faked. When I take my Uggs to the Australian Boot Co. on West Fourth Avenue in Vancouver a few days later, manager Katrina Mae is convinced at first they’re genuine. “The colour doesn’t look right, but it may be a few seasons old,” she says. “They look authentic.”

On closer inspection, however, she notices that the bag identifies the Uggs as snow boots, something she’s never seen before, and the soles have different markings on them than the other boots in the store. “I can see now that the stitching is a bit dodgy,” Mae says.

But with the solid buttons with Ugg brand stamped in, the suede patches where they are supposed to be and the logo on the heel a virtual facsimile, for anyone who cared to look – well, it’s close enough.

Why intellectual property is suddenly hot

Becoming the litigating watchdogs for brand names isn’t the only reason why the Canadian Bar Association cites more lawyers specifying IP expertise than ever before. 

A lot of the province’s businesses – be they technology firms, clean-tech companies, or software and video game developers – are particularly susceptible to patent and copyright claims.

Vancouver lawyer Dean Palmer, who regularly represents green-tech and technology companies, says more of these industries are going overseas for sales and support and want their technology protected by Canadian patents and international ones: “Many of our clean-tech clients have been doing business around the world and want to avoid copyright issues.”

With the economy still struggling, many businesses are also starting to recognize that what they already have is worth protecting in anticipation of being acquired or leveraging or licensing their IP with other firms. “IP goes beyond patents. They’re the sexy part of it, but there’s also copyrights and trade secrets and proprietary confidential information,” says Lisa Sim, a lawyer with MBM Intellectual Property Law LLP. “There’s a growing recognition that not only do companies have to protect their IP but that intellectual property is a potential asset that they may not be leveraging. At the end of the day, IP is a business tool.”

High-profile court cases have also increased attention and drawn firms to seek IP legal advice, the most notable being a pending Amazon.com Inc. claim first filed in 1998. Regular customers at Amazon.com would recognize the one-click button allowing them to purchase items without having to refill credit card and address information. Canada’s patent office initially rejected Amazon’s claim that this technology was patentable because it was a business scheme. The Federal Court of Canada heard Amazon’s appeal and reversed the decision, sending the application back for re-examination.

The uncertainty surrounding the Amazon case has many companies now considering whether they should file for protection of the method in which they conduct their business, says Palmer: “Now that there’s a clear statement from the court that business method patents are not automatically barred from patent protection, that has opened up new possibilities and avenues for businesses to file.”

The outcome of the Amazon decision could herald a new paradigm for considering the patentability of computer inventions, according to IP lawyer Gavin Manning, a partner with Oyen Wiggs Green & Mutala LLP: “The result of that appeal will have far-reaching effects on the patentability of computer-related subject matters in Canada, which is going to affect our local companies – both those in favour of patent protection, because they’ve found it enhances the values of their companies, and those who, for philosophical reasons, believe computer software ought to be free from concerns related to patents.”

Software developer Cliff Hammerschmidt says that while he agrees there should be some protection for invention, many developers strongly believe software should not be in the realm of patentability. “There is no software that is not written from other software. When you look at how fast computers and technology have been moving, the rate of change has been enormous because people haven’t been able to protect and get a patent on every little thing,” he says. “In many ways, patents stifle innovation.”

Computer developer Jurgen Hissen, who holds about half a dozen patents, says getting patents is now routine: “Even things that are not particularly new and revolutionary, you still want to get it patented, just in case. It’s like a nuclear deterrent. . . . If another company ever comes after us, we can start looking through our list and see if there have been any violations.”