Safeguarding Brands

It is no surprise that the scale of counterfeit sales the virtual world over is growing exponentially, leaving companies baffled by the lack of solutions and resources available. Indeed, the sale of counterfeit goods has grown into a booming business in an otherwise down economy ' accounting for more than $600 billion annually, according to the International Anti-Counterfeiting Coalition (http://www.iacc.org/).

Experts at MarkMonitor, a company that protects the brands of more than half of the Fortune 100, estimate that $137 billion of fake goods will be sold online this year.

Because the Internet provides opportunistic criminals with a powerful platform for marketing their tainted goods on a mass scale, and with limited funding and personnel, law-enforcement agencies are unable to make a noticeable dent in the fight against counterfeits, leaving companies with the costly burden of protecting their customers.

In the face of ubiquitous and pervasive budget cuts, today's innovative in-house counsel deploys non-traditional responses via technology, to show senior executives some visible, cost-effective results.

Case Study: Illegal
Online Pharmacies

Pharmaceutical industry trends provide a useful case study for understanding how global companies are affected by this insidious rise in online counterfeit sales. The Summer Edition of the Brandjacking Index included an in-depth study of the pharmaceutical market that highlights attempts by brandjackers to abuse top-ranked pharmaceutical brands and that are endangering consumers with a supply chain compromised by the sale of counterfeit drugs on the Internet. These trends are described below.

Methodology, Summary Results

The Brandjacking Index, produced quarterly by MarkMonitor, explores numerical trends and statistics on brand abuse. It contains anecdotal information about the business and technical methods brandjackers use, along with analysis and discussion of the business and social implications of brand abuse. The Summer Edition focused on the online-pharmaceuticals marketplace. It reported on data gathered over a year to identify schemes by which con artists hijack well-known drug brands for their own profit. Sixty million spam e-mails and billions of Web pages were tracked, including listings on online auctions and B2B (“business-to-business”) exchanges, to survey abuse targeting the six biggest drugs in the market, including three of the most popular drug products online. Summary findings are described in Figure 1, below.

[IMGCAP(1)]

Findings indicate that these prominent drug brands are subject to significant abuse through multiple channels, such as:

• Cybersquatting;
• Pay-per-click;
• e-Commerce activity; and
• False association.

From 2007 to 2008, these drug brands experienced a 66% increase in appearance on e-commerce sites ' to more than 5,000 sites, and a 33% increase in cybersquatting, involving an average of more than 17,000 instances per week of targeting these popular brands.

These results should serve as a wake-up call to drug companies to reevaluate their enforcement strategy, and to e-commerce and other concerns implicated or that may become implicated through devious methods. Traditional legal remedies such as Uniform Dispute Resolution Process (“UDRP”) and Lanham Act lawsuits are no longer preferred because of cost and delay. Instead, by developing an infringement strategy aided by technology that prioritizes levels of abuse, in-house counsel can implement and deploy an effective program that provides measurable results.

Understanding the Supply Chain For Counterfeits

Understanding the principal distribution channels is paramount to developing an effective online anti-piracy strategy. Depending on the industry, the supply-chain pirates' use may vary from major auction sites, such as B2B or B2C (“business-to-consumer”) exchange sites to peer-to peer networks to specialty e-commerce sites. (See, Figure 2, below, for trends in abuse of online pharmacies from last year through this year.)

[IMGCAP(2)]

In the pharmaceutical industry, illicit online pharmacies are a major vehicle for online sales of counterfeit drugs. Figure 2 highlights recent trends of abuse involving online pharmacies. Only two of the pharmacies identified in this study were VIPPS-certified, the certification program offered by the National Association of Boards of Pharmacy. (“VIPPS” stands for Verified Internet Pharmacy Practice Sites. The program, begun in 1999, certifies that online pharmacies meet state regulatory-board compliance, inspection, privacy, and other legal and best-practices guidelines. (See, http://vipps.nabp.net/verify.asp.) Surprisingly, close to two-thirds of the pharmacies didn't use any encryption to protect customer data, adding the risk of identity theft to the shopping experience. Over the last year, the number of daily visitors to these sites nearly tripled, exposing many consumers to potential harm. (For more on online-pharmacy regulation and how governments are addressing such issues as privacy in telemedicine, see, “Emerging Internet Telemedicine Issues: Privacy, Consent, Liability and Security Are Issues Affecting Physicians' Internet Use,” in the April edition of e-Commerce Law & Strategy.)

Online drug purchasing is fraught with fraudsters, and is more popular than it was a year ago. The cost of drugs and insurance plans, plus many insurers', including Medicare, high prescription-drug deductibles, all have forced consumers to try alternative tactics to purchase the drugs they need to maintain their health, even their lives ' and the Internet looms large in their array of alternatives. One result of this change in consumer habits is that more traffic is making its way to online pharmacy sites that are doing more business; another result is a 36% growth in the availability of drugs in the online supply chain. This dramatic increase in traffic drives a sizable increase in revenue, estimated at $12 billion annually. Online pharmacy sites are getting more sophisticated at attracting their audience by investing in search advertising words to drive more traffic to their virtual storefronts.

Understanding how consumers discover e-commerce sites to purchase counterfeits is key to counsel and others for developing an effective strategy to fight counterfeiting and fraud. Often, companies use search-engine advertising to draw more unsuspecting marks to these misleading sites. Industry figures for cost-per-click, impressions volume and click-through rates reveal that advertisers are spending $26 million annually on only the six drug brands that were studied. Disturbingly, of the identified 11,836 search ads targeting these brands, none of the ads analyzed were from legitimate brandholders. More than two-thirds of the ads showed trademark abuses, and all these ads led visitors to misleading sites that were selling these drugs.

These appear to be professional-looking sites. But the discerning eye sees a list of faked accreditation and safe-shopping links, and the sale of non-existing generic equivalents to patent-protected drugs. Consumers who purchase drugs from these sites could be risking their health and well-being, making these sites the type that should be made a top priority for any enforcement action, by legal entities and by companies seeking to protect their brands.

By understanding how pirates use search engines to target consumers, company officers and counsel often respond through a two-pronged approach designed to reduce the number of consumers reaching the site. First, companies can increase their spending on search-engine optimization or keyword purchases of their brands to ensure that consumers can reach legitimate distribution channels for their products. Second, companies should rely on the acceptable-use policies of the major search-engine companies to notify the search engines of violations of their policy, and to request a take-down of the sponsored advertisement. (For more on this topic, see, “Keeping Up with Online Brand and Other Related Scams and Frauds.”)

Using Web Site Data
To Prioritize Enforcements

It is often difficult to determine whether an e-commerce site is selling counterfeit goods. Web site data (such as Web-info company Alexa's rankings), Web site traffic information and revenue estimates can be useful metrics for company counsel in putting priorities on applying the brakes to infringing e-commerce activities. Similarly, failure to have deployed standard consumer-protection security methods by the Web site in collecting credit-card or personal information must play a crucial part in developing priorities for a company's anti-piracy program: this oversight must appropriately, effectively and quickly be addressed.

Pricing is also a valuable metric to consider when prioritizing enforcements. The old adage if something is too good to be true, it probably is works in spades when it comes to online pharmacies and other e-commerce sites. For example, the Brandjacking Index noted price discounts of 85% from established and certified pharmacies. These aggressive discounts can be a strong indicator that the drugs being sold by non-certified pharmacies are:

• Fake;
• Stolen;
• Alternates;
• Expired;
• Diluted; or
• Gray-market versions of drugs and that consumers should avoid them. ( Gray market means that goods are made without the authority of the patent or trademark owner, usually abroad, and are imported for sale under the radar of the owning company and regulatory authorities.)

These discounts should also signify to counsel that the Web site should be allocated a higher enforcement priority.

Specialized Technology Achieves Measurable Results

Data such as prices and quantities for sale are metrics that companies often rely on to identify Web sites or auction listings to prioritize enforcement activities. Because it is impossible to conduct a meaningful evaluation of thousands of suspicious Web sites for these metrics manually, brand-protection companies have developed e-commerce solutions that go beyond basic trademark-monitoring to scan known domestic and international e-commerce sites such as eBay, Alibaba, iOffer and Craigslist for key search terms, bringing back relevant listings from which those seeking to do so can initiate enforcements. These solutions deploy sophisticated algorithms that include graphics-recognition capabilities to search for stock photos, and apply composite-scoring methodology that enable companies to hone in on the most egregious offenses by weighing criteria such as:

• Price variances;
• Repeat offenders;
• Common sellers; and
• Bulk sales.

Companies use this new technology to send thousands of automated take-down requests, such as Digital Millennium Copyright Act (“DMCA”) notices, cease-and-desist letters, notices of acceptable-use-policy violations, and auction-listing take-down requests through eBay's VeRO (“verified rights owner”) Program. Robust case-management capabilities are available to enable companies to send, track, calendar and report the results of take-down requests in an efficient manner.

Litigation in Fighting Online Piracy

By adopting an updated enforcement strategy that makes maximum use of technology, costly litigation and legal action can be relegated to the most blatant situations in which significant volumes of dollars are at stake.

Company counsel should be selective in filing lawsuits, limiting litigation to high-profile situations where the costs of litigation can be kept to a minimum and the likelihood of success is great. High-profile cases can be a deterrent to brandjackers seeking to avoid costly litigation. In fact, companies such as Microsoft have used lawsuit-related publicity as a means of warning fraudsters to stay away from their products and to inform the public that the companies are serious about eradicating counterfeit sales.

Due to the international nature of online counterfeit sales, identifying the location of, and asserting jurisdiction over, the responsible parties introduces significant cost and complexity in anti-piracy litigation. For example, an online pharmacy may be labeled as Canadian, but is hosted in the Russian Federation and processes payments through an Israeli merchant account. This example illustrates the ease with which international pirates can be shielded by the complexities of international laws, making it difficult to pursue legal remedies against them.

Instead, many companies have focused their anti-counterfeit litigation on pursuing the third-party enablers under theories of contributory liability, with mixed results. In the highly publicized case Tiffany v. eBay, No. 04 Civ. 4607 (SDNY July 14, 2008), Tiffany sought to hold eBay responsible for the sale of counterfeit goods on its auction site. In ruling for eBay, the court recognized that, although eBay and Tiffany have an interest in eliminating counterfeit Tiffany merchandise from eBay, the burden of policing Tiffany's valuable trademarks on the Internet falls squarely on the brandholder. Because eBay immediately removed listings when notified of specific listings under its VeRO Program, eBay was not required to take preemptive steps to remove listings from its site before they became active. (For more on the case, see, “Tiffany v. eBay: The Right to Nominative Fair Use and the Avoidance of Secondary Liability,” in the September edition of e-Commerce Law & Strategy.)

Notably, the eBay decision was influenced by the costs incurred by both parties. eBay benefited from its substantial investments, putting as much as $20 million each year into tools to promote trust and safety on its Web site. In contrast, Tiffany invested relatively modest resources to combat this problem, budgeting approximately $763,000, representing less than .05% of its net sales, with only 1.15-1.6 full-time employee equivalents devoted to monitoring the eBay site. This spotlight on Tiffany's enforcement efforts exposes a disconcerting effort, and should provoke a review of a company's legal budget and resources devoted to the anti-counterfeit fight to ensure that it can endure the scrutiny of litigation.

eBay avoided liability to Tiffany because it had implemented its VeRO program and actively removed listings upon notice of infringements. Other e-commerce sites may face liability if they do not similarly respond to take-down requests sent by brandholders seeking to curb online piracy.

Effective Results for
Fighting Online Counterfeits

Fortunately, companies that apply best practices such as those described above are achieving success that is timely and measurable. Because the responsibility in protecting the brand and the consumer ultimately falls on the brandholder, implementing an online anti-piracy program that couples innovative brand-protection technology, prioritized enforcement actions and selective litigation gives company counsel the ability to affect millions of dollars of illegal counterfeit sales. This type of result will reflect positively on counsel in the eyes of senior executives concerned about the impact of counterfeit sales on the company's business.

It is no surprise that the scale of counterfeit sales the virtual world over is growing exponentially, leaving companies baffled by the lack of solutions and resources available. Indeed, the sale of counterfeit goods has grown into a booming business in an otherwise down economy ' accounting for more than $600 billion annually, according to the International Anti-Counterfeiting Coalition (http://www.iacc.org/).

Experts at MarkMonitor, a company that protects the brands of more than half of the Fortune 100, estimate that $137 billion of fake goods will be sold online this year.

Because the Internet provides opportunistic criminals with a powerful platform for marketing their tainted goods on a mass scale, and with limited funding and personnel, law-enforcement agencies are unable to make a noticeable dent in the fight against counterfeits, leaving companies with the costly burden of protecting their customers.

In the face of ubiquitous and pervasive budget cuts, today's innovative in-house counsel deploys non-traditional responses via technology, to show senior executives some visible, cost-effective results.

Case Study: Illegal
Online Pharmacies

Pharmaceutical industry trends provide a useful case study for understanding how global companies are affected by this insidious rise in online counterfeit sales. The Summer Edition of the Brandjacking Index included an in-depth study of the pharmaceutical market that highlights attempts by brandjackers to abuse top-ranked pharmaceutical brands and that are endangering consumers with a supply chain compromised by the sale of counterfeit drugs on the Internet. These trends are described below.

Methodology, Summary Results

The Brandjacking Index, produced quarterly by MarkMonitor, explores numerical trends and statistics on brand abuse. It contains anecdotal information about the business and technical methods brandjackers use, along with analysis and discussion of the business and social implications of brand abuse. The Summer Edition focused on the online-pharmaceuticals marketplace. It reported on data gathered over a year to identify schemes by which con artists hijack well-known drug brands for their own profit. Sixty million spam e-mails and billions of Web pages were tracked, including listings on online auctions and B2B (“business-to-business”) exchanges, to survey abuse targeting the six biggest drugs in the market, including three of the most popular drug products online. Summary findings are described in Figure 1, below.

[IMGCAP(1)]

Findings indicate that these prominent drug brands are subject to significant abuse through multiple channels, such as:

• Cybersquatting;
• Pay-per-click;
• e-Commerce activity; and
• False association.

From 2007 to 2008, these drug brands experienced a 66% increase in appearance on e-commerce sites ' to more than 5,000 sites, and a 33% increase in cybersquatting, involving an average of more than 17,000 instances per week of targeting these popular brands.

These results should serve as a wake-up call to drug companies to reevaluate their enforcement strategy, and to e-commerce and other concerns implicated or that may become implicated through devious methods. Traditional legal remedies such as Uniform Dispute Resolution Process (“UDRP”) and Lanham Act lawsuits are no longer preferred because of cost and delay. Instead, by developing an infringement strategy aided by technology that prioritizes levels of abuse, in-house counsel can implement and deploy an effective program that provides measurable results.

Understanding the Supply Chain For Counterfeits

Understanding the principal distribution channels is paramount to developing an effective online anti-piracy strategy. Depending on the industry, the supply-chain pirates' use may vary from major auction sites, such as B2B or B2C (“business-to-consumer”) exchange sites to peer-to peer networks to specialty e-commerce sites. (See, Figure 2, below, for trends in abuse of online pharmacies from last year through this year.)

[IMGCAP(2)]

In the pharmaceutical industry, illicit online pharmacies are a major vehicle for online sales of counterfeit drugs. Figure 2 highlights recent trends of abuse involving online pharmacies. Only two of the pharmacies identified in this study were VIPPS-certified, the certification program offered by the National Association of Boards of Pharmacy. (“VIPPS” stands for Verified Internet Pharmacy Practice Sites. The program, begun in 1999, certifies that online pharmacies meet state regulatory-board compliance, inspection, privacy, and other legal and best-practices guidelines. (See, http://vipps.nabp.net/verify.asp.) Surprisingly, close to two-thirds of the pharmacies didn't use any encryption to protect customer data, adding the risk of identity theft to the shopping experience. Over the last year, the number of daily visitors to these sites nearly tripled, exposing many consumers to potential harm. (For more on online-pharmacy regulation and how governments are addressing such issues as privacy in telemedicine, see, “Emerging Internet Telemedicine Issues: Privacy, Consent, Liability and Security Are Issues Affecting Physicians' Internet Use,” in the April edition of e-Commerce Law & Strategy.)

Online drug purchasing is fraught with fraudsters, and is more popular than it was a year ago. The cost of drugs and insurance plans, plus many insurers', including Medicare, high prescription-drug deductibles, all have forced consumers to try alternative tactics to purchase the drugs they need to maintain their health, even their lives ' and the Internet looms large in their array of alternatives. One result of this change in consumer habits is that more traffic is making its way to online pharmacy sites that are doing more business; another result is a 36% growth in the availability of drugs in the online supply chain. This dramatic increase in traffic drives a sizable increase in revenue, estimated at $12 billion annually. Online pharmacy sites are getting more sophisticated at attracting their audience by investing in search advertising words to drive more traffic to their virtual storefronts.

Understanding how consumers discover e-commerce sites to purchase counterfeits is key to counsel and others for developing an effective strategy to fight counterfeiting and fraud. Often, companies use search-engine advertising to draw more unsuspecting marks to these misleading sites. Industry figures for cost-per-click, impressions volume and click-through rates reveal that advertisers are spending $26 million annually on only the six drug brands that were studied. Disturbingly, of the identified 11,836 search ads targeting these brands, none of the ads analyzed were from legitimate brandholders. More than two-thirds of the ads showed trademark abuses, and all these ads led visitors to misleading sites that were selling these drugs.

These appear to be professional-looking sites. But the discerning eye sees a list of faked accreditation and safe-shopping links, and the sale of non-existing generic equivalents to patent-protected drugs. Consumers who purchase drugs from these sites could be risking their health and well-being, making these sites the type that should be made a top priority for any enforcement action, by legal entities and by companies seeking to protect their brands.

By understanding how pirates use search engines to target consumers, company officers and counsel often respond through a two-pronged approach designed to reduce the number of consumers reaching the site. First, companies can increase their spending on search-engine optimization or keyword purchases of their brands to ensure that consumers can reach legitimate distribution channels for their products. Second, companies should rely on the acceptable-use policies of the major search-engine companies to notify the search engines of violations of their policy, and to request a take-down of the sponsored advertisement. (For more on this topic, see, “Keeping Up with Online Brand and Other Related Scams and Frauds.”)

Using Web Site Data
To Prioritize Enforcements

It is often difficult to determine whether an e-commerce site is selling counterfeit goods. Web site data (such as Web-info company Alexa's rankings), Web site traffic information and revenue estimates can be useful metrics for company counsel in putting priorities on applying the brakes to infringing e-commerce activities. Similarly, failure to have deployed standard consumer-protection security methods by the Web site in collecting credit-card or personal information must play a crucial part in developing priorities for a company's anti-piracy program: this oversight must appropriately, effectively and quickly be addressed.

Pricing is also a valuable metric to consider when prioritizing enforcements. The old adage if something is too good to be true, it probably is works in spades when it comes to online pharmacies and other e-commerce sites. For example, the Brandjacking Index noted price discounts of 85% from established and certified pharmacies. These aggressive discounts can be a strong indicator that the drugs being sold by non-certified pharmacies are:

• Fake;
• Stolen;
• Alternates;
• Expired;
• Diluted; or
• Gray-market versions of drugs and that consumers should avoid them. ( Gray market means that goods are made without the authority of the patent or trademark owner, usually abroad, and are imported for sale under the radar of the owning company and regulatory authorities.)

These discounts should also signify to counsel that the Web site should be allocated a higher enforcement priority.

Specialized Technology Achieves Measurable Results

Data such as prices and quantities for sale are metrics that companies often rely on to identify Web sites or auction listings to prioritize enforcement activities. Because it is impossible to conduct a meaningful evaluation of thousands of suspicious Web sites for these metrics manually, brand-protection companies have developed e-commerce solutions that go beyond basic trademark-monitoring to scan known domestic and international e-commerce sites such as eBay, Alibaba, iOffer and Craigslist for key search terms, bringing back relevant listings from which those seeking to do so can initiate enforcements. These solutions deploy sophisticated algorithms that include graphics-recognition capabilities to search for stock photos, and apply composite-scoring methodology that enable companies to hone in on the most egregious offenses by weighing criteria such as:

• Price variances;
• Repeat offenders;
• Common sellers; and
• Bulk sales.

Companies use this new technology to send thousands of automated take-down requests, such as Digital Millennium Copyright Act (“DMCA”) notices, cease-and-desist letters, notices of acceptable-use-policy violations, and auction-listing take-down requests through eBay's VeRO (“verified rights owner”) Program. Robust case-management capabilities are available to enable companies to send, track, calendar and report the results of take-down requests in an efficient manner.

Litigation in Fighting Online Piracy

By adopting an updated enforcement strategy that makes maximum use of technology, costly litigation and legal action can be relegated to the most blatant situations in which significant volumes of dollars are at stake.

Company counsel should be selective in filing lawsuits, limiting litigation to high-profile situations where the costs of litigation can be kept to a minimum and the likelihood of success is great. High-profile cases can be a deterrent to brandjackers seeking to avoid costly litigation. In fact, companies such as Microsoft have used lawsuit-related publicity as a means of warning fraudsters to stay away from their products and to inform the public that the companies are serious about eradicating counterfeit sales.

Due to the international nature of online counterfeit sales, identifying the location of, and asserting jurisdiction over, the responsible parties introduces significant cost and complexity in anti-piracy litigation. For example, an online pharmacy may be labeled as Canadian, but is hosted in the Russian Federation and processes payments through an Israeli merchant account. This example illustrates the ease with which international pirates can be shielded by the complexities of international laws, making it difficult to pursue legal remedies against them.

Instead, many companies have focused their anti-counterfeit litigation on pursuing the third-party enablers under theories of contributory liability, with mixed results. In the highly publicized case Tiffany v. eBay, No. 04 Civ. 4607 (SDNY July 14, 2008), Tiffany sought to hold eBay responsible for the sale of counterfeit goods on its auction site. In ruling for eBay, the court recognized that, although eBay and Tiffany have an interest in eliminating counterfeit Tiffany merchandise from eBay, the burden of policing Tiffany's valuable trademarks on the Internet falls squarely on the brandholder. Because eBay immediately removed listings when notified of specific listings under its VeRO Program, eBay was not required to take preemptive steps to remove listings from its site before they became active. (For more on the case, see, “Tiffany v. eBay: The Right to Nominative Fair Use and the Avoidance of Secondary Liability,” in the September edition of e-Commerce Law & Strategy.)

Notably, the eBay decision was influenced by the costs incurred by both parties. eBay benefited from its substantial investments, putting as much as $20 million each year into tools to promote trust and safety on its Web site. In contrast, Tiffany invested relatively modest resources to combat this problem, budgeting approximately $763,000, representing less than .05% of its net sales, with only 1.15-1.6 full-time employee equivalents devoted to monitoring the eBay site. This spotlight on Tiffany's enforcement efforts exposes a disconcerting effort, and should provoke a review of a company's legal budget and resources devoted to the anti-counterfeit fight to ensure that it can endure the scrutiny of litigation.

eBay avoided liability to Tiffany because it had implemented its VeRO program and actively removed listings upon notice of infringements. Other e-commerce sites may face liability if they do not similarly respond to take-down requests sent by brandholders seeking to curb online piracy.

Effective Results for
Fighting Online Counterfeits

Fortunately, companies that apply best practices such as those described above are achieving success that is timely and measurable. Because the responsibility in protecting the brand and the consumer ultimately falls on the brandholder, implementing an online anti-piracy program that couples innovative brand-protection technology, prioritized enforcement actions and selective litigation gives company counsel the ability to affect millions of dollars of illegal counterfeit sales. This type of result will reflect positively on counsel in the eyes of senior executives concerned about the impact of counterfeit sales on the company's business.