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Legal Spotlight: Countering the Counterfeiters

1 May, 2012 By: Doug McPherson Response

They say imitation is the sincerest form of flattery. But when that imitation costs DRTV professionals thousands — sometimes millions — in sales (not to mention the headaches), to hell with flattery. Something needs to be fixed.

Countering the CounterfeitersResponse Magazine is in the fight — slugging it out to battle the complex and persistent problem of counterfeiting, knockoffs and other questionable business practices. To that end, we’ve interviewed experts who’ve collectively spent decades soldiering on the front lines to put these bad seeds out of business. All of them will serve as panelists on this topic at Response Expo 2012 in San Diego on May 17.

They are:

Jeff Campbell, executive vice president at SENSA Products LLC in El Segundo, Calif., has 15-plus years of direct marketing and direct response experience. Before joining SENSA, he served as the vice president of business development for the Midwest Center for Stress and Anxiety where he executed multi-channel media strategy and oversaw expansion of the company’s nutraceutical line into new direct-to-consumer channels. He also served as the chief operations officer for Dermacia and US Capital.

Denise Kovac is the founder of Full Service Marketing and marketing director at Genius Brands International Inc. in San Diego. She has more than 25 years of consumer product experience and has served as chief operating officer of Your Baby Can LLC; president of Thane Direct USA; president of Bay Street Brands; and vice president of sales at Fitness Quest/Warner Vision where she also managed sales for the Atlantic Records, Elektra Records and Rhino Records divisions.

Johann Verheem, CEO of FitnessIQ, is an inventor and marketer of the wildly successful Shake Weight and Shake Weight for Men products that have capitalized on viral success to sell more than 3 million units. Verheem also founded Application Technologies, a California-based packaging delivery systems company.

What is counterfeiting how do you define that word? And how does it relate to knockoffs and similar words?

Jeff Campbell, SENSA: As we see it, a counterfeit is a case where someone takes our brand, our product, our messaging and assets and markets them as their own. A knockoff will rebrand the product with some minor changes to the mechanics, delivery mechanism, etc., but will at least run it under a different name.

Denise Kovac, Full Service Marketing: My definition of a counterfeit is a product sold with patented and/or trademarked product that blatantly ignores intellectual property. It’s not a knockoff of a product that’s similar unless it infringes on the patent. I have a lot of firsthand experience in this area. A couple years ago, I went to Asia and posed as an international buyer and was offered not only my own product but also several others. One factory was manufacturing product and had inventory in the warehouse that they shouldn’t have had because there were no open purchase orders for the inventory. I’ve done surprise inspections in China many times during the past 20 years, and this — unfortunately — is not that unusual.

Johann Verheem, FitnessIQ: To me, counterfeiting occurs whenever a company makes products that work to confuse the consumer as to whether it’s the actual product that’s advertised on TV. We’ve found where they’ve taken our photos, our packaging, our inserts and our CDs and they change the name from Shake Weight to “Shake and Bump” or something like that. And they’re selling a large volume of these products. We’ve probably lost a $1 million on Shake Weight alone. But there’s also another problem that’s growing —there are companies that are in the business of making products very similar to existing DRTV products (and they don’t try to confuse the consumer), but it’s basically the same product. That’s going on all the time, and it’s a very gray line. It’s growing in the fitness category and in housewares. One of the challenges is that they end up ruining the marketplace. We might have a product at $20 and then someone comes out with a vastly inferior product and offers it for 25 percent less. That kills the category, and it’s bad for everybody. The retailers make lower margins, and it puts a damper on people willing to make the products. Quality doesn’t matter. The long-term brand doesn’t matter. And everything gets turned into commodities. In many cases it’s a feeding frenzy once there’s a successful product out there. It’s flash and burn — to get the lowest quality and lowest price.

Is the problem primarily coming from China, or are there other countries producing counterfeits and knockoffs? Are they being produced in the United States?

Campbell: My No. 1 concern is our domestic competition when it comes to knockoffs, and they can range from individuals to retailers. It’s a very competitive space. Manufacturers can copy pretty much anything, but you still have to have someone here to sell and distribute it.

Kovac: I’ve purchased product from companies I worked for online from U.S. websites and U.S. shipping addresses and found that the DVDs and CDs were duplicated within the U.S. on both amateur and large-scale professional equipment. We worked with police in several states to arrest some of these thieves. I’m currently investigating DVD and CD counterfeit issues in Singapore, India and the Philippines. We know the product is on the shelves in these countries, but I can’t say much because this is an ongoing investigation.

Verheem: China is the predominant source of low-cost knockoffs. But after the products are made, they go all over the world. Once the suppliers are willing to sell at a low price, a market gets created. Then the companies from all over the world are buying the products. We just went through about a year of litigation with China on knockoffs, and we had success. But it’s not going to solve the problem because they’ll move down the street and do it all again. Governments are more concerned about it and the Chinese government is doing more.

How bad is this problem, and how much is it costing the country?

Campbell: It’s bad because it’s becoming easier and cheaper to make copies. If you have a good idea, you need to execute flawlessly at the onset to protect your position.

Kovac: This is a very large problem. I don’t have the statistics about the cost, and I doubt anyone truly has a handle on it. Recently a brand told me they didn’t have counterfeit issues. But at a show in Dubai, that brand was one of the largest at the show — and none of the product was official. It was all counterfeit. That’s just one example of companies not knowing what’s happening with their brands around the world.

Verheem: The best way to look at it is that every successful product in DRTV will be facing knockoffs within three to six months, and those products will be available around the globe. I’m not sure we can quantify the losses.

Is the problem getting worse or better?

Campbell: It seems to be getting worse as the space gets more competitive and the mindshare on how to execute becomes more prolific. The barrier to entry is always getting lower.

Kovac: The Web is making this problem a lot worse. It gives the people with counterfeit product a place to sell. I was talking to a salesperson from a company that I contacted through, and they warned me that if I was going to buy counterfeits, I needed to ship 50 units or less of that product into the U.S. They told me which ports I should use for the least likely chance of getting caught. Again, they had no idea I was calling about my own product they were selling.

Verheem: It’s getting worse because I think the responsiveness of the knockoff guys are getting more sophisticated and faster. A lot of these companies can hit zero to 100 miles per hour — within three to six months, they can have a knockoff on the shelves from concept to product. Enforcement trademark laws aren’t getting any better, but copyright enforcement is getting better.

How do we fight the problem while leaving politics by the wayside and do whats right?

Campbell: It really comes back to our ability to maintain a strong relationship with our peers, both in and out of our verticals.

Kovac: I’d suggest larger fines that go directly into a fund to help police this area. In parts of China, I truly believe the average person doesn’t see this as wrong. A few years ago, I was riding a train in China. I had been talking with a few other passengers a little, when a man started screaming at me, ‘You Bush-loving American pig.’ Two men from the Middle East came over to make sure I was OK. They told me the man’s issue with President Bush was that Bush believed in protecting patents, but it was the Chinese who are making these products — not the patent holder — so we shouldn’t be able to stop them from selling the products.

Verheem: The most practical thing we can do in the industry is to work through our associations. And we have to police it so that we don’t give them a platform to market as legitimate companies. Knockoffs were exhibited at the 2010 Electronic Retailing Association (ERA) convention in Las Vegas. Our associations need to be tougher on the problem and not give legitimacy to the companies who do it. We’re a small industry compared to others, but trade organizations can police this and draw a clear line between the good and the bad. Going after the counterfeiters can work. We’ve successfully enforced laws against some U.S. companies, and we’ve resolved complaints but, unfortunately, that’s the exception instead of the rule. Trademarks, copyrights and patents — along with working with customs — are the tools of enforcement, and they can work well. You still have to enforce it. Associations need to push the agenda a little.

What efforts have worked in fighting the problem?

Campbell: As a company, we take a very active role in protecting our patents and more importantly our online position.

Kovac: Police the Internet for your product and trademarks daily. Do this on a worldwide basis. There are some good vendors to use to help automate this. Take action and report issues as early as possible. The more people who are prosecuted, the more fear there may be in buying and selling counterfeits.

Verheem: We’ve shut down several hundred online suppliers with cease-and-desist orders. We’ve been successful because we’ve been aggressive. We will continue to be very aggressive, but that costs money. It will be interesting to see how it plays out now that we’ve had success. That does scare off some of the knockoff guys. I’m not sure if we’ll get a positive return on investment, but we’ll roll the dice.

What about the online side of counterfeiting related to online reputation management and where marketers are stealing other marketersonline effortsessentially digital counterfeiting?

Campbell: The online side is much more pervasive than I believe television marketers understand. If a competitor is able to always maintain a superior search position because they’re slamming your product, you lose in two ways. Your reputation is questioned and your position on the first page is compromised. With anywhere between 35 percent to 55 percent of orders coming from online transactions, that means probably 25 percent of the total orders came from those people that searched the product first. So the math backs out. A very high percentage of potential customers are seeing those misleading reviews.

Kovac: I haven’t encountered this exact issue, but have seen a lot of people illegally using trademarked search and diverting to other products. This even includes one of the three largest retailers in the U.S. doing it.

Verheem: You can Google a top product and you’ll instantly find hundreds of suppliers in China who’ll say they can make it. We work closely with to fight this issue.

About the Author: Doug McPherson

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