Articles

Gray Matters: When the Legal and Black Market Collide

Originally published on June 17, 2009 in California’s Daily Journal

Not long ago, brand owners could take comfort in the intrinsic barriers hampering black marketers. While most large cities have places known by their dwellers to be sources of cheap goods of dubious origin, consumers have to consciously decide to explore these markets in addition to or in lieu of conventional establishments. Canal Street in New York’s Chinatown is a well-known example. The street is lined with densely packed shops offering watches, purses, and other luxury items at prices that are corruptively low. Until relatively recently, these markets did not pose a significant threat to brand owners. The remote locations of these markets created a sufficient bulwark to market entry. As a result, brand owners knowingly conceded that a small percentage of its would-be buyers bought cheap knock-offs instead.

Many brand owners justified their tolerance of these bazaars on the belief that someone shopping for a twenty-dollar Rolex watch is not even a would-be customer. This customer is simply looking for a cheap gimmick or perhaps his or her economic reality precludes any possibility of buying a genuine product for several thousand dollars more. Brand owners were also untroubled because the knock-offs were so obviously inferior to the genuine goods they sought to mimic. While a Guci purse may have looked just like a Gucci purse from across a dimly lit cocktail lounge, a casual glance in an unobstructed environment could quickly distinguish the two. Because such a terse inspection could expose these products as feeble imitations, brand owners concluded that no real threat existed.

Times have changed. Customers looking for bargains found in the black or gray market now have the ability to virtually browse anywhere there is an Internet connection. Equally vexing for brand owners is the modern difficulty of spotting illegitimate products. Indeed, the obstacles that were once sufficient to relieve concern for brand owners have been removed. The gray and black market economies have enjoyed incredible growth extending their reaches from Canal Street to our laptops.

A LITTLE PERSPECTIVE

In 2005, Arnold Schwarzenegger joined his friend and fellow action star Jackie Chan in Hong Kong to promote a campaign against film piracy in China. The 30-second anti-piracy public service announcement featured both actors in leather jackets zooming down a road on motorcycles, dodging exploding cars and other hazards. “When you buy pirated movies and music, you support criminals!” Mr. Chan says. Mr. Schwarzenegger adds, “Let’s terminate it!” Today, many countries are haplessly devoid of the necessary resources and infrastructure to adequately protect intellectual property. Countless articles and books can be found lamenting the lack of international enforcement to protect American innovation. It is worth remembering, however, that America is an ex-pirate itself:

  • [O]ne of the undeniable reasons [Charles] Dickens had gone to America [in 1841] was to work for the acceptance of International Copyright so that his books, among those others to be sure, would no longer be pirated by unscrupulous American publishers. It was a mission in which he entirely, humiliatingly failed, and a copyright agreement between England and the United States was not concluded until 1891. Gehard Joseph, Charles Dickens, International Copyright, and the Discretionary Silence of Martin Chuzzlewit, 10 Cardozo Arts & Ent. L.J. 523 (1992).

Assaults on innovation are nothing new. What is novel is how easy mounting these assaults has become. Today, laser printers, scanners, and computer graphics software allow fraudsters with limited budgets and sophistication to mass produce fake labels, trademarks, and other documentation. Other technologies similarly allow for low cost replication of CDs and DVDs. These latter technologies hurt many industries beyond music and film. Software and hardware products (that require software) are similarly duplicated further depriving revenues to the legitimate brand owner.

Technological progress has also made transporting pirated products faster and easier. Advancements in cargo containers, better roll-on and roll-off tools, superior port management, and even modern refrigeration techniques have all played a role in improving worldwide shipping. In addition, companies like UPS, FedEx, and PayPal provide business owners with a litany of tools to make efficient the machine of national and international commerce. From tracking products and confirming delivery to ensuring payment and tracking invoices, the world’s smallest business can now seamlessly participate in the global economy. These tools remove what were once barriers to market entry and create a much more level playing field. Because technological innovation is unbiased, the modern tools of transportation and logistics assist marketers just as they assist brand owners.

In this era of fast and easy duplication, the realities of globalization are forcing companies to have a paradoxical business strategy. While intellectual property is enduring a season of heightened vulnerability, American businesses are essentially forced to share their secrets with outsourced foreign partners to remain viable. Less than honorable partners may over-manufacture genuine goods, manufacture their own copycat goods, or share secret processes to other individuals or companies. The accounts of American businesses getting burned by foreign deceit are endless. And yet, remaining domestic for all operations is rarely a viable option. Brand owners must therefore be willing to go overseas but prudent enough go overseas prepared.

The speed and simplicity in which people communicate, buy, sell, and ship products across oceans and borders have paved the way for a worldwide outburst of infringement. While many brand owners were savvy to take advantage of the benefits modern globalization offered, the attendant harm to brand integrity caught most companies completely flat footed.

MOVING FORWARD

Because the bells of globalization and modern technology cannot be un-rung, brand owners must learn to capitalize and cope with the rewards and risks in this new economy. To generalize, American businesses have done a fine job capitalizing on the rewards. Where American companies have fallen short has been with respect to stepping-up efforts to protect their brands and intellectual property. The benefits of global expansion reach far beyond legitimate trade. Illegitimate trade has been equally eager to take advantage of the efficiencies and economies of scale that globalization offers. As a result, threats to brand owners in the form of black or gray market activity have skyrocketed in size and scope since the 1990s. Revenues derived from counterfeiting and piracy have increased by more than 400 percent since the early 1990s. During the same time period, legitimate trade only increased by 50 percent.

There are few, if any, industries immune from attack. From the luxurious to the mundane and the simple to the complex, there is now a global network of illegitimate traders willing to copy or divert genuine products for their own profits’ sake. Given the ease in which these illegitimate products can be bought and sold, it is important that brand owners take preventative action.

For more info contact David R. Sugden