The BCGuardian Blog

The Value of Systematic Test Purchasing at Scale

Brands and content owners know too well the process of conducting test purchases to verify and enforce against suspected counterfeit goods. In the modern digital economy, this usually means buying an item based on some combination of risk factors from an anonymous merchant on an online marketplace, verifying the good’s inauthenticity, and pursuing subsequent enforcement. While such ad-hoc test purchasing is a valuable resource in the toolkit to combat counterfeiting, it serves narrow IP protection objectives and enforcement outcomes. We advocate instead for systematic test purchasing at scale.

As we define the two differentiating pillars of this approach, a systematic test purchasing program pursues a larger unified IP protection strategy through a methodical and controlled process of evidence collection. A program that exists at scale includes sufficient purchasing volume to meet the rightsholder’s broader IP protection objectives relative to the scope of the rightsholder’s exposure to counterfeits in the market.

A systematic test purchasing program that exists at scale offers several benefits beyond conventional ad-hoc test purchases. We outline in brief three such advantages here.

Collecting Broad Marketplace Intelligence

Systematic test purchasing at scale provides tremendous insight into the market for a given product or rightsholder’s portfolio of products. Over time, data collected through observations of the market supported by purchases may allow the rightsholder to identify marketplace trends and build models for detecting unusual or unsustainable offers that could suggest the presence of illegitimate goods.

Additionally, such purchasing allows rightsholder to identify potential unforeseen issues within the supply chain, whether parallel importing from international markets or excess availability of sample/trial versions of a product. These instances are rarely reported in listings or offers for the product.

Understanding Counterfeit Reproductions of Your Product

If a product has been counterfeited, there is no guarantee that the exposure will be limited to the identified pirated copy alone. There are networks of counterfeit sellers across the globe, all of which have differing access to materials and resources to pirate a given product. As a result, you may see multiple version or iterations of a counterfeit product which may feature very different traits and qualities. Early identification of these iterations is key as it will inform enforcement efforts and assist with the education of trusted distributors and consumers.

Depending on the product, it may be essential to have a comprehensive understanding of the different iterations of counterfeits. Some counterfeit products, specifically food and/or products that are applied topically, can contain dangerous toxins that are unsafe for human consumption. Being prepared to educate consumers to authenticate products can help to mitigate the risk posed by these counterfeits.

Identifying the Sources of Piracy

The collection of physical evidence at scale not only allows for a greater understanding of the unauthorized sale of counterfeit products, but also allows for connections to be made among networks of distributors of those products. Following inspection of these counterfeit goods, brand owners may notice similarities among both the specific types of products these sellers offer and the specific types of counterfeits the distribute. This may indicate that these sellers have access to a similar source, which is likely to be a more prolific distributor of counterfeit goods.

Once these connections are identified, it becomes possible to potentially review sales/source records “upstream” to identify distributors closer to the source of production. This can be extremely valuable for identifying and ultimately removing distributors responsible for massive infringement.

BCGuardian has significant experience developing and managing systematic test purchasing programs at scale on behalf of rightsholders. Contact BCGuardian to learn how we may be able to protect your brand through such a program!

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Product Authentication Tools: Are They Right for Your Brand?

As brand owners evaluate options for combating counterfeit goods, one area in which they may address the problem is through product authentication tools. There are many solutions in this arena, ranging from simple holographic tags to highly technical integrated ERP solutions that serve both an anti-counterfeiting function and provide increased visibility through the supply chain.

We discuss here some of the considerations brands should assess when conducting a cost-benefit analysis in evaluating the need for and the potential effectiveness of product authentication tools.

Benefit: Deterring Counterfeits

The primary function of product authentication tools is to prevent the introduction of counterfeit products into the market. This goal is achieved by introducing yet another variable potential counterfeiters will need to consider in their reproduction of the underlying good. The absence or poor reproduction of an authenticity or security tag can be a clear red flag to consumers. Additionally, some solutions provide functionality (track and trace, ink detection, QR, etc.) that is difficult to replicate properly by counterfeiters.

Benefit: Adding Value to Other Business Units

Some functionalities, such as track and trace technology, provide data and information that is useful to business functions other than anti-piracy. Track and trace can provide insight into the supply chain and identify particular areas of risk. Utilizing functionality that benefits multiple business units may help a brand to rationalize the expenditure on these more robust product authentication solutions and provide a more comprehensive approach to securing the firm’s supply chain against previously unforeseen threats.

Benefit: Consumer Engagement

More advanced product authentication tools may also serve a sales and marketing function. Brands may be able to leverage scans of authentic products by end users as an opportunity to introduce similar or complimentary products that the consumer may find appealing or to collect valuable consumer data. For example, brands can encourage consumers to scan authentication tags on their purchased goods using their own smartphones (perhaps by offering the opportunity to win a prize). The scan will lead the user to a page that authenticates the product and requests their email address or other contact information, thereby contributing both to future marketing efforts as well as helping to alleviate any perceived stigma around the authentication tool.

Cost: Higher Landed Costs

Needless to say, the addition of product authentication tools will increase unit production costs and final landed costs. Brands must evaluate the feasibility of absorbing these costs in their margins. It is said that the cure should not be worse than the disease, so it becomes important for the brand to assess the potential impact product authentication tools will have on legitimate sales through targeted testing and/or pilots with at-risk assets.

Additional Consideration: Viability

Outside of production cost considerations, it is also important to determine whether the selected product authentication tool fits with the profile of the brand and its distribution model. Several questions that may guide these decisions are:

Who will ultimately be utilizing the functionality?

Licensed distributors may be better equipped to utilize specific solutions or identify potential counterfeits. Certain authenticity or security tags may require resources that can only be made available to select distributors as opposed to all end users, who may lack the education or platform to effectively utilize the solution or identify potential counterfeits. Conversely, as discussed above, a brand may seek to drive consumer engagement by encouraging end users to interact with the authentication tool.

Is there a secondhand market for the brand’s products?

Resale of goods through a secondhand market can limit the effectiveness of authenticity or security tags. The tags may be removed or discarded prior to the secondary sale, which could create confusion regarding the authenticity of the product. Additionally, certain functionality (track and trace, RFID, etc.) can be rendered ineffective if the tag is damaged or altered in any way.

Overall, product authentication tools can provide a meaningful impact for a brand’s anti-piracy efforts. However, it is important to conduct a thorough cost-benefit analysis of each solution to ensure that it meets the needs of the organization.

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Anti-Counterfeiting Actions to be Taken by U.S. Government

On January 24th, the U.S. Department of Homeland Security issued a report to the president in response to the White House’s April 2019 Memorandum on Combating Trafficking in Counterfeit and Pirated Goods, which we discussed in an earlier post.

While largely critical of e-commerce platforms and third-party marketplaces, DHS calls for strong government action to combat counterfeiting activity, outlining 11 immediate actions and recommendations to be taken by the United States Government. DHS also puts forward the elements of recommended private sector best practices.

This post overviews the immediate government actions and recommendations proposed by DHS. A discussion of DHS’s proposed private sector best practices will follow in a subsequent post.

Ensure Entities with Financial Interests in Imports Bear Responsibility

The Idea in Brief:

Calling attention to the need for a modern enforcement framework that adapts to the reality of the modern e-commerce landscape, DHS aims to increase the accountability of stakeholders in the e-commerce value chain. This includes by increasing the accountability of domestic warehouses and fulfillment centers frequently used by merchants operating on online marketplaces.

Under the DHS recommendations, CBP would treat domestic warehouses as the consignee for imports not sold directly to a consumer. Such treatment may allow CBP to identify and claw back counterfeits from bad actors that were not inspected or were missed during customs clearance. Operators of fulfillment centers will further be encouraged to coordinate with rightowners on the inspection and destruction of infringing goods discovered through this channel.

High-risk shipments, as determined by the declared contents and port of origin, will also be subject to additional scrutiny, extending even to shipments that would have otherwise qualified for duty-free or informal entry. In order to mitigate against the likely resultant surge of falsified manifests, CBP will pursue and make public information regarding customs violations of the False Claims Act.

Increase Scrutiny of Section 321 Environment

The Idea in Brief:

Section 321 offers tax and duty exempt importation of goods valued at less than $800. Given the lower declared value of Section 321 shipments, it follows that these shipments are more likely to be direct order fulfillment and thus only one step removed from the infringing seller.

To improve transparency in the Section 321 environment, DHS proposes the clarification of statutes and administrative practices related to Section 321 eligibility. DHS would see all Section 321 shipments require data sufficient to identify the transacting merchant and the nature of the good.

CBP is also currently piloting programs with private sector e-commerce platforms to provide advance data on Section 321 shipments before arrival. CBP is using this data to improve its planning and inspection capacity in an effort to more efficiently target high-risk shipments.

Suspend and Debar Repeat Offenders; Act Against Non-Compliant International Posts

The Idea in Brief:

DHS recommends amending the executive order governing the federal suspension and debarment list to prevent suspended and debarred entities from participating in the Importer of Record Program. The burden to police compliance will fall to consignment operators, carriers, and hub facilities, as access to trusted trader programs will become contingent on their abilities to prevent suspended and debarred entities from utilizing their services to move counterfeit goods into the U.S. market.

DHS also seeks to measure and enforce for non-compliance among international postal operators, though no specific plan of action is outlined.

Apply Civil Fines, Penalties and Injunctive Actions for Violative Imported Products

The Idea in Brief:

DHS has directed CBP and ICE to begin identifying instances where third-party intermediaries have aided in the importation and distribution of counterfeit goods. Along with the Department of Justice, they are to pursue civil fines against such entities.

In the same vein, DHS advocates for greater liability to be imposed on third-party intermediaries that support the distribution of counterfeit goods. Most notably, DHS recommends a regulatory change to allow the government to pursue injunctive relief against third-party marketplaces and other intermediaries.

In the interim and absent such legislation, ICE and CBP will continue to pursue IP related crimes and support rightsowners by sharing information and evidence related to the seizure of counterfeit goods.

Calling attention to the need for a modern enforcement framework that adapts to the reality of the modern e-commerce landscape, DHS aims to increase the accountability of stakeholders in the e-commerce value chain.

Leverage Advance Electronic Data for Mail Mode

The Idea in Brief:

USPS and DHS are working more collaboratively to monitor inbound shipments by sharing advance electronic data regarding inbound international shipments. Data sharing also extends to DHS’s Section 321 data pilot program, which will be used to enhance the tracking of international mail through air cargo. USPS is also working side-by-side with CBP during special operations to inspect and intercept counterfeit goods.

Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION) Plan

The Idea in Brief:

DHS supports the IPR Center’s E-Commerce Working Group initiative and seeks to expand its reach with the formation of the Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION). ACTION will seek to further address the challenge posed by the disparate existence of information regarding bad actors by opening channels of communication between various stakeholders within the value chain. This includes encouraging the sharing of automated targeting mechanisms that help to identify high-risk shipments and transactions.

Analyze Enforcement Resources

The Idea in Brief:

DHS cites insufficient resources for CBP to keep up with the surging volume of international shipments. Limited resources do not allow CBP to invest the requisite time in inspections, investigations, and enforcement. As such, CBP will analyze its current fee structure and make recommendations to the Department of the Treasury for additional funding.

Create Modernized E-Commerce Enforcement Framework

The Idea in Brief:

DHS seeks to modernize its enforcement framework by pursuing statutory changes to allow for the outright seizure and forfeiture of infringing goods and for the sharing of additional information with the private sector. Along with a risk-based bonding regime for high-risk e-commerce shipments, DHS advocates these changes within the context of a streamlined enforcement process for seized goods.

Assess Contributory Trademark Infringement Liability for Platforms

The Idea in Brief:

Frequently, online platforms have avoided liability for vicarious infringement in the sale of counterfeit goods on their platforms. As such, DHS recommends the Department of Commerce along with stakeholders in the private sector reassess the traditional doctrine for trademark infringement as it applies in the e-commerce environment.

Re-Examine the Legal Framework Surrounding Non-Resident Importers

The Idea in Brief:

Given the difficulty enforcing against non-resident importers, there is limited downside to foreign individuals and entities shipping counterfeit goods into the U.S. DHS intends to reevaluate the eligibility for Section 321 shipments by non-resident importers. Should their participation in the Section 321 environment be limited, duties and taxes along with the threat of seizure may serve as a deterrent.  

Establish a National Consumer Awareness Campaign

The Idea in Brief:

DHS advocates a joint effort between government, rightsowners, and online platforms to raise consumer awareness of the risk of counterfeits encountered when shopping on online marketplaces. Elements of the DHS proposed initiative include a “grassroots” counterfeit identification effort supported by reporting by the customers of online marketplaces, and prominent warnings featured on marketplace homepages and on product pages for high-risk products.

The actions proposed by DHS are well-founded and are based on a thorough assessment of counterfeit activity in the e-commerce landscape. However, it seems unlikely that each will be implemented successfully. Many of the actions recommended by DHS are overbroad or no actionable path forward is outlined (or even realistically envisioned). In others, DHS relies on assumptions of compliance and cooperation by stakeholders in the private sector that are highly unlikely.

An analysis of the effects on the stakeholders impacted is necessary to understand the likelihood of any action having a material impact on the flow of counterfeit goods into the U.S. market. For example, foreign-based importers hold comparatively little bargaining power when juxtaposed with the weight of the largest corporations in the world. It follows that reform of the Section 321 environment is more likely than e-commerce operators placing counterfeit warnings on their homepages.

We will continue to follow and update on the industry response to the DHS report and its implementation.

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