All businesses are painfully aware that counterfeiters are lurking in the shadows intent on profiting off of valuable brand names and trademarked products, looking to deceive consumers for their own monetary gain. In 2020, projected revenue generated by counterfeiting amounted to 1.82 trillion dollars [1] and is continuously increasing with some projections putting the value of counterfeiting at 4.2 trillion dollars in 2022. [2].

Given the success of the counterfeit industry, now, more than ever, businesses and consumers need to be aware of its far-reaching effects.

What is Counterfeiting?

Brand-owners expend significant amounts of money, time, and resources to develop brands and products which identify their company.

Think Nike and Apple, or even Rubik’s Cube, or an individual, like LeBron James.

All of these are brands created by companies or individuals, for which millions of dollars have been expended in marketing alone. Branded products are generally manufactured to high standards that consumers expect when purchasing these products.

Counterfeit goods bear the trademark, brand name, or use the trade dress of a legitimate trusted brand, but they are actually produced by another party who is not authorized to do so.

These products themselves are not made to the specifications of the brand-owner resulting in cheap and often-times faulty results.

With technological advancements, and the reach of the Internet, counterfeiters are more easily able to manufacture and distribute fake products throughout the world. The effects of which significantly impact brands and consumers in substantial ways.

Brands Lose More than Just Money

Losses incurred by brand-owners go far beyond lost sales. Below, we walk you through some of the effects that your business should account for in its intellectual property strategies.

1. Damage to Reputation

Given the poor quality and potentially unsafe products that are produced by counterfeiters, consumers who receive these products, not knowing that they are counterfeit (as counterfeiters do their best to disguise fake products as the real thing), are not only dissatisfied with the brand, but they also begin to distrust and lose confidence in the brand-owner. These consumers will likely not purchase products from this brand in the future and will discourage others from doing the same.

For example, if a consumer orders a pair of Levi’s jeans, and when the delivery arrives, the consumer opens the package to find discolored and/or a toxic smelling fabric, a zipper that does not work, or buttons that fall off in the first wash, that consumer will never associate Levi’s with great quality. In fact, any time someone mentions Levi’s that consumer will likely mention the negative experience. If thousands of Levi’s consumers are purchasing counterfeit goods annually, those negative experiences add up to huge reputational harm.

2. Eroded Brand Value

The erosion of brand value goes hand in hand with reputational damage. When low quality inexpensive fake products flood the market, the market demand and value of the brand declines substantially. [3].

It is estimated that Intellectual Property equals 45-75% of the value of Fortune 500 companies.

It goes without saying, that this has an immense immediate effect not only on revenue, but of the valuation of a business. Significant loss of brand equity, which is the value derived from consumer perception, can be fatal.

3. Decrease in Sales of Genuine Products

The more counterfeit goods that exist, the less sales your business will realize. Your consumers are looking for ways to buy your products, and they are being duped and deceived into purchasing fakes from counterfeiters.

Take action to suspend counterfeit stores and make finding and verifying products easier for your consumers in order to balance the scales.

4. Price Increases on Genuine Products

Unfortunately, businesses are forced to increase the sales prices of genuine branded products in order to make up for their lost revenue due to sales of counterfeit products. As consumers are in the dark as to why businesses increase the price of their products, this leaves consumers feeling taken advantage of, and gives them a negative view of the brand.

5. Increases in Warranty Claims

A lesser discussed, but significant, impact on businesses, are increases in warranty claims by consumers.

Many consumers feel that brand-owners should refund or replace the counterfeit goods received by the consumer.

It’s common for consumers to feel that it’s the brand-owners responsibility to police the market and ensure that they are purchasing genuine products. Because of this, businesses are forced to either alienate brand-devoted consumers by refusing such request or acquiesce to the demand and incur double losses.

6. Legal Liability

Counterfeit activity can result in tragic and dangerous situations, and any consumer harmed may take issue directly with the brand-owner claiming that the brand-owner failed to police the market against counterfeit products.

Hypothetical examples of such incidents are endless – a consumer uses a fake L’Oreal product only to have it burn the skin on their face, a child swallows toxic paint from a fake Hasbro toy, or a counterfeit Lenovo battery explodes in someone’s laptop when they are using it.

Though none of these products were genuine, none made by the true brand-owner, it may not stop harmed consumers from trying to hold those businesses accountable by filing a lawsuit against them to recover damages for their injuries.

7. Potential Employee Layoffs

Many businesses don’t realize that their employees’ jobs are at risk. [4].

The ICC has stated that up to 5.4 million legitimate jobs have been put at risk as of 2022 due to counterfeiting.

Lost revenue could mean that there isn’t enough money to pay your employees. If the losses are great enough, layoffs may be a step that businesses are forced to take.

These are just a few of the effects that businesses should take into consideration with their intellectual property approach.

High Costs to Consumers

While you must be cognizant of the immediate effects to your business, any brand-owner would be remiss if they didn’t also consider the great impact that counterfeiting has on your customers.

1. Health and Safety

Given the unregulated conditions of counterfeit manufacturers, the poor and most times unknown quality of the items used to create the product and the products themselves, and the lack of oversight or mandatory checks on the counterfeit goods, these products have a significantly high chance of harming consumers’ health and safety.

Items like electronics, toys, food, cosmetics, jewelry, car parts, baby products are all likely to be faulty and dangerous, if not toxic and deadly.

Car seats that don’t function properly, toys with sharp or loose parts, arsenic in cosmetics – all examples of counterfeit products that can severely harm consumers.

2. Brand Uncertainty

Since many consumers do not realize that the product received was a counterfeit good that is not associated with the brand-owner, consumers perception of the brand-owner turns negative and they have a distrust for that brand which will prevent them from purchasing genuine products in the future, and likely they will share their distrust of and unhappiness with the brand-owner with others, and will discourage others from supporting that brand.

3. Poor Return on Investment

Whatever the cost of the counterfeit item, the consumer paid for a product that they were deceived into purchasing and are unhappy with the product received. They are now out the money that was paid for it as counterfeiters generally will not replace or refund counterfeit goods. Consumers will likely not purchase another product bearing this brand out of fear that they will lose even more money.

4. Higher Cost for Genuine Products

If the consumer wishes to purchase a genuine product, it is likely that the price will have increased as the brand-owner must increase the cost of genuine products to make up for the losses incurred from the counterfeit activity.

Consumers not only lose money from the fake product, but lose even more if they try to make it right and purchase the genuine product later.

What Do We Do Now?

As you can see, businesses and consumers face a barrage of consequences due to the unlawful sale of counterfeit goods.

For businesses, the best thing to do is prepare an action plan to prevent counterfeit goods as much as possible including policing the market, plan how to mitigate damages when counterfeits are found, and educate your consumers about counterfeit products.

For consumers, stay aware when shopping, always buy from trusted retailers, and know the indicators of a genuine product. Most importantly, trust your gut - if it feels off, it probably is.

To discuss these strategies, and other effects that we did not mention, feel free to contact us.

[1] https://www.researchandmarkets.com/research/hzjb9c/global_brand?w=4

[2} https://www.mytotalretail.com/article/the-knockoff-effect-the-hidden-environmental-and-social-impact-of-counterfeit-goods/

[3] Lewis, Kevin (2009) "The Fake and the Fatal: The Consequences of Counterfeits," The Park Place Economist: Vol. 17 Available at: https://digitalcommons.iwu.edu/parkplace/vol17/iss1/14

[4] https://www.ice.gov/features/dangers-counterfeit-items