The National Pulse

Knockoffs Landing on Retail Shelves

Lawsuits claim fake luxury goods are showing up at chain stores

Posted Feb 21, 2007 5:30 AM CDT
By Stephanie Francis Ward

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Anyone hunting for knockoff handbags rarely has had to venture more than a block in downtown New York City to find a vendor cart loaded with fakes for sale.

But, says law professor Susan Scafidi, who writes about knockoff items on her Web log, Counterfeit Chic, fake luxury goods are appearing more of­ten on the shelves of the local chain store in the nearby strip mall.

“It’s not just about street counterfeiters anymore,” says Scafidi, who is a professor at Southern Methodist University in Dallas. Indeed, lawyers say counterfeit luxury goods are increasingly showing up at national discount chain stores, despite the significant legal penalties the retailers face.

“Now it’s also about making sure that thirdparty distributors don’t place these counterfeit bags in large chains,” Scafidi says. “It’s in the best interest of those chains to make very sure they police it, but obviously things are slipping through.”

Intellectual property attorneys point to a case from last fall filed by leather goods manufacturer Coach Inc. against Target Corp. In October, Coach alleged that a Largo, Fla., Target store was selling counterfeit bags composed of fabric modeled on the company’s signature fabric, with the “C” logo. The action, filed in U.S. District Court for the Southern District of New York, was recently settled.

Target did not return phone calls seeking comment on the case. And Carole P. Sadler, senior vice president, general counsel and secretary of Coach, would not disclose details of the settlement, which was reached less than a month after the filing.

Target maintained that the bags were authentic, purchased from a former Coach distributor. Coach’s engineering department found the bags to be counterfeit, according to the complaint. The situation came to Coach’s attention after one of the bags was shipped to Keith Monda, Coach’s president and chief oper­ating officer.

The complaint alleged that Target purchased the bags from Carlen Enterprises, a former Coach distribu­tor. The distribution relationship ended last year, the lawsuit said, after Car­len diverted Coach products to un­authorized retailers. A spokesperson from Carlen did not return calls seeking comment.

The complaint said that some distributors mix counterfeit goods with genuine articles to enhance profits. The filing described such behavior as an “increasingly popular trend” and asked that Target assemble all the bags in question in one place, so a Coach representative could determine how many were fakes.

“The sale of counterfeit products often results in a large number of incidents of actual confusion by Coach consumers,” the complaint stated. “In many instances, members of the pub­lic have purchased counterfeit Coach bags, believing them to be the genuine product. Many of those consumers send counterfeit Coach bags to Coach for repair or replacement, believing them to be genuine.” Coach Inc. v. Target Corp., No. 1:06cv07875AKH.

Having Vs. Enforcing Policies

A similar suit against Wal-Mart Stores Inc. was brought in June by the French luxury group LVMH Moet Hennessy Louis Vuitton. The international company owns more than 50 luxury brands, including Fendi.

The suit, also filed in federal court in New York City, maintains that a WalMart Sam’s Club, as well as other retailers, sold counterfeit Fendi bags for $508.25. Au­thentic models usually retail for $930. Fendi Adele S.R.L. v. WalMart Stores Inc., No. 1:06cv04370JESMHD.

Wal-Mart spokesman John Simley declined to comment on the matter because the litigation is pending. He did state that Wal Mart has a policy of selling only authentic goods.

Steven R. Gursky, a New York City lawyer who handles intellectual property prosecution and protection matters, says he has handled seven cases against Wal-Mart involving counterfeit luxury goods.

“It’s not as rare as it should be, and it shouldn’t exist at that level of sophistication [considering the] money being made,” says Gursky, who also filed similar suits against Costco, a national wholesale club operator.

Most chains have a policy against buying counterfeit goods, Gursky says, but some don’t enforce it. He says that Wal Mart has such a policy, but it was changed each time he filed a lawsuit against the Bentonville, Ark based corporation. Wal-Mart’s Simley declined to comment.

“If your business model is to give people value, you’d think it would be a bad business model to have it get out that you’re selling fakes,” Gursky says. “They themselves are a brand, and the trademark signifies something.”

Generally, he says, counterfeit luxury goods come to the chains through local purchase programs, which allow buyers to do business with regional companies such as soda distributors and local growers. However, many local buyers lack the ability to distinguish authentic products, according to Gursky.

“You wouldn’t want someone to buy designer apparel that way, because the buyer doesn’t have the sophistication or knowledge,” he adds. “The issue with these retailers is whether they are willfully blind and don’t do the proper inquiry, so they trample on the rights of the trademark holders.”

But others say trademark holders can be a bit hardcharging, particularly regarding gray-market goods. Such goods are legitimate products manufactured overseas and exported to the United States without the trademark holder’s consent.

“They have a very legitimate interest in protecting their brand equity, but gray market imports are a legitimate mechanism in trade,” says Lawrence M. Friedman, a Chicago lawyer who defends discount chains. He mentions a 1988 U.S. Supreme Court case that upheld Customs Service regulations permitting the importation of such goods. The case was brought by Cartier, the watchmaker and jeweler, against Kmart. Kmart Corp. v. Cartier Inc., 485 U.S. 176.

To protect brand image, Friedman says, some companies try to stop these imports and have the ammunition to do it, despite the Supreme Court ruling. For example, care labels are required on garments sold in the United States. Other countries don’t have such a requirement.

“So if you buy legitimate Ralph Lauren Polo shirts from a country that doesn’t have the requirement, that might keep the product out of the United States,” he says.

Is it Really a Trend?

Friedman says he disagrees with the notion that national chains increasingly sell counterfeit luxury goods.

“The bigger companies don’t want to take the public relations hits, they don’t want to take the legal hits, and in most cases they’d like to do business with the brands, so it doesn’t make sense to make them mad,” Friedman says.

According to Gursky, national chains don’t purposely buy coun­terfeit luxury goods, but some may take a “don’t ask, don’t tell” approach.
Scafidi agrees with Gursky’s as­sess­ment.

“There are several levels of precaution you can take, and I have a feeling that Target will be taking them in the future,” she says, adding that counterfeit purses can usually be determined by the quality of the product’s hardware and how the label is affixed. If a product is bought directly from a factory, Friedman says, the risk of purchasing counterfeit goods is greater. Companies, he says, can train buyers to ask producers for documentation showing that they have a right to produce the goods in question. And they can ask a representative from the brand to confirm the documentation.

If a court finds a business to be a willful counterfeiter, he says, businesses can be held to pay $1 per trade mark for each type of goods. That can amount to $1 million or more in damages, plus attorney fees.

If a company is going to sue a retail chain for selling counterfeit goods, Gursky says, the result should involve more than a simple apology.

“I approach the cases from the point of view of a businessperson--that is, if you spend money on litigation, is it convincing enough just to have someone say they’re sorry?” Gur­sky explains. “We tend to be more aggressive when making someone write a check, because people remember writing a check more than anything else. A businessperson never forgets that.”

And sometimes the counterfeiters win. Scafidi mentions Burberry, the England based brand known for its Novacheck plaid. The company stopped making baseball caps with the pattern because the model was heavily counterfeited. “They eventually backed away from their signature plaid altogether,” Scafidi says.

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