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Loss Prevention

Hitting the Mark

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Identity theft is no less troubling for businesses than it is for consumers. Beyond account hacking, there are many other ways a business’s identity can be stolen or compromised, from the poaching of trademarks and brand names to infringement on design patents and the appropriation of search terms.

Counterfeit merchandise is the most visible and probably the largest component of business identity theft in the retail delivery system. The International AntiCounterfeiting Coalition reports that product counterfeiting costs U.S. businesses between $200 billion and $250 billion in lost revenue annually.

The U.S. Immigration and Custom Enforcement says intellectual property rights enforcement led to more than 24,000 seizures in 2011 (the latest year for which figures are available), a 24 percent increase over 2010. Based on the manufacturer’s suggested retail prices of the legitimate items, the seized goods had a total value of more than $1.1 billion.

Federal law enforcement efforts to combat counterfeit products continued at a high level in 2012, including a late-year raid at a New Jersey port where agents confiscated 537 cartons of faux luxury items bearing such labels as Louis Vuitton, Gucci and Michael Kors valued at $20 million. In Orlando, three men were indicted for trafficking in bogus goods with tags and logos from Disney, Zumba, Coach, Fendi, Prada, Gucci and several professional sports teams. And in Orange County, Calif., a federal/local law enforcement sting operation netted nearly $1 million in counterfeit luxury wares bearing labels from Hermes, Chanel, Gucci and Louis Vuitton.

The e-commerce factor
Counterfeit goods and business identity theft are perhaps a greater problem in e-commerce, especially when measured as a percentage of all transactions. A recent report on bargain-hunting consumers from brand protection services firm MarkMonitor found that one in five individuals hunting for deals mistakenly shopped sites selling counterfeit goods.

There is definitely a trend toward more counterfeit merchandise and other illicit activity in the e-commerce channel, says William Ross, unit chief at the federal Department of Homeland Security’s Natural Intellectual Property Rights Coordination Center. Ross also notes that overseas shipments of counterfeit merchandise have become smaller recently. He speculates that shippers may feel smaller shipments may be harder to detect or that any one shipment lost to seizure by law enforcement agencies wouldn’t be as costly.

Ross’ unit is also responsible for busting phony e-tail sites, and “That’s getting a lot of our attention right now.” On November 26 — Cyber Monday 2012 — the unit and law enforcement agents in New York, New Jersey, California, Colorado, Maryland and Texas seized more than 100 domain names; 30 more sites were seized by authorities in Belgium, Denmark, France, Romania and the United Kingdom. Site operators were accused of selling a wide variety of counterfeit merchandise, including bogus DVDs, perfume, sports jerseys and Major League Baseball caps. Authorities said most of the knockoff merchandise was produced in China.

Patents vs. trademarks
While manufacturers and trademark holders are the most vigilant entities in combating counterfeit merchandise, retailers must exercise caution as well since they could be on the hook for selling such wares, says Stephen Peterson, an attorney specializing in trade dress and design patent issues with Washington, D.C.-based law firm Finnegan, Henderson, Farabow, Garrett and Dunner.

Laws and everyday practices notwithstanding, Peterson notes that there are different attitudes regarding concepts like trademarks and design patents.

“If you read [court] decisions, you can see there are two competing philosophies: One being that everything should be available to everyone — that if something is created and out there it should be available for anyone and everyone to use,” he says. “The other philosophy is if someone creates something and it is worth protecting, we’re going to protect it.”

The problems start with what can be protected — and how. Design patents and trademarks “are in some ways similar in how their protections are addressed, but the specifics are very different,” Peterson says. Trademarks are created just by using them and don’t necessarily have to be registered. “The longer and wider it is used, the stronger the protection gets, even if there is no registration,” he says. The trademark could be a mark, a name, a symbol, a word or a color, but for an object to be trademarked, it has to be a “source indicator,” which is a legal status that is relatively difficult to obtain.

Design patents, on the other hand, “have to meet statutory requirements,” meaning that what is and isn’t protected is spelled out in laws. If the item or issue in question “can’t pass this test, then there are no rights at all,” Peterson says.

The obligation to meet statutory requirements extends to everyone from manufacturers through to end users, Peterson says, but as a practical matter, patent holders “almost never go after consumers and generally not after retailers, who are, or potentially are, their customers.”

Two recent court cases on infringement issues involving well-known companies were concluded late last year. In one, Yves Saint Laurent won the right to make and sell red shoes with red soles, but the court granted trademark protection to Christian Louboutin’s red soles on shoes of any color. In the other case, Lululemon Athletica accused Calvin Klein of infringing on design patents covering, among other things, the waistband of a garment called Astro Pant. After Lululemon had presented its case, the parties reached an agreement but did not disclose the terms.

Trials over trademark and design patents are rare, Peterson says. “In 95 percent of the cases, they settle before going to court. For it to proceed to a trial, some fundamental argument is usually involved.”

URL and text hijacking
The challenges of dealing with Chinese knockoffs and phony websites is reverberating in the home country too, says Dave Reese, senior vice president of solutions and international development for e-commerce services firm PFSweb. After years of passively allowing the trade to proceed, Chinese officials are stepping up efforts to stem the flow of counterfeit merchandise, punctuated by the occasional arrest, show trial, fine and a return to “business as usual,” Reese says.

“They’re starting to get serious,” he says of Chinese authorities. “But Chinese consumers are still wary of buying luxury goods online because they assume the products are knockoffs, and that is almost certainly true if you are buying from another consumer.”

Reese notes that the “environment is improving, but we’ll have issues for quite a while,” adding that such intellectual property as movies, music and books don’t receive nearly as much attentions as do manufactured goods.

Stealing the design of a dress is one thing; commandeering an address is another, and it is one of the major LP issues for e-commerce merchants, says Dave Naffziger, CEO of trademark protection and monitoring services firm BrandVerity. His company looks for unsanctioned practices involving paid search advertising by retailers and marketers. These activities could include brand diversion and domain/trade name misuse or diversion, often by partners or affiliates of the merchants being poached upon.

In URL or advertising text hijacking, for example, the thieves use copy and the URL of a legitimate retailer, but route potential visitors through different links. Sometimes these affiliates use improper redirects to hide the original source of traffic.

“The most sophisticated abusers go out of their way to hide their activities,” Naffziger says. This could include displaying unauthorized ads during off-hours when merchants’ employees wouldn’t necessarily be monitoring activity, or running the offending in geographic areas where merchants’ employees aren’t likely to be located.

Not all violations are criminal: Some could arise from out-of-channel or other use by affiliates that are inadvertent violations of contract terms with the merchant.

BrandVerity monitors search ads on Google, Bing, Yahoo, Ask, AOL and AdSense. The detection involves both automated processes (certain terms are specified) and manual processes, whereby analysts pour over data for “laundering agents.”

To illustrate how the abuse could occur, Naffziger says an advertiser might have a large display banner at the top of a site, while another entity will place an ad designed to look like part of that campaign on the same site, thus stealing shoppers from the legitimate advertiser.

BrandVerity also monitors social media for compliance and issues like bogus “reviews,” Naffziger adds. Its newest service, introduced during the recent holiday selling season, involves coupon code monitoring to help merchants keep their use within the intended channel or among the targeted consumer group.