Sporting Goods Business

October 1, 2001

EYE ON ESPORTS

You spend millions of dollars burning your brand into the consciousness of consumers worldwide, and then, when surfing eBay, you come across a counterfeit pair of sneakers with your name on it priced at $10. What do you do?

Nothing, say most investigators. Auction sites are used by small-time criminals who are rarely worth pursuing. The real problems come from private trade bulletin boards and professional-looking Web sites dedicated to selling counterfeit or diverted items.

According to the International Chamber of Commerce, companies lose $25 billion to $30 billion a year worldwide to brand and trademark abuse online. Twenty-five percent of all branded goods sold on the Internet are counterfeit, reports the International Anti-Counterfeiting Coalition (IACC). Of the millions of counterfeit and diverted products sold, some sporting goods manufacturers estimate that 25 to 50 percent of sales occur online.

Despite efforts to thwart this illegal activity, most experts report that online sales of counterfeit and diverted merchandise are growing. One reason is the amount of excess inventory in the marketplace due to an economic slowdown, says Jeff Unger of GenuOne, a technology company that helps manufacturers fight brand erosion. Another is the increasing popularity of the Internet.

According to GenuOne, the Web is a fertile environment for illegal activity for many reasons. It has a low barrier of entry; it is a low-cost sales and distribution channel; it provides the instantaneous ability to transact; it gives criminals the ability to look professional and legitimate; and it provides a global point of access to millions of potential consumers. Moreover, it is fairly easy to steal and leverage metatags and eyeballs intended for legitimate sites.

One of the most disturbing aspects is that as brands become more visible and popular, they also become more attractive to counterfeiters. Donald DeKieffer, a lawyer with Washington, DC-based DeKeiffer & Horgan, says that for every dime a company spends on marketing, it should spend a penny protecting its brands.

Though fighting brand fraud can be very expensive, athletic shoe manufacturer New Balance says it's worthwhile. There are huge hidden costs in terms of brand damage when companies don't pursue counterfeiters, according to Jim Sciabarrasi, New Balance's corporate manager of sourcing, purchasing & logistics.

About four years ago, New Balance began seeing its name on illegal goods, a problem that corresponded with increased visibility of the brand. Since then, says Sciabarrasi, the company has developed a multi-pronged plan to fight the sale of counterfeit and diverted goods.

Part of the plan involves putting a unique fingerprint on its products, thereby allowing New Balance to determine whether merchandise in the marketplace is authentic. Specifically, New Balance uses GenuOne's GenuGuard technology to physically imprint its products with a covert marking. And with the help of GenAssist, a product can be tracked through the supply chain to discover at which point it was diverted.

Being able to ascertain product authenticity is particularly important now, since technology allows criminals to make near-perfect copies. "Bad guys have become a lot more sophisticated than the good guys," says Michael Kessler, president and CEO of Kessler International, an international forensic accounting and investigative consulting firm.

The second prong of New Balance's approach was to increase and refine its Internet monitoring techniques. Because the two words that make up the company's name—"new" and "balance"—are commonly used in the English language, the company had to design an intelligent search mechanism. So, a year-and-a-half ago, New Balance retained the use of GenuOne's GenuNet Solution, which searches a range of locations on the Internet—including chat rooms, message boards, use-net groups and e-commerce sites—allowing it to track, trend and report pricing structures and erosion, channel manipulation, product integrity and customer satisfaction.

Kessler International offers Web.Sweep, a similar product that allows the company to sweep the Internet in all languages looking for illegal use of its clients' copyrights, trademarks and logos. Kessler also offers News.Sweep, which helps companies find instances of defamation of brand or company name online, such as by competitors or disgruntled employees, and mentions of the company or brand in the media.

New Balance's third prong involves an investigative approach, in which the company develops leads and hands them off to its lead attorney in the field, Harley Lewin of New York-based Greenberg Traurig LLP.

DeKeiffer of DeKeiffer & Horgan says that having a plan for reacting quickly to the discovery of counterfeit or diverted goods is an important part of fighting brand erosion. Because counterfeit goods are often available for a short period of time, companies must have lawyers and investigators ready to respond within 24 hours.

New Balance's fourth prong is to engage its own marketing partners worldwide to create a stronger, more disciplined distribution channel. Part of this involves educating its global sales force about brand erosion and then providing a channel of communication back to New Balance through which criminal activity can be reported.

Often, the small selling entities the company is involved with overseas invest a certain amount of their own money in building the brand, in addition to New Balance's investment, says Sciabarrasi. Counterfeiters can damage these businesses very easily, thus creating a need for proper support from New Balance in fighting counterfeiting outside the U.S.

New Balance has fought counterfeiting overseas by taking out ads through local media outlets to notify consumers of the presence of counterfeit merchandise, and to warn counterfeiters that the company won't stand by while its brands are eroded. "It's good to tell the counterfeiters that if they're going to take your brand, you're going to fight!" exclaims Sciabarrasi.

Certainly, there is significant counterfeit activity overseas, but there are many problems within the U.S., as well. Major American discount retailers have often been the subjects of lawsuits. For instance, in 2000, both Nike and Adidas claimed Wal-Mart was selling counterfeit versions of their merchandise through its Sam's Club stores.

Though most experts admit that the problem of counterfeit and diverted goods can never be solved, they say the best way to fight back is to develop a reputation for enforcing a "no tolerance" policy. Kessler cites Nike, New Balance, Reebok, Callaway and Wilson as very effective at gaining visibility for their efforts to combat these problems.

Overall, states DeKieffer, "The sporting goods industry gets a C- in defending its trademarks, copyright and brands. Compared to the software, pharmaceutical and health and beauty industries, it is not particularly aggressive."