Home > Uncategorized > In the Fight Against Counterfeits, Even the Raids Can Be Fake

In the Fight Against Counterfeits, Even the Raids Can Be Fake

Seizing counterfeit goods has been a weapon for global brands, but corruption is compromising some raids

A customs officer arranges seized counterfeit goods in Hong Kong in August 2015. 

A customs officer arranges seized counterfeit goods in Hong Kong in August 2015.

Dec. 3, 2015

HONG KONG—As fake versions of its pricey sunglasses flooded China, Gucci filed a lawsuit early this year against a Chinese company it believed was behind some counterfeits.

Gucci’s case appeared strong: The Italian luxury brand had obtained documents from an outside investigator showing that more than 2,000 fake Gucci eyeglasses had been found during a raid of the Chinese company’s factory a few years before. The documents also said the Chinese government had fined the manufacturer for trademark infringement.

But a few months later, the Chinese court handling the case dismissed it, saying some of the documents may have been forged, and others were part of an unrelated case against an auto-accessories maker, according to the April decision. Gucci said it is “fully committed” to protecting its intellectual property rights globally and declined further comment.

The case highlights one big challenge foreign brands face in bringing suspected counterfeiters to justice: The raids that companies rely on to nail fraudsters may be tainted, staged or fabricated.

Globally, counterfeits account for $250 billion to $600 billion in annual sales, with the bulk likely made in China, according to government and industry groups. Global brands spend millions of dollars trying to eradicate this problem each year.

Raids and seizures of counterfeit goods have traditionally been key steps for brands seeking to shut shady manufacturers down. Many brands hire law firms or intellectual-property specialists, who then rely on local investigators or informants to gather evidence.

Increasingly, though, brands and industry experts are raising concerns about how frequently such efforts are marred by everything from investigators or authorities tipping off counterfeiters to fraudulent documentation, a problem inChina as well as other developing countries in Asia. Few statistics are available on what percentage of raids are compromised.

But more than a dozen intellectual-property experts and investigators interviewed by The Wall Street Journal, who have collectively supervised tens of thousands of raids, say corruption is a major concern in counterfeit cases.

In many cases he’s handled, “numbers are faked, documents are faked or there is something fishy,” said Alexander Theil, an investigator who says he has supervised thousands of raids for counterfeit goods, mostly in China, for global brands since 1996.

Compromised raids are a “constant worry” for brands trying to crack down on counterfeits, said Juanita Duggan, chief executive of the American Apparel & Footwear Association, which represents more than 1,000 brands.

ENLARGE

China, the source of almost two-thirds of the estimated $1.2 billion worth of counterfeits seized by U.S. authorities in the 2014 fiscal year, is making a big push to corral corruption, as well as counterfeiting, including special courts set up in three cities last year to deal with a rising number of intellectual-property cases. The country still scores in the bottom half of Transparency International’s index of how corrupt countries are perceived to be in the public sector.

Intellectual-property consultants say that if counterfeit producers are tipped off to raids, few, if any, fakes may be found. That means the seizures might not qualify for tougher criminal penalties under China’s legal system.

Corrupt investigators may also gin up their own business by asking factories to make fakes, and then charging brands to arrange for the products to be seized, according to Dan Plane, a director at Hong Kong-based consultancy Simone IP Services, who says he has supervised thousands of raids of counterfeits for major brands in Asia, Europe, the Middle East and Africa.

In Korea, four investigators were indicted last year for misdeeds including fabricating reports of counterfeit goods, accepting bribes from counterfeit-goods sellers and trying to resell more than $700,000 of seized products such as designer bags.

Bob Barchiesi, the president of the International AntiCounterfeiting Coalition, recalls a raid he went on a few years ago in the Pearl River Delta, China’s manufacturing hub, where authorities seized 3,000 pairs of jeans. The six officers left untouched other possible denim counterfeits, along with machinery and patterns to make the jeans, and they watched while factory workers walked out with manufacturing records, he said.

“It wasn’t like any law-enforcement action I’ve done,” said Mr. Barchiesi, a former New York City police officer.

Mr. Plane says he recently negotiated a settlement with a China-based investigator who admitted to fabricating reports about raids and counterfeit-goods seizures.

Numbers are faked, documents are faked or there is something fishy.

—Alexander Theil, investigator

His client, an accessories company, found out about the false reports when it sent a Chinese lawyer to the police department the investigator said had conducted the raid. The police department had no knowledge of the raid, Mr. Plane said.

Despite their problems, many brands continue to rely on raids to gather evidence and show that they are serious about fighting counterfeits, investigators say. Doug Clark, an intellectual-property protection expert in Hong Kong, says he told one client that raids are “rubbish,” only to be told that “my board wants to see these numbers.”

Some brands, however, are changing strategy.

Outdoor-apparel company Columbia Sportswear Co. says it has filed more than 500 lawsuits against suspected counterfeiters in China in the past five years, and is doing fewer raids of counterfeits. Raids may not be cost effective, says John Motley, director of intellectual property for the Portland, Ore.-based company, and they “need a lot of oversight to ensure there is nothing fraudulent going on.”

American Apparel’s Ex-CEO Plots a Return

American Apparel founder Dov Charney is reaching out to potential investors

American Apparel filed for chapter 11 in October and is now completing a reorganization. 

American Apparel filed for chapter 11 in October and is now completing a reorganization. Dec. 4, 2015

Dov Charney, the ousted founder of American Apparel Inc., has been reaching out to potential investors about making a bid for the company, according to people familiar with the situation.

Mr. Charney, who was fired a year ago over allegations of misconduct, would face an uphill battle in winning back the company he started in 1989 as a T-shirt maker. American Apparel filed for chapter 11 bankruptcy protection in October and is now completing a reorganization that would exchange about $200 million worth of debt for equity. That step would wipe out shareholders, including Mr. Charney, who is the Los Angeles-based retailer’s largest stockholder.

A successful bid would likely have to exceed $350 million in order to cover the money owed to bondholders, as well as pay off $90 million in debtor-in-possession financing and provide the $40 million of exit financing that is part of the chapter 11 plan. The plan has the backing of 95% of the company’s secured lenders. A hearing to confirm the plan is scheduled for Jan. 20.

An American Apparel spokeswoman said the company evaluates indications of interest, but that there was currently no transaction for the board to consider.

Mr. Charney said in a press statement on Friday that he has hired Cardinal Advisors LLC, a Los Angeles investment bank, to advise him on an evaluation of strategic alternatives involving the company. Bloomberg News had earlier reported Mr. Charney had hired Cardinal and was exploring a potential bid for the retailer.

American Apparel’s advisers received a letter several weeks ago indicating that Mr. Charney was interested in making a potential bid for the company, but it was unclear whether he had secured the financial backing, some of the people familiar with the matter said. Discussions haven’t progressed from there, these people said.

Mr. Charney is keeping an open mind about the role he would play at the company should he succeed in finding an investor willing to buy it, one of the people said. He would like to have a meaningful involvement in running the business, but isn’t demanding that he be reinstated as chief executive, this person added.

Mr. Charney built American Apparel into a hip retailer known for its sexy-spin on classic T-shirts and leggings, while also winning admiration for his commitment to manufacture in the U.S. But allegations of sexual harassment and other misconduct dogged him, despite his repeated denials that he had done anything wrong. And under his leadership, the company’s financial position deteriorated.

The financial problems worsened once he was removed from the company in December 2014. For the nine months through Sept. 30, the company lost $65 million on $385 million in sales. It has about 9,000 employees and more than 200 stores.

 

 

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