TUESDAY 18 MAY 1999

MS PHILIPPA CLARE

  545. Good morning, Ms Clare. We have invited you today because you are one of the self-confessed parallel traders. I do not mean that in a derogatory sense and do not necessarily mean parallel trading requires self-confessing, but you certainly assist the business of parallel trading, from what we can understand. You trace parallel goods back through the supply chain to check their authenticity. While we accept that individual cases might be confidential, can you outline how you would go about your job? How would you track these goods back and find out where they came from?

  (Ms Clare) It is actually very simple. The request, actually, for this service came from parallel traders themselves who wanted to extricate themselves from the possibility of selling counterfeit goods. Parallel trading/counterfeit should not be completely inter-twined. The main problem from all traders' points of view, once goods have gone into the wholesale chain, is there is a great need for each of them to observe the confidentiality back down the line, because everybody is worried about being hooked out of some level of profit. Our job is to, basically, begin with the goods at this end and find out where they originated from at that end, putting all the links in the chain inbetween, while guaranteeing confidentiality to each link of the chain so that we do not inform party A who party C is, etc, and so that confidentiality of that supply chain is maintained. There are two paper trails: one is the trail of money, the invoice trail, which if at all possible, particularly with large consignments, will link up with actual transactions, if the wire transfer has been made or whatever. The other line is the physical movement of the goods so that if they are believed, for example, to have originated within the European Union we should be able to get some level of freighting bill from whoever transported them to show that they actually did come originally from the distributor or an authorised wholesaler or an authorised shop. We will also do checks on each section of the chain to ensure that companies actually exist, that they are where they say they are and that they actually know they are involved in that transaction. As far as possible we check that the original paperwork, from the brand holder themselves is unsanitised, that is, not blacked out at all. We can check that it should be authentic. That is really the trailing that is done.

  546. You do not actually authenticate branded goods, your evidence suggested, but do you find brand owners happy to authenticate the goods? Are brand owners willing to assist in this?
  (Ms Clare) Some are, because they see our service actually as a very good buffer state between them and counterfeiters. They know that parallel traders exist and, in a sense, we are almost an internal police service. So there are brands who are extremely helpful, and they are brands who are not helpful at all. Basically, I would prefer to be able to send samples back to all of the brands before goods go into the retail chain, because paperwork on its own is only half the story—the goods themselves are the other. The other thing we try very hard to do, although this is difficult, is to ensure goods are not mixed, that the quantities remain as consistent as possible, that the transactions are as consecutive as possible, because mixing does happen. In that way parallel goods can be a way of transporting counterfeit.

  547. What about the issue of consent, because that is, obviously, quite central to the acceptance of the goods? How do you interpret a brand owner having given consent? Is there some means whereby you can do that easily? How do brand owners react when you start asking them about matters of consent, which seem to be central to the permission issue?
  (Ms Clare) As far as consent goes, if you can trace a transaction to its origin you can actually find out how that transaction was conducted: who said what, where, when; if there were any letters attached to the transaction; if there was any express prohibition put on the movement of goods at that particular moment in time. In one or two large consignments—I cannot remember exactly the quantity—there was about £12 million worth of Calvin Klein underwear sold directly from Warner Co in the States to a parallel trader in Denmark, and that was associated with a whole sheaf of letters from the relevant vice-president of Warner Co. We ensured that everything was countersigned, and there were no forgeries, as far as we possibly could, and that is a very simple case where written consent for the resale of those goods in the European Union was given. Again, this is anecdotal, but I know of instances where large consignments of well-known brands are sold in the States with a representative of the brand holder—be it the marketing director or the export manager, or whoever it is—present at the meeting who simply says nothing but knows perfectly well that those goods are coming into the European Union. I think, certainly in the garment industry anyway, the Silhouette ruling affected the importation of goods, particularly from America, (although I am not terribly sure why it was so specific) because a lot of the retailers who had moved into branded merchandise, larger retailers, suddenly said "We are not taking anything from America. So that is it"—almost whether it has got consent or not. So the issue of consent is problematic. Generally speaking, I do not ask too many questions because if a tacit consent has been given and somebody is asked to make it explicit it might well be the case that his or her job would be on the line if it all had to be made too open. Having said that, I do have quite a lot of documentation from brands, leading or otherwise, which have been entrusted to us in confidence and provided that I can send copies of them to you, again, in confidence, then I am perfectly happy to give those to you.

  Chairman: We often receive things in confidence. That would be helpful and we would, obviously, consult with you before we alluded to them in our report. We would be grateful for that.

  548. I get the impression that brand owners frequently supply the parallel market when it is in their own interests and they take legal action when it is not—and there is a perfectly rational economic case for behaving in that way. Is that what goes on?
  (Ms Clare) Certainly the supply of goods is definitely within the brand holder's control. Indeed, much of the counterfeiting alluded to earlier could actually be stopped by the brand holders themselves—certainly in the garment industry—if they had more control over their own factories and the amount of information that was given to each factory. Also, if they had more consistent styling for their garments, so they actually knew which garments were on the market worldwide. A lot of them do not because each sector is carved up. On the issue of putting goods into the parallel market, the Calvin Klein underwear is a case in point. Immediately before the Silhouette ruling there were a lot of genuine American Calvin Klein jeans. At the time they were intended to go into the Far Eastern market, the Far Eastern market dried up and they had to put them somewhere, and the parallel market going out into Europe was certainly one of the places where they were intended for. Then the Silhouette ruling happened and they were stuck with a lot of stock. There is a lot of stock.

  549. In your written submission you talk about "parallel trade is also a great sponge for over-production", and that brand owners in one country will often offload surplus production in another part of the world to retain value in its home market. Again, that is an absolutely rational point of view, although there is this curious denial that this activity could take place. Are you able to give us more examples of where this might occur—either now or in written evidence subsequently?
  (Ms Clare) I can give you a wider answer in written evidence, but if you look at the European situation and turn the whole thing on its head, the Silhouette duling has permitted European brands to gather together all their excess stock and ship it out. I know—and have contact with—a lot of American traders stock houses and so on, who are getting container loads of Armani jeans, container loads of Prada bags and sunglasses galore, and are calling us up on a regular basis saying "Why can we not bring this back into the European Union? It is European stock, surely." "Well, no, because you are the first recipient of it and I think, if you look at your contract, there will be a prohibition on reselling to the European Union." They are dumping over in America, wholesale.

  550. Have your company, or any of your clients, come across any problems associated with branded grey goods being totally different from those that would be retailed here in the United Kingdom? I think the example we got, a little while ago on the evidence, was Colegate toothpaste where a particular brand of Colegate toothpaste in South America was totally different from what you would purchase in this country, but the packaging was the same with the branded name.
  (Ms Clare) It depends. I will concentrate, again, on the garment industry. The Nike and Sainsburys issue which was brought up earlier is part of this problem, if you like. The Nike distributor who sold those goods to the wholesaler—who then sold them on to Sainsburys, via one or two intermediaries—at the time of manufacture was under licence to Nike. (I should probably put "allegedly" in front of all this.) Anyway, the thing was that Nike at the time did not have sufficient control over Nike in the Philippines, and the garments they were manufacturing for the home market, although the quantities they were producing were absolutely enormous, were substantially different from American and, certainly, from European Nike products. You will find that this is the case with most branded clothing; that different designs are aimed at different markets. It does not mean that the goods are counterfeit, the licence will have been paid in that particular area, and the brand holder, or the trade mark holder, will have received its levy for its massive advertising budget etc, but they are significantly different. American Lacoste, for example, is very inferior to European Lacoste. American Lacoste is actually aimed at a completely different market to European Lacoste; it is, sort of, not quite £2 a T-shirt but along those lines. It is a low-grade brand. Yves St Laurent in America have the most incredible designs. If you found them in a shop here and saw Yves St Laurent on the lapel you would think "There is something wrong", because they are incredible, they are just so garish and shocking. The point is that Yves St Laurent in France has no control over those designs. I do not think they have, anyway. If they have then they need their heads examining. A lot of the problem with policing goods on the counterfeit market is this fragmentation given through licence agreements and contracts between licensed distributors, and whether or not they are allowed to manufacture and whether or not they are allowed to create their own designs; how they utilise the logos and how they utilise the trade marks, etc. It is very difficult.

  551. As you know, the United States have looked at this and they are starting to exercise some controls on grey or parallel imports that are substantially different, unless they are clearly labelled as such. Have you got any particular views on that? Or, perhaps, do you think it may be forcing brand owners to differentiate between products as a way of preventing grey importing, for example?
  (Ms Clare) I am not entirely sure what you mean by "preventing grey importing". Taking Lacoste as an example, before the Silhouette ruling happened there was a very large consignment of legitimate American Lacoste which was available for sale in a large retailer. Lacoste took action against the retailer, not on the basis of whether the goods were legitimate or not but, actually, almost on a "passing off" issue; that Lacoste were passing themselves off as being Lacoste, and that by putting a label above them saying "Lacoste T-shirts" at whatever it was, and they were massively inferior, Lacoste Europe did not like it because their trademark was being used in a lookalike way. What I am saying is that that is almost an internal brand problem. I was reading an article the other day in Ireland about this issue and it was talking about the problem of Caterpillar heavy duty machinery in the States and the quantity of heavy duty machinery which was being shipped in from Mexico. The article was saying "If there is an accident on these inferior machines which are made for Mexico how are we, in America, going to cope with it?" My first feeling was "Why should Mexicans have things which are going to kill them and the Americans do not?" That does not seem to me an issue for parallel traders, that seems to me to be an issue for the brands and the policing of the brands and the consistency of their own quality.

  552. We had some evidence, for example—and I forget what the actual product was—where quite clearly manufacturers were putting together a product (I think it was an alcoholic product but I cannot remember what it was) and the bottle was identical but the contents were not even, perhaps, subtly different but quite different for different markets around the world. The Japanese taste for a particular product being quite different from the European taste. Do you think we are likely to be seeing more of that?
  (Ms Clare) I do not think there is going to be more, in that the targeting of particular markets has been going on for a very long time. Actually, parallel trade under an international exhaustion regime was continuing in the United Kingdom up to July 17 last year. As I said to the Financial Times, as far as Rishworth Chase is concerned, since July 17 the quantities of counterfeit goods which we have seen has increased beyond measure. I am stunned and staggered by the quantities which are entering the United Kingdom. It goes back to your question about whether, if legitimate goods were available, this would actually stamp out counterfeit. I personally think the answer is yes. Counterfeiting has expanded because of the desire for branded merchandise which has been fuelled by the large supermarkets and has been fuelled by these cost-cutting, out-of-town hypermarket places. They want goods. That is what they want, and they are presently being prevented from buying legitimate goods from outside the European Union. The quantity of European goods is very small. If you are going to break the law by selling goods a little bit by bringing legitimate goods in from outside, why not break the law completely and sell counterfeit goods at a lower price? Before the Silhouette ruling came in, that need was being supplied by genuine goods, which the brand holders were being paid their duty for and the licence was being paid. At the moment, I am beginning to feel that what Rishworth Chase is doing, increasingly, is not tracing back to ensure that goods are probably genuine, we are tracing back to find out where the counterfeit stuff is coming in, so that I can write round to people and say "Do not bother even tackling such-and-such a brand in such-and-such a way, that has come from such-and-such a place, because it is a waste of everybody's time."

  553. Brand owners, of course, say that if we had international exhaustion and parallel goods from outside the European economic area this would prevent them from innovating and cause them damage. Do you think that innovation, really, is genuinely likely to suffer if that were to happen?
  (Ms Clare) Why should it? Why should a free movement of goods prevent innovation? If the brands wish to keep their competitive edge on a worldwide stage then I have not seen any increased innovation in the last twelve months from any of the brands. We have not suddenly had a jack-in-the-box effect and entirely new ways of producing toothpaste or razor blades, or anything else.

  554. Your view would be that they would actually sell far more of the genuine product?
  (Ms Clare) My view is very strongly, yes.

  555. They would not have the consequences that Silhouette has produced, as far as you perceive it?
  (Ms Clare) And it would open up more of a possibility of actually cutting off the routes for these counterfeit goods to be sold into. You have two ways of stopping it: you stop it at the manufacturing end or you stop it at the retail end. If the retailers are being told that they are selling counterfeit goods and they have no price incentive for doing so, they are much more likely to turn them away.

  556. I can see that is an argument when we are talking about fashion goods, and particularly when we are talking about trainers or T-shirts, or whatever it happens to be. However, if we are talking about more sophisticated goods, like pharmaceuticals, where we have been given evidence that there is not a lot of counterfeiting coming into the United Kingdom (although there may be in certain third world countries) would your views still apply in those areas?
  (Ms Clare) I think there are other regulatory bodies involved in things like pharmaceuticals and drugs which, because of the low percentage of any counterfeit coming into the United Kingdom or other parts of the European Union, seem to be doing their job very well. Again, I do not think there has been a marked increase or decrease in counterfeit drugs, etc.

  557. No, the question I was asking was on the innovation point.
  (Ms Clare) The innovation point? Again, I see the two as completely separate. Innovation, surely, is there to promote a competitive edge and that competitive edge is going to be necessary whether you are permitted to ship goods in from the States or from Singapore, or wherever it is. In theory a free trade should increase innovation in order to keep people sharpened up, I would have thought. But that is just an opinion.

  558. On the subject of counterfeits, Rishworth Chase stated that "we have seen a marked increase in counterfeit goods since the Silhouette ruling". The increase in counterfeit goods has been mainly European. Can you say why that is?
  (Ms Clare) If it actually said they were European that was a typing error. What they are being presented as are goods for the European market. If you do trace, particularly, the transport back, then the goods are being manufactured outside the European Union, in Turkey or Pakistan (the usual suspects, really) and they are being brought into the European Union through the ports which have already been mentioned, Portugal and Greece. I would add Norway to that list. If anything comes through Norway I am deeply suspicious straight away. A funny lot. The reason is very simple: the demand for branded goods is still very high but the supply of totally legitimate branded goods has diminished massively by the American authorities demands being cut off. Basically, the counterfeiters saw a main chance and took it.

  559. Are the importers buying goods that they know are counterfeit?
  (Ms Clare) Not the importers who use Rishworth Chase.