Politics

Smuggler's Delight

The American marketplace is awash in illegal fake products. Governments are supposed to police them, but most don't.
by | July 2007
 

Tucked in the hills of North Carolina, 30 miles from Greensboro, the town of Lexington resembles most small communities in the state. It has a 19th-century courthouse, a big annual barbecue festival and an abundance of NASCAR fans. But it's also typical in a less benign way: Counterfeiters call it home.

Last November, state, local and federal law enforcement officials descended on a warehouse and wholesale store in Lexington and seized thousands of knock-off items ranging from brand-name hats to socks with Disney characters on them--13,000 pairs of fake socks in all--and 22,000 illegally imported knives, more than enough for every Lexington resident to have one.

Similar busts have occurred in towns across North Carolina, from Yadkinville to Fletcher to Lumberton. The raids have taken place largely because of one person: Secretary of State Elaine Marshall. North Carolina gives its secretaries of state unusual responsibilities, and one of those involves the registration and enforcement of legal trademarks. Marshall has made the battle against counterfeiting a hallmark of her decade in office, so much so that she is hailed as a hero by a nonprofit group called the International Anti-Counterfeiting Coalition.

Many major companies, the ones whose trademarks are being violated, would like to see an Elaine Marshall in every state. That is unlikely to happen. Not many secretaries of state have the authority she has-- they are primarily election administrators--and few other statewide officials have shown much inclination to assume the task. But as the problem worsens in states all over the country, the demand for somebody in state government to take charge on counterfeiting is bound to grow.

CONTRABAND TOOTHPASTE

It's only a slight exaggeration to say that any product sold in the global marketplace these days is bound to generate a counterfeit version. The World Customs Organization and Interpol estimate that $600 billion in counterfeit merchandise went to market last year--much of it made in China--and U.S. businesses alone lost $250 billion because of the practice. A lot of it is fashion accessory merchandise, from fake Oakley sunglasses that sell for $10 instead of $100, to imitation Louis Vuitton handbags that go for a fraction of their regular price.

In recent years, however, the breadth of the counterfeiters' repertoire has expanded well beyond the typical fashion lines to include electrical products, prescription drugs, fake Microsoft operating systems and, in some more troubling cases, toothpaste, medical devices and airplane parts. As counterfeiting has spread, the problem of stopping it has grown more nettlesome for two reasons: Internet commerce has made verifying the authenticity of goods more difficult, and counterfeiters have grown more sophisticated at producing imitations that only an expert's eye can distinguish from the real thing.

All levels of government have a role to play against counterfeit products, from federal customs officials who try to keep them out of the country to local law enforcement officers who see something amiss at a flea market or discount store in a place such as Lexington. But despite this multi-faceted government role, the most dedicated policing of counterfeit products doesn't come from government at all. It's the companies whose products are being knocked off that have most of the manpower on the front lines. "We have a network of lawyers, investigators and informants that keep us well apprised to what is going on," says Brian Brokate, a partner at the law firm that serves as general counsel to Rolex.

In contrast, the New York Police Department is thought to be the only local law enforcement agency in the country with a unit dedicated to the investigation of counterfeiting. Most local officials claim to take the issue seriously, but it's rarely a top priority for them. "Law enforcement is highly over-scheduled," says Barbara Kolsun, general counsel at Seven for All Mankind, a high-end jeans manufacturer.

Counterfeiting is explicitly forbidden under federal law and by state law in about 35 states. But many of the statutes impose misdemeanor penalties, and where the opportunity for profit is substantial, that may not be enough to deter violations. Travis Johnson, associate counsel for the International Anti-Counterfeiting Coalition, argues that the knock-off market is currently so lucrative that just slapping on a fine or even seizing the illegal goods isn't much of a deterrent. "That becomes their cost of doing business," Johnson says.

Congress beefed up federal law earlier this year, authorizing stiffer penalties--such as the destruction of equipment used to produce counterfeits--that IACC hopes will be imposed in the states. But what anti-counterfeit activists want most is a lowering of the threshold for felony prosecution.

Elaine Marshall says this is a key to solving the problem. A few years ago, she says, "you almost had to intercept a truckload of stuff until you got to felony status." In large part at Marshall's insistence, the volume of counterfeit merchandise needed to make a felony case in North Carolina has been reduced. According to her, this makes law enforcement more willing to go after counterfeiters--there isn't much incentive to catch them if they're only going to be fined and released.

COUNTERFEIT ALLEY

North Carolina has a statewide anti-counterfeiting task force, made up of representatives from law enforcement at all levels of government. Members of the task force gather to be trained to identify counterfeit goods, with some of the most frequently victimized companies coming in to explain the difference between the fakes and the real things. Whether it's because of this approach or just the secretary of state's aggressiveness in general, North Carolina has significantly increased the volume of counterfeit goods recovered in recent years. During the first six months of 2006, the secretary of state's office confiscated more than $5 million worth of counterfeit products--a drop in the global bucket but a big load of knock-off Disney socks.

Besides North Carolina, the jurisdiction that takes counterfeiting most seriously is New York City. The Big Apple has long been known for vendors hawking counterfeits at cheap prices, to the point that an area in Manhattan's Garment District has earned the nickname of "Counterfeit Alley." For a long time, city enforcement efforts centered on the street vendors who were the most visible sign of the problem, but that tactic wasn't enough. "We all know that's a relatively limited approach," says John Feinblatt, New York's criminal justice coordinator, noting the seemingly endless supply of scofflaws willing to sell counterfeits. "Tip of the iceberg doesn't even quite describe it."

The city's new approach is to look one step up the counterfeiting chain, to landlords who knowingly house the vendors. Many of the knock-off merchants stock and sell their goods in large warehouses in Counterfeit Alley that are sometimes referred to as "counterfeit malls." Since late 2003, city officials have been targeting these malls, confiscating nearly $50 million in illegal goods.

But they've also gone a few steps further, closing down the buildings once the counterfeiters are caught and sending in inspectors from various city departments: health, fire and the Department of Buildings in particular. What these inspectors invariably find is buildings that aren't up to code. Heavy fines follow, leading the landlords to reach settlements with the city under which they promise to convert the buildings to other purposes and put up large bonds that they forfeit if illegal activity resumes on their property.

VICTIMLESS CRIME?

While these tactics seem effective, there are those who continue to question whether they are worth the effort. No one has ever died from a knock-off hat or handbag (although electrical products and prescription drugs may be another story). Counterfeiters typically target giant corporations because they're the ones with brand names that are lucrative to imitate. Is it really an intelligent use of over-stretched state and local law enforcement workers to protect multinational corporations, many with no significant manufacturing presence anywhere in the United States?

Pose this question to people who make a living in the battle against counterfeiting and you will hear them talk about the illusion of a "victimless crime." They point to a bevy of statistics indicating a link between counterfeiting and organized crime. No one does so more effectively than New York's Feinblatt.

Counterfeiting, he says, hurts not only the corporate trademark holders but also consumers, who may be harmed by a shoddy product; people living and working near Counterfeit Alley, who suffer from the code violations; legitimate merchants, who lose business to the black market; and--far from least--local governments, which can't collect taxes on sales that occur in a shadow economy.

These are the sorts of points that Elaine Marshall has been making for years in North Carolina. She adds her own wrinkle to the argument, connecting counterfeiters to the loss of jobs. It's hard enough, she argues, for North Carolina entrepreneurs to scratch out a living in the global economy, but they don't have a chance if they have to compete against cheaply made knock-offs from overseas. Marshall's message seems to have resonated in her own state, but unless it sinks in elsewhere, aggressive efforts like hers will remain the exception rather than the rule.

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com

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