The proliferation of counterfeit beauty products is one of the biggest issues currently plaguing the beauty industry. These counterfeit items often find their way into the market through unauthorized channels known as the gray market, bypassing the original manufacturer or trademark owner's authorization. For consumers, the use of these counterfeit products can lead to serious health risks, including skin allergies, infections, and even long-term damage. In addition to a loss of sales, brands targeted by counterfeiters face reputational damage that can erode consumer trust, which could ultimately lead to the brand's downfall. Furthermore, given the complexity of the Modernization of Cosmetics Regulation Act (MoCRA) and new sustainability regulations, counterfeit products put brands at risk for lawsuits.
So, how can brands protect their intellectual property and reputation when selling products online? The Independent Beauty Association (IBA) Cosmetics Convergence 2024 Spring Symposium addressed this pressing issue, providing practical advice and resources for beauty brands and businesses facing this threat. In case you missed it, here’s a recap of the insights shared surrounding the gray market, diversion, and counterfeit problems in the beauty industry.
Why It’s Important to Protect Your Brand
Building a brand is much more than creating and launching a product. Brand owners spend a lot of time and money cultivating an identity that reflects their values, expertise, and vision for the future, but you can’t buy a great reputation. That comes with time in the market and positive customer experiences. Consumers grow to trust brands, but that trust can be broken in an instant due to counterfeits, knockoffs, unauthorized sales, and other brand infringers. Taking down counterfeits might seem like an impossible task, but there are things you can do to help protect your brand and to take action and do something if your brand’s reputation is damaged in the marketplace as a result of counterfeits.
Building a Strong Legal Foundation
According to Michael Murphy, a partner at K&L Gates, the most effective strategy for brands to shield themselves from counterfeits is to establish a robust legal foundation. This foundation allows them to take action against infringers and address distribution challenges within the marketplace. When building your brand, consider implementing the following four elements:
Murphy emphasized the importance of knowing the difference between counterfeits, knockoffs, and unauthorized sales. Counterfeit products are products that bear your trademark and pretend to be the real thing. If you own the trademark, this is clearly illegal. Legally, you can pursue the counterfeiter for infringing on your trademark. This is why setting up IP protections early in your brand’s journey is critical.
Knock-off products are products that imitate your look and feel but don’t bear your trademark. This is where it becomes a little more complicated legally. If they’re infringing on one of your design patents or utility patents, you may have grounds to pursue legal action.
Many unauthorized sellers acquire real products through liquidation or a leak in a brand’s distribution network. Unauthorized sales of authentic products can be tricky. In many cases, it’s considered false advertising if the unauthorized seller advertises the product as new, but the product is actually used or damaged. This can be very disruptive for brands. Murphy suggests finding the leak in your brand’s distribution network to shut down these types of sales.
Fighting Counterfeits Under MoCRA
Counterfeit and knockoff products can not only cause reputational harm, but also physical harm to consumers. Regardless of whether a consumer purchased a product from an authorized seller or not, consumers who experience an adverse event may share that with the brand, and under new federal regulations, brands are held accountable for such incidents.
With its focus on consumer safety, MoCRA is changing the cosmetics regulatory landscape and creating new challenges and risk profiles for brands. One of the newest provisions of MoCRA is safety substantiation and adverse event reporting and record keeping. According to MoCRA, the FDA “shall not consider a cosmetic ingredient or cosmetic product injurious to users solely because it can cause minor and transient reactions or minor and transient skin irritations in some users.”
MoCRA defines a serious adverse event as an infection or significant disfigurement (including serious and persistent rashes, second- or third-degree burns, significant hair loss, or persistent or significant alteration to appearance), other than as intended under conditions of use that are customary or usual; or requires, based on reasonable medical judgment, a medical or surgical intervention to prevent an outcome as described above.
Under MoCRA, brands have to report to the FDA any serious adverse event within 15 business days after receiving information concerning such an event if it meets the above criteria. Rick Kingston, President at SafetyCall International, advises that brands know the answers to the following three questions to make sure brands are meeting the letter of the law as it relates to adverse events:
1. What is the benchmarked and expected normalized incidence rate for any given product’s adverse event, and are there systems in place to monitor significant deviations for minor, moderate, or major outcomes?
2. Is the observed incidence rate a true reflection of expected consumer reactions when using a given product, or are these reports simply “background noise”?
3. Is the product actually causing customers to experience adverse effects, and how serious are they? Can they be mitigated, and if not, do they represent acceptable or unacceptable risk?
To determine the severity of the adverse events, brands will have to work to sort out the “background noise” and uncover if the product is truly to blame or if the adverse event is due to something else. Some consumers will have a concomitant illness that causes an adverse reaction, or they’ve misidentified the potentially offending substance or product. Other consumers will claim to have had an adverse event in order to get a refund. Counterfeit items can also put your brand and customers at risk. Figuring out whether the problem is because the product is counterfeit or fake is critical.
“Not all adverse event reports are created equal, and not all adverse event reports are background noise,” says Kingston. Monitoring adverse events and determining whether the problem is due to the product or because it’s a counterfeit product is critically important.
How Amazon Protects Brands and Customers from Counterfeit Fraud
Amazon offers a full suite of tools to prevent counterfeit fraud and bad actor abuse. Brands can take advantage of programs like Amazon Brand Registry, Project Zero, IP Accelerator, Counterfeit Crimes Unit, and more.
Amazon’s brand registry is the first tool that Benjamin Erickson, Enterprise Sales Executive at Amazon, suggests that brand owners explore, regardless of whether or not they sell products on Amazon’s platform. It’s a free tool that allows brands to identify themselves as the IP owner and activates proactive protections that help put an end to bad listings. All you have to do is upload a valid pending or fully registered trademark.
Project Zero is an invite-only program that provides immediate counterfeit protection for your brand. Brands that have submitted reports of potential infringements through the Report a Violation tool with an acceptance rate of at least 90% over the last six months will be invited to join the program. Brands in Project Zero are given the unprecedented ability to immediately remove counterfeit listings without contacting Amazon.
Amazon’s Transparency program is a proactive solution to protect your brand and customers from counterfeit products. It uses secure, unique codes to identify individual units and prevent counterfeits from reaching customers. These codes can be added as a sticker or to the design of current packaging or label artwork and can be printed externally through a vetted transparency service provider (TSP) or other print vendor. Whether fulfilled by Amazon or shipped directly by sellers, products cannot be listed on Amazon or shipped without valid Transparency codes. Amazon already has 47,000 brands that are enrolled and protected via this program, so if you’re facing counterfeit issues, it’s worth exploring.
It’s important to note that Amazon will not shut down unauthorized sellers if those sellers are selling authentic products, and Amazon will not intervene in contract disputes, but they are dedicated to protecting brands and customers from counterfeit, fraud, and other forms of abuse. Last year, Amazon spent $1.2 billion to protect brands from IP infringement and stopped 700,000 accounts before they were able to list a single product for sale. Also last year, Amazon identified, seized, and appropriately disposed of more than 7 million counterfeit products worldwide.
If a third-party retailer is selling your product but they are not in your network of retailers, there are steps you can take, but only if you build out the proper legal foundation.
“Under trademark law, if a brand makes a product warranty or product guarantee that it’s only available to a consumer who purchases directly through them or an authorized seller, you can create a claim of trademark infringement under the law if that’s not being disclosed,” says Murphy.
Going after unauthorized sellers might seem like an uphill battle, but if you have patent protections in place and are thoughtful about what IP protections you file, you’ll have a much better chance of shutting down these sellers.
“Can you expect internet marketplaces to help you enforce [your trademark]? No, but you can go directly after these unauthorized resellers and work to find these leaks in your distribution,” says Murphy. “We’ve seen people go to great lengths to obtain unauthorized products. Subscription boxes are a huge gray market driver. It’s about putting a foundation in place and setting up a consistent and aggressive system for monitoring and enforcement."
