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A Model for the Secure Management of Supply Chains

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					A Model for the Secure Management of

           Supply Chains

              Chapter 3

      The Counterfeiting Problem
           A Model for the Secure Management of Supply Chains


                            3.1 Introduction


The concept of counterfeiting is not new – it stretches back to Egyptian times.

Today, the difference lies in the scale of the problem and the effect on

economies, companies and consumers [ACGI]. Companies compete on the

basis of quality and price. The counterfeiter can be compared to a parasite,

seeking only to make money while deliberately damaging the reputable

manufacturer.




                    3.2 Defining Counterfeiting


The word counterfeiting is used in reference to the unauthorised appropriation

of a variety of Intellectual property, but only in the area of infringement of

trademarks on physical goods is the word counterfeiting semantically correct

in South African parlance [PAUL].



There are many legal definitions of counterfeiting, covering a wide variety of

Intellectual Property. Bearing in mind that this dissertation is mainly

concerned with the situation where the specific details of the product have

been copied in addition to patent or trademark infringement, The Anti-

Counterfeiting Group [ACGI] defines counterfeiting as:

   •   A deliberate attempt to deceive consumers by copying and marketing

       goods bearing well known trademarks, generally together with

       packaging and product configuration, so that they look like they are


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            A Model for the Secure Management of Supply Chains


       made by a reputable manufacturer when they are, in fact, inferior

       copies.



Another term often associated with counterfeiting is piracy. Piracy commonly

refers to clear-cut unauthorised infringement of copyrights on sound

recordings, videos and computer software [PAUL]. Although there is no full

definition of piracy in the copyright area, it can be said that piracy involves the

reproduction of works, which essentially directly fulfil the sales of the original

owner of the intellectual property.




                     3.3 The Counterfeit Market


A counterfeiter seeks to maximise profit with a minimum of effort. The

counterfeiter makes no investment in quality materials, quality control,

research and development or marketing. This means that the counterfeiter’s

manufacturing costs are far lower than that of the established company. Even

so he will often sell the item at near the original price to maximise his profit

and to further dupe consumers.



A survey conducted in the United Kingdom [AASV] showed that counterfeiting

and piracy cost industry in the UK over £8,500,000,000 in 2001. This covered

£6 billion pounds in the manufacturing area, £2.2 billion in computer software

and £330 million in home entertainment. Music piracy in the year 2001

increased by 30% over levels in the year 2000.



                  Chapter 3 – The Counterfeiting Problem                        22
            A Model for the Secure Management of Supply Chains




We are all familiar with counterfeit watches, shirts and caps from famous

labels such as Rolex, Lacoste and Ferrari, which are widely available from

vendors in the informal sector. These low quality products are damaging to

the owner of the trademark and the general economy, but there is a much

darker side.



On rare occasions, counterfeit goods are quality replacements for genuine

articles, but more often they are of such poor quality as to possibly endanger

human life. An example of this was found in Nigeria where counterfeit brake

pads were being manufactured. In brake tests the counterfeits took up to 10

times longer to stop the vehicle than the genuine article. An example was

even found that was made from tightly compressed grass, which burst into

flames when tested [ACGI]. The counterfeiters are only interested in the

profits from their activities and the old retail cliché “making a killing” takes on a

whole new meaning.



Probably the most widespread form of counterfeiting is producing fake

currency, predominantly U.S. dollars. According to the U.S. Secret Service,

modern counterfeiters are not professionals printing thousands of fake bills on

large presses, but rather students using the high quality copying, scanning,

imaging and printing equipment now available. The percentage of people who

used computers for counterfeiting rose from 2% in 1973 to 73% in 1999

[MORE]. The aim of this dissertation is not to fight currency counterfeiting,

however it is worth noting the rise of small time counterfeiters using high



                  Chapter 3 – The Counterfeiting Problem                          23
             A Model for the Secure Management of Supply Chains


technology equipment. It is my experience that such equipment in the hands

of a skilled user can produce remarkably accurate counterfeits of T-shirts,

caps, CDs, DVDs and the like.



However, not all counterfeit products on the market have been falsely

manufactured by counterfeiters. There are a growing number of incidents of

theft, both of materials and finished goods. These goods are normally

misappropriated in large volumes and often with the aid of employees from

the targeted company. These goods often are sold at a substantial discount in

the so-called “Grey market” to compete against legitimate goods. The system

under    discussion    in   the   dissertation   is   aimed   at   defeating   this

misappropriation of goods and materials, in both the manufacturing SC and

the transportation SC.




                            3.4 The Grey Market


The twin problems of own-brand copying and parallel trading form what is

known as the grey market. Manufacturers often find themselves in the rather

strange position of competing against their own products. These competing

products, known as grey market goods, fall into 2 distinct scenarios [DENN]:

   1. The goods are manufactured for export purposes and the manufacturer

        finds that the goods have been diverted, either before or after

        exportation, back to the country of origin.




                   Chapter 3 – The Counterfeiting Problem                       24
             A Model for the Secure Management of Supply Chains


   2. Goods manufactured overseas by a foreign licensee are imported into

       the country without the permission of the domestic licence holder.

Point two represent the most common situation where a dealer finds that, due

to favourable exchange rates or other reasons, he can sell imported goods at

a lower price than the local manufacturer.



Purchasing grey market goods can have disadvantages that far outweigh the

cost savings. As mentioned above, the worst-case scenario is the goods

could turn out to be stolen. Further, if the products are covered by a warranty,

it may not be valid or the domestic manufacturer may not be obliged to fulfil

that warranty. Foreign products may also have incompatibilities with local

equipment.




               3.5 Steps To Combat Counterfeiting


Organisations such as the Anti-Counterfeiting Group [ACGI] and the Alliance

Against Counterfeiting and Piracy [ALSU] are large groups representing

manufacturers, distributors and retailers in the campaign against the

counterfeit trade. These groups work to change society’s perception of

counterfeiting and piracy by highlighting the potential dangers as well as the

damaging effect on the economy. They also lobby governments to bring in

anti-counterfeiting legislation.




                  Chapter 3 – The Counterfeiting Problem                     25
            A Model for the Secure Management of Supply Chains


According to the Anti-Counterfeiting Group, the only way to combat

counterfeiting, aside from the near impossible task of changing society, is

through enforcement. Effective enforcement comprises the following steps:

   1. Companies must commit themselves to protecting their rights and

      products.

   2. Governments must provide the necessary resources to the agencies

      enforcing anti-counterfeiting legislation.

   3. The enforcement agencies must bring the cases before the courts.

   4. The judiciary and courts must make an effort to deter further

      counterfeiting by imposing appropriate penalties.




                       3.6 Legal Ramifications


Although a detailed discussion of the legal aspects of prosecution and

conviction following a counterfeiting offence are beyond the scope of this

document, I would like to highlight a few sections.



Any trafficking or attempted trafficking in goods or services knowingly using a

counterfeit mark does constitute a crime [PAUL]. Copyright infringement, with

the element of intent, is a criminal offence. In the trademark area, the

prosecutor must prove the defendant manufactured for sale, sold or

distributed a confusingly similar mark. The prosecution must also show that

the defendant knew that the mark was owned by another and prove the case

beyond a reasonable doubt. An interesting twist is that counterfeiting that



                  Chapter 3 – The Counterfeiting Problem                     26
            A Model for the Secure Management of Supply Chains


infringes on a patent or design patent does not constitute a criminal offence

under the intellectual property law [PAUL].



In order to take action against counterfeiting, the owner of the intellectual

property or plaintiff may file for a temporary restraining order which restrains

the counterfeiter or defendant from further infringing activity. This may be

done without the knowledge of the defendant, if the plaintiff can show that

incriminating evidence of the counterfeiting activity will disappear. The plaintiff

can then apply for an ex parte seizure of the infringing items where after a full

trial in the matter will be held. If the plaintiff prevails in the trial the court may

grant a permanent injunction against the defendant, where after the plaintiff

can file a damage suit. The court may award “damages adequate to

compensate for the infringement, but in no event less than a reasonable

royalty for the use made of the invention by the infringer together with interest

and costs as fixed by the court.” [PAUL pg 5]. In the event that the actions of

the defendant are shown to be wilful, the amount may be increased up to

three times the damages assessed. An ideal situation where treble damages

might apply is in the counterfeiting and piracy areas [PAUL].




                               3.7 Conclusion


The rise of the popularity and value of brands has been a major contributor to

the rise of counterfeiting. The globalisation of commerce and the availability of

cheap, yet powerful information technology makes business extremely



                   Chapter 3 – The Counterfeiting Problem                          27
            A Model for the Secure Management of Supply Chains


profitable for the counterfeiter. The low risk of being caught, successfully

prosecuted and the relatively lenient sentences, especially for small time

counterfeiters, also encourages them.



“Why pay for an original when I can get a fake to do the same function for so

much less?” This question is often asked by the general consumer when

visiting informal shopping areas such as ‘Flea Markets’. This rather

shortsighted approach doesn’t consider the entire economic effect of their

actions. The ‘street value’ of the counterfeit goods seized does not give a true

reflection of the actual losses [ACGI]. Aside from the direct loss of the sale to

the owner of the intellectual property, losses to the government in unpaid VAT

have to be recouped by other means. The examples mentioned above show

how dangerous these products may become, directly to the purchaser as well

as to innocent third parties. In the long term, reduced profitability due to

counterfeiting has serious repercussions on the labour force, with an

estimated one hundred thousand job losses every year in the European Union

alone.



Developed countries already have laws to defeat counterfeiting and protect

trademarks. The World Trade Organisation has put in place the Trade Related

Aspects of Intellectual Property Rights (TRIPS) agreement aimed at

encouraging developing countries to alter their laws in line with the developed

countries [ACGI].




                    Chapter 3 – The Counterfeiting Problem                    28

				
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