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Fighting The IP Wars

Jan. 11, 2008
The costs of protecting their IP assets, plus the threat of losing market share to overseas black markets, have U.S. manufacturers fighting mad, and they're learning how to protect their turf.

When it comes to intellectual property (IP), everyone in the economy is at risk, especially manufacturers, distributors, government, consumers and even the U.S. workforce. For example, the loss of more than 750,000 jobs is attributed to counterfeit merchandise, says the U.S. Customs and Border Patrol. Underwriters Laboratories estimates that the annual global costs of counterfeiting stand at more than $500 billion. The U.S. economy's share is as much as $250 billion annually.

And be careful where you buy medicines -- the World Health Organization estimates that 10% of all drugs are counterfeits. For some developing countries the counterfeit drug share can reach 60%, the WHO reports.

Foreign governments play a key role in fighting IP theft, but unfortunately, there is a wide variance in how countries are attacking the problems of counterfeiting and IP theft, according to a 30-nation study by the OECD (Organization for Economic Cooperation and Development). The top performing countries are: U.S., UK, Germany and France. Also among the best performers, in descending order: Japan, Switzerland, the Netherlands, Singapore and Australia.

At the other end of the spectrum, responders named China and Russia, respectively, as the two worst performing countries, followed by India, Brazil, Indonesia, Vietnam, Taiwan, Pakistan, Turkey and Ukraine.

"The mention of these bottom-performing countries shows the problem is indeed worldwide and requires a global solution," says International Chamber of Commerce secretary general Guy Sebban. "Focusing on one or two problem areas is simply not enough."

When Schneider Electric's Square D Co. discovered counterfeiting of its circuit breakers by Chinese plants, the reaction was more than lawsuits and confiscation of fakes. Square D also enlisted the help of the Chinese government to raid and shut down counterfeiters such the operation shown in this photo.Adds Bob Wright, CEO of media and entertainment giant NBC Universal, "This issue needs to be moved up on the agenda of every business leader, every trade organization and every policymaker. At risk is every sector of our economy where creativity, innovation and invention drive the creation of economic value and of high-wage jobs."

Regarding business strategies to rein in fake products, respondents to the OECD study say they spent over half their R&D investment on anti-piracy technologies and product differentiation. The investment of around 50% of R&D in technologies to thwart copying indicates that companies are working hard to stay a step ahead of the pirates, Sebban adds.

The OECD study may seem to suggest that IP theft and counterfeiting is a well recognized problem, but in reality many firms are just coming to terms with it, says Brian Monks, vice president of anti-counterfeiting operations at safety certification organization Underwriters Laboratories (UL). And even if an organization hasn't been victimized yet, chances are good it soon will be, he warns. Brand volume and good margins increase the risk.

He describes IP theft/counterfeiting as a combination of challenges. "Initially it's a threat to economic growth," he says. Monks refers to the Counterfeiting Intelligence Bureau estimates that counterfeiting has grown to 5% to 7% of world trade. In addition counterfeiting also tends to diminish innovation as the public begins to perceive a certain group of products to be of questionable safety.

Monks also notes that the growth in counterfeiting places both the brand name and the bottom line in jeopardy. The evidence: The International Anti-Counterfeiting Coalition (IACC) reports that the global trade in illegitimate goods has increased from $55 billion annually in 1982 to as much as $600 billion today.

Counterfeiting's risks are more than just tangible business losses, Monks observes. He's referring to the concept that a brand and the commitment to quality it represents can have value that exceeds a company's physical assets. The risk is in having counterfeits associate a brand name with negative connotations -- such as malfunctions leading to a fire or loss of life or some other catastrophe that could lead to legal ramifications.

See Also

Spotting Fakes

Left unchecked, the damage from counterfeiters and IP theft can go on to affect an entire industry -- down to the customer base, says UL's John Drengenberg, manager of consumer affairs. Counterfeit products embellished with false safety certification marks endanger both customer safety and security, he adds.

The ultimate solution starts with initiating an active program to determine the nature of the risks and developing an anti-counterfeiting strategy, suggests Drengenberg. He recommends working with other manufacturers, even in other industries, and maintaining a working dialogue with anti-counterfeiting agencies.

Fighting Back Takes Constant Vigilance

One such battle began about 18 months ago, remembers Brian W. Lewis, partner in the litigation department of Chicago-based law firm Wildman, Harrold, Allen & Dixon LLP. "Initially we were retained by Square D Co. to represent it in a product disparagement case," he says. "A local non-authorized distributor had made some disparaging comments in advertising about Square D and its distributors." Square D is a manufacturer of electrical distribution and industrial control products and is part of the Schneider Electric product family.

Adds Square D's Stephen Litchfield, assistant general council, "We felt our rights were being violated. And after investigating, we were puzzled to discover they were also advertising extremely low prices for the Square D QO line of circuit breakers. The prices quoted were actually below the wholesale range. Those circumstances raised our suspicions and we felt the need to investigate further."

After purchasing four of the breakers, Litchfield and Lewis discovered that three were counterfeit. The counterfeit product targeted consumer and light industrial markets, adds Lewis.

The next step, says Lewis, was to sue the unauthorized distributor, being careful to obtain all documents pertaining to the sale and purchase of the Square D products. "We identified a substantial number of counterfeits in the distributor's inventory."

Ultimately that process led to 40 subpoenas being served and 13 lawsuits. Lewis reports over 250,000 counterfeits were seized or quarantined with 300,000 products under recall. "Consent orders were entered -- seven final and three preliminary." Substantial monetary settlements were involved, adds Lewis. With the help of Chinese authorities, Square D was able to raid some of the facilities involved and even shut down one counterfeiter. He says Square D's "outstanding results" were realized in less than two years.

"Sometimes price can help identify counterfeits," notes Lewis. "The authentic circuit breakers would sell in the marketplace for between $5 and $28, while the fakes were selling between 54 cents and $2.54." The operative rule, says Lewis, is that if the price is too good to be true, it probably isn't.

For Square D, the important lessons learned involve the total confirmation of its emphasis on counterfeiting vigilance, says Litchfield. That includes the monitoring of import records at ports of entry, education of customs personnel on the identification of counterfeit products and continual monitoring of the industrial market in general. Litchfield says the company's underlying philosophy is to regard counterfeiting as a global problem confronting all name-brand electrical product manufacturers. "On counterfeiting's health and safety issues Square D realizes no other conclusion has validity -- since fake circuit breakers can imperil users with catastrophic failure," he emphasizes.

Civil litigation is only one premise of Square D's anti-counterfeiting program. Another is collaboration with law enforcement and government on a global basis. A third is collaboration with industry to develop a comprehensive response to counterfeiting. For Square D, other important collaboration partners include Underwriters Laboratories, the National Electrical Manufacturers Association (NEMA), the U.S. Chamber of Commerce and the National Association of Manufacturers (NAM). All of them are bolstered by Square D's dedication of substantial resources and a persistent sense of responsibility, adds Lewis. That persistence extends to using U.S. trade associations to facilitate working with the Chinese to help curb the counterfeit problem at its source. In addition Square D's customers are reminded that buying only from authorized distributors can eliminate the counterfeit problem.

The company offers a lesson that it hopes counterfeiters will learn: "Square D is fighting back!"

Reflecting on Square D and other clients, Lewis says that counterfeits coming out of China seem to dominate in the electrical product sector. For non-electrical counterfeits, Lewis names Russia and India as originating countries.

The Collaboration Connection

Also tied to the growth in intellectual property theft is the increasing flurry of activity in global outsourcing and collaboration, says Robin Saitz, vice president of solutions marketing for PTC, a provider of product development software. The supporting evidence: Statistics from analyst firm AMR Research indicate 30% of industrial organizations are currently outsourcing some aspect of their product development and launch process. An additional 40% of industrial companies plan to outsource during the next 12 to 24 months, and another 27% already have captive development centers in place.

According to AMR, companies that effectively outsource and collaborate globally can increase market share through increased innovation 30% to 50%, reduce time-to-market by up to 50%, and increase their margins and return on investment by reducing R&D resources by 25%.

While outsourcing and other forms of collaboration offer great strategic potential, IP theft can be a significant risk, adds Saitz. "Some companies are finding out the hard way that they don't have proper security measures in place." PTC's solution was to incorporate IP theft solutions in its product development software.

Saitz says even the early versions of ProENGINEER, PTC's CAD/CAM software solution, have included the means to protect against IP theft during design collaboration. One feature that has survived and grown more valuable over several software releases enables users to de-feature product models when designers share product data with suppliers or customers. Called Shrink Wrap, the feature assures that only the needed product data is permitted to be shared. That secures the ever-growing documentation that accompanies a product model regardless of how much data accumulates.

"Over time, a part model accumulates more than dimensional and material data," Saitz explains. "An increasing amount of valuable information is captured in the CAD model [design geometry, annotations, tolerance ranges, performance requirements and optimizations]. That increases the need to fully protect the CAD model. The model, in effect, becomes a smart model replete with a wide variety of valuable design, analysis and manufacturing data."

PTC has also incorporated a feature similar to Shrink Wrap into its Mathcad software, an intuitive application that lets design engineers capture the calculations underlying a product model. The resulting calculations drive the design decisions that differentiate product, explains Saitz. When the application's work sheets are to be shared, a feature similar to Shrink Wrap can hide how the calculations contributed to the design decisions.

With Windchill, the company's PLM solution, a variety of elaborate access control features secure the software's data. Saitz says many companies have security policies and processes implemented in their product lifecycle management (PLM) systems in support of global collaboration. However, a PLM system can only protect information when it is in the system. Once that data is out of the physical protection ring of the IP owner and/or secure PLM system, there is usually nothing to prevent its intended or unintended disclosure to third parties, competitors, black-market manufacturers and other non-authorized parties.

To resolve that challenge, PTC is offering increased IP theft protection with Wildfire 4.0, the ProENGINEER version introduced in January. Using Digital Rights Management (DRM) technology, PTC offers both persistent and dynamic protection at the file level, adds PTC's Sandy Joung, director of product marketing. With DRM, an OEM can grant more access to a supplier or have their access quickly and easily removed from a process server.

In addition, the DRM capabilities also improve version control and change management processes, especially when outsourcing design and manufacturing projects, adds Joung. By enabling access to only the correct version of files and disabling access to all other versions, an OEM can ensure that partners are using the right information.

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