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Hunting counterfeiters is no longer a job just for the Secret Service. A new breed of investigators and lawyers are aggressively pursuing product counterfeiters through lawsuits, often working hand-in-hand with law enforcement to shut down suppliers. Some companies, like Philip Morris USA, have created in-house departments to fight counterfeiting. What once was a small area of trademark work is booming. Some estimates cited by the International AntiCounterfeiting Coalition hold that $350 billion worth of counterfeit goods make their way through the world economy every year, creating a continuous cat-and-mouse game between counterfeiters and hunters. The results are mixed. For every counterfeiter shut down, three new ones pop up. While counterfeiting has been around for ages, it has skyrocketed in recent years, catching the attention of companies unwilling to let mass distribution of fake goods erode their sales. Porous national borders invite wholesale distribution in the United States of counterfeit items manufactured abroad. And the Internet allows counterfeit goods to be marketed worldwide with little or no setup costs. Armed with a revamped trademark law, which increased penalties for parties working with counterfeiters, companies have filed lawsuits with increasing frequency. Earlier this year, for example, the luxury designer Tiffany’s launched a suit in the Southern District of New York against eBay, the leading Internet auction house, for allegedly turning a blind eye to sales of fakes of its jewelry. Tiffany (NJ) Inc. v. eBay Inc. THE OUTSIDE GUN Finding counterfeit items is not an exact science. Companies typically send salespeople to suspicious stores and hire outside investigators to find fake goods, said Louis Ederer, a partner at Torys in New York and head of the firm’s intellectual property team. At other times, “my wife sees something” and reports back, he said. Ederer spends about 25 percent to 35 percent of his practice pursuing counterfeiters and has represented companies such as Nike and Tommy Hilfiger. Several of the suits he has worked on involve discount chain stores. Many luxury-goods manufacturers do not sell their products to discount chains because of branding concerns, said Ederer. Discounters then are forced to purchase designer goods from secondary markets, such as authorized retailers. The counterfeits, Ederer explained, enter the distribution system somewhere in this process and discount chains should remain alert to that possibility. Pursuing street vendors selling fake goods serves little economic purpose, said Ederer. But large discount chains present perfect targets. Enforcement of a court victory is feasible and the amount of counterfeited goods involved make it worthwhile to spend significant dollars on legal fees. “That’s where you really find your big scores,” said Ederer. A case from last year between Ederer’s client, Tommy Hilfiger, and Goody’s Family Clothing, a discount chain store based in the South, underscored this strategy. In Tommy Hilfiger Licensing v. Goody’s Family Clothing, a U.S. district judge for the Northern District of Georgia in Atlanta, found “willful blindness” on the part of Goody’s, and held the store liable for selling fake Hilfiger T-shirts it had purchased from an unauthorized supplier. The court listed plenty of suspicious facts that caught Goody’s attention but were regularly ignored or approached in a half-hearted manner that allowed the sales of counterfeit goods to go through. For one thing, the judge found that Goody’s failed to obtain a proper release authenticating the seller’s right to sell Hilfiger T-shirts knowing that such a release was necessary. Goody’s purchased a huge number of shirts, far more than the typical amount under normal market conditions, said the judge. Under the 1996 Anticounterfeiting Consumer Protection Act, Hilfiger won two damage awards from which it could select one. It could receive three times Goody’s profits or a statutory figure the judge computed at $2.1 million. The 1996 law led to the dual awards. Because trademark holders often find it difficult to calculate an infringer’s profits, the statute called for awards up to $1 million per mark. It also made it easier to seize fake products and increase criminal penalties, giving trademark holders extra incentive to pursue counterfeiters. The key for trademark holders, said Ederer, rests on selectively targeting the supply chain. Should a company like Tommy Hilfiger stop after winning a verdict against Goody’s or dig deeper and chase down the supplier, he asked. The process does not end there. A company can then pursue the manufacturer abroad or seek criminal charges. Both steps raise additional complications and require assistance from law enforcement. Ederer said companies must weigh the costs and gains at each step. PHILIP MORRIS MODEL Most companies with brand names have a small staff tracking counterfeiters and acting as a liaison between outside investigators and lawyers. Few have taken the measures of Philip Morris USA, a subsidiary of Altria. In 2002, the company established a brand integrity unit staffed with 30 people and headed by an in-house lawyer, John Holleran, who spent seven years in legal and managerial positions at the company prior to leading the group. The unit concentrates on everything from counterfeiting to “garden variety smuggling,” said Holleran. Taxes in the cigarette industry create huge incentives for smuggling or selling to unintended markets. Through these avenues, illegal sellers gross hundreds of millions a year, according to the company’s Web site. Because each state and city charges different excise taxes, said Holleran, people will purchase cigarettes in a low-tax state like Virginia and divert it to a high-tax state like New York. Others will simply sell cigarettes without paying any taxes, costing governments billions of dollars in revenue, according to the U.S. General Accounting Office. New York City, for example, earlier this year sued 15 online suppliers to recover lost taxes in excess of $15 million. Philip Morris staffed its unit with six former federal law enforcement experts from the Secret Service, Customs, Alcohol Tobacco & Firearms, and the FBI, said Holleran, to help communicate with law enforcement. One of the unit’s main objectives is to “educate and compliment” the efforts of law enforcement, he said, by raising awareness and completing much of the initial investigatory work before handing off cases to the government. In addition to ex-law enforcement personnel, the unit includes employees picked from other departments that hold expertise in distribution channels, packaging and design, and other areas of the cigarette business. Holleran declined to reveal the unit’s budget but said it was “significant.” Philip Morris has also pursued an aggressive litigation campaign over the past few years. Working with local outside counsel, it has sued 2,500 retailers for selling counterfeits and it follows up by sending investigators to ensure the retailers obey the terms of the litigation. “Litigation has proved to be a very effective tool for changing behavior,” said Holleran, stopping 90 percent of these retailers from continuing to make illegal sales. The company has now turned its attention to Internet sellers operating abroad. In 2000, Congress passed the Imported Cigarette Compliance Act which bans the re-importation of brand name cigarettes without permission from the manufacturer. Boosted by this statute, Philip Morris has filed seven suits around the country under the act and has won six of them, said Dana Bolden, a company spokesman. Philip Morris has also filed 20 additional suits alleging trademark infringement and other wrongs, Bolden said. Of these, seven have led to consent decrees or settlements and seven ended in default judgments. It is easy to see why smokers would be interested in buying untaxed cigarettes from abroad. Otamedia, a Swiss-based supplier, sells a carton of Marlboro Lights, among Philip Morris’ most popular products, for $13.95 (plus postage). In New York City, the same carton typically costs more than $60. Earlier this year, Philip Morris won a suit against Otamedia in the Southern District of New York, ( Philip Morris USA v. Otamedia) and took the extraordinary step of seizing Otamedia’s American-based Web site. On Otamedia’s new Web site, now registered in Switzerland, it continues to market cigarettes to Americans. While Philip Morris vowed to pursue Otamedia across the world, the situation showcases the difficulty counterfeit hunters face. A counterfeiter can reach the world through a Web site. Without resorting to complex smuggling operations, they can rely on simple postal services to deliver their goods. It looks like counterfeit hunters will be on the prowl for years to come.

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