House of Commons - Trade and Industry

Select Committee on Trade and Industry Eighth Report

VII COUNTERFEIT GOODS AND PIRACY

100. The debate over parallel and grey trading is not primarily a debate over counterfeit goods. Goods imported by legitimate traders from other countries are not, by and large, 'counterfeit'. As CIPA put it "it is a legitimate economic activity to turn a profit by buying in the cheapest market and selling in the dearest".[282] The same can not be said for trade in counterfeit goods: it is an illegal and damaging activity and one that should carry a heavy penalty. Concerns were, however, expressed to the Committee that extending parallel and grey trading would make counterfeit goods harder to detect and monitor, or conversely that the Silhouette ruling had exacerbated the problem. The Department of Trade and Industry told us that "links between counterfeiting and piracy and organised crime have begun to emerge".[283] The Anti-Counterfeiting Group (ACG) noted that "serious and organised criminal involvement in counterfeiting is widely accepted by the Police, Customs and international regulatory authorities such as Interpol and the Anti-Fraud Unit of the European Commission".[284]

Definitions

101. The Anti-Counterfeiting Group pointed out that definitions of 'counterfeit' are difficult and there "are as many as there are pieces of legislation to control the phenomenon of counterfeiting". The ACG broadly campaigns on the definition of "the deliberate cheating of consumers by manufacturers, distributors and retailers who reproduce well known trade marks, packaging and product configuration to market goods that look identical to those produced by reputable brand owners".[285] In October 1998 the European Commission produced a Green Paper Combatting counterfeiting and piracy in the Single Market, the main aim of which was to gather information. Mr Anderson of the ACG told us in oral evidence that one of the problems with the Green Paper was that it was far too broad. It "sought to encompass all forms of intellectual property infringement - patents, utility models, copyright, designs, and even a suggestion that it would cover parallel trading".[286] We agree with the Department of Trade and Industry in their response to the Green Paper that "careful consideration will need to be given to what should constitute counterfeiting and piracy having particular regard to the type of the intellectual property right and the nature of the infringement of that right".[287] The Communication following the Green Paper is not expected to be published until the autumn of this year.

Existing UK legislation

102. In the UK, section 111 of the Copyright, Designs and Patents Act 1988 allows the owner of a copyright to give notice in writing to Customs and Excise that infringing copies of published literary, dramatic or musical works or of sound recordings of films, are expected to arrive in the UK and should be treated as prohibited. Section 111 is subject to the same restrictions as section 89 of the Trade Marks Act (see paragraph 16). However, because of the limitations and conditions which apply and the availability of EC legislation to deal with copyright infringements, Customs & Excise told us that notices under this section are extremely rare: "none has been lodged in the last five years and consequently all seizures by Customs of copyright-infringing goods have been made under EC Regulation 3295/94."[288] This Regulation lays down "measures to prohibit the release for free circulation, export, re-export or entry to a suspensive procedure of counterfeit and pirated goods".[289] Council Regulation (EC) 3295/94 has been amended by Regulation (EC) 241/1999 which, from 1 July 1999, extends the scope of the prohibitions to goods infringing patents and supplementary protection certificates and to goods under all forms of customs supervision. It also provides a procedure enabling holders of Community Trade Marks to make a single application for customs intervention in any number of Member States.[290] In January 1998 the European Commission reported that across the Community between July 1995 and June 1997 customs authorities took action in over 4000 cases, compared with only 2000 in the previous 7 years prior to the existing Regulation.[291]

The scale of the problem

103. The Green Paper estimated that counterfeiting and piracy accounted for between 5% and 7% of world trade in value terms.[292] Certain sectors are more prone to counterfeiting or piracy. The Commission notes that the levels of counterfeiting and piracy in relation to the turnover of some of the sectors concerned are considerable: 35% in the software industry, 25% in the audio-visual industry and 12% in the toy industry.[293] Mr Anderson from the Anti-Counterfeiting Group told us that the main copyright industries of music, films and software were very vulnerable to counterfeits, and that in the branded goods sector, the biggest problem currently exists in clothing and footwear. Fragrances and cosmetics, 'luxury goods', motor car parts, industrial goods, aircraft parts, pharmaceuticals, food and drink and industrial chemicals also face problems.[294] The scale of the problem varies across Europe with luxury goods more counterfeited in France and Italy, and industrial goods and car parts much more counterfeited in Germany.[295] Rishworth Chase told us that counterfeit goods are often accompanied by notarised paperwork certifying the goods as genuine. However, "the problem is that in a lot of Europan countries notaries (a) have no legal training and (b) there is no come-back to them at all".[296]

104. Counterfeit goods present an obvious threat to consumer health and safety. The Anti-Counterfeiting Group provided us with a number of examples of counterfeit goods having caused injuries or fatalities worldwide.[297] In the UK, the problem is not as severe as in other some other countries but the ACG did cite the example of fake vodka sold in the UK which caused blindness.[298]

105. In the case of the recording industry, there are three categories of what the industry generically refers to as piracy: pirate recordings are issued without the authority of the owner, usually packaged differently to the original and often compilations; counterfeit recordings are unauthorised copies made and packaged to resemble the original as closely as possible; bootlegs are recordings of live performances or broadcasts manufactured and sold without the authorisation of the artist.[299] In general terms, the British Phonographic Industry stated that it is estimated that pirate sales of CDs and cassettes worldwide in 1997 were worth £4.5 billion. Additionally, pirate recordings have become increasingly sophisticated and are often indistinguishable from genuine copies.[300] Beggars Banquet told us that piracy runs at 33% of the world music business: when Beggars Banquet had a number one album with Prodigy in 28 countries their "Russian number one was created by 10,000 legitimate CD sales and an estimated 120,000 pirate ones".[301] The International Federation of the Phonographic Industry noted that "CD piracy is the most serious threat to the music industry globally".[302]

106. Figures are somewhat imprecise over the extent to which counterfeit pharmaceuticals are a problem in the UK. ABPI told us that the WHO estimates that around 5% of medicines worldwide are counterfeit.[303] SmithKline Beecham stated that: "it is noteworthy that no counterfeit products were found in the UK NHS distribution system until the application of EU free movement of goods for pharmaceuticals started to accelerate",[304] implying both a link to parallel imports and the existence of a problem. The Association of Pharmaceutical Importers told us "cases of counterfeit product entering the UK are almost unknown".[305] The MCA told us that the level of counterfeit pharmaceuticals in the UK would be "expected to be substantially lower" than 5%.[306] They also noted that "investigations undertaken by the MCA do not show a causal link between UK market penetration by counterfeits and parallel imports".[307]

The potential effects of parallel or grey trade on counterfeiting

107. It was expressed to the Committee a number of times that, as Mr Willoughby stated: "The very conditions which attract parallelers are those which attract counterfeiters".[308] He went on to allege that "it is not uncommon for parallelers to turn to counterfeiting when they run short of supplies of the genuine product".[309] The ACG stated that "there have been a number of cases recently where shipments of grey or parallel goods have been a cover for a much larger shipment of counterfeit goods".[310] They cited an example of a case currently in court. The TMPDF stated that in general "an international exhaustion regime will make it much easier for counterfeits and unauthorised product to enter the EU".[311] In the pharmaceutical sector, Mr Hesketh of the ABPI told us "we do have a rightful concern that parallel trading can mask counterfeit products. We do not know the extent of this. That is the whole problem".[312] The ACG further extended the alleged link between grey and parallel trading and counterfeit goods noting that parallel trade is "also attractive as part of closely inter-linked international criminal activity of counterfeiting, drugs and illegal arms dealing and money laundering".[313]

108. There were also those who felt that rather than international exhaustion leading to an increase in counterfeiting, the opposite was occurring and the denial of international exhaustion was actually exacerbating the problem of counterfeiting. Philippa Clare of Rishworth Chase told the Committee that since the Silhouette judgment, "quantities of counterfeit goods which we have seen has increased beyond measure".[314] She went on to say that, in her opinion, if legitimate goods were available, it would stamp out counterfeit. "If you are going to break the law by selling goods a little bit by bringing in legitimate goods in from outside, why not break the law completely and sell counterfeit goods at a lower price".[315] However, she also noted that: "I firmly believe that retailers particularly do not want to sell counterfeit merchandise, but at the moment they are turning a blind eye to the fact they are selling what are commonly called 'factory goods', those goods which are over-production on which a licence has not been paid, but actually most of those are out-and-out counterfeits".[316] Consumers' Association put forward the view that the "opportunity for counterfeiting largely exists because counterfeiters can undercut official suppliers" but that if increased volumes of parallel traded goods had the effect of lowering prices, then the price advantage enjoyed by counterfeits would narrow. "This may act to widen the legitimate market and undermine the counterfeit market".[317] On the retailers side, Davies Arnold Cooper stated that: "The retailers for whom we have conducted checks on consignments of grey goods have gone to great lengths and expense to ensure that they do not sell counterfeit goods."[318] Costco noted that they themselves are trade mark owners in their own right and they are "utterly opposed to dealing in counterfeit items".[319]

109. We have heard nothing to sustain the allegation or implication of any substantial links between parallel or grey trade and trade in counterfeit goods, let alone drugs and arms dealing, referred to in passing by the ACG.[320] While there are no doubt those that would use the cover of grey trading to mask counterfeit goods, we share the view expressed by the Institute of Trading Standards Officers that "sellers of such [grey] goods are usually open about their actions and are not part of the enormous black economy which distinguishes the essentially criminal elements of actual product counterfeiting".[321] There is little or no evidence to connect the discussion over international exhaustion of trade mark rights with the problems of preventing counterfeiting and enforcing anti-counterfeiting legislation.

Combatting counterfeiting

110. A number of possible actions that could be taken to help combat counterfeiting were suggested to the Committee. The key problems appear to be with resources and penalties. The Institute of Trade Mark Attorneys, amongst others, believes that the problem is one of "establishing effective penalties and enforcement of the law".[322] The London Law Society Intellectual Property Sub-Committee stated that "it is generally felt that the law does not yet sufficiently take into account the specificity and seriousness of the counterfeiting phenomenon".[323] Rishworth Chase stated that: "I think at the moment the sanctions against counterfeiters are not strong enough and they are almost being lumped in with trade mark infringers".[324] Mr Noble of the BBG told us "the problem is one of resource and one of the legislative tools that are available for trading standards officers and brand manufacturers to take action against counterfeits".[325] The ACG noted that: "There is neither enough priority accorded to anti-counterfeiting measures nor enough resources devoted to it. The fragmentation of the Trading Standards Services following the reorganisation of UK local authorities has greatly exacerbated the problem".[326] The Minister stated that trading standards officers are "very often under-resourced" and that he hopes to "make some progress in ensuring they have the resources to carry out those statutory duties".[327] We look forward to seeing details of additional resources to be devoted to the fight against counterfeiting and piracy in the forthcoming White Paper on consumer strategy. Whilst the main weight of such action must be directed at those who manufacture and trade in counterfeits, some consideration could usefully be given to measures to bring home to those who connive in the trade by knowingly purchasing counterfeit or pirated goods the degree of responsibility they bear. Raising public awareness of the damaging effect of counterfeiting and its recognition in the public mind as an offence of dishonesty, is an essential pre-requisite to acceptance of more effective action against counterfeiting.