The need for distributed ledger technologies in the fight against counterfeits
On the 6 June 2019, the European Union Intellectual Property Office (EUIPO) released an extensive report highlighting that the EU is currently losing € 60 billion each year as a result of counterfeits. Alongside the trends of globalization, integration of markets and the rise of the Internet economy, a new era has evolved for the world’s growing counterfeiting industry, leading to challenges for both legislators and European brand owners.
The EUIPO report estimates that the overall losses in sales in the EU amount to 7.4%, this translates into a cost of € 116 per year for each EU citizen, and a loss of 468,000 jobs. The report compiled the findings of research studies carried out for the past five years by the EUIPO, through the European Observatory on the Infringement of Intellectual Property Rights. It tracked the economic costs of counterfeiting in 11 sectors known to be vulnerable to intellectual property right infringements, with the clothing, footwear and accessories sector being the one with the most financial losses at € 28.4 billion per year.
But it does not stop here. According to a study carried out by the EUIPO and the OECD earlier this year, the world-wide volume of trade in counterfeit goods is now estimated at US$ 509 billion, amounting to 3.3% of world trade (up from 2.5% of world trade in 2013). Imports of counterfeits into the EU from the rest of the world are now estimated at € 121 billion, or 6.8% of total EU imports. Seemingly, counterfeits are widespread in the EU and while the detention rate at the EU borders are increasing, what is needed in reality is for new innovative measures which can prevent consumers from falling prey to counterfeit shopping to begin with.
In November 2017, the European Commission adopted a comprehensive package of measures to further improve the application and enforcement of intellectual property rights and step up the efforts against counterfeiting and piracy. This was followed, in 2018, by a new EU Customs Action Plan to combat intellectual property right infringements covering the years 2018–2022, now adopted by the European Council. While several governmental bodies are implementing new and innovative measures to halt the flux of imported counterfeits, preventive actions from the brand owners themselves are also needed to curb the growing issue of counterfeits.
Brand owners have for long relied on archaic systems with serial numbers, barcode systems, UPC codes and paper certificates to protect and inform their customer base. The reality is though, that the above measures are easily cloned and copied and can in today’s landscape no longer attest to the authenticity of a product. What’s more, brands have for too long relied on traditional intellectual property protection and turned to trade associations and law enforcement agencies in costly efforts to shut down and raid those making and selling fakes, but what is instead needed is the application and integration of new technologies, which is what brand owners such as Moncler, Burberry, Vivienne Westwood, Gerry Weber and Salvatore Ferragamo are doing.
By combining and integrating RFID chips and blockchain technology into their apparel/leather goods, these brand owners have created a new set of authenticity rules which not only helps them combat counterfeits but also increases brand interaction and brand confidence. Moncler has for instance applied the combination of RFID chips and QR codes who are stitched into the seams of their Moncler down-coats. A unique ID will allow users to scan and authenticate their Moncler coats via their smartphones or through the code.moncler. com website.
Salvatorre Ferragamo on the other hand is embedding RFID chips into the left soles of its women’s shoes to allow the company to verify their authenticity. It has since added the tags to products in other categories, including women’s bags and luggage, men’s shoes and small leather goods. The efforts of these two brand owners serves as a proof of concept that new technology is multi-purpose, ranging from controlling inventory, tracking supply chain, but foremost assuring authenticity for end-users.
Other brands have taken this one step further and developed their own distributed ledger technology. Luxury brand conglomerate LVMH, released earlier this year its own blockchain called «AURA». AURA is a cryptographic provenance platform and has been built using a permissioned version of the Ethereum blockchain called Quorum, which was developed by JPMorgan. LVMH who controls over 60 luxury brands including many well-known names like Dior, Dom Pérignon and Hublot will be using AURA in an effort to authenticate products and help consumers trace the origins of their purchases, but the technology could also be used to safeguard creative intellectual property and curb advertising fraud. With AURA, consumers can trace the lifecycle of their products, including the design, raw materials, manufacturing and distribution. Customers will also be able to find specific product care instructions, after-sales and warranty services on the AURA platform.
Whilst LVMH’s efforts are groundbreaking, they are not the first to propose an authenticity-tracking blockchain; there have been other luxury provenance platforms and mini consortia on the market, such as Arianee or Vechain who both aim at providing a service that allows for supply chain control, product lifecycle management but foremost, product certification.
As stated by the EUIPO report, counterfeiting and piracy activities are broad in scope, large in value and are growing rapidly. Since 1982, the global trade in illegitimate goods has increased from US$ 5.5 billion to about US$ 600 billion annually. In a 2017 report by the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) and the International Trademark Association (INTA), it was projected that the global economic value of counterfeit and pirated goods alone would reach close to US$ 3 trillion by 2022. Counterfeiting may be viewed as a «soft crime» but it is no longer a small-scale business of insignificance, and that is why measures such as those taken by LVMH, Moncler and others are paramount in hindering the growth of counterfeits. In embracing new technologies, brand owners can not only contribute significantly to their own growth but also to that of their sector and society. The adoption of new technology is pivotal and has shown positive effects on brands as consumer interaction and awareness is increased. What we need in order for the EU to gain a foothold on its borders, is increased combined efforts by brand owners and authorities with added investments in new technology which can improve the landscape for authentic products, protect consumers and national economies, disable the access to counterfeits and ultimately disincentivize the manufacturers behind the counterfeits.