How safe is your intellectual property?

Howard Cottrell says that misrepresentation of brand image will escalate with the internet explosion, but companies are taking surprisingly few precautions to protect themselves.

In 1998, the US Federal Bureau of Investigation (FBI) predicted that counterfeiting would become "the crime of the 21st century". Despite this early warning, when ArmorGroup interviewed marketing or brand managers, City representatives, IP lawyers, and more than 300 consumers, the results showed that the safety of intellectual property is as much at risk as ever.

The findings are alarming. A third of consumers have seen goods that they suspect are counterfeit. The same percentage have knowing-

ly bought fake items. In tests of goods such as footwear and jeans, a third either wrongly identified items as being genuine or could not tell whether they were genuine or fake.

Counterfeiting operations are sophisticated and diverse. Fraudsters are keeping abreast of fashion and even ahead of consumer trends.

Counterfeiters used to favour branded sports apparel. As street fashions have evolved, they have turned their attention to walking and hiking boot brands such as Rockport and Timberland. Operating from places as far apart as China and the Balkans, counterfeiters visit trade fairs to steal prototypes of new products in which brand-owning companies have invested heavily. They can often produce counterfeits so quickly that they are available before the genuine article. For example, counterfeiters stole Reebok's DMX footwear design from a trade show and were selling fakes a matter of weeks later. Some counterfeiters are so audacious that they will take part in the trade exhibitions themselves, with their counterfeit products available "under the table".

Internet opportunities
Fraudsters are not slow to take advantage of new technology. The internet creates huge opportunities for them to masquerade as reputable companies and sell fake goods direct to millions of consumers.

According to the World Institute of Intellectual Property, 35% of all luxury goods for sale on the internet are fake, and this figure is growing. With quick downloading technology enabling sale of movies and music via e-commerce, another potentially huge market opens for those keen to defraud legitimate copyright holders.

More than one in five consumers expect to conduct all of their shopping from home, via the internet, telephone or post, within the next five years. Increasing misrepresentation through these media is virtually inevitable.

Companies should address this problem now. An essential first step is to find out how their images and brands are being used and abused on the internet. This can be difficult, with most search engines only trawling about 15% of the content of the internet. To resolve this, we recently formed a partnership with IBNet, whose Homer Internet surveillance software reaches closer to 90%.

Companies identifying abuse need to take action. If they don't have a coherent strategy to counter internet-based fraud, they are potentially vulnerable to attacks on their assets, as well as their reputations.

Dealing with counterfeits involves a process of intelligence and investigation. Eliminating counterfeits at source requires tracing back through retailers to wholesalers and then to manufacturers, to establish exactly where the products originate.

Most counterfeits come from abroad. Therefore, it is important to have people on the ground, monitoring counterfeiting activity, who understand local procedures and can liaise with the relevant enforcement bodies.

Vulnerable companies
Top brands are major assets. Brand assault can affect your bottom line and balance sheet so brand protection is a crucial issue. But our research shows that many companies, including some big brand owners, do not yet have an anti-counterfeiting strategy in place.

This is particularly the case with the fast growth companies in sectors like telecoms and information technology (IT), as well as the "dot corns". Many have grown quick ly. Their focus on sales and expansion has not left time to put in place even basic fraud protection procedures or to look at fundamental tactics, such as product security.

Even longer established companies are not adequately protected. While 33% of companies surveyed said their legal advisers were responsible for protecting brands and 29% used an internal legal specialist, 30% last met with their legal teams a year or more ago. 14% said brand protection was the responsibility of the company secretary.

Marketing executives do not rate brand protection as an important issue and IP lawyers spend most of their time on defensive action. When asked to rate brand threats from 1 (not a problem) to 5 (a major concern), marketers rated counterfeits and patent infringements as low priority, giving them a score of 2.1 and 2 respectively

Only 28% of companies taking part in the study had registered their company names in major markets. A thir had registered logos; 60% had registered brand names, 55% their trademarks, and just a quarter, the colours usec in their brand livery.

New products unprotected
New product development is crucial for leading brand owners to maintain their market lead. It is an area that is particularly exposed to counterfeiting. On average, the companies surveyed develop 32 new products and product spin-offs each year, involving both internal and external personnel. Few use confidentiality agreements.

The study shows that under 30% of the many advertising agencies, designers, marketing agencies, packaging companies and market researchers who are privy to plans for new products are asked to sign confidentiality agreements. Almost half (42%) of those questioned said that their employment contract does not include a confidentiality clause; 36% do not involve the legal team in new product development and 18% only involve the legal team when names need checking.

Companies depend on their in-house and external IP lawyers to protect their brands. But over a quarter of in-house lawyers and 15% of those from law firms are not involved in new product development.

Defensive rather than offensive
The IP lawyer's role seems predominantly reactive rather than proactive - handling disputes brought against brand owners rather than prosecuting threats to the brands. When asked to rank their activities from 1 (that on which they spend most time) to 6 (least time), lawyers said they spend most time on patent, trademark and IP disputes brought by other companies. Trademark searches are the second most time-consuming task. They spend least time on investigating fraud and tracking down parallel traders. On average, each company involves its lawyers in five counterfeit problems each year. Only 12% of incidents result in legal prosecution.

High risks for brand owners
The incentive for fraudulent branding is high. Our study shows that consumers are willing to pay 33% more for a branded item compared to an unbranded product.

Potential damage is equally high. Surveying stock analysts and other City representatives revealed that 25% would be more concerned about the effects on share price resulting from a counterfeiting scare than from earnings' results below expectation or the resignation of the chief executive.

Parallel trading opens floodgates
Kim Howells MP, UK Consumer Affairs Minister, has spoken in favour of parallel or grey market trading which takes advantage of the price differentials between countries. It allows goods bought from cheaper markets, such as Eastern Europe or the USA, to be sold on to UK retailers. Seemingly, it benefits the consumer by making branded items available at a lower cost. But grey marketeering potentially exposes shoppers to significantly more counterfeits.

Counterfeiting and parallel trading are particularly rife in some areas and for some products. For example, based on current findings, up to 25% of the goods a youngster in North-West England encounters in his or her day-to-day life will be fakes. Over 20% of the cigarettes bought in the UK have been illegally brought into the country. Grey marketeering is set to increase. What we are seeing at the moment is probably only the tip of the iceberg.

Previously, the main sources of fake goods were car boot sales, markets and street traders. It was difficult for criminals to get their goods into the major chains. Most buyers were young people who wanted to obtain branded and electronic goods cheaply. However, extensive parallel trading will make fakes far more widely available, since it will provide a ready-made route for counterfeits to saturate the major, trusted high street retailers.

In our experience, opportunistic counterfeiters are beginning to take advantage of the upsurge in grey mar-keteering with a system of "pick and mix" that combines counterfeit goods with genuine items. Criminals are now so sophisticated that they can produce fake documentation to make it look as if they are buying from authentic distributors.

Grey markets exist when distributors sell outside their legitimate territory. This makes monitoring such trading very difficult. Major multinationals can protect themselves by policing the distribution chain. We use a formula involving such elements as the retailer's size, back orders and potential customers, to ensure that orders are legitimate. Tracing and tracking goods coming into a country provides a check that they are not being traded on the grey market.

Retailers can't use these methods. They can only guard against fake consumer items flooding their shelves by ensuring they buy exclusively from the authorised distrib utors. However, this makes it impossible for them to participate in grey marketeering, which may well reduce theii competitiveness.

Active encouragement of parallel trading, with competitors selling goods more cheaply, will force retailers to follow the same course. The result is that consumers will be able to do little to guarantee that the goods they buy are genuine. Growing use of the internet, an ideal platform for parallel trading, will open up the grey market further.

Fakes are now such big business that practically any item can be sourced globally. Various countries tend to specialise in certain items. For example, manufacturers of fake jeans are often based in Turkey and the former Yugoslavia; fake mobile telephone producers are prevalent in Lebanon. Those involved in counterfeit activity in the USA tend to specialise in producing car parts - a reverse of the norm as, in this instance, the first world is manufacturing goods for sale to the third.

Another increasingly serious problem with grey marketeering is that it allows sale of fake items that could pose dangers to consumers. Parallel trading of pharmaceuti-cals, for example, puts the public at risk of buying counterfeit medicines. Even legitimate items often need to be repackaged to conform to the local market, thereby running the risk of errors and incorrect information. Potential dangers also come from grey market car parts and other electronic goods that are not subject to any technical support or customer care.

The threat to brands is growing. The severe impact a brand attack may have means that corporations would do well to put some basic safeguards in place.
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Howard Cottrell is executive director of IP Services at ArmorGroup.

Warning case studies for importers and retailers
Though grey marketeering remains a civil matter between brand owners and retailers, UK trading standards officers have found examples of counterfeit products disguised as grey market material being offered to, or already infiltrating, high street retailers.

At the end of 1998, sports shops across the country were being supplied with fake Adidas, Puma, Nike, Timberland and Reebok items which they believed were genuine grey market goods. Nottingham trading standards officers traced back the distribution chain and discovered that Speed 5400 Ltd, an importer based in London, was bringing the items into the country, buying them from an agent in Peru. The importer was paying reasonable grey market prices and believed the items were legitimate. Speed 5400 received a formal caution and suffered a severe loss from the thousands of items which were seized.

A well-known fashion retail chain has recently sold fake Helly Hansen fleece tops which it bought, believing them genuine, from an importer based in South Wales who had purchased them from Sri Lanka.

Nottingham-based Gunn and Moore, a manufacturer of English cricket bats and gear, has suffered at the hands of counterfeiters. It was on the distribution list for a mail-shot sent out by an importer and distributor in Elstree, Commodities International Ltd trading as Unisport, which was selling counterfeit Gunn and Moore products imported from India.

Source:Trading standards offices.