Collaring Counterfeiters is Everybody's Business

Penalties for using counterfeit products can be severe.

By John Paul Quinn

Government officials, association executives and manufacturers are convinced of two things when it comes to counterfeit electrical products: First, the problem is enormous, growing and pervasive; and second, distributors and contractors are not aware of how much they are threatened by selling and installing these products.

Certainly, significant advances have been made in combating counterfeiting, but by no means can anyone in law enforcement or in the supply chain afford to be complacent.

One place to start discussing the roles and responsibilities of all concerned is to review what has been done and by whom and then consider what has to be done better.

STOP!

In October 2004, a group of U.S. government departments and agencies banded together to pool their resources, data and respective individual capabilities and to coordinate their anti-counterfeiting activities.

The group is called the National Intellectual Property Law Enforcement Coordination Council (NIPLECC) and includes representa-tives from the State, Justice and Commerce Departments; the Office of the U.S. Trade Representative; U. S. Customs and Border Pro-tection (CBP); Immigration and Customs Enforcement (ICE); the U.S. Patent and Trademark Office; the Federal Drug Administration; and the FBI.

The strategy the group adopted is called the Strategy Targeting Organized Piracy (STOP!). According to the NIPLECC’s coordina-tor, Wayne Paugh, the group has five objectives:

• Help trademark and brand owners protect themselves.
• Increase seizure of counterfeit goods.
• Pursue and prosecute counterfeiters more effectively.
• Work closer with trade associations and industry.
• Engage foreign trading partners and convince them to show more respect for U.S. intellectual property rights (IPR).

Impressive gains have been realized, and since 2003, seizures of all counterfeit products coming into the United States have dou-bled. One of the most significant accomplishments within the past year was the first-ever joint effort of CBP and the European Union, which was called “Operation Infrastructure.”

The action resulted in confiscation of approximately 360,000 counterfeit integrated circuits and computer network components bearing 40 different trademarks, valued at $1.3 billion.

David Brener, chief of the IPR operations branch in CBP’s Office of International Trade, acknowledges the success of the interna-tional operation but notes there has to be more interaction on the domestic scene between authorities and industry.

“A solution to the counterfeiting problem cannot happen without ongoing dialogue between the government and the private sector,” he said. “The electrical industry has to make its people aware that everybody in the supply chain has a responsibility and role to play.

“The government or the trade association can’t handle this threat by themselves. Companies have to be involved. Field intelligence is critical, and distributors are in an ideal position to say where counterfeits are coming from,” Brener said.

How to get involved

A number of electrical manufacturers already have strategic plans and procedural systems in place that involve their distributors in the anti-counterfeiting effort.

Given that circuit breakers pose serious safety issues and are among the easiest to fake, Siemens Energy & Automation Inc., in Al-pharetta, Ga., developed a plan of action for protecting its position in the residential and industrial markets.

The plan includes the following:

• Educating target audiences about the risks of counterfeit breakers
• Helping authorities identify and remove counterfeits from the market
• Hiring secret shoppers and investigators in the United States to root out counterfeit products
• Offering rewards to supply chain partners for reporting counterfeit sellers
• Aggressively prosecuting makers and sellers of counterfeit breakers.

Dave Griffith, electrical distribution channel manager at GE Consumer & Industrial Division, Nela Park, Ohio, said his company’s anti-counterfeiting objectives include protecting and enforcing its IPR, reducing risk of injury or damage caused by counterfeits, recapturing lost business caused by counterfeits and increasing sales, maintaining a reputation of vigilance and action, and protecting the company’s brand, whatever the cost.

The company has a dedicated legal team that pursues counterfeiters internationally and has established relationships with a number of investigative agencies.

“This problem has become so prevalent, we have made anti-counterfeiting actions a standard process, so when we come across an in-stance, we already have a playbook in place,” he said.

The company communicates on the counterfeiting issue with distributors both individually and through print and electronic media. The fall issue of its quarterly electronic newsletter included a set of anti-counterfeit guidelines for its distributors to follow.

“Some distributors just don’t understand how ridiculous it is to put their company on the line and their customers at risk for the sake of saving $1 on a $2.50 breaker,” Griffith said. “And two arguments that don’t wash in court are, ‘I had to buy them because my customer needed them immediately,’ and ‘I can’t control my salespeople.’”

GE has started laser-etching its products for positive identification, and this can be used to trace legitimate products to an original equipment manufacturer who may have purchased them for unauthorized resale. With regard to contractors, Griffith said they would probably find it difficult to identify a counterfeit; they should depend on their distributors because buying off the Internet or from an un-documented source is asking for trouble.

What kind of trouble?

“What many distributors and contractors fail to understand is that, if they have no paper trail of traceability back to a legitimate manufac-turer, they will bear the full liability for any counterfeit products they sell or install and which malfunction,” said Tom Grace, sales manager, aftermarket and brand protection, Eaton Corp., Pittsburgh.

Stephen Litchfield, assistant general counsel at Schneider Electric/Square D, Palatine, Ill. underscored that same point.

“Both distributors and contractors should be aware that no manufacturer will defend anyone in their channel of distribution who has been charged with product liability involving a counterfeit product bearing their name,” he said. “Distributors and contractors should un-derstand that they are our eyes and ears in the field, and if they suspect the validity of a product, they should come to us immediately. We have a designated point person to go to for taking action whose title is manager for anti-counterfeiting and unauthorized distribution.”

The Justice Department reports a 35 percent increase in the number of sentences imposed for IPR violations over the past two years.Many who are low in the supply chain don’t realize there are multiple layers of liability.

“Distributors and contractors can be caught in a crossfire of civil and criminal litigation,” said Brian Lewis, Schneider Electric/Square D outside counsel. “This includes the requirement to conduct expensive recalls, exposure to product liability suits, and subsequent loss of goodwill in the marketplace.

“If they cannot prove the source was a legitimate manufacturer, they won’t be covered by insurance, and there is no upside to the situation they will find themselves in,” he said.

Lewis said the best way to ensure a product is legitimate is to buy it directly from an authorized distributor.

“Our distributors are required to buy Square D products only from us, and the company strictly enforces this policy with its distributors, ensuring that the products are genuine,” he said.

And the stakes for dabbling in counterfeits are higher than one might think.

“The Justice Department reports a 35 percent increase in the number of sentences imposed for IPR violations over the past two years,” Paugh said. “But a more telling statistic is that those convicted are not getting slap-on-the-wrist sentences. Over the past two years, there has been a 130 percent increase in the number of sentences for counterfeiting that were greater than two years in length.”

The anti-counterfeit agenda

As evidenced by the formation of NIPLECC, the increase in seizures by CBP and the hard line of the Justice Department, government agencies are doing their best to oppose the insidious incursion of counterfeits into the supply chain.

Manufacturers have put programs in place to work closely with government agencies and to assist their distributors in identifying counterfeits and helping to track them to their source.

Distributors and contractors, the final critical links in the supply chain, should make every effort to be involved in the anti-counterfeit agenda. Given the risks involved, they can’t afford not to.

QUINN reports on a wide range of business topics for journals in the United States and Europe. He can be reached at 203.323.9850 or by e-mail at mirabel@snet.net.