Part 2 in this series of articles on legal issues of relevance to the cosmetics industry looks at counterfeit products, discussing why they are a problem and the ways in which they may be dealt with. Counterfeits can be a major issue for cosmetics companies, resulting in reputational damage and potentially large sums of money spent trying to tackle them.

According to a 2017 OECD and EUIPO report:

“The high IP-intensity of the perfumery and cosmetics industry and its high degree of integration in the global economy make it particularly vulnerable to counterfeiting.” ¹

As with Part 1 (which provided an introduction to the types of intellectual property relevant to the cosmetics industry and can be found here), this article aims to highlight relevant issues, but should not be considered an exhaustive review of the world of counterfeits and lookalikes nor should it or any of the points made in it be considered legal advice.

What are counterfeits and why should I be concerned about them?

Counterfeits are products which are intended to look identical or highly similar to the genuine goods. In short, they are fakes. They will make use of trademarks as well as other protectable elements of genuine goods (which could include designs—registered or unregistered—and the general get-up or trade dress). That designer handbag you picked up in that market in Bangkok with the designer’s logo printed on the lining for the equivalent of a couple of US dollars? Very likely counterfeit.

The aim of the counterfeiter is to make their goods appear genuine to either deceive consumers into thinking they’ve managed to secure a good deal, or to appeal to those who know that what they are purchasing isn’t authentic but have no qualms about this.

However, this is not just about (big) companies losing money. The money counterfeits generate makes them a key source of income for players in the criminal underworld. A 2016 OECD and EUIPO report found that imports of counterfeit and pirated goods were worth USD 461 billion in 2013, or around 2.5% of global trade, equivalent to Austria’s GDP.² The estimated value of global trade in counterfeit perfumery and cosmetics alone in 2013 was USD 5.25 billion, representing 4.7% of global trade in perfumes and cosmetics³, and counterfeits are an issue in many countries. China was the origin of 59% of the total seized value of counterfeit perfumes and cosmetics worldwide, with Turkey in second place with 19%, and the UAE third with 8%.4 Hong Kong, the UAE, and Kuwait are key initial receivers of counterfeit cosmetics and perfumes from China. Those goods are then, in many cases, re-exported to the EU and Africa. Albania, for example, is a key recipient of counterfeits from Turkey. Those goods are then re-exported across the EU.5 Panama is another important hub of goods to the US and other parts of South America.

The Vicious Cycle Of Counterfeiting

Aside from the potential health and safety risks posed by counterfeit cosmetics (more on this below), counterfeits can pose potential serious reputational damage to brands. It’s something of a vicious cycle:

• a brand produces a showstopper product that sells out and becomes immediately desirable;
• counterfeiters see this and produce a counterfeit version (this may well be a totally different product just packaged in a way that makes it appear identical to the genuine product);
• the counterfeit product is advertised and made available for sale;
• the counterfeit product is purchased either by unsuspecting customers who receive a poor-quality product that calls into question the quality of the brand, or by customers who know the goods are counterfeit.

While “knowing” buyers won’t necessarily judge the quality of the genuine product or brand (they simply want to buy into the brand image or appear to the outside world as associated with that brand), the fact that more products are on the market and indeed the very existence of counterfeits may reduce the desirability of the brand and make it appear ubiquitous. However, this in turn may impact the brand’s reputation, image, and goodwill.

Lookalikes are different to counterfeits and will be discussed in Part 3 of this series but, in short, these are products which, surprise surprise, look like more well-known products, and often the party responsible will have taken steps to try to make sure they can not or are unlikely to be considered counterfeits.

For completeness, note that piracy refers to infringing electronic or “soft” works such as music and video so, yes, your streaming of Game of Thrones on a peer-to-peer network is piracy rather than counterfeiting. Piracy is less likely to be of immediate relevance to the cosmetics industry so has not been addressed here.

How do I develop an anti-counterfeiting strategy? What are the problems I may face with taking action against counterfeiters?

When it comes to the origination and development of an anti-counterfeiting strategy, key questions to ask at the outset will include:

• Which are the key markets where I want to stop counterfeits? Are there any markets in which I don’t sell but which I will want to include in my strategy as they are counterfeit gateways (e.g., Panama)?
• What level of resource (monetary and human) do I have to put towards the strategy?
• Will I need the help of external advisers?
• How much information do I currently have about markers of genuine goods?
• Do I have any evidence of counterfeiting activity?
• How prevalent are counterfeits on online marketplaces and social media?

The path of counterfeits from purchase to delivery and the various tactics used by counterfeiters used at each stage needs to be considered. There are many obstacles that may be faced when it comes to taking action against counterfeiters. This isn’t to say that there is nothing that can be done, but rather that expectations should be tempered with the reality of the increasing sophistication of counterfeiters.

Importantly, taking no action on the basis that it may be futile also comes with a potential price. It could suggest to customs authorities and counterfeiters alike that brand protection is not a priority, meaning that the former may be less inclined to take action at borders and the latter more inclined to step up their efforts knowing that the relevant brand owner is unlikely to take action against them.

One obvious place to begin efforts to tackle counterfeiters is at physical marketplaces/stores or online marketplaces via social media posts where they advertise their goods. The legal position in the UK and EU alone is complicated, so while I don’t propose to go into detail here about what can be done and the degree of responsibility e.g., an online marketplace has when it comes to proactively tackling counterfeiters (often not much at all), it should be known that there are steps that can be taken and legal avenues that can be followed. These can be costly and may prove ineffective where a seller simply sets up a whole new account or a new social media page, but will be worth consideration where a threat is posed to a brand’s reputation.

The appetite of enforcement authorities (both customs at the border and bodies like Trading Standards) to take action will often be dependent on policy priorities. Products that pose health and safety threats to consumers will likely always take priority, so electronics, toys, spare parts, and pharmaceuticals are often at the top of enforcement authorities’ action lists. Cosmetics also attract attention for policy reasons given that they are topically applied.

Counterfeiter Tricks And Routes

When it comes to the production and delivery to market of counterfeits, counterfeiters are becoming increasingly sophisticated and are finding ways to cheat brands’ anti-counterfeiting markers such as holograms. Counterfeiters also tend to make use of complex trade routes, often making use of a number of diversions so various transit points are passed through, generating misleading or even fraudulent documentation, meaning enforcement authorities and rightsholders are often unable to pinpoint the exact origin of goods. Free Trade Zones are increasing in number and so is their use by counterfeiters.6

Some common counterfeiter tricks include:

• sending packaging and labels separately to the final product to be assembled at destination;
• sending products in disassembled form where possible for assembly at the final destination;
• using fake names and addresses on shipping documentation to make the job of tracking down the consignors difficult if not impossible;
• sending counterfeits in small shipments to try and evade detection by appearing like noncommercial post;
• using stamps from international postal services to make packages appear like they have come from e.g. an EU member state;7
• importing goods into EU countries with fewer controls and then redirecting them to another EU member state;
• constantly changing trade routes to evade detection; and
• mixing counterfeit goods with legitimate goods or burying counterfeit goods deep in containers.

So what can I actually do to implement my strategy?

While there is no fail-safe way to deal with counterfeits, there are ways to make counterfeiting harder. These include:

• Putting customs notices in place to provide a legal avenue for customs authorities to seize potentially counterfeit goods at the border. Note the following:
• While filing a notice is a helpful first step, a simple list of trademarks is unlikely to be very effective. As well as providing a legal means of stopping counterfeit goods, customs notices also act as an educational guide, teaching customs how to spot counterfeit goods and distinguish them from genuine ones.
• Attending training sessions run by customs authorities where brand owners are given the opportunity to train customs authorities and show them how to spot counterfeit goods are another useful way of engaging with customs.
• In some countries (e.g., Germany) it is possible to put national notices in place which empower authorities to seize goods within borders.
• In some countries customs notices can only be filed where there is evidence of counterfeits being sold in that country.
• A customs notice can be put in place that covers the European Union as a whole. It can be filed in any of the EU member states and the information it contains will be disseminated to each of the EU members states’ national customs authorities.
• Investigate and make use of security markers on packaging. From bar codes to holograms, these are useful indicators of authenticity and can help customs and other authorities identify counterfeits. Changing these occasionally can help to keep ahead of counterfeiters, but this may not be practically possible where high volumes of product and multiple SKUs are being sold.
• Dedicate resources to the monitoring and investigation of online and physical marketplaces and consider legal remedies. While customs notices are helpful at the border, it is highly unlikely customs authorities will ever be able to prevent all counterfeit goods entering onto the market, so monitoring points of sale and reporting counterfeits through available notice and takedown systems will be important.

There are a number of industry and cross-industry groups which work to address the challenges posed by counterfeits and are good sources of information, including the following:

• Anti-Counterfeiting Group
• Global Anti-Counterfeiting Network
• International Anti-Counterfeiting Coalition
• Business Action to Stop Counterfeiting and Piracy (BASCAP)

Read the full series:

• Legal Part 1: Very Intellectual (Property)
• Legal Part 3: Lookalikes Here’s Looka-Liking at You, Kid
• Legal Part 4: Influencers and Native Advertising