Making the Internal Business Case
Corporate security directors are often presented with a host of challenges when it comes to brand protection and IP enforcement. In many cases, CEO, CFOs, and other corporate executives do not see the need to fund antipiracy programs, regarding them as an unnecessary cost rather than a priority to protect the company’s brand and recover lost sales. In today’s climate of limited budgets, security managers are under pressure to articulate a sound business justification and a return on investment (ROI) for all programs.
Demonstrating that counterfeit items in the market represent a potentially displaced sale of genuine product requires reliable data. An impact assessment that examines market potential, the availability of counterfeits, and current sales of genuine products can help to provide such data. For example, the software industry estimates piracy rates by looking at the number of new computers shipped versus the number of genuine software operating systems sold and activated—the discrepancy is an indicator of pirated software installations since in most cases software operating systems (Original Equipment Manufacture versions) are installed at the factory. A sudden decrease in sales of a genuine product in a given market is another indication that piracy may be a factor and is often pointed out by sales personnel or distributors. Aggressive IP enforcement is not only a necessary deterrent but can also be a potential source of revenue to fund anti-counterfeiting programs through civil asset forfeiture and out of court settlements, while at the same time preserving brand integrity.
Often the sudden appearance of a particular counterfeit product on the market, a dramatic drop in sales, or a major seizure by law enforcement alerts the corporate leadership to the need for greater antipiracy enforcement. Unfortunately, when such an incident occurs, people often react by reaching for very costly “Band Aid” solutions. Instead, having an effective antipiracy program in place that consists of sustained enforcement effort and consumer education is a much better corporate strategy in the longer term. An added benefit of this approach is that law enforcement agencies are more inclined to work with companies that have well-developed programs and demonstrate a serious commitment to antipiracy enforcement.
The Assessment Phase
Because most managers need facts and figures to support budget and resource requests, an initial assessment is recommended to determine the scope and magnitude of the problem. Depending upon the type of product and the brand, on-site visits to sales outlets as well as Internet searches for the company’s products are critical. The latter has increasingly become a means of “direct- to - customer” sales and has changed the business model for counterfeiters, by eliminating the need for wholesale distributors.
One large organized crime group that operated from Russia sold thousands of “burned” or copied CDs of software programs directly to retail customers in the U.S. via the Internet, thereby circumventing wholesale distributors. They used thousands of affiliate sites as well as spam tactics to generate sales. Pirated or counterfeit software and games are sold in shops, flea markets, or so called swap meets, which are essentially the same as flea markets. Pirated goods are also offered on the Internet through independent web sites or auction sites. An online search for cheap software will produce hundreds of results. Other types of products such as batteries, razor blades, or car parts are often available on business-to-business (B-to-B) sites, while counterfeit or unapproved generic pharmaceuticals are sold on both B-to-B sites and illegal online pharmacies.
Many sites selling pirated goods are hosted in countries where cybercrime and IP enforcement are almost non-existent, making it very difficult to identify, much less go after the criminals. There are many companies that perform Internet searches, often called “web crawling”, to help locate where the imposter products are being sold. The searches are based upon specific search terms or logos or both provided by the IP rights holder. One often finds that spamming and the sale of counterfeit items and pornography on the Internet are ultimately controlled by the same organizations. It is important to find a search company with expertise and reliable baseline data in a specific industry to avoid the expense and time in the learning process.
In order to get an accurate picture of the size and nature of your company’s piracy problem you should have an experienced antipiracy investigator conduct a series of test purchases (TPs) from sales outlets and Internet sellers. Based upon guidance provided by the brand owner, the investigator should gather specific information regarding the seller, the product, the make, the model, the design, the title, the version, and other key characteristics, including product authenticity.
Proper product authentication by the IP holder is critical, since sales are not limited to counterfeits. So called “grey market” items that have been diverted from the intended distribution channel are one of the many challenging issues in the brand protection domain. The TP is designed to obtain samples and to determine origin, price, quantity, quality, accepted payment methods, shipping, and return policies. Once there is enough information to permit a good sampling of the products most often pirated, an analysis and interpretation of the data should be conducted with an eye towards identifying commonalities and vulnerabilities. They may be in violation of laws other than those related to copyright and trademark infringement.
For example, is the seller of your company’s pirated product also liable for wire fraud and money laundering offenses or involved with the sale of child pornography? These additional factors often make them more attractive targets for a law enforcement investigation. But it is important to remember that the initial goal is to assess risk and damages and not to conduct an investigation—that can come later. Some key considerations one should consider: Is there a health and safety risk? Are the products high-quality copies designed to deceive or cheap knock-offs? To what extent are they displacing sales of genuine products? What are the estimated losses of legitimate sales and which products and markets are most impacted? Are the products perhaps original equipment manufacturer (OEM) versions or stolen or fraudulently obtained genuine items?
If so, this may be an indication of an integrity problem within the distribution chain and with third-party manufacturers, distributors, or transporters and at some point a complete audit of manufacturing plants and distributors may be advisable. One company, for example, uncovered a huge problem with “leakage” of genuine products from its supply chain because they were leaving the plant marked as “scrap.” An investigation revealed that several warehouse employees had been compromised by an organized criminal group. Thanks to good liaison and private-public cooperation with the FBI, the case was thoroughly investigated and the organized criminal gang was brought to justice. In addition, the company recovered some of its losses by bringing civil action against a third party manufacturer.
This case also pointed to an internal management problem. The account representatives for the third-party manufacturing plant had failed to conduct regular audits as prescribed in their vendor contracts. Such audits would have discovered that the use of raw materials did not correspond with the amount of finished product and that the plant had failed to properly account for the destruction of surplus goods. In another case, during the closing of a plant, numerous master “stampers” for digital media, each with a value in the hundreds of thousands of dollars, had gone missing and were being sold for a high price on the illicit market. Thanks to an FBI informant and good liaison efforts the stampers were prevented from getting into the hands of counterfeiters.
One of the challenges in the assessment phase is obtaining reliable information concerning counterfeiting or piracy. Sharing and comparing trend information with various internal corporate entities can often provide useful information and insights. An internal company survey might also surface good information about piracy and lets employees know that the company is protecting its valuable IP. Coordination with the legal, sales, marketing, product development, packaging, and manufacturing teams is highly recommended and is indicative of a holistic approach to antipiracy. Corporate stakeholders can also become allies in the quest for executive support and budget for antipiracy operations. As the program develops, an antipiracy advisory board comprised of key company players and stake holders ensures that proper information sharing and coordination across the company are being accomplished.