Sporting Goods Business

June 1, 2002

FAKE OUT

Every year, the pirates' season lasts 12 months. Not Pittsburgh's baseball team, but the criminals who operate counterfeiting rings and steal business from you. Some are sophisticated, intelligent rogues who use the latest, fastest computers and technology to administer multinational conglomerates. Others run crude operations from the backs of cargo vans or rundown apartments.

Without a doubt, counterfeiting is a nationwide problem. The United States Customs Service calculates that counterfeit apparel makes up about 25 percent of its seizures, and the agency estimates that counterfeit products have cost the U.S. economy more than 750,000 jobs in the past decade.

Companies lose more than customers to counterfeiters; they lose credibility when the legitimate manufacturers and retail businesses that follow strict standards ensuring the durability and quality of their products are called into question. Misspelled names and shoddy workmanship are just two examples of the ways counterfeiters can damage consumers' perception of legitimate businesses.

Many agencies, public and private, are devoted to protecting vendors, trademark holders, retail businesses and consumers from falling prey to counterfeiters. One of the most visible organizations is CAPS, the Coalition to Advance the Protection of Sports logos. Founded in 1992, CAPS is an affiliation of the Collegiate Licensing Company, Major League Baseball Properties, NBA Properties, NFL Properties and NHL Enterprises, which are devoted to working together with law enforcement agencies to protect member rights against counterfeiters.

Bruce Siegal, SVP, general counsel for the CLC and founding member of CAPS, says that in 2001 CAPS participated in 136 collective enforcement actions in 12 states which led to 531 arrests and seizures of more than 250,000 items of product. Working in conjunction with local law enforcement, CAPS officials conducted a major seizure at the 2002 Rose Bowl. In addition to the 5,000-plus pieces of product seized, Siegal says officials discovered a large production facility in South Central Los Angeles where equipment, including screen printing presses and heaters for drying, was confiscated. In addition to pirating hot market Rose Bowl product, this factory, Siegal says, was also producing counterfeit merchandise for the professional leagues.

But counterfeiters pilfer much more than the licensed product of the sports leagues. According to Michael Kessler, president of Kessler International, a forensic accounting and investigative consulting firm in New York, counterfeiters target market items with the highest demand. "Some of these people are sophisticated enough to operate on a seasonal basis just like retail stores," Kessler says. "They'll have coats for winter and golf clubs for the warmer months."

Kessler notes that the most sophisticated counterfeiters are highly versatile and operate across myriad industries. "Guys doing fragrances today might be doing pharmaceuticals tomorrow and T-shirts the next day," he says. Other advanced counterfeiters beguile the market by becoming specialists in specific labels and brands or particular fabrics like denim or fleece.

Up and down the manufacturing and supply chain, the sporting goods industry is susceptible to counterfeiting, but possibly the most vulnerable area is in overseas, outsourced manufacturing.

"When there is a factor of risk that a product may be susceptible to counterfeiters, multiply that factor tenfold when you take outsourcing into account," Kessler says. "When a factory employee making $8 a week can get a $50,000 score if he steals a dye or a mold and has it back by the next morning, what do you expect him to do?"

Counterfeit manufacturers often do not work alone. Kessler says he has worked cases where buyers who are on the take will "salt" product, mixing counterfeit items with legitimate merchandise. For example, unscrupulous buyers may buy complete sets of name brand golf clubs as well as complete sets of counterfeit clubs, mix them together ("salt"), and get them to retail shelves.

"The smart criminals are always a step ahead of the manufacturers and law enforcement," Kessler observes. "There is a lot of money in counterfeiting and where there is this much money, there is brains and power."

In order to combat these sophisticated criminals, Kessler says law enforcement personnel must be made to perceive counterfeiting as a major problem. Too often, counterfeiting is perceived as a victimless crime that only harms large, faceless corporations and as a result, law enforcement is unwilling to police the problem. Consequently, Kessler encourages manufacturers and retailers to form alliances that press for new legislation as well as encourage law enforcement to be more proactive enforcing laws already on the books.

The lobbying efforts are making some gains. According to Siegal, lobbying by CAPS and the IACC has helped put felony counterfeiting penalties on the books in 30 states. Prior to 1992, there was not a single felony anti-counterfeiting law in effect.