United We Stand—Divided We Fall

An industry comes together to combat counterfeiting.

By Jeff Gavin

Sponsored by major manufacturers who aggressively fight counterfeit goods, including Schneider Electric/Square D and Siemens, initiative endorsers to date include the National Association of Electrical Distributors (NAED), the National Electrical Manufacturers Association (NEMA), the National Electrical Contractors Association (NECA) and Underwriters Laboratories (UL).

Several of the associations had been campaigning against counterfeit electrical products before the initiative. The AntiCounterfeit Products Initiative will pool these existing efforts, share them throughout the supply chain and create new efforts (e.g., this special supplement), all under the initiative banner.

“We’re really at the beginning stages of our information campaign,” said Edward M. Orlet, director of development for NAED, St. Louis. “The effort will spread information about pirated electrical goods in a comprehensive way, so it reaches salespeople, field people and the consumer.”

What’s at stake

The initiative’s first industry event, “Counterfeit Products: Are You Liable?”, was a roundtable discussion presented at the 2008 NECA Convention and Trade Show in Chicago. Representatives from manufacturers and UL presented in stark terms the liability counterfeit goods present. Panel moderator John Maisel, publisher of NECA’s ELECTRICAL CONTRACTOR magazine, started the discussion with sobering words.

“This is a multimillion-dollar problem. Not only is there a loss of dollars for manufacturers, electrical contractors and distributors, but there is a loss of image, as well. More important than either of those is the loss of life when a knockoff product causes a fire or electrocutes a homeowner,” he said.

The panel spoke directly to electrical contractors, distributors and others who can protect themselves from unknowingly acquiring these goods.

Panel speakers included Kevin Yates, vice president, Residential Products Division, Siemens Energy & Automation; Stephen Litchfield, assistant general counsel, Schneider Electric/Square D; Bob Crane, lead enforcement specialist, Underwriters Laboratories; and William Ferguson, vice president of administration and general counsel for Babcock Power Inc. For panelists, the first tool in the anti-counterfeiting effort is education.

Yates said an estimated $250 billion in revenue is lost in this country due to counterfeit products. What share of that represents electrical products is hard to gauge, but other than pharmaceuticals, they remain the riskiest of pirated products.

“If you choose to install a product that is not genuine but counterfeit and causes harm, you can be held liable for personal damages and possibly face imprisonment,” Yates said. “Distributors face liability as well, especially if they purchase known counterfeit products.”

Ferguson, a former electrical contractor before entering law, fine-tuned the point.

“You will be sued for breach of contract, negligence, gross negligence, perhaps internal misrepresentation, strict liability or fraud,” he said. “Criminal liability would be leveled if you intentionally or someone in your organization conspired to bring counterfeit product into your company. In the U.S., it is not ‘a slap on the wrist’ like it is in China and other countries. You could face 10 years in prison, $5 million in fines and $10 million for the company for a first offense.”

All panel participants emphasized that the “I didn’t know” defense offers little protection in court.

“The manufacturer is in the business of protecting their good name and reputation,” Ferguson said. “However, if a counterfeiter sends a product in the United States that you purchase and/or install, these manufacturers will not be liable because they did not manufacture the product. If they can show that, they are out of the lawsuit.”

“The closer you are to the end of the supply chain, the more liability you have,” Yates said. “The electrical contractor actually has the highest liability in the supply chain.”

The potential of physical harm or property damage due to counterfeit electrical products should scare anyone in the channel.

“We did some tests on counterfeit circuit breakers,” Litchfield said. “We discovered the counterfeits had a 3,200-amp short circuit rating instead of the expected 10,000-amp. They also exhibited erratic tripping and had no calibrations. The flexible connection inside the breaker was frayed and failed. The magnetic strip was inoperable. The breakers did not meet UL or any other standards. During a UL test, a short sent through a counterfeit circuit breaker caused a tremendous explosion with molten metal spraying across the room. And what if you had a dangerous electrical problem in your home that wasn’t caught because the counterfeit circuit breaker doesn’t trip?”

A brewing crisis

“The scale of the problem is so large that it is hard to measure success,” Orlet said. “When one law enforcement seizure closes a counterfeit manufacturing plant, another invariably opens. We need collective action to strike a stronger blow against the counterfeiting industry.”

Bernd Heinze, president and CEO of Philadelphia-based Sequent Insurance Group, a claim, litigation management and auditing company, said it is hard to measure how many counterfeiters there are, but seizure statistics from the U.S. Department of Homeland Security shed some light.

“The agency, in a 2006 report, shared there were 14,000 seizures of counterfeit products, a 67 percent increase over the year previous. It is an $11 billion to $20 billion business globally, and a $300-$400 million business in the U.S. alone,” he said.

Sequent conducted a research study for NAED titled, “Product Liability Exposure: How to Manage and Mitigate the Risks in Today’s Global Market.” It lays out the problem posed by electrical counterfeit goods, including the prevalence of low-cost producers, offshore product, the volume of product coming into the United States, and its effect on the entire supply chain.

“Many more companies can find sources for low-cost products than in the past,” Orlet added. “It’s hard to pass up a bargain, but you have to think through the possible consequences. The study details the potential danger to buyers and users of counterfeit product. Some distributors operate under a misperception that counterfeit products are the manufacturer’s problem. They need to understand that liability extends to the whole supply chain.”

Heinze has presented highlights of the paper at NAED events and through webinars. The research also was the focus of a three-part article in the June, July and August 2008 issues of TED magazine.

“Now that I’m aware of the size and damage caused by overseas counterfeit electrical products, I’ve become very passionate in the efforts to combat them,” Heinze said. “We need to raise awareness and confront head-on this war against people who surreptitiously destroy the legitimacy of the supply channel.”

Heinze said there are risks in doing business overseas, even in South America or Canada, with manufacturers infringing on the intellectual property rights of other companies’ goods in all regions and countries. Going after offshore counterfeiters may prove daunting.

“The mountain is steep and extremely difficult,” Heinze said. “These are criminals traced from U.S. Homeland Security. The pipeline that pays them involves money laundering by al-Qaeda, organized crime and others who finance these operations. It’s difficult going after them, but know you are not going it alone with groups like UL, manufacturers like Square D and Siemens, and the collective organizations that make up this new initiative.”

Panelists highlighted the scope of the counterfeit program.Associations take action

NEMA and the Electrical Safety Foundation International (ESFI) have been addressing electrical counterfeiting over the past few years. The new initiative’s collective umbrella is an approach all members welcome to build awareness and add urgency.

“This issue really came to the fore when some for our members told us of dangerous ground-fault interrupters discovered in the New York area,” said Clark Silcox, general counsel for NEMA, Rosslyn, Va.

The NEMA Web site devotes an entire area to the counterfeiting issue. Educational brochures and videos, webinars and news on anti-counterfeiting progress are just a few of the features. ESFI has a similar wealth of information on its Web site. One tool of note is a joint NEMA/ESFI DVD entitled “Counterfeits Can Kill,” which addresses the problem as it affects several players in the supply chain.

“On the DVD is a counterfeit extension cord connected to a simple hair dryer,” Silcox said. “Within minutes, the cord is smoking. In a short time, it goes up in flames. Substandard performance in many other consumer goods from knockoff batteries for flash lights to no-name phone chargers is a danger we need to communicate to the consumer.”

ESFI is heading a consumer awareness effort.

“Awareness of counterfeit electrical products by consumers is almost nonexistent,” said Christopher Lindsay, director of programs for ESFI in Rosslyn, Va. “Gallup created a report with the U.S. Chamber of Commerce that revealed more than two-thirds of consumers were unaware that electrical products such as batteries and electrical cords were counterfeited.

“Our supporters who make up ESFI helped identify this counterfeiting issue as something that had to be front and center,” Lindsay said. “We all need to be working with legitimate supply channels, and we need to be aggressive in our vigilance against counterfeit products. This is a long-term effort as we look to change behavior on the supply chain. Right now, we need to let people know there is a problem. Awareness is everything.”

Silcox said to be diligent buying electrical products.

“One of the tricks counterfeiters use is announcing surplus products with a low purchase cost to move them. They play on a marketplace looking for a price point that can increase profit margins. Beware of such tactics,” he said.

What it will take

At the NECA panel discussion, participants shared what actions they have taken to combat the growing counterfeiting issue. A combination of surveillance, raids, tips and aggressive prosecutions have yielded results while exposing a problem that is bigger than anyone anticipated.

“United we stand. Divided we fall against the counterfeiters,” Crane said. “They don’t play by any rules, any boundaries, laws or regulations. Counterfeiting is high profit, low prosecution. The Internet allows for products to be shipped and sold anywhere in the world from undisclosed locations.”

The UL testing and certification mark is applied to an estimated 21 billion products every year. Though UL has seen its labels counterfeited for years, the numbers have escalated steadily with more products produced overseas.

“By the time counterfeit circuit breakers, toasters or extension cords find their way into your house, it’s too late,” Crane said. “Over the past 10 years, we’ve developed a relationship with U.S Customs and Border Protection agents, arming them with forensic tools and education to detect counterfeits entering the country. We have also helped train the U.S Chamber of Commerce, the U.S. Patent and Trademark Office, and the Department of Commerce to spot counterfeits. In cooperation with law enforcement agencies, we make undercover buys from known counterfeiters in this country and put these people behind bars. They are doing five to seven years and seeing penalties of $1 million or more.”

On the international front, UL works with international agencies such as Interpol, the Royal Canadian Mounted Police and agencies from South America.

“Global cooperation will be increasingly important to applying real pressure on counterfeiters,” Silcox added.

Litchfield noted the importance of aggressive prosecution in their successes to date.

“In 2004, we undertook a clandestine buy from an unauthorized wholesaler,” he said. “Half of those products we bought were counterfeit. We filed suit against the wholesaler. We used that lawsuit and discovery process to find out whom they bought products from and whom they sold them to, then sued both those parties. We then used the discovery process in that suit to find out who those parties bought from and sued them as well.”

Square D has settled a number its counterfeit lawsuits, adding some very tough measures for the “losing” unauthorized wholesalers.

“The defendant must notify the Consumer Product Safety Commission that they were selling the counterfeit product,” Litchfield said. “They then have to do a recall and let their customers know they were sold counterfeit circuit breakers, then go out and retrieve them, even if they’ve been installed.”

Siemens Energy & Automation, Alpharetta, Ga., has its own forceful risk management plan.

“We aggressively register our patents, making it much more difficult for someone to counterfeit our product,” Yates said. “We have ‘secret shoppers’ within our distribution channel to investigate those that might be involved in this illicit behavior, and we bring them to justice. We are getting reports from the British Engineering Manufacturers Association, other groups within Siemens and anti-counterfeiting initiatives across the globe to help monitor what might be entering the U.S.”

Lobbying in Washington also will play an important role in combating counterfeit electrical goods. While future specific legislative proposals remain to be identified, NEMA and others have already played an active role.

“We lobbied for and provided input into the drafting and passage in 2006 of the Stop Counterfeiting in Manufactured Goods Act and the Prioritizing Resources and Organization for Intellectual Property Act, which President Bush signed into law [Oct. 14, 2008],” Silcox said. “IBEW [the International Brotherhood of Electrical Workers] was also one of the proponents of the Pro-IP Act, a bill that brought both business and labor together.”

The Pro-IP Act creates a new copyright enforcement division with the Department of Justice. It also allows law enforcement agents to seize property from copyright violators.

Clark added that state enforcement laws need improvement, as most enforcement takes place at the local level.

“This is one area where NECA and NAED’s local presence might prove important. NEMA has been working with the International Anti-Counterfeiting Coalition and the International Trademark Association to support model state legislation.”

An observant eye

The danger with today’s counterfeits is that, to the untrained eye, they look like the real thing.

A joint print advertisement by NAED and NEMA shows a genuine manufacturer’s circuit breaker beside an offshore knockoff. They look alike. The problem is the counterfeit is merely a toggle switch with no trip mechanism or subsequent circuit protection. The ad implores the reader to “Get your electrical products from an authorized dealer.”

Orlet said, although more counterfeiters are being prosecuted, there still is work to be done.

“It is practically impossible to catch every counterfeiter. Therefore, everyone in the supply chain should have a comprehensive risk management strategy, which starts with ‘deal only with trusted suppliers’,” he said.

In response, the Anti-Counterfeit Product Initiative has launched its own Web site (www.counterfeitscankill.com). This Web site features white papers, position statements, webinars and panel discussions. Highlights include a video of the panel discussion “Counterfeit Products: Are You Liable?” Slated for January 2009 is a follow-up anti-counterfeit webinar. The site also features direct links to the initiative partners’ respective sites including participating associations, sponsors, testing and certification, and government organizations.

GAVIN is the owner of Gavo Communications, a marketing services firm serving the construction, landscaping and related design industries. He can be reached at gavo7@comcast.net.