The personal care products industry is fighting to preserve its reputation against counterfeiters and pirates as Keith Nuthall, Julian Ryall, Emma Jackson and Leah Germain report
Time was when counterfeit personal care products were commonly crude fake perfumes pedalled in markets and workplaces during Christmas and other festive periods to bargain hunters who knew they were buying rubbish. Not any more. Counterfeit packaging and products of varied cosmetics, creams, soaps and scents are now often so hard to detect that only manufacturers can really spot a fake. Add to that the growing grey market of personal care products designed for one country’s regulatory regime that end up in another, outright smuggling, the apeing of popular brands and other scams and you have a sector that is increasingly under pressure from organised crime.
Complex litigation brought by cosmetics manufacturers against internet auction house eBay has recently highlighted the difficulties posed to the sector by commercial crime in general and counterfeiting in particular. With packaging and production technology becoming ever more sophisticated, especially in regard to visual design, spotting fakes is so tough some retailers can claim they should not be held responsible.
This is the argument made, largely successfully, by eBay in its court cases. A Paris tribunal recently rejected a L’Oréal action against the US-based web company for alleged counterfeiting, claiming damages of €3.5m. The court accepted eBay’s plea that it only “helped” internet-based clients to sell their products and did not control the content. However, this ran counter to a similar French tribunal ruling in 2008 when eBay was fined €20,000, where judges maintained that by taking a commission from each sale, the internet auction house had actually profited from a trade in counterfeits, and so actively participated in this crime rather than being a passive host for wrongdoing. Interestingly, in April this year London local newspapers reported that a British eBay seller was actually found responsible for selling £26,000’s worth of counterfeit goods on the site, including cosmetics, and received a community service order after being convicted by a magistrates court in the British capital. Clearly there is a long way to go before any kind of legal consensus is reached regarding legal liability over the sales of counterfeiting, especially online.
The majors also found success recently when a European Court of Justice ruled in favour of L’Oréal in a trademark case (p8).
SAFETY CONCERNS
However, there is a far greater consensus over the fact that counterfeiting of personal care products is a growing problem and that it poses a threat to the sector and its consumers.
Paul Crawford, head of regulatory and environmental services for the UK’s Cosmetic Toiletry and Perfumery Association (CTPA), said this perception was growing amongst consumers as well as the industry. In the past, it was viewed as a way of buying cheap goods, “but views have changed,” he says. “Safety is a key issue. It could be poor quality. Who knows what’s in there? There have not been any safety controls.”
And it’s not just developed world markets such as the UK where these potential health risks are acknowledged. Last year the acting director of the Tanzania Food and Drugs Authority (TFDA) called for concerted efforts to prevent counterfeit cosmetics and medicines from being imported. Director Hiiti Sillo said that the fakes came from the south, through Zambia and Malawi. He said the public needed to understand the “quality and standard of medicines and cosmetics in use”.
And potentially harmful fake cosmetics do not just damage the health of consumers, they also harm brands, maybe badly. Crawford adds: “There is a big issue of confidence in brands and their reputation. If a consumer has a poor quality product and goes back to the supposed brand manufacturer and they just say ‘well it’s a counterfeit’, then that’s not really a satisfactory response. This has the capacity to cause a lot of damage to the basic reputation of companies.”
The problem is exacerbated by the fact that the production of counterfeit cosmetics, soap and perfumes really does seem to be booming. Crawford says: “The problem has grown alarmingly and has been growing for the past ten years.”
It is of course hard to nail down the true extent of an illicit trade because nobody really knows how much fake product slips through the net, but the European Commission releases solid figures on seizures by EU customs and trading officials. Last year, it said in 2006 there were 6.1 million pirated or counterfeit personal care products seized within the EU – this represented 7.72% of the total legitimate and illicit trade for these products and the 6.1 million items was an astonishing 264% more that the number of pirated and counterfeit personal care products seized within the EU in 2005.
Interestingly, according to this report, despite the accusatory finger usually (correctly) wagged at China over intellectual property rights infringements, the source of these counterfeit and pirated personal care products was not mainly from illicit Chinese manufacturers. Instead 32.11% of them came from Georgia; 28.68% from neighbouring Turkey; just 15.86% from China; 5.67% from Singapore; 4.34% from South Korea; 2.27% from the United Arab Emirates; and 2.01% from Algeria.
And of course this is a global issue, with counterfeit goods being moved from jurisdiction to jurisdiction, blurring the identity of suppliers. The International Chamber of Commerce (ICC) has been developing a database to help track blatant examples of commercial counterfeiting, and the personal care product sector is often mentioned. Take this year’s entries to the ICC’s Business Action to Stop Counterfeiting and Piracy (BASCAP) database. In April, Romanian customs authorities seized counterfeit Chinese cosmetics during regular inspections in the port of Constanta in southeastern Romania. They discovered 12,090 counterfeit L’Oréal, Chanel, Max Factor, Lancôme, Hugo Boss, Revlon and Givenchy cosmetic products worth approximately €117,000 (US$155,000), reported BASCAP, all shipped from China.
BASCAP also noted that in April Palestinian police raided and seized the contents of two cosmetic and medical product factories in the Nablus area. The factories had been manufacturing, relabelling and selling both expired and counterfeit products into local markets. BASCAP reported that hundreds of thousands of shekels worth of shampoos, detergents, medications and raw materials had been seized, many allegedly obtained from illegal Israeli settlements in the West Bank.
In January, the ICC service highlighted the arrest of two counterfeiting suspects by Indian police in the Mumbai suburb of Ghatkopar, after seizing 6.2m Indian Rupees (US$125,000) worth of fake soaps bearing well known brands such as Lux, Santoor and Lifebuoy. And in March, BASCAP reported a discovery of a £500,000 haul of counterfeit medicines in Middlesbrough in northern England, including diet pills.
These cases are almost certainly just the tip of an iceberg. A simple scan around the local newspapers of various countries certainly shows this. Philippines journals reported in February that the country’s National Bureau of Investigation (NBI) seized 54m Philippine peso (US$1.13m) worth of counterfeit MAC cosmetics (52,060 pieces) and Clinique (1,859 items) during a raid of warehouses in Manila. Meanwhile the Saigon Times reported an interesting variation of scams in Hanoi, Vietnam in April, where unauthorised fake L’Oréal dealers were selling counterfeits of the brand, and also of Maybelline, Lancôme and MAC. L’Oréal Vietnam Ltd said it had uncovered at least 22 faux L’Oréal dealers in the Vietnamese capital selling cheap fakes. In Algeria, the daily newspaper L’Expression has recently claimed that 40% of cosmetics sold in the country are counterfeit.
These issues often focus on blatant counterfeiting, but there are other legal issues surrounding intellectual property that exercises the minds of C&T product manufacturers. In March, for instance, a district court of the southern district of New York entered judgment against three independently operated perfume distributors in New York City accused of trademark infringement and unfair competition by Switzerland’s Victorinox Swiss Army, which markets perfume. The Swiss had complained against the sale of “decoded” fragrance products, from which serial numbers and other manufacturing identifiers helping Victorinox protect its intellectual property rights had been removed, according to court pleadings by the company.
Another issue is using similar names to established brands. For instance, last June Estée Lauder Cos Inc filed a federal lawsuit against two US retailers and a perfume manufacturer complaining about the use of names including Impression of Happy by Clinique and Impression of Beautiful by Estée Lauder, which the big brand argued infringed its trademark rights.
GREY MARKET
Then there is the grey trade. Trademark exhaustion is a serious problem in the EU for some manufacturers because once a product has been released onto the EU market, legally there is no way a brand can prevent its sale in any of the 27 member states. This can cause problems. Labelling may fail to comply with local legislation, especially on language. However, CTPA’s Crawford does think manufacturers should ever be on the hook for this kind of problem: “They have no control over that. It has to be down to the distributor and retailer for not complying with the regulations,” he says.
But there are more significant problems with parallel imports from countries that are not part of a common jurisdiction such as the EU. A grey marketer could buy personal care products that are legally manufactured in the US, according to its health and safety laws, and export them to the EU, where their composition might break local legislation.
And when retailers decide to use these kinds of grey market suppliers the risk is always higher and Crawford points out that actual counterfeits could be mixed in with the legitimate and parallel products. “Brand owners don’t like the grey market. There’s less control over distribution,” he stresses.
Using formal channels, brand owners are better able to monitor trade flows and urge the use of new technology to make sure only legitimate products are sold to the correct markets. And given the increasing sophistication of these fakes, companies are offering technical solutions that can be used. For instance, at the Perfume, Cosmetics & Design (PCD) Congress in Paris in February, South Africa-based global pulp and paper group Sappi launched a new ‘Identicate level 3’ security system designed to help brand owners identify and authenticate their products. This uses a random distribution of invisible marker particles on the surface of Sappi packaging materials, which can be read by a scanner. As well as proving authenticity, this allows the tracking of each batch, pallet, pack or individual item to its place of origin, claims Sappi.
“Each year losses and damage to world trade due to counterfeiting and piracy reach more than US$600bn,” says Sappi marketing manager Kris Verschueren. “Packaging is also faked on a large scale, so the difference between a high quality product and its inexpensive imitation is often barely noticeable.”