Fight Counterfeits

A four-tiered approach to help fight against the global problem of counterfeiting.

By Leah Genuario

The packaging was imperfect. Then in came an anonymous tip. It didn’t take long for John Paul Mitchell Systems, marketers of professional hair care products, to discover it was the victim of counterfeiting. The fakes were sold at legitimate retail outlets, but outside of the authorized distribution channel.

Rock-Tenn White Label Security Board has covert security features in its face stock, which is made from Appleton’s TechMark line of intelligent papers.

The problem started about three years ago in South Florida. Although manufactured using a different molding process, the bottle shapes were closely modeled after the original product. The poorly engineered counterfeit caps caused leaks, but more upsetting, the counterfeit formulation contained unhealthy levels of bacteria that could cause infection.

“Counterfeiting from our point of view not only compromises the brand, but it also has the potential of significant health risks for the consumer,” says Vikki Bresnahan, product security manager for John Paul Mitchell Systems in Beverly Hills, CA.

Counterfeiting is a serious problem today.  It poses health risks to consumers. It has suspected links to organized crime and to terrorism. It erodes brand integrity. But perhaps more disconcerting is the scope of the problem. Consider these statistics:

• 5-7 percent of world trade is in counterfeit goods — International Chamber of Commerce

• Estimated U.S. losses from counterfeiting and piracy in 1982: $5.5 billion; Losses in 1988:     $60 billion; Losses in 1996: $200 billion — International Trade Commission

• In fiscal year 2005, the U.S. government seized $93 million worth of counterfeited goods. — U.S. Customs and Border Protection (Industry experts estimate that only 1 percent of counterfeits are actually seized).

The beauty industry has felt the blow of counterfeiting. In 2005, fake perfumes ranked one of the top ten most-seized counterfeit commodities by the U.S. government, with seized goods valued at $2.7 million. Seized pharmaceuticals, by comparison, valued $2.1 million.

“Counterfeiting within the cosmetic and fragrance sector is a significant problem on a global scale. For example, European Union customs officials have estimated that seizures of counterfeit cosmetics and perfumes increased by a factor of 800 percent between 2002 and 2003,” says Joshua Paul, an attorney leading the Intellectual Property Practice in the New York office of Sedgwick, Detert, Moran & Arnold. He specializes in trademark, copyright and advertising matters, including all aspects of anti-counterfeiting and IP enforcement activities.

Despite popular opinion, counterfeiting is a problem for low and high value items alike. Counterfeiters are widely known to reproduce expensive items, but there are also documented incidences of low value counterfeits, such as shampoo and toothpaste.

“It’s across the board. We see goods that sell for as low as a dollar that end up being counterfeited,” says Steven D’Onofrio, executive director of the International Anti-Counterfeiting Coalition in Washington, DC.

While counterfeiting is a formidable opponent, there are ways to fight it. Luc Van Gestel, vice president of design and print management, M-real Corporation, IBP Packaging Services, offers a four-tier approach: Direct action against counterfeiters, support of new legislation, security packaging and education of the general public and customs officers.

Direct Action

For John Paul Mitchell Systems, prosecuting cases has met with reasonable success. “The fortunate thing with counterfeiting is that we can bring it to the attention of the local law enforcement, federal law enforcement, etc. We have pretty good success in the prosecution of cases,” says Bresnahan. “I’ve had one counterfeit case in the six years that I’ve been with the company, but my understanding is that it tends to be cyclical for some reason. I would surmise that the people who did it got caught, they spend some time in jail, they get out and try their hand at it again. It is not as constant for Paul Mitchell as it is for a lot of other companies.”

In the case of John Paul Mitchell Systems, the person involved in the latest counterfeit scheme was living in the United States. This was fortunate. “In the United States the laws already on the books are, with some exceptions, adequate,” says Paul. “The situation in some foreign countries is very different. Unfortunately, there are still many countries whose law enforcement structures and personnel simply cannot — or will not — effectively prosecute counterfeiting and other crimes against intellectual property rights holders. China remains a very big problem, but there are others — Russia, Mexico, Philippines and Taiwan to name a few.”

Direct action is also most effective when it targets counterfeiters higher up in the supply chain. Chasing low-level criminals, such as those peddling counterfeit bags on a city street, may prove counterproductive. “You stamp out one person and another one appears. It’s like a cockroach,” says D’Onofrio. “The only way it really gets addressed is through criminal enforcement at a high level.”

A word of advice for brand owners who want to pursue prosecution: “The real challenge is how to get a busy Customs agent or prosecutor focused on your problem, on your brand. A brand marketer needs to convince the prosecutor that its case is especially important and deserving. Doing your homework before the first meeting with law enforcement officials is very important. The objective is to show them that the brand marketer has already done a lot of the legwork,” says Paul.

Legislation

Joining an organization, such as the International Anti-Counterfeiting Coalition, that fights for higher intellectual property rights standards is one way to fight counterfeiting globally. Many beauty brand marketers have already taken this step. Also important is following legislation domestically.  

These efforts pay off. A U.S. federal appeals court decision in 2000 created a setback for brand owners. The case, U.S. v. Giles, viewed current counterfeit laws narrowly. The defendant had been caught shipping counterfeit trademarked handbag labels and hangtags. But because the counterfeit labels and tags were not attached to counterfeit bags, the court dismissed the indictment.         

Trademarked labels are protected in some industries due to another law, Section 2318 of the Criminal Code, but the beauty industry is not on the protected list.

That’s hopefully about to change. “Congress seems to be on the verge of passing legislation that would make it a federal crime to traffick in counterfeit packaging of any sort — including primary and secondary packaging for fragrance, cosmetic or other beauty products. The House of Representatives passed the Stop Counterfeiting in Manufacturing Goods Act early last year. The Senate passed a slightly different bill in November 2005. What needs to happen now is for the House and Senate to iron out the differences in their bills so that legislation can be put on the president’s desk soon,” says Paul.

Security Packaging

The sophistication of counterfeit packaging rings should not be underestimated. Although quality runs the gamut, there are some counterfeiters that produce high quality replica packaging. Bob Muscat, vice president of marketing, paperboard division, Rock-Tenn company, recalls a company in the beauty industry that discovered counterfeit products because the printing quality on the counterfeit packaging was too good. “The counterfeiters had better equipment than most of the conventional packagers,” he says.  

Now that’s security packaging! Courtesy of Kurz Transfer Products

Despite the illegal trade’s printing sophistication, security packaging remains an effective way to combat counterfeiting. Security packaging can act as a deterrent to would-be counterfeiters. If one branded product is protected, and another is not, there’s a good chance counterfeiters will choose the easier target.

It also aids in prosecution of cases if the product is counterfeited, and can help combat diversion, which is when product finds its way into unauthorized distribution channels. Security packaging can help track information such as the point of manufacture and its intended country of sale. At lower levels, as in the case of a hologram in a trademarked shape, “it would be easier to prosecute because they are maliciously going after your trademark,” says Brad Long, business development director for Kurz Transfer Products, a holograph foil manufacturer in Charlotte, NC.

“A lot of people in the [beauty] industry are talking about security features, especially within high end fragrances. They are looking for information and ways to protect their brand equity,” says Tom Koslowsky, director of new business development for printer Topflight in Glen Rock, PA. “There are many different levels of brand security available,” he adds.

Security packaging falls into three main categories, according to Neil Sellars, director of product development and marketing for National Label Company, a custom printer located in Lafayette Hill, PA.

According to Sellars, level one is overt technology and is directed at consumers. “The packager uses something that’s recognizable, like a hologram of your logo, or color shifting ink that a consumer would recognize as being your product. The consumer would validate your product by looking at it.” The bonus to including overt technology is that it is often decorative.

Level two is “an easily distinguished covert technology with a readily available device such as a loop for identifying microtaggants, or a UV lamp for magnifying UV florescents,” Sellars says. Retail outlets, for example, would activate this level of covert technology to authenticate a beauty product.

Level three is also a covert technology, but it is usually a proprietary system used only by the manufacturer. This is also known as the forensic level of security packaging technology. “It would be a closed loop system, some sort of reader technology that can verify if the product is authentic,” says Sellars. “The most frequently known technology would be a radio frequency taggant tied to a manufacturer’s system.”

Increasing Effectiveness

Which security features are right for a brand owner? Since each level of security packaging is targeted at a particular audience for a particular goal, sometimes the answer is a combination. Using several different technologies also further deters counterfeiters.

Layering technologies does not always add tremendous costs. With holograms, for example, “it doesn’t cost more to include covert features in holograms as they are built into the initial optical rendering. So, most companies go with overt and covert within holograms,” says Long.

Another way to increase security packaging effectiveness is through frequent design changes. “Security solution design should be altered at regular intervals to stay ahead of the sophisticated counterfeiter. We have to remember that high tech technology such as scanners and professional software are also available to the counterfeiter. For some security solutions, the shelf life is limited to six months, after which it is better to change the design or content,” says Van Gestel.

Security packaging can be effective on various levels, but with the protection comes a price tag. “Of all the approaches that are out there today, I would say most are highly effective, but inefficient. Your cost per package is relatively high,” says Muscat of Rock-Tenn Company.

Despite this, for those products that are subject to counterfeiting the cost may be worth it. “They have to look at the benefits side, which says my counterfeiting rate will go down 20 percent, for example, and then calculate the revenues,” he adds.

Education

The fourth approach to fighting counterfeiting is through education. A key piece is educating the consumer.

John Paul Mitchell Systems is a proponent of consumer education. “We have national television ads aimed at consumers to inform them that if they do see our products at drug, discount or grocery stores that they should know that it does not come from us, it is not authorized by us. It could be old, stolen, counterfeit, tampered with or diverted. We also have national print ads that speak to that same issue,” says Bresnahan.

For those companies that include overt security features in the packages, it is important to alert consumers to look for it. “You have to make the consumer aware to look for those things,” says D’Onofrio. “It may not always deter them, but certainly the better you can educate them that purchasing counterfeits is both illegal and may, in some cases, be harmful, the better.”

Informed law enforcement is also important. “Some of the security features can be used for law enforcement purposes. Law enforcement should know what to look for as well,” says D’Onofrio.

The Fight Continues

Counterfeiting is a lucrative trade and the criminals are oftentimes highly sophisticated. But becoming a repeat victim of this crime does not have to be inevitable. There are many ways a brand marketer can protect itself.

“There’s no one size fits all solution, of course, but the best generalized advice I have given to clients is to plan and prepare.

“First, take a look at your distribution network and make sure that your key brand names are registered as trademarks in all major markets. Second, establish and stick to strict packaging guidelines; doing this will enhance your company’s ability to detect counterfeit packaging. Third, consider the use of various overt or covert security measures to track inventory through the supply chain and to enhance your ability to detect counterfeit product. Fourth, know your supply chain partners,” says Paul. “Finally, maintain and update a database of information about incidents of suspected counterfeiting as they occur. Review that information periodically to make sure that you have committed the right resources in the right place.”