Hot Property
Advocacy is often birthed by acts of hostility.
Such was the case with David Blackburn, president and CEO of The Thomas G. Faria Co., Uncasville, Conn.
Several years ago, the company found out that a Chinese manufacturer was selling counterfeit Faria gauges in Central and South America. Blackburn’s immediate steps to protect the Faria brand proved to be ineffective.
For one thing, there wasn’t much support from regional law enforcement. To make matters worse, Blackburn learned that someone had approached his authorized exporter in Columbia and told the man that his life and the lives of his family were at risk should anyone interfere with the sale of the counterfeit gauges. The exporter became afraid to be associated with Faria and ultimately went out of business.
At the time, the Central and South American markets represented just a small part of Faria’s business, while the U.S. market offered promising new opportunities. Blackburn decided to cut his losses and direct his resources to domestic growth.
But it was a different story in 2004. This time a Chinese counterfeiter, possibly the same one behind the first infringement, offered a fake Faria gauge to one of the company’s domestic customers.
“I was able to obtain one of the replicas and that began my quest to deal with the problem head on,” said Blackburn.
It hasn’t been easy, although that seems to have merely strengthened Blackburn’s commitment.
“We can’t stop international competition, but when they copy your product, take your name and even put your address on the product, that’s not competition,” he said. “That’s breaking the law.”
While it is little comfort, Faria is far from alone. Global counterfeiting is out of control. Everything from music to movies, motorcycles, prescription drugs, laundry detergent, handbags, clothing, helicopter parts and entire automobiles is being replicated. If a product is popular, the odds are that someone will try to cash in with a fake version.
And the problem is growing. In 1998, the International Chamber of Commerce estimated that counterfeited goods represented 5 to 7 percent of world trade, or a $350 billion value. In May 2004, the U.S. Trade Representative — a government agency responsible for developing and coordinating U.S. international trade policy — estimated that losses to the U.S. industry alone from counterfeiting are now between $200 billion to $250 billion a year.
Given the amount of money involved, it is no surprise that counterfeiting has been linked to organized crime. Last winter, for example, the New York Police Department, the FBI and the Department of Homeland Security’s enforcement arm – U.S. Immigration and Customs Enforcement – dismantled two Chinese crime rings that subsidized much of their criminal activity with counterfeit luxury goods. In addition to trafficking in counterfeit goods, those indicted were charged with racketeering, alien smuggling, extortion, conspiracy to commit murder and illegal gambling, among other things.
The link between counterfeiting and terrorist groups has also been widely reported, including evidence secured by the FBI suggesting that the terrorists who bombed the World Trade Center in 1993 financed their activities with counterfeit T-shirts and other fake textile products. (For more, see the International AntiCounterfeiting Coalition’s white paper, “The Negative Consequences of International Intellectual Property Theft: Economic Harm, Threats to Public Health and Safety, and Links to Organized Crime and Terrorist Organizations,” at www.iacc.org.)
So far, the impact on the marine industry appears to be relatively minimal. However, the stakes are high. As a rule, counterfeit products are less reliable, and an unreliable part on a boat can have life threatening consequences.
Some believe that the reported cases are just the tip of the iceberg.
“The problem is just too rampant,” said Monita Fontaine, vice president of government relations for the National Marine Manufacturers Association, Washington, D.C. “We have reason to believe that other companies have been affected. Some may be reticent to speak about it because they don’t want to diminish the value of their brands by suggesting that some of it may be counterfeit.”
Whatever the impact, it will likely become more widespread. Of particular concern are China’s efforts to develop a megayacht industry. It wants to go head-to-head in that market, but how much of that competition will be based on counterfeit parts and technology? And how much damage will that do to the entire boating industry?
Everyone is vulnerable
Last December, NorCross Marine Products filed suit against Daka Development, Ltd. of Hong Kong, Daka Designs Ltd. of Bermuda and JC Penney Corp. of the United States for allegedly using the Orlando, Fla.-based company’s intellectual property without authorization. Daka, asserted NorCross, had copied some NorCross fish finders – from product concepts to the nearly word-for-word operator manuals – while JC Penney had willfully violated NorCross’ copyright by purchasing and selling products that included Daka’s infringing manual.
NorCross settled the lawsuit out of court a few months later, when Daka agreed to change its packaging and operating manuals and pay NorCross’ legal fees.
“We had a bulletproof case, but because of the research I’d done on the difficulties of collecting from Chinese companies, we decided that businesswise it would not be a good idea to pursue it,” said Gregg Lentine, president of NorCross, Orlando, Fla. “We put that money into product development instead.”
Unlike Faria’s situation, NorCross once had a legitimate relationship with its alleged counterfeiter. It had contracted with Daka in 2002 to manufacture NorCross fish finders. As part of that agreement, NorCross provided Daka with a fish finder design package that included concepts, specifications, field testing data and more. The contract relationship ended in fall of 2003. Soon after, Daka started marketing its “own” fish finder.
Since filing the lawsuit, NorCross has taken steps to protect its intellectual property.
“We opened our own R&D facility, and when we run production at third-party facilities, we have dedicated employees who go with the programming and leave with the programming so nobody else has access to it,” Lentine said. “So now we control it all.”
There is a misconception among many small and even large companies that if they do not intend to do business in China, whether manufacturing or marketing, they don’t need to worry about having their products copied by unscrupulous manufacturers. Unfortunately, as Blackburn can attest, that isn’t the case.
“Everybody is vulnerable,” he said. “You don’t have to be a $500 million company to be a viable target for Chinese counterfeiters. They can make a lot of money with a relatively small volume of product because they can produce it at a fraction of what it would cost to make in the United States.”
Soon after hearing about the counterfeit Faria gauge, Blackburn tried to register Faria’s trademark in China, only to find out that the individual he believes is responsible for the counterfeit gauge had also made an application.
Under Chinese law, the first to register a trademark owns it, whether that person, or company, is the owner of the intellectual property or not. Faria is in the process of protesting that registration and applying for its own. Blackburn is also working with the U.S. Patent and Trade Office and has hired outside resources as well to investigate the situation and help him plan a strategy for resolving the current infringement and protecting Faria’s intellectual property going forward.
Registering patents and trademarks in China, and other countries as warranted, is highly recommended by the U.S. government and others involved in fighting counterfeiting. China is of particular concern given that the vast majority, 70 percent by some reports, of counterfeited goods originate there.
But not everyone agrees that registering intellectual property is worth the effort. Perko, Inc., for instance, is not doing anything right now to protect its product line from counterfeiting.
“We make more than 7,000 different products and very few of them are high-volume, high-dollar items,” said George Bellwoar, vice president of sales and marketing, Perko. “Unless you have a product that has a significantly high volume of sales, the cost to establish the patent and defend it outweighs the profit that you make on it in five years.”
It’s a situation that many in the marine industry face, said Bellwoar, who is also chairman of the board of NMMA.
“It is hard enough for Honda or Toyota to defend their products let alone a small company that does $1.5 million a year in sales,” Bellwoar said. “Suppose a product with sales of $50,000 a year gets counterfeited. The total annual profit on that product might be just $3,000 to $4,000. How do you even begin to address chasing down your rights on something like that?”
On the other hand, he doesn’t believe that anyone in the industry should think that they can just ignore the issue.
“It is still critical that we all know about the issue. Every company needs to evaluate for themselves what approach makes the most sense for their situation,” Bellwoar said. “They need to think about it just like they would any other business decision.”
Everyone is part of the solution
Perko was the victim of a counterfeit scheme back in the late 1980s. An importer was bringing in several navigation lights that were exact replicas of Perko products down to the company’s name. Unlike the Faria and NorCross situations, however, Perko had plenty of clout with the importer.
“It was a significant company doing a lot of business in the United States, and it didn’t want to lose its position in the marketplace,” Bellwoar explained. “We sued and won, and the company was required to either pull back every product or remove the nameplate with our name.”
But he is careful to stress the difference between knock-offs and counterfeited goods. “Perko has probably had more parts knocked off than any other company in the marine industry,” Bellwoar said.
One way the company deals with that, he said, is realizing that product lifecycles aren’t what they were 20 years ago and pushing product development accordingly.
“If we come out with a new product today, it will probably be knocked off anywhere within one to five years,” he said. “That’s unfortunate, but that’s our expectation. The best protection I can have against a knock-off or a counterfeit product is to quickly come out with a new product that eclipses the old one.”
While manufacturers are defending against counterfeiters by developing new products, distributors and retailers can do their part by making sure they aren’t buying fake products. If the deal sounds too good to be true, it probably involves counterfeits. And while everyone likes to save a buck or even a bundle, doing so at the expense of another American business and at the risk of a potential safety hazard raises some ethical questions. Or at least should.
“If customers know who they are buying from and support the vendors that they know are legitimate manufacturers of products, they are doing themselves and their vendors a favor as well as supporting the industry as a whole,” said Bellwoar.
“The consumer is the one who is really hurt in the long run,” said NorCross’ Lentine. “Right now, there is no incentive for foreign manufacturers to make good products. If they get faced with a lawsuit, they can just take their assets and hide behind their borders. If a consumer gets hurt, there is no recourse.”
In an effort to raise awareness of the threat counterfeiting presents to the marine industry, the NMMA has invited agents from ICE to be on hand at the International Boatbuilders Exposition and Conference, Oct. 19-21, in Miami. ICE also had a booth at the Marine Aftermarket Accessories Trade Show in Las Vegas in July.
“Right now the marine industry is ahead of the curve on this issue,” said NMMA’s Fontaine, “but the more we can educate the industry, the better we all will be able to avoid the pitfalls.”
The NMMA is also lobbying for passage of federal legislation to strengthen U.S. laws governing acts of counterfeiting. In the meantime, other federal resources have been put toward anti-counterfeiting efforts (see sidebar pg 34). Most of the burden, however, falls on the company experiencing the infringement.
“It is a daunting task, and there is no guarantee of a positive result,” said Faria’s Blackburn. “But if you don’t do anything, you are guaranteed that the counterfeiter will be successful.”
Sidebar
The China Factor
It has been said that there will be no real solution to Chinese counterfeiting until the Chinese have their own intellectual property to protect. Others believe that the U.S. government could force the issue by taking a more aggressive stance in demanding that the Chinese government comply with the World Trade Organization’s requirements for protecting and enforcing intellectual property laws, something it had agreed to do when it was admitted into the WTO a few years ago.
Whatever the long-range solution turns out to be, companies can take some steps in the meantime to at least make a prospective IP thief’s task more difficult. The first is to make sure that all of its patent, trademark, copyright and other IP registrations are in order.
“China has an IP system in place, and while it isn’t perfect, it can work in your favor,” said Andy Dubosky, head of U.S. business development for Rouse & Co. International, a firm that specializes in intellectual property law.
Dubosky, who is located in the firm’s Baltimore office, helps companies of all sizes develop strategies for protecting their IP. Among the many points to consider, he said, are the following:
These are just a few of the ways companies can help themselves when doing business in China. The magnitude of the task might cause some companies to avoid the issue altogether, but that would be a mistake, said Dubosky.
“China is too significant both as a manufacturing center and an end market down the road,” he said. “It is worth the effort of developing a strategy that concentrates on the most effective ways to protect and enforce your IP rights. That leaves you with more resources to then produce and market your product.”
Sidebar 2
You vs. The counterfeiters
The federal government has set up a national hotline –1-866-999-HALT – for companies that believe their products are being counterfeited. The call will direct them to the U.S. Patent Trademark Office, where they will talk to a government lawyer who specializes in the area of infringement – patent or trademark, for example – and suspected region of production, such as China, Russia, the Ukraine and others.
“We can’t give callers legal advice, but we can help them strategize on how to investigate the problem,” said Elaine Wu, a PTO attorney advisor.
The PTO can also refer the callers to U.S. Foreign Commercial Services, which, like the PTO, is in the Department of Commerce. Through its offices around the world, the FCS can connect callers with local law firms.
Full details of the support offered by the PTO can be viewed at www.upsto.gov, while more on fighting counterfeiting can be found at www.stopfakes.gov.
Wu also recommends that companies check out the “IPR Tool Kit” offered by the U.S. Embassy in China. Geared for small- and medium-sized companies, it provides a wealth of information on the protection and enforcement of intellectual property rights in China. See www.usembassy-china.org.cn/ipr.
Other good resources include U.S. Immigration and Customs Enforcement, at 202-344-2410, or www.ice.gov, and the International Anti Counterfeiting Coalition, at 202-223-6667, or www.iacc.org. The IACC is a Washington, D.C.-based nonprofit organization comprised of business and industry.
Companies interested in learning more about exporting can check out www.buyusa.gov.
