The battle over counterfeit goods

FORGERIES IN SILICON (PDF) Receive this article, plus new, related content in the EDN/Electronic Business special online supplement addressing counterfeiting in the electronics industry.

Margaret Peterlin, deputy under secretary of Commerce for intellectual property and deputy director of the United States Patent and Trademark Office, sat down with Electronic Business to talk about global counterfeiting. What follows are excerpts of that conversation.

Q: How big is the counterfeiting problem?
Peterlin: Counterfeiting and piracy drain about $250 billion out of the U.S. economy each year and 750,000 jobs. No matter what metric you use, there's either loss or harm.

Q: Why is the U.S. Patent Office involved?
Peterlin: We work with eight other federal agencies as part of President Bush's STOP [Strategy Targeting Organized Piracy] initiative to collectively address the counterfeiting issue. We're seeing a lot of loss and potentially significant harm. We had one case of brake pads made of sawdust that Customs intercepted. The stories go from cell phones that burst into flames to medical supplies that are not sterile.

Q: So what exactly does the U.S. Patent Office do?
Peterlin: We work as part of the Department of Commerce and with the United States Trade Representative to establish intellectual property rights chapters in free trade agreements. That's one of the best tools the U.S. government has to raise the standard of intellectual property in other countries and make sure they have substantive laws that are best practices and that also are enforced. Additionally, we have IP attachés in countries that are the biggest concern, such as China, India, Egypt, Thailand, Brazil, and Russia. They make sure we have training programs in place.

Q: How much of the problem involves electronics?
Peterlin: It's significant. In 2006, in terms of seizures—which is going to under-account for the real amount because it's what we were able to intercept—5 percent of the total value seized was consumer electronics. In 2007, it was 9 percent, which is a bad news story for what the bad guys are willing to target. Footwear and apparel are No. 1 and No. 2, followed by pharmaceuticals and then electronics.

Q: Is most of that coming out of China?
Peterlin: Yes. With China, if it can be copied, there's a very high likelihood it will be copied and shipped out for export. But even if the Chinese government were to engage in this aggressively, that wouldn't end the problem. Where there is a demand for fakes, there will be supply. If things were to improve in China, we would expect supplies to move someplace else—Russia, India, or Brazil. That's why the United States has a multilateral approach to try to raise the standard through free-trade agreements, where we can, and then through other training opportunities.

Q: There is a move afoot in Congress to change the U.S. Patent Laws. What effect will that have on counterfeiting?
Peterlin: One of the most important things in attacking counterfeiting is up-front efficiency from the Patent Office. One of the provisions in the bill is applicant-quality submissions. It involves an initial search report by the applicant, who has the best information about the invention, and bringing that to the Office at the beginning of the process. The patent system used to have a lack of transparency. Over time, it has returned to strong transparency. One of the first things the office can do is make sure quality is high and that rights are settled as quickly and efficiently as possible. That's one issue. A second is damages. The Bush administration does have concern that the current formulation undervalues patents over time. The administration wants to ensure that the judges are able to apply the most accurate proxies based on the specific facts of the case.

Q: We normally associate counterfeiting with illegal imports, but is any of this happening within the United States?
Peterlin: We do have counterfeiting that occurs within the United States. One of the things we are trying to remind people that it's not just the cute fake watch anymore where you knew you were buying a fake watch, and when it broke three days later you could make fun of yourself for buying a piece of junk. Instead, now, it's people going to a mainstream store and buying what they think is legitimate software, for example, putting it on their system, and watch everything crash over time because it's not legitimate. That puts entire companies at risk.

Q: How much has the Internet accelerated the ability to sell fake goods?
Peterlin: Greatly. That allows counterfeiters to get access to your goods because they go on your Web site and they completely mimic it. They even mimic the pictures of the CEOs, and then they set up completely false fronts. There is easy delivery over the Internet. That's why we believe you have to have a very engaged, multilateral approach using all of the tools the federal government has to raise the standard of intellectual property substantive law and then enforce across the board.

Q: Is there really a way to stop it entirely, or is this a problem that will be with us forever as part of a global industry?
Peterlin: We clearly think there is a way to dampen it severely. But one of the things that's interesting about this challenge—and we have several traveling shows we put on with the U.S. Chamber of Commerce to work with small business, in particular—is that this is truly a partnership between business and the U.S. government. If you go to China and you don't register your trademark and patent your invention, the U.S. government doesn't have the ability to weigh in and say to China, 'You're infringing that.' Without registration or patenting, you don't technically own your idea in that country. It's very important that intellectual property developers actually are owners of their intellectual property. Patent violations are not criminal violations. These are self-enforced property rights, where you go and say, 'I have the right of exclusivity, and if someone infringes me I will take them to court.'

Q: In a civil suit?
Peterlin: Yes. Or they can decide to license and settle it inside the marketplace or outside the market in the court system.

Q: How are other governments, such as China, reacting to all of this?
Peterlin: They are not reacting well to the WTO [World Trade Organization] suits that the United States has brought. The U.S. Trade Representative brought two suits against China for WTO violations. Those cast a negative light on China's enforcement activities.

Q: Is there simply too much to enforce effectively?
Peterlin: You have to look at prosecution thresholds. When the U.S. Border Patrol was looking at the best way to stop human smuggling across the border, they had to figure out the market model of the coyotes: How many people did they need to get across to have a profitable business? In China, they have thresholds as low as 500 copies for DVDs before it is considered a criminal act. That doesn't work, because that's probably the local street vendor's range for production. If you have a proliferation of street vendors, you need to set the threshold at a level that will interrupt what they consider a successful market model. Whether you're talking about counterfeiting or something as terrible as human smuggling, we have to attack these issues systematically and end their practices.

Q: Part of this is also a mindset that it's okay to do this. How do you change that?
Peterlin: If you look at Singapore, they were very aggressive. They got celebrities and government officials involved and said, 'It might be nice to have a fake product, but you're contributing to an economy that's also fake pharmaceuticals and fake consumer electronics.' But one of the things about counterfeiters is they don't tend to specialize. They will go where the money is. If they start with one type of software, they'll go somewhere else if the market is there. For them it's about getting a high return. If you compare that with drug smugglers, the return is higher and the likelihood of getting caught is lower for counterfeiters.

Q: Overall, what countries are the biggest problems? Is it better in new manufacturing areas, such as Vietnam?
Peterlin: The countries we have identified as the biggest threats are Brazil, India, Russia, and China.

Q: So is this a fact of life in a world economy?
Peterlin: Five [percent] to 7 percent of world trade is counterfeit. I don't think that's a level we should just accept.