buySAFE Invited By French Government to Help Stop Online Sales of Counterfeit Luxury Goods

Travis Brown wears a few hats at buySAFE: Biz Dev, International and General Counsel. He recently returned from a trip as part of a high-level US delegation invited by the French government to learn about the threat that online sales of counterfeits presents to the French luxury goods industry and to explore innovative ways to fight this huge and growing problem. I’ve invited Travis to do a guest blog to pass on some thoughts from this trip. It follows now. I believe you will enjoy!

Back in early February, Jeff Grass posted a blog setting out some ideas about how a luxury brand can protect itself from online sales of counterfeit goods. You can read it by clicking here. Fast forward three weeks: buySAFE was invited by the French Government to be part of a US delegation to study issues around counterfeiting and the luxury goods industry and I spent last week in France learning more about issues and discussing solutions.

It was a tremendous trip: “we” were a group of about 16 Americans, including the head of the US Copyright Office and other US Gov’t officials, executives from US fashion industry organizations, journalists (Business Week, Harper’s Bazaar, Travel and Leisure, important trade journals), IP attorneys, and, most importantly, US designers (Kevan Hall, Anna Sui represented). “They” (our hosts and hostesses) were French Ministers of Budget, Industry, Trade; the Anti-Counterfeiting Agency; the Mayors of Cannes and Marseilles; the Customs Agency; and several luxury goods houses, including Hermes, LVMH, Baccarat, and PPR.

As I was the (lucky) buySAFE employee assigned to this dangerous mission to hang out in Paris, Marseilles and Cannes for six days, I want to share some of the key insights from this trip.

The Problem

The statistics boggle the mind: Counterfeit luxury goods may make up to 10% of all international trade and an even higher percentage of total revenues in the luxury goods category. The impact of this “underground” economy is enormous:

• It costs the French economy 30,000 lost jobs each year;
• It deprives young and emerging designers (as well as established firms) of the economic value of their work, and therefore literally steals livelihoods from a very creative (and already risky) sector;
• The trade in these goods diminishes the value of the legitimate brands because of customer confusion, inferior quality knock-offs, and ubiquity of brands that once stood for exclusivity and very high quality;
• Illegal enterprises deprive governments of legitimate tax revenues, foster the growth of related counterfeit trade in pharmaceuticals, fake car and aircraft parts, music, videos, movies, and software. I don’t have to elaborate, but health and safety implications of fake pharmaceuticals, etc. are about as bad as you think they are;
• Revenues from the sale of counterfeits have been traced to benefit organized crime syndicates, sweatshops that exploit child and immigrant labor, and to terrorist groups … precisely NOT the “stakeholders” that most consumers want to support by their purchasing … Indeed, it is now commonly thought that the Madrid train bombings were financed with dirty cash raised from sales of pirated DVD’s and CD’s. 

Diagnosis

The problem is complex, and any thoughtful response must include an understanding of the legal and regulatory landscape, of the dynamics of an industry that relies on creativity, while being led by relatively few dominant brands, of international trade and offshore manufacturing, of customer behavior in a fickle, trend-driven market, and many other factors. So any short statement is an over-simplification, but let me try one: The fashion industry is, at core, an IP business: that is, the value inherent in a Gucci purse or an Hermes scarf is first and foremost about great design -- which is, if you will, the Adam and Eve of Intellectual Property. Of course it’s also about very very good execution of those designs, but, the design comes first. In this sense, the fashion industry is very similar to the music business, the pharmaceutical business, and the software business: there is a huge investment in getting to “the first copy” – and huge risk around that bet. But once the first “run” finds a market, the cost of making incremental units is relatively small … in the case of software or music downloads, almost costless. And SO, it naturally attracts counterfeiting: the counterfeiter effectively steals the high-value element – the design – and incurs costs of only the lower value piece – manufacturing. A good formula for high margins, if you don’t care about theft!

The Response So Far

Many of the responses to date fall under the heading “How To Stop Bad Guys.” These include: 

• beefed-up efforts to intercept shipments of counterfeit and contraband goods shipped into France (but wait, that’s only 20-30% of the global market for French luxury goods!);  

• public prosecutions to go after bricks-and-mortar sellers of fakes;  

• a lot of energy in persuading the US to pass a law that would make our copyright protections for fashion designs conform to the French (and EU) law on this;  

• loud and frequent condemnations of eBay France (and, I understand, private litigation against eBay France) for allowing sales of fake goods;  

• industry-wide coordination and cooperation to combat trade in fakes.  

These efforts can be found both at the national level (I was told that the national police force has 50 gendarmes investigating transactions on eBay France) and at the local level (the Mayor Cannes says he hires 200 extra police (yes, 200!) in the summer to fight the influx of sellers of fake goods (and the criminal element that comes with them) in that resort town).

And, most recently, the French national government has sponsored a $6mm educational campaign directed at consumers that attempts to explain why consumers should say “Non, merci!” to counterfeiters. This takes the form of posters and short tv spots. 

Prognosis 

It’s a big complex problem, and judging particular results isn’t an exact science.  But … no one feels like the current approach is effective enough. Indeed, it feels like the rate of growth in the “black” markets is much, much greater than that in the legitimate channels. And so it feeds on itself: a Customs officer in Marseilles, showing me around a warehouse of confiscated “designer” shoes and bags from China and other goods, told me that drug dealers have been shifting to designer goods BECAUSE THE MARGINS ARE BETTER. That says it all …

I respectfully think that no solution (or set of solutions) will be very effective if it attempts to regulate only the supply-side. Criminal enterprise is simply too innovative, too nimble, too beyond the jurisdiction of any one government to be stopped (or much slowed) by governments’ responding to yesterday’s tactic. And the stakes are too high.   But there is enormous energy and high-level interest in protecting the French brands: it’s hardly an exaggeration to say that if the brands CANNOT be protected, and the most creative and internationally respected French businesses CANNOT collect the revenues and profits that properly belong to them, then both these businesses and the French economy are seriously damaged. Indeed, if you think of France as a business (a heresy, but bear with me), and if it cannot solve this problem, then sooner or later, it will trade at a discount.   

A Fresh Idea (Modest Proposal) 

So: How does this issue get solved? Not by more of the same. It’s not enough. Efforts so far may well be necessary, but they are not sufficient. I think the breakthrough that would make a difference is to focus with much more intensity on the demand-side of the retail equation. How to enlist the REAL support of the REAL customer who REALLY funds the entire engine.

Imagine, if you will, that there are three categories of transactions: 

First, there is what I’ll call the “carriage trade” customer, largely insensitive to price, who will go to (for example), the Hermes store in Paris (or London or New York or Dubai) and pay “list price” for what is certainly an authentic, and no doubt beautifully made, scarf. Let me add that, for about 150 years, this WAS the market.

Second, there is what I’ll call the “black market”, which lives both off line and on line, but is epitomized by the sidewalk seller of the $30 Chanel watch, or the $20 Gucci bag. Both the seller and the buyer know this is a fake, and agree to a “fair” exchange of value for that plainly fake (and illegal) good.

Third, there is a vast middle category, especially online, of price-sensitive buyers who WANT TO BUY THE REAL THING at the lowest price possible, and sellers who want to move their goods – legit or not – at the best price, perhaps exploiting the fact that the seller typically knows more about the goods than the buyer. Call this the “grey market”. 

The grey market is the key to the problem: if online shoppers could rely on a signal, some form of certification,  that they were getting authentic goods, even if from an unknown seller, then I predict that the overwhelming majority would choose to buy genuine goods in a risk-free transaction at a market price. (A few, I predict, once they see the price of “genuine”, might say to themselves, gee, I simply can’t afford a real Hermes scarf, and then they have to decide what every consumer decides: do I not buy this thing? Buy a less expensive alternative? Steal the appearance of the design via a counterfeiter? What do I do?)  The “carriage trade” market takes care of itself, and the true black market, while often illegal, is less of a threat to these brands than the “grey market.” 

The impact of EMPOWERING the consumer to be able to exercise a moral choice at the point of sale – to buy the real good from an honest seller – would transform the market. Honest sellers collect the revenue and profits, which are then channeled to rightful owners. This shift in the spending pattern effectively reduces (I hope, starves) the counterfeiters and their underground bad-guy owners of revenues and margin, and thereby makes that a less attractive business to enter or to stay in. 

And that’s where buySAFE comes in. If a manufacturer were to say to its online resellers: look, we need to give all these online browsers/ shoppers/ buyers an easier way of doing the right thing … of discriminating between authentic and illegitimate goods ... and so we will let you resell our luxury goods online, BUT ONLY IF you qualify for and continue to qualify to be a buySAFE bonded merchant and display the buySAFE seal. That means, among other things, that if you (m. merchant) ever sell a fake item,

(a) you’re responsible for delivering the real thing (or paying up) (so you cant get away with it) ; and (b) you’re out … no more certified re-seller status (you didn’t get away with it). buySAFE is independent, so can act fairly and neutrally in administering the program.

And who’s the winner with this new rule in place? There are really three: first, the online reseller who gets the sale; second, the brand owner / manufacturer who OWNS the IP and is entitled to capture that value; and third, the satisfied online customer, who in fact purchased what she intended to purchase, no if’s, and’s or but’s. Oh, and La France, which continues to do what perhaps it does best: create wonderful things that the French and the rest of the world value.

It would be, as the French say, ironique, if the creative sector of French business and culture falters because it is not quick and resourceful enough to adopt innovations necessary to protect and to preserve themselves. I come away from my trip confident that this will not be the case: there is a huge willingness in both government and the businesses to develop the combination of responses, tools and programs to curtail the growth of the counterfeit industry. I’m confident that buySAFE can be part of that solution.

Comments

[Vivian G. Kelly]

Travis, you go, boy!
Vivian

[Travis Brown]

Dear Alain -- My thanks for taking the time to share your thoughts on my recent blog entry setting out a few observations from the study tour of the French luxury goods industry, as well as my thanks for forwarding the text of your remarks given at the lunch in Paris that the Federation Francaise de la Couture so kindly hosted for us.

You’re right: my blog entry did not focus on (a) the significant differences between US and French copyright laws as they relate to the design of “useful objects” or (b) efforts that would amend the US law on this point. My piece did state that that list of current French initiatives includes “a lot of energy in persuading the US to pass a law that would make our copyright protections for fashion designs conform to the French (and EU) law on this”, but that was the extent of my mention of this particular initiative. So, I’d like to provide you an explanation for what I wrote – and didn’t write. This email being the step-child of a blog, I’ll keep it short (for a lawyer).

It’s a blog, not a treatise, and could have been usefully expanded in many different directions. You are correct that I could have described in more detail the efforts both in France and the US to bring our respective laws into closer coordination around this issue, and I, for one, think that such coordination would be a good thing. I support these efforts.

That said, the campaign to amend the US laws does not appear to lack attention or support within the groups we met with. I heard a great deal about it during our tour. I also heard various conflicting opinions from high level US, EU and other officials about the likelihood of such legislation ever becoming law in the US in the next few years. Having been a lawyer in Washington for a long time, I am sure of this: betting the farm on the adoption of any piece of legislation or regulation is a high-risk bet, and so cannot be a wise master strategy if a great deal is at stake. So while I support the sort of extension of the copyright laws that you’ve proposed, I also am convinced that the French luxury goods industry, the French government and others need to try multiple strategies to combat this continuing threat. That seems only prudent.

As you know, the linkage between legislation and solving a complex, international problem is a loose one. If laws alone were the answer, I assure you that America would have no traffic in illegal drugs, no undocumented aliens, no pirated music and no uneducated children -- all of these things are now “illegal” here! Good and consistent laws are surely part of any solution, but only part.

French industry has a tremendous history of innovation in many areas. My core suggestion is simply this: the French luxury goods industry should take advantage of available internet technology to fight the counterfeiting problem at the level of retail e-commerce. This can be done by private industry, with no legislation, treaties or governmental action required. It can be done quickly and inexpensively. If it succeeds in shifting even ten percent of demand from illegitimate sellers of fakes to legitimate sellers of genuine goods, then it will be hugely effective – and it has the potential to have much greater impact than that. If it fails, very little will be lost. Given the immediacy, magnitude and growth rate of the problem, it seems like a worthwhile experiment. Let me be clear: this is NOT a substitute for other approaches to the problem, but a SUPPLEMENT to them. I am eager to work together with you and/or any of your colleagues to move this forward.

Let me close this note by repeating my thanks to you and your colleagues for both your gracious hospitality and the substantive discussion in Paris, especially the lunch on February 23. The talk by Didier Grumbach was a real privilege and a high point of the entire tour for me. (Indeed, I’m trying to find a copy of his Histoires de la Mode online – as it is out of print, this is a bit of a challenge.)

With my thanks for your interest and all best regards, Travis

[alain coblence]

Dear Travis,
I have to say that I am a bit disappointed (to say the least) that your report does not refer at all to the fact that in the United States, piracy is allowed, knock-offs are legal and what you call the "Bad Guys" appear on the morning shows a couple of days after the Red Carpet show at the Oscars to peddle their fakes. One thing is to give a "coup de chapeau" to the French for their good work, another is to remain silent on the lawfully organized trade of counterfeits in this country as long as they do not bear a fake label.
Warm greetings nonetheless.
Alain Coblence