Retail’s $1.7 Trillion Problem

Every adult knows that when faced the proposition to buy with designer shoes at Payless prices, or a pair of designer sunglasses that can be obtained for “whatever you’ve got in your pocket,” the alarm bells should go off. After all, didn’t our mothers tell us that “if it appears to be too good to be true, it’s because it probably is.”

Maybe those adults go on to buy the Foakleys or the Pruda pumps, maybe they don’t, but more likely than not they aren’t exactly fooled — they just hope everyone else will be when they are spotted around town wearing them.

In retail, context is everything — and no matter how realistic a watch, bag, or piece of jewelry looks, if you buy it in a store, you expect it to be real. And, if you buy it out of a guy’s trunk, you hope it’s merely a fake and not actually stolen.

Things get puzzling, however, when context would tell consumers they are getting the “real deal,” because they are buying an item in a store, but, as it turns out, they aren’t. Or when a consumer learns that a retailer’s definition of the “real deal” might be more expansive that the average person’s.

Or — as was the case with Costco’s recent spat with Tiffany & Co — when it comes out that a retailer is using a more expansive definition of “real” than a judge is prone to allow.

Costco was recently busted for selling “Tiffany” engagement rings in the jewelry display. “Tiffany” in the sense that they resembled Tiffany rings and were labeled “Tiffany.” But the similarities ended there — and the rings were not in fact bought from or produced by Tiffany & Co. The internationally recognized jewelry brand states that they have absolutely no association with the Costco jewelry and the company was quite surprised when irate consumers told them something labeled as their own was being sold at Costco.

Costco’s defense was that it did not think “Tiffany” denoted a specific brand of ring and that it instead referred generically to a certain setting design typical of Tiffany products, sort of like the way any lamp with stained glass shading is called a Tiffany lamp.

Really?

The judge, unsurprisingly, did not find that argument compelling, and found that Costco has infringed on Tiffany’s trademarks — and thus owes damages for trademark infringements and counterfeiting. The case will move to a jury trial in late October to determine just how much Costco will owe Tiffany, though a spokesman for the jeweler noted that the decision alone is valuable to a firm with a name that is a major part of its brand.

“We believe this decision further validates the strength and value of the Tiffany mark and reinforces our continuing efforts to protect the brand,” said Leigh Harlan, Tiffany’s general counsel, in a statement to Fortune.

Costco had no comment.

And while it is certainly surprising to see the nation’s second largest retailer on the losing side of a counterfeiting suite, it does highlight an often under-appreciated issue: just how much money is leaking out of the economy in fake goods.

How big is the problem? Where are all the goods coming from? Can anything be done? PYMNTS has the quick guide.

The Scale Of The Problem

According to the OECD (Organisation for Economic Co-Operation And Development) the value of the international counterfeit good market was around $250 billion in 2007. The more pessimistic International Chamber of Commerce clocked that figure in at $650 billion in 2008 — and estimated that by 2015 that value would have swelled to $1.7 trillion.

If that more pessimistic figure turns out to be correct, counterfeit goods will account for 2 percent of the world’s total economic output.

“The whole business has just exploded,” said Jeffrey Hardy, head of the anti-counterfeiting program at ICC. “And it goes way beyond music and Gucci bags.”

Far beyond, as it turns out, and in highly terrifying ways. Getting a faux Tiffany engagement ring may be something of a bummer and a future embarrassment for one’s descendants on “Antiques Roadshow,” but one is highly unlikely to die from such a mishap. However, counterfeiting extends into every imaginable good; some of the more concerning examples include smartphones and chargers, substandard appliances, motorcycle helmets, prescription drugs and knock-off auto parts.

“If you can make it, they can fake it,” Bob Barcheisi , president of the International AntiCounterfeiting Coalition, told Consumer Reports.

While the perils of taking bad drugs is obvious, substandard electronics with a tendency to catch fire or auto parts that have a tendency toward literal high-speed come aparts are a genuine danger.

“At best these parts will not perform as well as authentic ones. At worst, they can fail catastrophically with potentially fatal consequences,” said Bruce Foucart, director of the National Intellectual Property Rights Coordination Center.

China, statistically speaking, is the most likely origination point for most of the market’s counterfeit goods. According to the Department of Homeland Security, China and Hong Kong represent 83 percent of the world’s counterfeit materials by the amount spent on them.

What Can Be Done

Most experts agree that elementally counterfeiting goods is a problem that essentially sees the rubber hits the road at a very basic supply and demand level. If consumers didn’t want them, the market for them would not be so terribly large.

“If shoppers don’t buy fakes, then counterfeit goods and the sellers behind them, won’t prosper,” said Sandra Bell, deputy assistant commissioner for the Office of International Trade.

Which is not to say that brands and law enforcement agencies are not doing their level best to bring disincentives to counterfeiters.

Luxury retailers filed suit against Chinese eCommerce giant Alibaba over counterfeit versions of their products circulating freely on the world’s largest digital marketplace.

Gucci, Yves Saint Laurent and other brands owned by Paris-based Kering are seeking damages based on an argument that the online shopping place made it easy for fakers to sell their goods all over the world with virtual impunity. A charge Alibaba denies.

“We continue to work in partnership with numerous brands to help them protect their intellectual property, and we have a strong track record of doing so. Unfortunately, Kering Group has chosen the path of wasteful litigation instead of the path of constructive cooperation. We believe this complaint has no basis and we will fight it vigorously,” a spokesperson noted.

U.S. law enforcement has also moved more aggressively to stop the sales of counterfeit goods online. Immigration and Customs Enforcement and Homeland Security’s investigations have shut down 29,684 domain names that were illegally selling counterfeit merchandise online to unsuspecting consumers. Still, the progress to date represents a mere fraction of the work left to be done.

Most experts also agree that as summer burns into fall and holiday shopping begins, the season for counterfeit goods will rev up with it. PYMNTS will keep you posted.