Counterfeits in the Supply Chain: A Big Problem and it's Getting Worse
The world markets and global supply distribution chains provide opportunities for companies to grow and prosper. Sales through the Internet allow for products to be sold and sent to almost anywhere in the world. Consumers can view and order products online at any time of the day. Manufacturers work to keep up with the demand and are constantly looking for ways to reduce costs through efficient manufacturing and low-cost supply of materials and components. These opportunities and markets, however, have created and encouraged the growth of counterfeit goods and the theft of companies’ intellectual property.
The false labeling of products, fake or inferior materials and components used to make products, and the misappropriated use of another’s trademark are just a few examples of how counterfeit goods and the theft of intellectual property are hurting consumers and companies. Let’s begin by looking at the counterfeit problems encountered by many companies.
The Definition of Counterfeit Products
The Agreement on Trade-Related Aspects of Intellectual Property Rights (the “TRIPS Agreement”) defines “counterfeit trademark goods” as “goods, including packaging, bearing without authorization a trademark which is identical to the trademark validly registered in respect of such goods, or which cannot be distinguished in its essential aspects from such a trademark, and which thereby infringes the rights of the owner of the trademark in question under the law of the country of importation.” “Pirated copyright goods” are defined as “any goods which are copies made without the consent of the right holder or person duly authorized by the right holder in the country of production and which are made directly or indirectly from an article where the making of that copy would have constituted an infringement of a copyright or a related right under the law of the country of importation.”
The World Health Organization (“WHO”) has a broader definition for counterfeit products. It defines, for example, a “counterfeit medicine” as one “which is deliberately and fraudulently mislabeled with respect to identity and/or source.” The WHO further states that “counterfeiting can apply to both branded and generic products and counterfeit products may include products with the correct ingredients or with the wrong ingredients, without active ingredients, with insufficient active ingredients or with fake packaging.”
Counterfeit Products Create Global Problems
Counterfeit products create global problems that affect a wide range of industries. In the pharmaceutical industry, buying or using counterfeit medicine has the potential for creating safety and health risks. As shown in the figure below, in the pharmaceutical supply chain, from the initial raw materials to manufacturing to distribution, plenty of opportunities exist for providing fake or mislabeled materials and ingredients, leading to possibilities to create a counterfeit product.
Raw materials that are processed into active ingredients for the creation of the final product, if not checked for quality, source of supply and proper delivery to the manufacturer, can be altered or fake materials can be provided. Additionally, inactive ingredients sometimes used in the manufacturing process also need to be properly inspected and controlled. When the final product is made, the delivery to the distributors needs to be verified and checked to ensure no mislabeling or fake products are delivered. The chain of transfer from the suppliers to the distributors to the end consumer needs to be properly verified.
An example of what occurs when the pharmaceutical chain is not properly controlled and verified against alteration took place in Panama in 2006. Cough medicine that was manufactured and sold there but was using unauthorized ingredients originating from China led to over 78 deaths. Panamanian authorities found that diethylene glycol, which is often used in antifreeze, was used in the cough medicine instead of glycerin, an inactive ingredient used in medicines to make syrup. The barrels had been mislabeled to indicate they contained glycerin, when they actually contained diethylene glycol.
Another example relating to potential problems with the pharmaceutical chain occurred in the United States in 2012, relating to Avastin, an injectable medicine used to treat cancer. A Canadian supplier sold counterfeit Avastin that did not contain any of the active ingredients required for the medicine.
The impact from counterfeit products is felt by the brand owner, the consumer and the companies that unknowingly use or sell counterfeit products. They are all harmed by the distribution of counterfeit products. Substandard drugs that are made from poor quality raw materials, using an improper dosage of the active ingredients, inadequate storage or transportation, or products made from a process that does not follow good manufacturing practices all create dangerous risks for the consumer. Certain health organizations found instances of counterfeit drugs that contained harmful ingredients such as boric acid, brick dust, chalk dust, cement powder, talcum powder, floor polish, shoe polish and antifreeze. Adverse drug reactions, permanent injury or death can result from the use of counterfeit drugs.
Other Affected Industries
The consumer goods, apparel, spare parts and luxury products industries have also encountered counterfeit products. Counterfeit consumer goods can create health and safety risks. Milk, toothpaste, cigarettes and beverages are just some examples of goods found to have tainted or toxic chemicals, such as arsenic, diethylene glycol and methanol. Other examples include toys having lead paint, smart phones with counterfeit batteries that overheat and pose a burn hazard, computers with fake component parts, counterfeit airbags that do not deploy or inflate improperly and car brake pads with inferior and unreliable pads. These counterfeit products were not only inferior products but were also dangerous to the public and resulted in consumers’ complaints being directed to the brand owner.
Counterfeit products also result in consumers paying higher prices for legitimate goods as companies bear the additional costs associated with improved packaging and the enforcement efforts used against counterfeiters. Employees of companies targeted by counterfeiters are also affected with the potential loss of jobs due to reduced sales of legitimate goods and the unfair competition created by the sale of the counterfeit goods. The harmful effects created by the counterfeit products, the dangers to consumers, the loss of revenue and the damaged reputation of brand owners are on-going global challenges that we all encounter.
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In Part 2 of this article, we will discuss international efforts and a multifaceted anticounterfeiting program to help address these counterfeit problems.
J. Michael Martinez de Andino, is a partner at Hunton & Williams LLP, a law firm that provides legal services to corporations, financial institutions, governments and individuals. Based in Richmond, he advises companies and organizations on how to protect their intellectual property rights. When clients believe that their patent or other IP rights have been infringed or allegations of infringement arise, he works with clients to analyze the situation, assess the extent of potential infringement or damages, and to develop and implement an effective response. In addition to litigation, and when appropriate, he investigates and recommends alternative solutions to assist in resolving disputes, including settlements and negotiation of licenses.
