Sniffing out fakes
Firms that specialize in counterfeit detection are in demand
Last year, Peter Capolino, president of Mitchell & Ness Nostalgia Co., was desperate to shut down the street vendors and Internet sites selling counterfeit versions of his vintage sports jerseys, which can sell for up to $300. The Philadelphia firm's sales had been dropping, in part because lower-priced fake versions of its collectible shirts--which look like ones worn by teams such as the Lakers and the Red Sox--were flooding the market. With police busy with homicide and narcotic investigations, Capolino turned to Stuart Drobny, a private investigator.
Drobny, head of Norristown, Pa.-based Stumar Investigations, and his team immediately hit the streets, weeding through flea market stalls and hunting down street vendors. A year later, Drobny has raided more than 20 sellers in four states, served dozens of cease-and-desist letters, and confiscated hundreds of the bogus jerseys. This doesn't come cheap. Mitchell & Ness spends about $400,000 a year pursuing counterfeiters. "I should be spending my time and money on sales and advertising instead," says Capolino. "It's really frustrating."
With the surge in ersatz merchandise pouring in from Asia, business is booming for private investigators, like Drobny, who specialize in counterfeits. A little over a decade ago, counterfeiters focused on copying designer footwear, handbags, and jewelry, or CD s, videos, and DVD s. But today's counterfeiting trade has no limits: Everything from soaps and printer toner to airplane parts and medicine has an evil twin. And the copycats have moved beyond peddling their bogus wares via street vendors and flea markets. Fakes are even finding their way onto the shelves of major retailers and websites like eBay.
Pricey imports. Indeed, from October 2003 to March 2004, U.S. customs officials seized $64 million worth of counterfeit goods, up from an estimated $38 million during the same period the previous year. The FBI estimates that U.S. businesses lose up to $250 billion a year from the sham products. "If you are a brand owner, you can't get anywhere without hiring private investigators or having in-house counterfeit investigators," says Dan Chow, a law professor at Ohio State University and an expert in Chinese counterfeiting.
While most consumers consider buying a fake Louis Vuitton bag a victimless crime, companies argue the opposite. Yes, counterfeiting robs the company of revenue and jeopardizes brand reputation. But it also can be dangerous or even deadly--think counterfeit medicine, auto parts, and food.
Most Fortune 500 companies say they spend between $2 million and $4 million per year to combat counterfeiting, according to the International AntiCounterfeiting Coalition in Washington, D.C. In 2002, CEO s of several major companies, including Unilever, Gillette, Heineken, and Procter & Gamble, formed a coalition to devise strategies to address the threats to their brands, including pressing for stronger penalties for counterfeiters and tougher law enforcement.
The problem has worsened in recent years. Forget the old cottage-industry nature of counterfeiting. Many outfits now have mass production capability and have wormed their way into legitimate distribution channels. Technological advances such as scanners, high-speed CD and DVD burners, and digital embroidery machines have made some phony products virtually indistinguishable from the real thing. "Many companies feel that they are not winning the war against counterfeiting," says Timothy Trainer, president of the anticounterfeiting coalition. Mitchell & Ness is fighting back even harder. It recently added holograms and serial numbers to its labels to differentiate them.
Web tricks. At the same time, the popularity of online auction and retail sites on the Internet has made it easier for counterfeiters to unload their fakes on an unsuspecting public. The venerable jeweler Tiffany, for example, says it recently found that more than 70 percent of the jewelry sold on eBay under the Tiffany name was phony. The firm is suing eBay, claiming that the online auctioneer has aided and benefited from trademark violations by allowing those items to be sold. Officials at eBay argue that it has a program in place that enables companies to police the auction site for counterfeit goods, but Tiffany says eBay bears that responsibility.
Some companies do have their own internal investigation units, but that can be prohibitively expensive. That's why many businesses turn to the 20 or so private firms, like Drobny's, or larger firms like Kroll or Pinkerton Consulting & Investigations that operate worldwide, to track down the bogus merchandise. Some firms also monitor Internet activity, such as Virginia-based Cyveillance and GenuOne in Boston. "We look for sites selling inappropriate packaging and pricing, as well as bulk sales by unauthorized retailers," says Todd Bransford, vice president of marketing for Cyveillance. Capolino, for example, pays GenuOne $5,000 a month to help catch sales of phony Mitchell & Ness products on eBay, where a quarterback jersey with a fake label can sell for $2,500.
Most gumshoes have law enforcement backgrounds. But Drobny started out working for a private investigator. After he received his law degree, the southern New Jersey native opened up his own sleuthing shop 24 years ago, and he began specializing in counterfeits after Nike asked him to help track down fake sneakers in 1988. His firm now has 40 full-time employees, and his client list reads like a Who's Who of luxury retailers: Kate Spade, Louis Vuitton, and Tiffany, to name a few.
Drobny usually starts his hunt by gathering tips on the whereabouts of counterfeit vendors and wholesalers. The next step: purchasing some of the spurious items, which Drobny then sends back to the client to examine and verify that they are indeed fakes. With evidence in hand, the trademark owner, by law, can demand that the counterfeiters cease and desist--in the form of a letter that investigators like Drobny often serve.
In some cases, investigators can persuade the seller to voluntarily fork over the imitated goods and may even use the vendor or store owner as an informant to get to the bigger fish. "You can't stop with the vendors," says Drobny. "You use them to get to the distributors and eventually to shut down the manufacturer."
Private investigators have no legal authority, but if a judge grants permission, the investigator--along with a law enforcement official--can raid the counterfeit seller's place of business and confiscate evidence and financial records. If the investigation ultimately leads to a civil or criminal trial, the investigator typically acts as an expert witness.
Another ploy: The detective firms will play the counterfeiters' game, setting up a pretext storefront to buy the phony products. "We keep undercover businesses going all the time," says investigator Michael Kessler of New York, whose clients include Sara Lee Household and Body Care USA. "It's a way to monitor the marketplace."
Tracking down counterfeiters is similar to pursuing drug dealers, says Howard Dozier, an investigator in North Carolina. "You have an assumed name and identification and try to get to the factories through the wholesaler," says Dozier, who has worked in law enforcement for 25 years, focusing on criminal intelligence and organized crime investigations. "It's just like when I worked undercover in vice."
This story appears in the September 13, 2004 print edition of U.S. News & World Report.