Knockoffs

'How Can Brands Flourish in the Knockoff Kingdom? What China Tells Us About the Bad – And Good – Effects of Luxury Goods Counterfeiting' by Kal Raustiala and Christopher Jon Sprigman in Beebe, Sun and Sunder (eds) The Luxury Economy and Intellectual Property: Critical Reflections (Forthcoming) comments 

By many measures China is now the world’s largest market for luxury goods. At the same time, however, the Middle Kingdom remains the Knockoff Kingdom. The Chinese are great producers and consumers of counterfeit and copied goods, and efforts to curtail counterfeiting are a central focus of many Western firms and Western governments.

How did China become the world’s leader in luxury goods sales — a category that relies heavily on IP rights for its market value — while at the same time achieving unchallenged global dominance in “IP theft”? How can authentic luxury products, with their often-stratospheric prices, have such astonishing market success in China when knockoff versions are so easily produced and so widely available?

In this chapter we explore this paradox. We begin by describing China’s approach to IP and its thriving luxury goods market. We then examine China’s equally robust knockoff economy, and explore how copying and counterfeiting occur in China. Finally, we speculate about how the success in China of both legitimate branded luxury goods and counterfeits can be reconciled. In particular, we analyze the critical role played by brands and the complex chemistry that exists between genuine trademarked luxury goods and the fakes that imitate them. We argue that much of the harm assumed to flow from counterfeits is difficult to demonstrate empirically in the luxury goods sector, and there are good theoretical reasons to doubt its magnitude. Indeed, the conventional wisdom about the harm caused by counterfeits is more a matter of logical inference than empirical evidence. And there is some evidence, including evidence from China itself, that counterfeits can strengthen brands as well as undercut them. One inference to draw from all this is that copies and originals can coexist in China because they are not as intrinsically antagonistic as conventional wisdom suggests.

To be clear, we do not argue that counterfeits are harmless — only that the standard case against them is surprisingly weak. As a result, the case for public enforcement of trademark law to stem the tide of luxury goods counterfeits is also weak, and especially so in China. It is no surprise that the Chinese government’s anti-counterfeiting enforcement efforts have been relatively ineffective, and that piracy consequently thrives even as luxury goods sell in great numbers to China’s burgeoning wealthy classes. Regardless of whether (or how much) Chinese counterfeits harm luxury goods makers, from a Chinese perspective counterfeits have many virtues. China is a country where both the economy and income inequality are expanding rapidly, and where the growing gap between rich and poor contributes to social unrest that troubles the country’s leadership. In this context, a tolerance for counterfeits can serve important social and political goals, goals that may outweigh whatever harms may stem from counterfeits — especially considering that most of that harm, at present and for the foreseeable future, falls on foreign manufacturers.

UK IP Offences

The UK Intellectual Property Office (IPO) - the British counterpart of IP Australia - has released a 67 page IP Crime Report 2010-11 from its IP Crime Group.

The Group was formed by the IPO in 2004 to "bring together experts from industry, enforcement agencies and government to work together on piracy and counterfeiting issues".

Along with many official reports, more context would be nice. The report boasts that "More people than ever before are being successfully prosecuted for committing intellectual property crime in the UK", that "75 per cent of all criminal copyright cases end in a positive conviction" and that "80 per cent of all IP crime cases result in guilty plea prosecutions against the defendants". Regrettably there is no indication of how many offences don't make it to court, and whether many of the 'no-shows' are attributable to lack of resources for vigorous and effective prosecution.

The report characterises IP Crime as "the counterfeiting of trade marked goods such as clothes and the piracy of copyright material such as CDs and DVDs". Its authors indicate an increase in the sale and distribution of counterfeit goods over the net during the year. It also suggests there has been a decline in IP crime at venues such as outdoor markets.

Notably, it identifies highlights the significance of the Proceeds of Crime Act in dealing with "piracy and counterfeiting". Last year the Trading Standards arm of the London Borough of Enfield secured an £11 million confiscation order, one of the largest ever secured by a local council under that statute. The order followed successful prosecution of a local man in 2008 after seizure of a mere 30,000 pairs of counterfeit Burberry shoes. The defendant was also involved in a £72 million VAT fraud.

Six people were jailed for a combined total of 56 years for involvement in production of 1.3 million litres of vodka, ie infringing trade marks in 24 brands with an estimated value of £16 million.

The report notes that -

A man has been jailed for eight years after an investigation into the importation of fake cancer and other life saving drugs. Following a trial at Croydon Crown Court lasting four months and involving the most serious known breach of the UK regulated supply chain, a 64 year old man from Windsor, Berkshire was found guilty of all charges on 8th April 2011 and was sentenced to eight years imprisonment. Four other men on trial for their involvement were acquitted.

The case, known as Operation Singapore, involved the infiltration of counterfeit medicine into the UK legitimate supply chain during a five-month period in 2007. More than two million doses of fake life-saving drugs were imported into the UK and, although more than half of these were seized by the Medicines & Healthcare products Regulatory Agency (MHRA), almost 900,000 doses reached pharmacies and patients.

The MHRA carried out an immediate recall of Zyprexa (used for the treatment of psychosis), Plavix (used for the prevention of blood clots) and Casodex (used for the treatment of prostate cancer) and, as a result, a further 196,000 doses were recovered; however 700,000 doses were unaccounted for.

The tablets were manufactured in China and were transported to the UK via Singapore and Belgium. Further work on the products, to improve their appearance for UK supply, was undertaken at an industrial unit in Basingstoke where they were transferred into outer cardboard boxes to remove all evidence of their origin. The products, now purporting to come from Luxembourg but manufactured in France, were then supplied to two licensed UK wholesalers who, in turn, sold them on into the supply chain where they were eventually dispensed by unsuspecting pharmacists to UK patients

Less alarmingly from a public safety perspective -

Five men who had admitted possession of an infringing article with a view to sale (under Section 92 of the Trade Marks Act 1994) were convicted for their part in smuggling 25 tonnes of low quality fake washing powder in to the country and storing it at a warehouse in Cheshire. Flat pack boxes along with individual nine kilogramme bags of detergent were found.

Three of the men received sentences of 12 months in prison and another two were both given six month prison sentences suspended for two years and ordered to carry out 200 hours of unpaid work. A sixth man found guilty of the same offence was jailed for two years. Following a confiscation hearing attended by the five men, they were ordered to hand over more than £37,000 under the Proceeds of Crime Act. The sixth man was due to attend a confiscation hearing at a later date

Pirates of the ISPs

From Noah Shachtman's 51 page Pirates of the ISPs: Tactics for Turning Online Crooks Into International Pariahs (Brookings Institute) [PDF] -

At the beginning of the 19th century, piracy was an ongoing threat and an accepted military tactic. By the end of the century, it was taboo, occurring solely off the shores of failed states and minor powers. The practice of hijacking did not vanish entirely, of course; it is flourishing now on the world’s computer networks, costing companies and consumers countless billions of dollars.

Cybercrime today seems like a nearly insoluble problem, much like piracy was centuries ago. There are steps, however, that can be taken to curb cybercrime’s growth — and perhaps begin to marginalize the people behind it. Some of the methods used to sideline piracy provide a useful, if incomplete, template for how to get it done.

Shutting down the markets for stolen treasure cut off the pirates’ financial lifeblood; similar pushes could be made against the companies that support online criminals. Piracy was eventually brought to heel when nations took responsibility for what went on within its borders. Based on this precedent, cybercrime will only begin to be curbed when greater authority — and accountability — is exercised over the networks that form the sea on which these modern pirates sail.

In this new campaign, however, private companies, not governments, will have to play the central role, as Harvard’s Tyler Moore and others have suggested. After all, the Internet is not a network of governments; it is mostly an amalgam of businesses that rely almost exclusively on handshake agreements to carry data from one side of the planet to another. The vast majority of the Internet’s infrastructure is in the hands of these 5,000 or so Internet Service Providers (ISPs) and carrier networks, as is the ability to keep crooks off that infrastructure. If this relatively small group can be persuaded to move against online criminals, it will represent an enormous step towards turning these crooks into global pariahs.

The most productive thing ISPs can do to curb crime is put pressure on the companies that support and abet these underground enterprises. Currently, registration companies sell criminals their domain names, like "thief.com". Hosting firms provide the server space and Internet Protocol addresses needed to make malicious content online accessible. But without ISPs, no business, straight or crooked, gets online. A simple statistic underscores the ISPs’ role as a critical intermediary: just ten ISPs account for around 30% of all the spam-spewing machines on the planet.

ISPs are well aware of which hosting companies, for example, are the most friendly to criminals; lists of these firms are published constantly. But, currently, ISPs have little motivation to cut these criminal havens off from the rest of the Internet. There is no penalty for allowing illicit traffic to transit over their networks. If anything, there is a strong incentive for maintaining business-as-usual: the hosting company that caters to crooks also has legitimate customers, and both pay for Internet access. So ISPs often turn a blind eye, even though the worst criminal havens are well-known.

That is where government could help. It could introduce new mechanisms to hold hosting companies liable for the damage done by their criminal clientele. It could allow ISPs to be held liable for their criminal hosts. It could encourage and regulate ISPs to share more information on the threats they find. Government could also encourage more private businesses to come clean when they are victimized. Today, just three in ten organizations surveyed by the security firm McAfee report all of their data breaches. That not only obscures the true scope of cybercrime; it prevents criminals and criminal trends from being caught earlier.

Government can alter that equation by expanding the requirements to report data breaches. It could require its contractors to purchase network security insurance, forcing companies to take these breaches more seriously. And it can pour new resources into and craft new strategies for disrupting criminals’ support networks.
These steps will serve as important signals that America will no longer tolerate thieves and con artists operating on its networks. After all, 20 of the 50 most crime-friendly hosts in the world are American, according to the security researchers at HostExploit.

As the United States gets serious in curbing these criminals, it can ask more from — and work more closely with — other countries. China, for instance, sees itself as the world’s biggest victim of cybercrime, even as it remains a hotbed for illicit activity.

Not coincidentally, China is also only partially connected to the global community of ISPs. Dialogues to bring the Chinese closer into the fold will not only make it easier to marginalize cybercriminals; it will build momentum for broader negotiations on all sorts of Internet security issues.

In a recent item in The Conversation I pointed to research by Levchenko et al arguing that around "95% of spam-advertised pharmaceutical, replica and software products are monetised using merchant services" from a handful of financial institutions such as the Latvijas Pasta Banka, State Bank of Mauritius, St. Kitts & Nevis Anguilla National Bank and Azerigazbank. There is scope for crimping the pirates' sails - and sales!

Shachtman offers 13 recommendations -

1: Begin US-China Talks, Centered around cybercrime (It’s not just the most pressing issue; it’s the one with the most common ground)

2: Draw the Chinese into the larger community of ISPs and network carriers (It should speed the resolution of major network issues — and encourage China to become a more responsible actor on the global network stage)

3: Avoid national retaliation as a cybercrime solution (It is too blunt an instrument for the nuanced issue of cybersecurity; besides, many of the worst criminals set up shop in the United States)

4: Lean on the criminal support networks (Online crooks depend on these businesses. That makes them nodes of pressure and of vulnerability)

5: Motivate ISPs to pressure the criminal ecosystem (They are perfectly placed to interrupt illicit traffic)

6: Hold the worst hosting companies liable for their criminal clients and the worst ISPs liable for their criminal hosts (This will provide financial incentives to turn against the criminals, instead of profiting from their traffic)

7: Encourage ISPs to notify customers of infections (It is easy for the providers to tell which clients have been compromised, and it is better for everyone if those breaches get fixed)

8: Amend the laws to allow ISPs to share attack data (Spotting criminal trends early requires more information)

9: Push companies to expand reporting of network breaches (It is good for consumers; it may shame some firms into shoring up their networks; and it provides more data for cybercrime detection)

10: Require government contractors to carry cybersecurity insurance (It builds the market for insurance, which encourages companies to get more serious about network protection)

11: Expand and improve training for cybercrime specialists in law enforcement ("The FBI is underinvesting in cyberthreats right now in the same way that it underinvested in
counterterrorism in the 1990s")

12: Pursue Civil Strategies to disrupt criminal networks (The crooks move fast – and are often beyond American jurisdiction. Civil courts may be the only way to fracture their support system)

13: Avoid Schemes to strip away internet anonymity; continue to promote freedom of online expression (Corralling cybercrime does not mean curbing our ideals)

Aviation crime

The Australian Minister for Home Affairs, Brendan O'Connor, has proposed tougher penalties for aviation-related crime such as bomb hoaxes, 'air rage' and endangering an aircraft in flight.

The proposed change would involve amendment of the Crimes (Aviation) Act 1991 (Cth), with the maximum penalty for hoax offences - a false threat to destroy, damage or endanger an aircraft or airport - increased from two years to 10 years imprisonment.

Under the proposal, maximum penalties for aviation-related crimes will be provided within four categories -

* 10 years jail for hoax offences such as calling an airline and saying a bomb is on a plane or threatening to bomb an airport (currently a two year maximum jail term)
* 14 years jail for offences against aircraft or aviation environments, such as damaging a runway or air traffic control facilities at a major airport (currently a maximum jail term of seven or ten years)
* 20 years jail for very serious offences that pose danger or cause harm to groups of people, such as assaulting a pilot or endangering an aircraft while in flight (currently a maximum jail term of seven, 14 or 15 years)
* offences such as hijacking or destroying an aircraft and being reckless as to causing death (life imprisonment).

Three new offences are proposed -

* Assault of an aircraft crew member - a maximum penalty of 10 years imprisonment
* Reckless endangerment of an aircraft, where danger of serious harm or death can be shown - a maximum penalty of 14 years
* Having dangerous goods onboard an aircraft, where there is a risk of serious harm or death - a maximum penalty of 14 years.

OECD on digital piracy

The OECD has released a new 134pp report (browsable here) on Piracy of Digital Content as a follow-up to the 2008 Seoul Declaration on the Future of the Internet Economy [PDF]. 

It centres on sports rights and overall is a statement of received wisdom. A dash of wasabi might have helped. 

The report is described as studying ...

digital piracy - the infringement of copyrighted content (such as music, films, software, broadcasting, books, etc.) - where the end product does not involve the use of hard media, such as CDs and DVDs. It presents the unique economic properties of markets for pirated digital products, where the existence of a large number of suppliers willing to provide pirated content at virtually no cost poses new and difficult challenges to copyright owners and policy makers in combating that piracy. These economic features, together with rapid technological developments, create special and unique problems to policy makers and the large number of actors involved in different jurisdictions.