US Government Cracks Down on Counterfeits in 2020

BakerHostetler

Combating counterfeit goods has become a serious focus of the U.S. government in 2020. This article is the first in an ongoing series about the actions being taken in this fight and the implications for e-commerce platforms and companies seeking to protect their brands from the threat of counterfeit goods.

The U.S. Department of Homeland Security (DHS) recently issued a report to address the rapidly growing e-commerce marketplaces that created new channels for the trafficking of counterfeit and pirated goods. Counterfeit goods are no longer restricted to street corners and back-alley shops; they are now just a click away. E-commerce platforms and online third-party marketplaces created new, easy and profitable channels for trafficking counterfeit goods.

The dramatic rise of this illicit trade drew the attention of the White House last April when President Trump issued a call to action.[1] DHS issued a report in response on Jan. 24.[2] President Trump reacted swiftly and on Jan. 30 signed an executive order aimed at preventing counterfeit goods from being sold on e-commerce websites.[3] While this measure is a step in the right direction, the DHS Report makes clear that “[g]overnment action alone is not enough to bring about the needed paradigm shift and ultimately stem the tide of counterfeit and pirated goods.” Companies selling consumer goods must take an active role in policing and protecting their intellectual property, and e-commerce owners need to establish policies and procedures to prevent the sale of counterfeit goods.

The key points from the DHS report and the president’s executive order are summarized below.

1. Counterfeit goods are on the rise

As e-commerce retail sales grow year-over year – a growth of 13.3% in the second quarter of 2019 compared with a retail sales increase of only 3.2% – the amount of infringing goods has similarly increased.[4] In 2018 alone, Walmart’s e-commerce sales grew 40% and Amazon’s third-party sales on its marketplace reached $160 billion. Counterfeit goods have followed the same trajectory, with seizures of infringing goods at the U.S. border having increased tenfold. In 2003, there were 3,244 seizures reported; in 2018, that number rose to 33,810. The domestic value of the seized merchandise reached $1.4 billion in 2018 compared with $93 million in 2013. The rise in counterfeit goods is not just an issue domestically, the Organisation for Economic Cooperation and Development, an intergovernmental group consisting of 36-member states that discuss and develop economic and social policies, documented a 154% increase in counterfeits traded internationally, from $200 billion in 2005 to $509 billion in 2016.

2. Certain products are more prone to counterfeiting than others

Not all goods face the same risk of counterfeiting. U.S. Customs and Border Protection’s (CBP) intellectual property rights annual seizure statistics for fiscal year 2018 reveal the top four categories of products that were most frequently seized: (1) wearing apparel/accessories, (2) footwear, (3) watches/jewelry and (4) handbags/wallets.

The DHS Report notes that many of the items seized were luxury brands’ merchandise but also other brand name products.

3. E-commerce and third-party marketplaces make trafficking counterfeit goods easier and more profitable

E-commerce platforms have made selling counterfeit goods easier and more profitable than ever before. Counterfeiters benefit from the lower production and distribution costs by having access to millions of potential customers at the click of a button, greater convenience in executing transactions, and an air of legitimacy by being listed on well-known platforms. Sellers of counterfeit goods also face much lower startup and overhead costs, as they can quickly set up a virtual storefront as opposed to renting retail space.

Additionally, virtual storefronts lower the risk associated with trafficking counterfeit goods, by allowing counterfeiters to evade law enforcement. Counterfeiters can now operate anonymously behind computers in another country, avoiding criminal charges or civil liability. Even if an existing site is shut down, the seller can quickly set up a new website or seller account. All these factors minimize the cost of trafficking counterfeit goods, making it an increasingly profitable and attractive enterprise.

4. Consumer perception of counterfeit goods has shifted

E-commerce platforms hinder consumers’ ability to identify counterfeit goods. Previously, consumers could rely on certain “red flag” indictors such as the suspicious location of a seller or poor-quality packaging. These indicators are now gone, as counterfeiters can utilize well-known platforms to give an air of legitimacy to the goods they sell.

This issue is further exacerbated by third-party marketplaces. In 2017, 39% of all unwitting purchases of counterfeit goods were bought through online third-party marketplaces. Social media has also helped proliferate counterfeits, as sellers can take advantage of algorithms by using the names of luxury brands in hashtags – making discerning a counterfeit product from a real one even more challenging. A 2019 report found that nearly 20% of the posts analyzed regarding fashion products on Instagram featured counterfeit goods; the report also identified more than 50,000 Instagram accounts as promoting and selling counterfeits, a 171% increase from a 2016 study.

5. Counterfeit goods cause serious economic harm

The economic impact of counterfeit goods should not be underestimated. In 2013, counterfeit goods displaced roughly half a trillion dollars in global sales of legitimate companies. This figure is expected to reach $1 trillion to $1.2 trillion by 2022. The sale of counterfeit goods also resulted in global employment losses of between 2 million and 2.6 million jobs in 2013, which is expected to double by 2020.

6. Monitoring, detecting and preventing trafficking online is key

Counterfeit goods no longer just harm the value of a brand, but also negatively impact the e-commerce platform itself. Counterfeit goods sold on legitimate e-commerce platforms are eroding consumers’ trust in those platforms.

As a result of the massive amount of counterfeit goods currently being trafficked online, e-commerce platforms will soon face additional regulations aimed at prevention. The president’s executive order tasks DHS with, among other things, establishing stronger criteria that companies must comply with when importing goods. DHS, in its report, recognized the need for a more developed policy for e-commerce platforms. DHS provided “best practices” that e-commerce platforms should adopt and tasked the National Intellectual Property Rights Coordination Center with monitoring and reporting on the adoption of these practices.

The DHS Report and actions by the White House addressing the issues surrounding counterfeit goods are important developments, but there is still much work to be done. While the government works to implement best practices and policies across e-commerce platforms and third-party marketplaces, brands will need to be vigilant in policing websites to ensure counterfeit versions of their products are not being sold and their brand reputations are not being diminished.

[1] Memorandum on Combating Trafficking in Counterfeit and Pirated Goods, (April 3, 2019), https://www.whitehouse.gov/presidential-actions/memorandum-combating-trafficking-counterfeit-pirated-goods/.

[2] U.S. Dept. Homeland Sec., Combating Trafficking in Counterfeit and Pirated Goods, (Jan. 24, 2020), https://www.dhs.gov/sites/default/files/publications/20_0124_plcy_counterfeit-pirated-goods-report_01.pdf. Hereinafter referred to as the “DHS Report.”

[3] Exec. Order, Ensuring Safe & Lawful E-Commerce for US Consumers, Businesses, Government Supply Chains, and Intellectual Property Rights, (Jan. 31, 2020), https://www.whitehouse.gov/presidential-actions/ensuring-safe-lawful-e-commerce-us-consumers-businesses-government-supply-chains-intellectual-property-rights/.

[4] DHS Report at 7 (citing Dept. of Commerce, Quarterly Retail E-Commerce Sales 2nd Quarter 2019, (Aug. 19, 2019), https://www2.census.gov/retail/releases/historical/ecomm/19q2.pdf).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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