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.


HAHAHAHAHA

The thing is...Ebay IS selling counterfeits. When a buyer receives a fake item, they are told to send it to and address in Dallas, TX. This is a liquidator and they resell the items for Ebay and send them a check.

See this vieo, for more info:

http://www.youtube.com/watch?v=1DJWNP9LKEA

Karl

I used to work at the head office of a franchised accessory shop here in Seoul. While business was booming fakes flooded the streets and could be seen on virtually every corner. But, the CEO undertook a major offensive to halt the production of the fakes by leaning on the sellers to give up their producers. It was quite successful. However, then something curious happened. As the items started to disappear from the streets sales also began to slip. So, counterfeits on the streets, at least for smaller firms, might be beneficial as they essentially work as a free form of advertising and keep the brand in the public mind.

Thomas Brownback

"There’s also no “free market” for stealing one’s intellectual property."

How far we've come when government created monopolies are considered the true free market!

Gary Arseneau

It is a cottage industry.

If you only all knew.

Gary Arseneau

artist & scholar

garyarseneau.blogspot.com

Matt

I would say that eBay actually sides with the copyright holders too much without validating their claims before removing the auctions. For example in the UK, the laws regarding image rights are different to those in the US. If you make alterations to an image beyond a certain amount then it becomes 'yours' legally (think of it along the lines writing a new song - it might sound similar to an old song but can be judged different enough to be a new song)

A friend of mine sells t-shirts through eBay and has got all his images registered (his wife is a lawyer, which helps!) The legal folk for a well known rock band then VERO'd him (Verified Rights Owner - the scheme eBay uses to remove fakes etc) so he could not sell it on eBay even though it was legally his image.

He reported it to eBay and showed them the nesc legal information and they refused to remove the VERO until the complainant agreed. Since they have a large legal team that can simply spend their way to stop anyone smaller selling by delaying it. Luckily eBay were not up for the fight and when they received a notice from a lawyer pointing out that the VERO was actually claiming the rights to another person's property and that eBay are obliged to enforce this in both directions, they removed the VERO, but not until they were threatened with legal action.

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Richard

JS makes a valid point at #13

"eBay against counterfeiting" is (in my opinion) merely a PR exercise to keep IP owners and law enforcement off their backs. In reality, eBay ARE negligent in their handling of rogue traders.

I recently received some bootleg DVDs from an eBay seller. I immediately reported this to eBay Trust & Safety. However, the seller continues to list the same DVD set.

Now, you could argue 'why should eBay take action against the seller, based on one complaint'? The answer is simple - if they were concerned about fake items, they could request third party confirmation and/or ask to see the actual goods supplied. (and temporarily block new listings from the seller, pending investigation) .... Instead, I got a generic eBay response stating "you received an item that was significantly different' (note the omission of the word 'counterfeit'), you should contact the seller". - in other words 'it's not our problem'.

That same seller has also subsequently received feedback complaining of 'copies', but he's still listing DVDs, and eBay (+PayPal) are still collecting their fees.

The judge in the Tiffany case has obviously never had direct dealings with eBay's badly named Trust & Safety department, otherwise the result may have been very different.

It's no wonder that IP owners are up in arms. Without its fees earned from counterfeit goods, eBay would probably go bust!

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Diversity

It is very simple economics. Quite a lot of "counterfeit" goods are produced from the same materials to the same standards as those that have the "genuine" label attached. Few people can tell the difference, except by price. The logical decision is to buy the counterfeit, and since the Genuine will not sell if the couterfeit is next door, to sell the counterfeit. That is to say, there is a limit to how much you can charge in an open market for your brand reputation; and quite a few brands are greedily exceeding that limit and claiming foul when that does not work.

The only way to get away with really outrageous brand margins is to keep supply very restricted and under close control. If you cannot look up a Mausoleeus handbag by number on the Mausoleus site and find the name of the registered owner, it is not genuine: that degree of control. Do it in those terms, and you will find a fair number of fools in Japan , at Nieman Marcus stores, etc., etc., to part from nice quantities of their money.

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k.z.

I heard just today that stores like CVS, Wallgreens, Rite Aid and other similar retailers sell counterfeit cosmetics ranging from brands such as Vichy and La-Roche Posay skin care, Paul Mitchell hair products, and other higher end products. The way that these are supposedly counterfeited is by adding more ingredients and making more of the product to sell for a profit. These more expensive items also have stickers that read "this item intended for sale at CVS pharmacy # so and so, if found at other outlets, please call # so and so." I have been trying to find some information about such counterfeiting but I haven't found anything solid. Does anyone know anything about this?

John Kleeberg

There are some areas of counterfeiting that are harmless (handbags, sunglasses), and there are some areas of counterfeiting that are extraordinarily noxious: pharmaceuticals, and most scary of all, replacement aircraft parts. There are also some areas of counterfeiting that have positive effects. During the Depression of the 1930s there was a rash of counterfeiting in the United States - lead nickels and quarters, fake ten dollar bills. Those counterfeiters were heroes. One reason for the Depression was the massive shrinkage of the money supply - and the counterfeiters were among the few people doing something to counteract that.

And some governments have chosen not to prosecute counterfeiters, but to redeem all the money as if it were good. The rationale is that, otherwise, if you tell the population that some of the currency is counterfeit, they will believe that all of it is counterfeit, and lose trust in all paper currency. This policy costs the issuing government nothing - they just print more fiat paper when they exchange it for the older currency. This policy was followed by the revolutionary government of Haiti and by the Germans in German East Africa.

I also find it interesting that genuine goods are so highly prized in Japan. Many luxury goods sell very well there. I suspect that may also explain why the Japanese economy has been performing so poorly - they are misallocating their resources. Because if paying $8,000 for a handbag isn't a misallocation of resources, nothing is.

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Amanda

I doubt diamonds will ever be "counterfeited." The importance of quality in a diamond could be likened to where Zaichkowsky wrote above:

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.

Imagine the difference between buying your wife a fake Louis V bag on your most recent trip to New York and buying her cubic zirconia earrings for her birthday. DeBeers has just done too good a job of telling us real diamonds are the most important thing in the world.

JS

I do not refute either of your points but neither of them address the issue at hand - fakes. No one denies that eBay customer service is terrible or that shill bidders are a headache but that has nothing to do with the existence of counterfeit items.

J.S.

I have a comment about eBay's follow through. I purchased a counterfit DVD, reported it to eBay as did others who bought from this seller. eBay took almost two years to shut that seller down.

kip

Piracy and counterfeiting are two different things, aren't they? I wouldn't call illegally-reproduced music, movies, and software counterfeit. Counterfeit usually means you are making something which looks very similar to the original (say, a Rolex watch) but is in fact made cheaply and sold cheaply. With piracy in music, movies, and software, you are simply copying the original and reselling it without a license. Duplicating the latest Britney Spears CD is piracy, not counterfeit. If you and your sister re-recorded every track on the CD and sold that to people, claiming it was actually Britney (or expecting them to tell others it was actually Britney), *then* it would be counterfeit.

T.G.

Piracy and counterfeiting is the same thing. The end result is the person who owns the rights to the work is not compensated. There's also no "free market" for stealing one's intellectual property. And regardless of where something is manufactured, if it's not made in compliance with the brand holder it is also counterfeit.

dnm

I'm confused as to why anyone would want to mimic overpriced fake crap anyway -- I realise it's all capitalism, but buying the real stuff is a sure way to throw money away, anyway.

Vizeroth

Counterfeiting CDs usually involves trying to pass off a copy of the original as the original. In other words, trying to reproduce the packaging or otherwise pass off a copy as the original. Making a new recording would be far more work than it's worth when making a digital copy is so easy. As I said in my previous post, the hard part is reproducing the packaging, and even that is getting easier.

Piracy is just a word used by the software and media companies to represent general copyright violations. The actual legal definition of piracy has nothing to do with their use of the term.

DD

Given the easy availability of "fake" handbags-- they can be purchased at mall kiosks, how do they get away with this, never mind Ebay?-- I won't buy a quality handbag (not even Coach). I just assume now that anyone on the street with a LV, Prada, or Coach bag is caring a fake and if you have a real one, everyone will assume the same...

Zoinks

And one point not related to the specifics in this article: eBay in some cases is the only thing that's keeping a lot of American families afloat right now because it gives them a nationwide (ok, global, but let's be realistic) marketplace in which to sell their stuff.

I've actually used eBay in the past few months to help keep my lights on. If this was 1990, I could never have done that.

Richard Mendales

There's another interesting problem related to this, concerning "gray market" goods, which are goods produced by the original manufacturer but brought into the U.S. by someone other than the manufacturer's official importer. The importers can tell the difference, among other ways, by checking the serial number on the goods. This can be a problem for buyers of used electronic or photographic equipment, who have no way to know whether the goods they purchase are "gray market" or not--but if they are, authorized repair facilities will not touch their goods.

Zoinks

Rob below has a great point about the Japanese versions of Stratocasters: it reminds me of Harley Davidson's troubles. The Japanese started manufacturing motorcycles that replicated the essential style of a Harley but were actually engineered to stop, start, steer and not leak oil.

Enough of Harley's prospective customers decided to look elsewhere that Harley was forced to make much better bikes. Today's Harley Davidsons still command a premium price and have all the style they ever had, but they're also something you can ride without crashing into something, having your leg broken off by a backfiring kickstarter, or getting electrocuted because the wiring was put together incorrectly.

The cheap and cheezy "Jap Crap" Harley knockoffs actually improved the Harley Davidson beyond all measure. There are still some people who think having a motorcycle that falls apart all by itself -- while you're riding it -- is a sign of some kind of courage, but they've been outvoted.

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