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Atlanta Business Chronicle
June 6, 2003
GOODY'S LOSES LAWSUIT OVER PHONY T-SHIRTS
Counterfeit Tommy Hilfiger T-shirts may end up costing Goody's Family Clothing Inc. $11 million
A U.S. District Court judge in Atlanta ruled May 9 the Knoxville, Tenn.-based clothing chain (Nasdaq: GDYS) must pay Tommy Hilfiger for selling the counterfeit T-shirts.
Goody's recorded an $8 million pre-tax charge for its quarter ended May 22 for legal claims and related legal fees in connection with the Hilfiger lawsuit and subsequent lawsuits Goody's filed against its vendors over the matter.
Without the $8 million pre-tax charge, or 15 cents a share, Goody's would have had its best quarter, as far as earnings per share, since it went public in 1991, according to a company statement.
Goody's claims it got the fake goods from a vendor and didn't know the items weren't the real thing.
"Goody's strongly disagrees with the courts findings and believes it has meritorious grounds for appeal," the company said in a recent filing with the Securities and Exchange Commission. "Goody's is currently reviewing its options for appeal."
Other lawsuits
Goody's is one of several retailers in recent months that has been accused of selling counterfeit goods.
A Texas hair-care company recently filed lawsuits against Cincinnati-based The Kroger Co. (NYSE: KR) and CVS Pharmacy Inc., a subsidiary of CVS Corp. (NYSE: CVS) for selling knockoffs of its products at several stores in Atlanta.
TIGI Linea L.P., a Carrolton, Texas-based firm, makes and sells professional hair-care products under the brands Bed Head, Moisture Maniac, Control Freak, Self Absorbed and Dumb Blonde.
In its May 7 federal lawsuit, TIGI claims Kroger sold counterfeit products under TIGI's label at stores in Atlanta, Alpharetta, Roswell and Marietta. In addition, TIGI claims it found its counterfeited products at Kroger stores in Texas, California, Oregon and Arizona.
TIGI, which also sued Woonsocket R.I.-based CVS May 7 in federal court here, claims the pharmacy chain sold counterfeit hair-care products at stores in Atlanta, Roswell and Marietta, as well as in Jacksonville, Fla., Charlotte, N.C., and Orlando, Fla.
TIGI also claims CVS and Kroger kept selling the products at several stores, including some in Atlanta, after a letter Feb. 28 demanding both companies stop.
The counterfeit products were tested and found to have potentially harmful bacteria, TIGI said in both lawsuits.
Chris Westfall, a spokesman for TIGI Worldwide, said because the matter in Atlanta is in litigation, he could not comment further.
A CVS spokesman said TIGI's suit has no merit.
"We have not found any evidence of any counterfeit products," said Todd Andrews, CVS spokesman. "We believe this is a frivolous complaint."
Officials at Kroger declined to comment because the lawsuit is pending. At press time, Kroger had not responded to the lawsuit.
TIGI has been aware that it has been a target of counterfeiters. On Feb. 11, TIGI representatives were present when agents from the U.S. Postal Service, the Food & Drug Administration and the U.S. Customs Service raided warehouses of alleged counterfeiters. Agents seized computers, paper files and inventory items. A similar raid occurred in Canada a few days later.
Canadian health officials issued warnings March 6 and May 16 alerting consumers that the counterfeit TIGI products contain potentially harmful bacteria.
TIGI products are intended to be sold exclusively through professional salons and not retail chains. TIGI claims it did not authorize CVS nor Kroger to sell its products according to the lawsuits.
Big business
Counterfeit goods cost the retail industry an estimated $200 billion a year, said Michael Kessler, president and CEO of Kessler International, a corporate investigation services based in New York.
"This is a tremendous loss to business each year," he said. "Soap bars, shampoo, auto parts, adult videos, electronic circuit breaker boxes, food products. You name it it's been counterfeited because there is money to be made. "
Kessler said because of confidentiality agreements with clients, he can't disclose local companies that may have faced a counterfeit problem "but things have been counterfeited from soft drinks to optical care."
The estimated $200 billion may just scratch the surface of losses, said Marshal Cohen, co-president of NPD Fashion World, a market information company in New York.
"There is really no way to track the size of it," he said. "Some of these hot properties, like Tommy Hilfiger, estimate 10 to 12 percent of their sales volume is lost to counterfeit. That comes from what they can measure. And that's only in the United States. Outside the United States, it's even worse."
Diversionary tactics
Part of the problem is the practice called diversion.
Manufacturers sell product at different price levels in different regions. For example, a manufacturer sells a bottle of shampoo for $1 in the United States, but it sells the same bottle for 70 cents in Canada and 50 cents in Latin America, Kessler said.
So business men and women set up companies in Canada and Latin America that buy that shampoo and then sell it back to U.S. companies at a discounted rate, he said.
"It's all legal," Kessler said. "You can buy product in Latin America and sell it to U.S. companies."
But those foreign companies set up to sell diverted products to the United States also have access to the counterfeit product, he said.
"Me sale and distribution of counterfeit products is a crime," Kessler said. But retailers are turning "a blind eye to the fact that it is counterfeit product. These are [retail] companies that are big enough they can buy directly from the manufacturer."
Trafficking in counterfeit goods can draw a five-year federal prison sentence and up to a $1 million fine, but the cases are very time-consuming to make, Kessler said. "Normally these are white collar crimes and you have to trace back invoices."
Even when computers are seized, financial records often have been deleted, he said.
As in the case Tommy Hilfiger brought against Goody's, "it's a lesson that retailers are going to learn quick and hard," Cohen said. "Tommy Hilfiger is one of the most copied products. They spend a tremendous amount of time to chase after counterfeiters to protect their own [trade] mark. And they are right to do it."
Author - Lisa R. Schoolcraft
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