Did eBay Start a Counterfeit Crackdown?

Louis Vuitton and Tiffany both brought counterfeiting suits against eBay recently, claiming eBay wasn’t doing enough to eliminate counterfeits sold on its site. (EBay lost the Vuitton case in Europe but won the Tiffany case.)

Similarly, Estee Lauder filed a lawsuit against CVS and Family Dollar last month, claiming the stores sold knock-offs of its brands. And city agents shut down 32 shops on Canal Street in Manahattan last February for selling counterfeit goods.

It didn’t look much different this morning:

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Is this the start of a counterfeiting crackdown or will it go on largely unabated?

We asked Judith Zaichkowsky, author of Counterfeiting — The Psychology Behind Trademark Infringement and Counterfeiting; and co-authors of “The Piracy Paradox,” Kal Raustiala, director of the UCLA Ronald W. Burkle Center for International Relations, and Christopher Sprigman, associate professor of law at Virginia Law, about the suits and how they’ll affect counterfeiting culture.

Q: CVS, Family Dollar, and eBay all encountered similar suits recently. Is this due to a heightened awareness of counterfeiting?

Raustiala/ Sprigman: We doubt that: counterfeit goods are quite common and this sort of litigation is not new. In any event, it wasn’t a surprise to us that the court ruled against Tiffany and in favor of eBay.

There is one big difference between previous counterfeiting cases and what we see in the eBay case: eBay is not a seller, but rather an online marketplace that connects sellers and buyers. Brick-and-mortar stores like CVS have the ability to inspect the merchandise they stock and perhaps distinguish genuine from fake. EBay can’t do that — they never take delivery of the merchandise that people auction using their site.

As the court in the eBay case recognized, it makes little sense to hold eBay responsible for counterfeit goods sold on their site — just so long as eBay, when it is told that particular counterfeit goods are being offered for auction, responds by quickly shutting that auction down. The evidence in the case against eBay suggests that eBay does just that.

The CVS case involved not true counterfeiting but so-called “gray market” goods. Gray market goods are not fakes, but rather genuine goods obtained from unauthorized distributors. Gray market selling is very lightly regulated.

Then there are “knock-offs”: goods that appropriate some aspect of the design or appearance of another good but not the trademark itself — for example, perfume that is marketed as “smelling like” Chanel No. 5, or dresses that are “inspired by” the work of a famous fashion designer. Knock-offs are almost always legal.

We have written an academic paper arguing that fashion knock-offs, in addition to making designer-inspired apparel more accessible, are also (on balance) good for the fashion industry. Knock-offs play an important role in the creation of fashion trends, and the industry relies on trends to sell more fashion.

Zaichkowsky: Maybe. The interesting thing is that people have been selling counterfeits on-line since there have been counterfeits and since there has been online commerce. EBay is not the only reseller of counterfeits but maybe they are the biggest and easiest target to attack. Furthermore the problem is not just that they have been used to sell counterfeits, but the goods sold are advertised as “real.” It is one thing to knowingly buy a counterfeit and another to buy it under false labels.

This is likely a big part of the eBay-Vuitton suit and in the end, one could say that perhaps Louis Vuitton is doing a lot of customers of eBay a big service by wielding a big stick.

Q: What will, or won’t, change in counterfeiting culture because of high-profile suits like eBay? What will happen to vendors like those on Canal Street (will prices go up or supply down)?

Raustiala/ Sprigman: The result in the eBay case won’t change anything fundamentally — but then again, the same would be true even if Tiffany had won that case. Counterfeiting is very hard to control — in part because of the very high prices that some genuine goods (like prestige handbags) command. The off-line markets in counterfeits are already enormously robust and competitive. Even if eBay were to ban all luxury goods auctions on its site, the effect would likely be limited to items that are less popular, and thus less frequently counterfeited.

For these “niche” fakes, eBay’s worldwide online market may provide enough buyers and sellers to make trade in these items economic, whereas even vendors on Canal Street in New York City or Santee Alley in Los Angeles may find too few buyers to make some counterfeits worthwhile.

So for this class of goods, prices may rise and supply shrink. But overall, the business of counterfeiting is likely to outlive us all.

Zaichkowsky: Lawsuits like this do a lot to bring counterfeiting to the attention of business, but the lawsuit focus is on the company selling, not the consumer buying. You need to stop the demand before you can stop the practice. And the only country in which I think it is illegal to buy counterfeits is Italy.

When the consumer demand is there, there will always be manufacturers and sellers. The solution lies not in the law but in creating a negative image of a counterfeit consumer: one who buys counterfeits supports organized crime or is a fake person for buying a fake item.

Japan has the lowest consumption of counterfeit handbags. The Japanese covet quality and the real thing. They would lose face if their friends found out they had a fake bag.

As long as U.S. consumers think it “fun” to own a few counterfeits, New York City vendors will sell them.

As for prices, this is interesting because manufacturers in China produce 4 grades of counterfeits. Do you want A, B, C, or D? Prices vary as does quality.

My colleague in Paris told me of a story where the head of Louis Vuitton was approached in China by a manufacturer of fake Vuitton bags. He wanted to be licensed by Vuitton to manufacture for them. His product was excellent and of high quality. But there was no way Vuitton wanted to manufacture in China.

So some of these fakes are excellent quality and sell for more.

Another rumor that abounds (told to me by my secretary) is that the real stores have fakes mixed into their selection of real items, and/or that people bring fake bags into Vuitton and the staff can’t tell the difference. This is pretty dangerous territory for Vuitton and they need to reassure customers that their staff knows the difference between fakes and real goods.

One solution that seems to be ignored so far is to number pieces, much like limited edition prints by an artist. Customers can check if numbers are registered and where. This is not a new idea, but I am sure it is a bit cumbersome.

Q: In what industry is counterfeiting most “accepted” and in which is it least accepted/most penalized?

Raustiala/ Sprigman: Real counterfeiting is not accepted anywhere. Knock-offs, however, are more accepted — or perhaps it is better to say tolerated — in some creative industries than others.

An interesting example is the music industry, which presents a split personality on this issue. If you sample even a few notes from another’s sound recording, you may end up on the wrong end of a copyright lawsuit. But at the same time, the practice in (and the legal rules governing) the industry permits you to take someone else’s music composition and, for a small fee, make your own cover version. So don’t touch someone else’s recording, but feel free to re-make their entire song!

Zaichkowsky: One could say the only industry where counterfeiting is really not accepted is currency. Counterfeit currency operations are always prosecuted to the full extent of the law because it is the government which is harmed and the government makes the laws of the country.

I am not sure any industry accepts counterfeiting. The industry where the most counterfeiting is consumed is media/software. In a recent man-on-the-street survey done in Hong Kong we found about 60 to 70 percent of people readily admitted to purchasing counterfeit audio/visual (CD/DVD/VCD) and software. This is likely under represented because of social bias. I think some stats say about 90 percent of CDs and software are counterfeit in some countries.

The areas where consumers are not keen to purchase counterfeit goods are in drugs and certain electrical goods where they are afraid product failure may harm them. In fact, a woman recently died here in B.C. (Canada) after consuming “vitamins” she bought online. Most Viagra sold online is likely counterfeit and surely does not contain the same ingredients as that from Pfizer.

There are several attitudes at play from the consumer side. First a lot of CDs, software, etc. is consumed privately and is a necessity good for most. Therefore a lot of times the consumer is not subject to scrutiny when purchasing these items. A lot of the software comes from Microsoft which is a huge American company and many people think there is no harm in ripping off Microsoft.

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  1. LH says:

    Interesting discussion. I would still say EBay needs to do more to police their site for fakes. It would be very easy to flag posted auctions for review if the name or text of the auction included words like Tiffany, Vuitton, and so forth. Not a complete solution, but a start. It kind of addresses the point of selling a fake as a fake or as the real thing. In addition, for items like Vuitton which have a distinct logo pattern on many of their items, image scanning software has reached pretty impressive levels, and could also flag for review many non-text violations.

    Overall, I’m no fan of the excuse by companies like EBay that they’re not responsible for what their users post. EBay is making money on each and every auction, and as such, is a party to the fraud.

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  2. Vizeroth says:

    It should be noted that their discussion of the music industry is a little off. If you ask for permission to sample a song the artist may decide to allow you to do so, just as in the case of a cover. The fee for either is an agreement between the copyright holder and the people doing the sampling/covering of the song, and can range drastically. The copyright owner can also, ultimately, ask you to change your work if you’ve used a sample or covered their song. For example: Megadeth’s cover of “These Boots (are Made for Walking)” was changed when they re-released/re-mastered the album due to complaints from the copyright holder regarding the version that was originally released. They could have asked for those changes to be made at any time, but the complaints only came up when they were negotiating for the rights to release the remaster.

    The issues of counterfeiting CDs, though, go back to the arguments of how easily a perfect reproduction of the CDs themselves can be made, while the packaging takes somewhat more effort (depending on the choices of the artists and labels when choosing the packaging). Since the industry (and for the most part the consumer) focuses on the product as the music on the disc, the counterfeit is for all intents and purposes just as good, because it is the same. With most of the customers in the US moving to downloaded music and the industry failing to motivate listeners with the higher quality of CDs vs. mp3 files (and the various other downloadable formats used by most online music stores), and failing to move buyers to new formats (DVD-Audio and SA-CD), it’s no small wonder that piracy is an issue on the street in Hong Kong (or Russia, or anywhere else for that matter).

    Further, when looking at the global market, the high availability of counterfeits in some regions actually makes it harder for the consumer to get the real thing. This even goes so far as some music, movies, software, and games not being distributed legally in some regions. The video game industry, especially, has developed special game systems to be sold in regions like China, with additional controls to combat piracy, and are generally well behind the systems available in the US, Japan, and western Europe. The region coding for Blu-Ray and DVD discs also reflects many of these issues and the ways in which the movie industry is trying to address them (notice Blu-Ray has fewer regions, mostly reflecting the differing TV standards in the world, yet groups most of the “problem” areas into a single region).

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  3. Kate says:

    Well, Ebay certainly polices its sites for those corporations it’s cozy with, including Weight Watchers. I tried to sell some WW materials in excellent condition and received threatening letters from Ebay and was told my selling privileges were in jeopardy.

    I had to correspond with Legal in WW over this topic, because Ebay would not specify exactly the reason I was not permitted to sell some of the items I was selling.

    This was a small number of items I had received as a paid member of WW.

    So, Ebay is quite willing to police the auctions. My suspicion is that it must be for the right price.

    By the way, I’ve been an Ebay member and occasional seller for over 10 years.

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  4. Barr L. says:

    A crucial part of eBay’s value-add is the “due diligence” it does on buyers (rating systems, etc.)Although eBay never takes ownership of the branded merchandise, there are ways the company can tie the hands of would-be fake sellers so that the benefits of selling fakes do not outweigh the costs.

    Logic does not suggest eBay will sell much high-end stuff if it cannot take more effective measures to deter theives.

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  5. Mike B says:

    I read somewhere in the NY Times that organized crime in Italy runs many of the designer clothing/accessory factories and after they are done with their official order they simply run off as many “fakes” as they want to sell through their own channels. The designers are aware of this, but are powerless to do anything due to the massive corruption in Italy.

    This brings up the question, can a good made in the same factory, by the same materials, by the same people and by the same process be considered counterfeit?

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  6. frankenduf says:

    kind of a humorous example of luxury good maufacturers sticking their fingers in the dike of a true free market: the internet- no doubt no luxury good maker wants a free market- protectionism and supply restriction are paramount to artificially raising prices on consumers- the diamond industry is perhaps the archetype of the luxury good monopoly- it will be interesting to see how long DeBeers can hold off ‘counterfeit’ diamonds on the market in order to sustain their price gouging

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  7. Qal says:

    Does Judith Zaichkowsky actually know what Ebay is? Has she been on the site? Has she used it? Describing Ebay as a “reseller” is simply silly. Ebay does not sell anything but a communications medium. If a seller on Ebay lists something as a Tiffany or LV product, how is the company supposed to know it’s a fake, as opposed to somebody selling their real but unwanted vase or purse?

    May as well sue the city (“owners” of a sidewalk) for sales of bogus items on the sidewalk. The city also makes money off the transaction, in the form of sales taxes.

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  8. Clark Silcox says:

    It is incorrect to say the CVS case did not involve counterfeiting and was a “grey market” case. Persons who buy genuine product and then alter labels or markings containing important product information which is part of the quality of the product to which the genuine trademark relates, as was the case in CVS, are engaged in trademark infringement and counterfeiting. Several court cases have so held. In the case of food, drugs, electrical products and many other products, these markings contain date codes, manufacturer batch information, and serial codes — all of which can be critical to an FDA, CPSC or other legal recall when consumer safety might be at issue — and removing these markings, which is what happened in the CVS case poses a threat to consumers. That is counterfeiting just as it is counterfeiting to remove a label on a drug that says it is a low dosage product and replace it with a label on a drug indicating it is a higher dosage product. In the eBay case, eBay apparently established to the court that when Tiffany asked for counterfeits to be taken off the site, eBay obliged. There are brand owners who have not had success with either eBay’s VERO program or in getting responses to letters in getting counterfeit products, some dangerous, removed from eBay. The federal court decision in the Tiffany case does not apply in that circumstance.

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