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HOW TO SKIN A COPYCATBusinesses can't afford to ignore counterfeiters
If imitation is the sincerest form of flattery, then Beirne Chisolm and his brother Gregg can lay claim to a three-foot-long plastic box full of compliments.
The box is filled with thousands of knockoffs of the Band, a multicolored watchband made by the brothers' Salt Lake City company, Chisco Sports Accessories. They are the fruits of Chisco's innovative ``knock the knock- offs'' campaign. For every copycat version of the Band that a dealer sends in, Chisco will swap it for a real one at no cost. It's the company's way of winning the loyalty of retailers--and keeping track of pirate competition. ``We don't even look at how much this campaign costs us. We look at it as what we have to do to stay the market leader,'' says Beirne Chisolm.
The privately owned Chisco, which has sales of ``a few million'' dollars annually, is lucky. Lots of small companies are knocked out of business altogether by illegal knockoffs. Others barely survive. Sales at WildeWood Creative Products Inc. in Sonora, Calif., which hit it big with clear-plastic kaleidoscopes a few years ago, plummeted from $4 million in 1992 to $1 million last year because of competition from Chinese copycat goods costing a third as much. ``They really took the wind out of our sails,'' says founder Mark Eilrich. ``I'm proud that we've survived.''
``SCRAP AND FIGHT.'' Knockoffs aren't new, of course. But a more global economy and more sophisticated copying technology have made the problem much worse than in the early 1980s, when shoppers first began fingering the mass-market duplicates of Yves Saint Laurent handbags and Gloria Vanderbilt jeans. These days, experts say, counterfeited goods cost American companies some $200 billion annually--roughly four times what they did a decade ago. And illegal knockoffs now affect companies in virtually every industry, from software to Sheetrock.
Small businesses suffer the most from product cloning. Less diverse lines mean revenues take a severe beating, not just a hit, when popular items are counterfeited. And if the imitations are poorly made, small companies can suffer permanent damage to their reputation, as they lack the brand-name power of larger victims, such as Nike Inc.
They also find it harder to defend themselves. Usually, small companies can't afford the legal teams or private investigators marshaled by huge marketers such as Levi Strauss & Co. or Chanel Inc. Nor do they wield the political clout of a Microsoft Corp., which has gotten U.S. government help against Chinese pirates. ``You don't see a lot of people messing with Disney. They know Disney will smash them,'' says Mark J. Zimmermann, a Dallas-based intellectual-property litigator.
Yet for small companies, too, the cost of fighting knockoffs-- with strategies ranging from patents to PR--is a critical investment. Unfortunately, it's one many fail to make. When Beirne and Gregg Chisolm started out more than a decade ago, they were worried about fundamentals such as creating the product and controlling costs--not knockoffs. Rather than shell out $4,000 to $6,000 to patent the Band, they spent the money on marketing. ``We were just two young guys in our 20s, working in a basement trying to put a product together,'' recalls Beirne. ``It didn't make sense to spend time and money patenting a product that we didn't even know there would be demand for.''
That reasoning is common but misguided. The basic legal weapons used against counterfeiters don't cost a lot (table) and can be surprisingly effective. For example, securing a federal trademark, including both research and registration fees, generally runs less than $1,000. For an additional onetime fee of $190, the U.S. Customs Service will watch at the border for counterfeiters stealing your trademark. (Last year, the feds made 2,091 seizures for trademark and other intellectual-property violations.) Even patents, which can cost tens of thousands of dollars for complex products, are normally just a few thousand--not a huge investment in the scheme of things. ``Getting intellectual-property protection is part and parcel of entering the marketplace,'' says George W. Abbott of the International AntiCounterfeiting Coalition in Washington. ``You never know when you are going to be sitting on top of a gold mine, and you're silly if you let others cash in on it.''
Of course, beating back knockoff artists takes more than a piece of government paper saying you own an idea. You also have to bear the expense of enforcing those rights. But it's not as bad as many folks fear. Lawsuits are monstrously expensive, of course, but they're usually not necessary. Lawyers say most knockoff artists or their distributors can be scared off with a simple cease-and-desist letter--which an intellectual-property specialist can crank out for less than $1,000. (Count on spending $1,000 more for a watertight settlement with the offenders.)
Handled properly, the process of defending yourself can even yield a new customer. That's what Dr. Seuss Enterprises in La Jolla, Calif., a partnership managing the estate of deceased writer and artist Theodor S. Geisel, discovered earlier this year. Dr. Seuss, which has annual revenues of $7 million to $10 million, sent a cease-and-desist order to a gift-catalog company marketing unlicensed clothing bearing Dr. Seuss characters. ``They said, `We did not realize we were infringing. We'd love to sell the licensed product,''' recalls San Diego lawyer Alexander H. Rogers, who represents Dr. Seuss.
LIFE OR DEATH. The very existence of some companies, though, depends on a costly, ongoing legal assault against knockoffs. Winner International Corp., maker of the ubiquitous auto antitheft device the Club, had sales of less than $200,000 during its first year of business in 1986. Today, the Sharon (Pa.) outfit racks up annual sales of nearly $100 million--largely because it's been able to turn back a torrent of knockoffs. Imitations of the Club started flooding into stores worldwide shortly after the product was launched. Made primarily in China, Taiwan, and Singapore, the knockoffs were generally sold under different names, but they copied the Club's shape and distinctive red-and-black design. Over the years, Winner has spent more than $100 million on marketing and has always worried imitators would ride its advertising coattails. So the company adopted a win-at-all-costs litigation strategy. It has been enormously successful: Winner claims a 28-0 court record against imitators.
Leaving nothing to chance, General Counsel John F. Hornbostel Jr. prowls trade shows from Las Vegas to Cologne, Germany, looking for knockoffs. Armed with cease-and-desist orders printed in English, French, German, and Mandarin, he collars copycats while they're still setting up booths. He shows them a three-ring binder containing every court order the company has won against knockoff artists; if they don't close up, he immediately sues. Frequently, the offending products are removed before buyers ever show up. Elsewhere, Winner uses its sales force, outside attorneys, and employees as an early-warning system against knockoffs. When they spot a copycat, the standing instructions are to call Hornbostel, who tries to fire out a cease-and-desist letter ``within an hour,'' he says. In all, Winner files 40 to 50 court actions against imitators each year. Because of its legal strategy, Winner still holds well over half of the domestic market for steering-wheel antitheft devices--quite an achievement for a product so susceptible to knockoffs.
FUNNY SMELL. Winner's strategy is not for everyone. The expense of taking a copycat to court makes it a questionable move when products don't have a long and profitable life span. Many foreign knockoff artists ``can copy your style within two or three weeks and clear out of the business entirely,'' says Don Lawrence, an attorney at California-based clothing maker LA Gear Inc.
Nor is Winner's court record necessarily easy to duplicate. Its cases have been strong because of the close similarity of the knockoffs. That's not always so. And many knockoffs, in fact, are legal. Take Chromosome XX XY, a so-called alternative fragrance that is a lower-priced knockoff of CK One, the runaway success from Calvin Klein Inc. Soon after CK One hit store shelves in 1994, the fragrance found itself in the company of almost four dozen imitators, including Chromosome XX XY. The two fragrances--Chromosome XX XY and CK One--do smell virtually the same. But thanks to its different name, packaging, and slightly different formula, Chromosome XX XY hasn't infringed on CK One's trademark protection so far.
Fortunately, nonlegal strategies can also be effective against knockoffs--both legal and illegal. First, think twice before selling or licensing a product in countries notorious for producing knockoffs, such as China, India, Thailand, Venezuela, and Colombia. Similarly, if you intend to manufacture, sell, or license your product abroad, consider spending a couple of thousand dollars to have an international detective agency, such as Pinkerton's Inc. or Kroll Associates Inc., investigate your potential business partners to see if they're suspected knockoff artists.
Advertising also can be a potent weapon against copycats, warning consumers about cheap imitations and pointing out your product's superiority. Winner, for example, spends much of its ad budget telling people to ``Accept no imitations'' for the Club. But beware: Broadcasting the existence of fakes can also scare away customers.
BEST DEFENSE. Packaging also can be used as a weapon against imitators. More and more companies are using holograms--the shiny, engraved silver strips dangling from a growing array of products--to certify the authenticity of their wares, while advising consumers to look for them. The markers generally cost less than 4 cents apiece and can be affixed with a machine that costs less than $10,000. True, they can be copied, but it's difficult and costly to duplicate the originals' sharpness. One happy user is Photo File Inc. in Yonkers, N.Y., a $6 million outfit that sells pictures of sports stars to large retailers and has been hit by low-cost counterfeiters. ``The hologram helps customers recognize that ours is a quality product,'' says photo editor Bryan Reilly.
Sometimes it simply makes sense to try to outrun the knockoffs. Kaleidoscope manufacturer WildeWood, for example, gets cloned so relentlessly that founder Eilrich concluded his best defense is simply to introduce at least three new products annually and cash in on them before the copycats strike. While he also sues counterfeiters, Eilrich has concluded that lawyers are not a complete solution. ``It pays to be defensive, not just offensive,'' he says.
And that's a good lesson for any small business. Forget about preventing knockoffs entirely. But with intelligent, defensive precautions, combined with judicious legal offensives, it's possible to keep them at bay.
By Mike France and Sana Siwolop in New York
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.