Counterfeiting and Piracy: How Pervasive Is It?

Industry experts and government officials estimate that counterfeiting and piracy is growing worldwide, and the cost to the nation, companies and consumers is alarming.

By Cheryl D. Smith

iStockFrom counterfeit prescription drugs and automotive parts to computer software and electrical extension cords, the market for bogus products is increasin.

and is of particular concern to electrical manufacturers, distributors and contractors that stand behind the products they make, sell and install. While one of the biggest challenges facing the electrical industry is the physical danger counterfeit products pose to consumers, there also is the economic impact to consider. When intellectual property rights are infringed upon, it undermines the ability to innovate and create breakthrough technological solutions that bolster the global economy and create jobs for millions of Americans.

Counterfeiting and piracy cost the U.S. economy approximately $250 billion in annual revenues and have led to the loss of more than 750,000 American jobs. The automotive industry, for example, could employ an additional 250,000 workers if counterfeit auto parts sales were eliminated, according to the U.S. Federal Trade Commission. It is estimated that phony auto parts cost the global automotive industry approximately $12 billion annually.

Small businesses also suffer because many lack the resources to bring a claim against a perpetrator, and a malicious attack to steal a trademark or copyright could ultimately destroy the company. In 2005, the U.S. Patent and Trademark office found that only 15 percent of small companies that conduct business abroad are aware that a U.S. patent or trademark only protects them in the United States. On the global economy, the impact of intellectual property theft accounts for $500 to $600 billion in lost sales each year, or 5 to 7 percent of world trade.

“There are estimates that intellectual property in the United States is worth between $5 trillion and $5.5 trillion and accounts for approximately half of U.S. exports with roughly 40 percent driving U.S. economic growth,” said Alex Burgos, representative for the U.S. Chamber of Commerce Global Intellectual Property Center. “The impact of intellectual property on the U.S. economy is undeniable.”

Health and safety risks also are mounting as counterfeit prescription drugs account for 10 percent of all pharmaceuticals, according to the World Health Organization. The Center for Medicine in the Public Interest reports that imitation drug commerce is expected to grow 13 percent annually through 2010.

Data compiled by the U.S. Customs and Border Protection (CBP) and Immigration Customs Enforcement Unit (ICE) shows a dramatic increase in seizures of counterfeit and pirated goods in recent years. In fiscal year 2007, CBP and ICE conducted 1,295 seizures of counterfeit goods that posed potential safety and security risks with a domestic value of $27.9 million. Seizures of hazardous counterfeit goods more than doubled year-to-year in both value and number. The types of products seized included electrical equipment, pharmaceuticals, perfume, cigarettes, batteries, auto parts, food and sunglasses. By midfiscal year 2008, CBP and ICE had confiscated 796 shipments of products with possible safety risks with a domestic value of $24.8 million—a 28 percent rise in seizures and 30 percent increase in domestic value compared to 2007. (These numbers show the magnitude of counterfeiting as a whole and not just electrical components.)

“The size of the counterfeit electrical market is difficult to determine because we don’t know that a product is counterfeit unless it has been previously tested, inspected or failed to perform its intended function,” said Bernd Heinze, president and CEO of the Philadelphia-based Sequent Insurance Group. “Most estimates, although conservative, project the amount of global counterfeiting of electrical products between $11 billion and $20 billion annually and between $300 million and $400 million in North America.”

Heinze has represented and defended electric utilities, distributors, suppliers, installers and manufacturers in product liability and contract matters. He recently produced a white paper on behalf of the National Association of Electrical Distributors (NAED) to help distributors assess legal and risk exposures of doing business overseas. Based on his study, “Product Liability Exposure: How to Manage and Mitigate the Risks in Today’s Global Market,” Heinze said the growth of products being contracted overseas and purchased from unauthorized dealers has contributed to an increase of recalled electrical goods and claims filed against electrical distributors and manufacturers.

“With global trafficking of counterfeit electrical products on the rise, distributors and manufacturers can minimize the risk of being sued by exercising due diligence to verify the legitimacy of the manufacturer,” Heinze said. “Representatives in the electrical distribution channel must conduct business with reputable sources in order to have confidence in the integrity of the product.”

Square D, the flagship brand for Schneider Electric’s North American Operating Division, Palatine, Ill., has filed several lawsuits against U.S. companies that were selling counterfeit Square D circuit breakers and obtained permanent injunctions barring distributors from selling and importing Square D products (for more on this, see page 40i).

“Five years ago, we were unaware of any counterfeit Square D products in the United States, but there has been an influx in recent years of trafficking counterfeit goods,” said Tracy Garner, anti-counterfeiting manager for Schneider Electric/Square D. “Based on our lawsuits, hundreds of thousands of counterfeit Square D circuit breakers were sold in the United States. Other manufacturers’ products are being negatively affected as well. Counterfeiting is a huge issue for our industry.”

Consider that as many as 250,000 circuit breakers could fit into a 40-foot container shipped into the United States. An average home may contain about 15 circuit breakers, which means more than 16,000 homes could be dangerously affected by just one container of counterfeit circuit breakers. CBP reported the seizure of 500,000 circuit breakers in the United States between January 2006 and June 2007.

According to www.ul.com, Underwriters Laboratories (UL) has experienced counterfeiting of its UL mark, which certifies that products have been tested and considered safe for use by consumers. Products that usually bear a counterfeit UL mark are high-volume, low-cost items, such as extension cords and power strips. UL estimates that a small percentage of its mark is being illegally affixed to products, but UL has a zero-tolerance policy for any goods with counterfeit marks. UL has worked with CBP on thousands of seizures valued at more than $150 million.

The upsurge of counterfeiting and piracy also is having an overwhelming affect on electrical contractors, according to ELECTRICAL CONTRACTOR magazine’s “2008 Profile of the Electrical Contractor.” The survey, published by the National Electrical Contractors Association (NECA), revealed that 60 percent of contractors are extremely or very concerned about the effectiveness of counterfeit products, while 43 percent were unsure if they have encountered counterfeit electrical goods over the past year. To address electrical contractors’ concerns, the magazine convened a one-hour session, “Counterfeit Products: Are You Liable?” at NECA’s 2008 Convention and Trade Show in Chicago.

How are counterfeit products getting into the marketplace?

Shoddy products can enter the United States and infiltrate the legitimate supply chain through a variety of distribution channels. One popular method that counterfeiters use to transport illegal goods is through imports.

“The U.S. government serves as the first line of defense for counterfeit products coming from abroad, and the majority of them originate from China,” Burgos said. “We encourage industries and businesses to manage their supply chain and share intelligence with government officials and law enforcement to improve and defend our U.S. ports.”

A more contemporary vehicle used by counterfeiters to sell fake products is through e-commerce, auction sites and e-mail solicitations on the Internet. According to “The Economic Impact of Counterfeiting and Piracy,” a study by the France-based Organisation for Economic Development and Co-operation, online environments are appealing for a number of reasons, including anonymity, flexibility, the size of market, market reach and deception.

The Internet has a wide-reaching global audience that creates substantial opportunities for perpetrators to conduct illegal sales. Counterfeiters also can conceal their identity and establish online merchant sites that can be quickly removed and relocated. The overwhelming number of e-commerce sites makes it hard for enforcement agencies to track and capture the culprits, and the high level of software available to build sophisticated and professional Web sites allow counterfeiters and pirates to deceive consumers and businesses.

“The Internet is a major issue with pharmaceutical companies because almost 50 percent of counterfeit medications are trafficked through illicit Web sites,” Burgos said. “Companies or industries that are most affected by illegal online commerce generally have departments within their organizations specifically designed to monitor unlawful activity.”

A major concern for the international market is free trade zones. OECD reports that traders can store, assemble and manufacture products that are moving across borders with minimum regulation. Merchandise that passes through the zones provides unlawful opportunities for shipping documents to be “sanitized” to conceal their original point of manufacture. Goods also can be repackaged with counterfeit trademarks prior to being exported to other countries.

As the enormity of the counterfeiting and piracy problem continues to increase, the battle to save lives, safeguard intellectual property and advance global economic growth requires collaboration across industries and partnership with government and law enforcement agencies. Counterfeiting and piracy undercuts the investment that electrical manufacturers make in their brands to meet and exceed electrical safety standards. It also damages distributors in the wholesale and retail market that legitimately promote quality brands and shatters the confidence that contractors expect to have in the products they install in homes and businesses.

“Strong business relationships are essential as the problem of counterfeiting and piracy intensifies,” Heinze said. “Creating awareness and working together is the greatest weapon to prevent injuries, damages and losses attributed to counterfeit electrical products.”

For more information on counterfeiting and piracy, visit the U.S. Chamber of Commerce Global Intellectual Property Center on the Web at www.theglobalipcenter.com and the Coalition Against Counterfeiting and Piracy at www.theglobalipcenter.com/gipc/cacp.

SMITH is a freelance writer in Upper Marlboro, Md. She can be reached at accd.smith3@comcast.net.

Counterfits Can Kill