Counterfeiting problematic for retail suppliers, law change complicates enforcement

It’s not just Gucci or Birkenstock targeted by counterfeiters. The International Chamber of Commerce estimates piracy and product knockoffs and theft of trade secrets drain up to $600 billion from the U.S. economy annually. Despite the losses, little is being done to stop it as the jurisdiction change in patent law passed last year makes it harder to sue offenders.

A 2017 report from the Commission on Theft of American Intellectual Property indicates the problem is growing and pegs China as the world’s No. 1 culprit. The report estimates counterfeit goods cost the U.S. between $29 billion and $41 billion a year and 87% of seized products come from China, including Hong Kong.

Hugh and Nicole Jarratt of Fayetteville know firsthand the problem counterfeiting is for U.S. manufacturers and inventors. Long before Jarratt Industries began selling taco plates in Walmart stores the product was sold online at Amazon.

“I was selling lots and lots of these patented taco plates on Amazon with very high ratings. The high ranking at Amazon was based on the sales volume and the positive feedback from customers. Then I got an email from a customer who said the plates they bought from Amazon were not made in the U.S. like the product claimed. They gave us a negative rating and we started to see more clues we were being counterfeited,” Hugh Jarratt said.

He then ordered some of the plates from the seller that showed up on his Amazon page and found the plates were an exact replica of his product and priced lower than than $4 price for a set of four. An attorney by trade, Jarratt set out to find the counterfeiters and sue them for patent infringement.

Jarratt said the fallout of the counterfeiting hurt his business and he received no help from Amazon. He said Amazon would not remove the listing without a court judgment and it was a huge headache for him to get something done.

“I ended up suing Amazon and after a cumbersome search I found an address and was able to sue the manufacture and serve them in New Jersey for patent infringement. These marketplace sellers hide behind fake names that they change all the time making it really hard to find out the true identity and location. Retailers need to hold these imposter suppliers accountable by requiring them to file legal paperwork of their true identity and domicile,” he said.

Jarratt said Amazon removed his listing because it was compromised. All the credibility he had built over a few years was gone as he had to set up a new page starting over from scratch. He said the infringement happened again by a different counterfeiter on the same taco plates leaving him to still trying to rebuild his credibility on that site.

“These scam artists are smart and as long as you don’t have to disclose your identity to list on Amazon this problem is going to continue. It’s not just Amazon. eBay and lots of other sites, even Walmart, are targeted by scam artists. In my experience Walmart does a better job policing than most retail marketplaces,” Jarratt said.

He said anytime a consumer purchases an item online that is touted to be made in the U.S. and the shipper is from China or elsewhere that should be red flag. Jarratt said a 2017 law changed how a lawsuit on patent infringement is filed could hinder his ability sue if if happens again. He said the law changed the jurisdiction where a suit could be filed. Suits now must be filed and litigated in the domicile of the perpetrator’s business, not where the transaction took place. Jarratt said as a lawyer he could represent himself in patent litigation, but now he might have to travel to New Jersey or elsewhere to do it. He said finding out where they are located is challenging enough, much less having to travel to them to file the case.

Patents are supposed to protect inventors against being ripped off, but Jarratt said when it comes to online commerce a more practical way to fight back is through registering the images of products with retailers as copyrighted trademarks. He said if this is done and that image is used to sell fake items it’s must easier to sue for copyright/trademark infringement. Jarratt said suppliers have to be proactive to seek copyright trademark registration before they are targeted by counterfeiters.

“Anyone who has a product selling successfully online is a target by counterfeiters. If two operations would target copying a $1 taco plate, they will copy anything. It’s not if, but when, it happens because top selling products are targeted,” Jarratt said. “It takes about 18 months to get a patent and I still ensure my inventions are at least provisionally patented before I begin selling them online. I also make sure the images are registered as official trademarks and copyrighted because until laws are changed to hold these counterfeiters accountable we are all sitting ducks.”

The National Retail Federation said the jurisdiction change in patent laws was needed because of patent trolls concentrated in the Eastern District of Texas filing two-thirds of all patent lawsuits. The trade group said retailers were caught in the middle of suits filed most often by trolls claiming to hold a patent. NRF said the cases cost legitimate businesses close to $30 billion a year in direct costs and $80 billion indirectly, amounting to close to $1,000 a year for the average household when passed on to consumers. Last year there 3,657 patent lawsuits filed in U.S. District Count, down from 5,838 peak in 2015. There were 5,453 disputes handled by the U.S. Patent Office last year, down from 7,631 in 2015.

Amazon launched earlier this year its “Transparency” anti-counterfeiting service and tested it with 1,000 of its top suppliers. This program involves using a transparency code scanned for authenticity at its fulfillment centers on inbound and outbound products. The service is free to suppliers for six months but then costs between 1 cent and 5 cents per code.

Earlier this year Holly MacLean, founder of Wee Urban, told CNBC her Amazon business peaked at $500,000 in 2016. Then she was targeted by imposters selling knockoff products causing her sales to plunge 80% in 2017. MacLean said she tried to close her Amazon account but it remained open and she could see prices on her products were being altered. Though Amazon did eventually assign her a new seller ID it wasn’t consistent with her trademark brand. Getting that corrected required she hire an attorney to intercede. MacLean told CNBC she had mostly given up on the Amazon business and was focusing on sales with 250 retailers in North America where revenue is growing.

Jarratt said selling online amid marketplace sellers is akin to commerce in the wild, wild west where laws and enforcement are lax. He said small suppliers have to be vigilant and check their listings for any sign of counterfeits because no one is immune to the threat.