Counterfeiting is a cynical way of violating trademark rights
Quite often, the negative consequences of the presence of counterfeit products on the market are commonly perceived through the losses suffered by the IP rights holders and the original product manufacturers or through the damage caused to consumers. However, the problem is much broader than it may seem and, unfortunately, affects – in addition to consumers and public – the state overall. To understand the main negative consequences of counterfeiting, I would suggest comparing the “business” and the original product manufacturing.
So, shadow counterfeit businesses do not order the logo design and advertising and do not invest in brand promotion marketing; this suggests that their designers and marketers have less work to do. Quite often the employees of counterfeit businesses do not have proper employment records, which also reduces the workload for the finance and human resources departments. The dissemination of counterfeit goods is carried out without the official registration of employees of such professions as storekeepers, drivers, and logistics managers. In other words, counterfeit businesses undermine the volume of official employment in areas like design, marketing, production, HR, finance, logistics, and distribution, which in unison has a negative effect on the creation of jobs in the said industries and, as a result, the state budget receives less in personal income tax, military duty, and the unified social tax (in Ukrainian: ESV) that are payable to it.
Furthermore, counterfeit businesses do not transfer income tax and VAT to the state budget, which altogether undermines the national economy. Since the counterfeit business negatively affects the sales of original products, the official business suffers a decrease in sales and workload on its employees and, consequently, because of the illegal activities of counterfeiters, is forced to reduce jobs and make fewer deductions to the state budget.
A dozen small-size counterfeit product enterprises can seriously undermine the economy of a mid-size manufacturer of original products, turn 30 to 50 employees into jobless people, and underpay tens of millions of dollars in taxes payable to the state budget. There are thousands of counterfeit manufacturers in Ukraine of various sizes.
Counterfeit businesses do not care about consumers and product quality, which is not certified in any manner and often does not meet the relevant regulations and quality standards. Counterfeit products can harm the health of consumers not only because they’re made of poor-quality raw materials or contain harmful substances but also because very often counterfeit product manufacturing facilities are a breeding place for infections. Counterfeit medicines, food and children’s toys can cause serious harm. Under the current circumstances related to COVID-19, one would easily predict that vaccines appearing on the market will be the targets of large-scale counterfeiting.
The packaging of counterfeit products does not usually meet environmental standards and is harmful to the environment. Some types of counterfeit products, such as household chemicals, usually differ drastically in their composition from the original products and cannot be spilt safely without causing irreparable harm to the country’s water resources.
The problem of counterfeiting also has a negative psychological impact on consumers. There are various reasons as to why consumers of counterfeit products buy them: some of them are duped buyers, while others are forced to buy a counterfeit product because of their limited financial means. However, all these types of consumers can regularly see offers to buy counterfeit products online or in markets and do not react in any way, that is, to be tolerant. In other words, consumers are getting used to a generous offering of low-quality products and have learned to live in an environment presenting risks to the basic human need of safety. The absence of the feeling of safety can affect the level of stress and overall dissatisfaction.
Also, counterfeit businesses cause reputational as well as image damage for the state, as a problem like this significantly reduces the profitability of official businesses and undermines the interest of investors in doing business in Ukraine.
Some of the money received as a result of counterfeiting is usually used to pay for the “protection” of an illegal business, thereby stimulating corruption.
A medium-sized counterfeit business is often associated with criminals and provides funds to stimulate criminal activity related to drug trafficking, weapons trafficking and other crimes.
So, counterfeiting is not only a problem for the manufacturers of original products. This problem undermines the physical and psychological health of consumers, reduces investment and tax payments in the country’s economy and causes damage to the environment.
It is possible to significantly reduce counterfeit-related threats only through a systematic and integrated approach. At the institutional level, there is a need to single out a specialised unit in the law-enforcement system under the wing of one of the bodies with exclusive subject-matter jurisdiction over crimes in the intellectual property field. Creating a specialised department for IP cases in the prosecutor’s office is also long overdue. It is also necessary to establish key performance indicators for specialised operational and investigative bodies that will stimulate them so as to solve counterfeiting crimes in a qualitative manner. Increasing the level of knowledge, regular communication, and efficient interaction between the police, prosecutors, courts, and rights holders will help to quickly identify and resolve practical and law-enforcement problems.
There is a need to increase and expand criminal and administrative liability at the legislative level and to remove procedural barriers which impede or delay the procedure for solving crimes, such as classifying and declassifying materials in criminal cases.
The so-called John Doe procedure (claim against an unidentified offender) has proven to be effective in several countries. I believe that its legislative implementation will contribute to the rapid suppression of the sale of counterfeit products, especially online.
The introduction of the institution of private investigation into crimes of private prosecution, legalisation on the activities of private detectives and expansion of the powers of the future Higher Court on intellectual property issues in the category of criminal IP cases will have a very positive effect on the level of detection of IP crimes.
Since IP crimes are private prosecution crimes, the role of IP rights holders in such cases is very important because the rights holder is the only person with the right to initiate criminal proceedings.
The proper response to information about counterfeiting, collecting evidence, facilitating the investigation, and actively proving the fact of an offence and the amount of damages in a civil claim – these are the main actions, without which counterfeiters remain unpunished and consumers unprotected.
I have observed that many rights holders do not monitor the market for counterfeit products and do not realise the extent of the problem in Ukraine. There are also cases where copyright holders ignore information about the presence of counterfeit products on the market due to the economic inexpediency of investing in anti-counterfeiting activities. Due to such a passive position taken up rights holders, consumers of their products are primarily exposed to risks. Given the exclusive right of copyright holders to protect their intellectual property, it would be highly appropriate to develop a mechanism to protect consumers from inaction by IP rights holders. For example, through regressive claims for compensation for damages caused by the purchase of counterfeit goods.
Extensive international experience in combating counterfeiting shows that anti-counterfeiting measures taken by companies are aimed at protecting the economic interests of IP rights holders, their competitive advantage and taking care of consumers.