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One Grave Problem: Counterfeiting, Piracy and IP Theft


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: May 8, 2011 @ 11:55 am
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Counterfeiting and the theft of intellectual property rights is not just a matter for companies.  Such theft, or piracy as it is frequently referred to, is a major issue for the United States government.  Over the years the piracy problem has continued to grow in importance in both trade relations and in the war against organized crime and terrorists.  The United States needs to do what it can to prevent intellectual property theft because of the negative impact it has on job creation and our economy.  It is also imperative to shut off the flow of easy money to criminal enterprises.  Without money they become starved for resources, a big strategy in the fight against global terror.

On May 5, 2011, in prepared remarks in a speech to commemorate World Intellectual Property Day, U.S. Commerce Secretary Gary Locke acknowledged  that much still needs to be done regarding theft of intellectual property around the globe.  Secretary Locke said: “[W]hen over 80 percent of all software installed on computers in China is counterfeit and when first-run movies continue to appear on rogue web sites as soon as they show up in the theaters – then we know the problem is still grave.”

The world-wide problem of counterfeits and theft of intellectual property is grave indeed, and particularly difficult for the United States since over the years we have continued to lose manufacturing jobs and have, rightly or wrongly, transformed out economy into one that relies in an extraordinary way on the generation of a variety of intangible assets protected only by various forms of intellectual property.

Of course, companies must play an active role in protecting their own intellectual property and cannot leave enforcement up to the government.  Frankly, the government seems ill-equipped to deal with the problems despite what seem like honestly good intentions.  So efforts like the recent enforcement activity of Rosetta Stone Inc. (NYSE:RST) are critical.

On May 5, 2011, Rosetta Stone, a leading provider of technology-based language-learning solutions, announced that it had reached settlements in cases against 77 individuals, in 73 cities, across 27 states for copyright and trademark infringement. The individuals pirated software, including unauthorized copying, downloading, sharing and selling of counterfeit Rosetta Stone® language learning software.

“Consumers need to be aware of the dangers of software piracy, including the risks of identity theft, malware, spyware and defective software,” said Michael Wu, general counsel and corporate secretary, Rosetta Stone. “If consumers are unsure about the authenticity of products or whether products are being offered by legitimate distributors or retailers, they should contact Rosetta Stone. Our Customer Care team can verify whether genuine products are being purchased from authorized sellers. Remember, if a price looks too good to be true, it probably is.”

If you ask me, most consumers almost certainly know when they are purchasing counterfeit software.  The lure of a cheap price, however, is more than most people can ignore sadly.  If only consumers would stop and ask themselves three questions: (1) what is this counterfeit software likely to do to my computer; (2) what negative impact is likely to be suffered as a result of identity theft if I use counterfeit software; and (3) where does the money go when I purchase counterfeit software?  The first two questions are obviously individual in nature, and despite the truthful warnings to the contrary many people are naive enough to simply make decisions that are not in their best interest and which in the long run will cost them far more than buying a legitimate copy of the software.  The last question, however, is a society issue.

Criminals are finding that the penalties for intellectual property crimes pale in comparison to the penalties they would receive for trafficking drugs and engaging in other illicit activities.  At the same time, the profit margin for counterfeit software, as well as for other counterfeit goods, is extremely high.  So the combination of great riches, relatively low penalties and a low likelihood of being caught and you can see why criminal enterprises, including terrorist networks, are becoming major players in the counterfeit software black-market.  In fact, one of the most vicious drug cartels in the world makes an estimated $2.4 million per day selling counterfeit software.  On this point the White House recently explained.

Because of the high profit margin and shorter prison sentence for intellectual property crimes compared to other offenses, piracy and counterfeiting are a strong lure to organized criminal enterprises, which can use infringement as a revenue source to fund their other unlawful activities.  One of the most brutal drug cartels in the world – Mexico-based La Familia — manufacturers and sells counterfeit software, generating more than $2.4 million in profits each day.

See Concrete Steps Congress Can Take to Protect America’s Intellectual Property, March 15, 2011.

Counterfeiting also costs jobs, which are an unfortunate scarcity as we continue to struggle to get clear of the clutches of the Great Recession.  On this point the White House directly and simply said: “The theft of American innovation costs jobs and imperils economic growth.  This must end.”  To emphasis this point in his speech to commemorate World Intellectual Property Day, Secretary Locke explained: “Counterfeiting and piracy are taking a huge toll on U.S. industry and workers, costing billions of dollars and thousands of jobs every year, according to some estimates.”  Locke acknowledged that some quibble with whether billions of dollars are really lost ever year, but if you ask me those who won’t acknowledge that the problem is massive in its impact are fooling only themselves.  They also likely lead rather sheltered lives that don’t get them out in the real world much either.  For those who live and work in the real world, or who spend any time online whatsoever, it is apparent that intellectual property theft is rampant.  From there it doesn’t take a rocket scientist to understand the negative impact on jobs.

Currently the White House is recommending that Congress take action.   Specifically, the White House has recommended legislative changes that will raise penalties for counterfeiting and attempt to provide more consumer protections.  Among the recommendations passed to Congress, the White House is seeking significantly increased criminal penalties for those who sell counterfeits to those in the military, as well as significantly increased criminal penalties when the sale of counterfeited goods goes to fund organized criminal activity and for those stealing American innovation and transferring it overseas.

Increased criminal penalties is a good start, but likely won’t be enough.  Nevertheless, if you go to any counterfeiting presentations, such as routinely held at events at the United States Patent and Trademark Office, you will repeatedly hear government officials and career employees of a variety of U.S. agencies who constantly talk of changing the calculus for criminals.  There is a widespread belief that as long as the criminal penalties are so low compared to other criminal activities the risk-benefit analysis for criminal enterprises will continue to select counterfeiting as a business strategy, albeit an illegal business strategy.

In any event, Congress is the process of drafting and reintroducing online infringement legislation to curb the illegal activities of rogue websites which cost the U.S. economy an estimated $58 billion in total annual output according to the U.S. Chamber of Commerce.  Undoubtedly many will question that number, but only those who choose to turn a blind eye to criminal activity will ignore the magnitude of the problem.  Sadly, no matter what the U.S. government does or what companies like Rosetta Stone do, as long as consumers are willing to participate in the criminal enterprise as purchasers of counterfeit products it will be an uphill battle.

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Posted in: Copyright, Gene Quinn, IP News, IPWatchdog.com Articles, Software, Trademark, Trademark Basics, US Economy

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

21 comments
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  1. Good for Rosetta Stone taking action on this kind of thing. Securing software like theirs against Piracy is virtually impossible, and is so damaging to their company, and the industry as a whole.

  2. The buzz words alone may ignite some consternation….

    – but but but, if I light my taper from yours, you still have your taper….

    and pedanticism…
    – It cannot be “theft” because you still have your idea… (just go back in time to your grade school days – if you tried to “borrow” someone else’s ideas on test day – you were guilty of stealing answers).

  3. BD,
    Your school experience may have differed from mine, but the concerns with copying the answers from someone else were generally issues of fraud, falsely claiming that you had come up with the given answers yourself, and one’s ability to do so is what was being tested. If the party that was copied was complicit in this act (which would preclude any kind of interpretation of theft), this did not make it okay for the copying to occur, and the copied party was typically also subjected to punishment.

  4. Because of the high profit margin and shorter prison sentence for intellectual property crimes compared to other offenses, piracy and counterfeiting are a strong lure to organized criminal enterprises, which can use infringement as a revenue source to fund their other unlawful activities. One of the most brutal drug cartels in the world – Mexico-based La Familia — manufacturers and sells counterfeit software, generating more than $2.4 million in profits each day.

    Gene,

    I’m going to be mean to you. I’m going to ask you show proof that this is true.

    Because I did some research into this a while back, and I can tell you right now that you won’t find any proof, because the statement isn’t true. It’s a pile of complete and utter hog wash. The drug cartels won’t touch the pirated software market, because there isn’t any money in it. It’s the same thing with the terrorists. There’s no money, so they don’t go anywhere near it. Drugs on the other hand they’ll get involved it.

    It’s the same with the pirated DVD and pirated CD markets. There’s no money in either, so neither the drug cartels nor the terrorists will go anywhere near them.

    Wayne

  5. “Sadly, no matter what the U.S. government does or what companies like Rosetta Stone do, as long as consumers are willing to participate in the criminal enterprise as purchasers of counterfeit products it will be an uphill battle.”

    Sounds like the same can be said for illegal drugs? Harsh penalties don’t seem to have stopped the flow of them into the United States either.

    The similarity between both intellectual property counterfeiting and the war on drugs is that both are examples of market failures. Criminal law is not built to deal with markets; it’s built to deal with individuals. And therein lies the problem.

  6. Wayne-

    You really think there is no money in pirated software, pirated DVDs and pirated CDs? I find it hard to believe you can make such a statement.

    Given that all of the evidence readily available suggests you are wrong I think it is up to you to provide proof.

    -Gene

  7. Gene,
    Here’s a summary of a report on the matter that debunks the claims made.
    http://piracy.ssrc.org/about-the-report/
    Basically, the value of selling illicit DVDs and CDs as a business is in decline, as more efficient and reliable methods have been made widely available to consumers.

  8. Bobby-

    As per usual your “evidence” doesn’t support your position. The link you provided doesn’t actually have the report, just a few nebulous statements about the report. Even those, however, do not suggest that counterfeiting is on the decline. The report, by its own statements, says that piracy in developing markets is not a problem. Two things come to mind. First, if this means that developing markets are not engaging in counterfeiting that is simply false. Second, it seems that what is being said is that there is no market for counterfeits in developing economies because the people have no money. How exactly is that a shock or news? Counterfeits to to where there is a market.

    -Gene

  9. Here’s the entire report by Mr. Karaganis, referenced by Bobby above, all 400+ pages of it (distributed by the author):

    http://www.scribd.com/doc/50196972/MPEE-1-0-1

    Wherein he and his team rather assiduously debunk your baseless claims about, wait for it, terrorism, drugs and CDs.

    While you saved it for the very end, you nevertheless, apparently inadvertently, nailed the crux of this matter.

    “…as long as consumers are willing to participate in the criminal enterprise as purchasers of counterfeit products…”

    What would drive otherwise normal folks to such behavior?

    It’s apparent to people who want to buy that the prices charged for products (and terms and conditions) that big rightsholders are trying to sell are no longer connected to the received value of the transaction as perceived by the customer. See, that wasn’t difficult; Sony is ripping me off and I can get the movie elswhere anyway, for less!

    Freaked out rightsholders cannot change the old adage that the customer is always right. They can though decide that “piracy” is market intelligence pointing directly and clearly to a marketing and sales opportunity that is being missed. I’m not holding my breath on that one though.

  10. Robin-

    So your theory is that rightsholders should just create and gladly allow people to copy without paying because it proves the value of what they have created. You are not that naive, are you?

    I also like how you say my claims are baseless when it comes to terrorism and drugs. It isn’t as if I made this stuff up. So are you saying that President Obama is lying? Are you saying that Secretary Locke is lying? Are you saying that all of the career people at the Patent Office are lying? Are all of the career people at Customs lying? Are the FBI and other law enforcement agencies lying? Exactly how big does the conspiracy go?

    THANK GOODNESS we have this incredibly biased report that page after page says “In our view…” to provide conclusions that believers can use to ignore facts.

    How about you provide a citation from within the report that says, with citation of appropriate evidence, that criminals and terrorists are not using IP theft to fund their enterprises.

    -Gene

  11. And here is how that fake report manages to conclude with a straight face that piracy and theft of IP isn’t a problem. It explains simply: “A pirated CD purchased on the street for $2 is valued at $2 in thismodel, not $12.”

    You see, the real cost therefore must be $2 at most because that is all anyone would have been willing to pay. You see, the report explains that theft of intellectual property is a price problem, not really a theft problem. It is understandable given that evil creators of content want to get paid too much. People are apparently justified in taking what they want, and the fact that there is no stigma attached to buying counterfeit products seems to be evidence that there really isn’t a problem.

    What a bunch of hogwash! Thanks for the laugh though. Anyone who understands the issues and knows the facts will enjoy this piece of fiction.

    -Gene

  12. Gene
    “The link you provided doesn’t actually have the report, just a few nebulous statements about the report.”
    You can get the report itself for $8. There is a pretty clear link to getting the report on the page listed, but in case you have trouble finding it, try here http://piracy.ssrc.org/the-report/ Since Wayne is a Canadian, he can legally obtain a gratis copy, and I’ll look the other way on any dealings you have with each other.

    “Even those, however, do not suggest that counterfeiting is on the decline.”
    The claim was not that ‘counterfeiting’* was on the decline, but rather that the money to be made from illicit CDs and DVDs is in decline. My focus is not on a decline in volume, but a decline in profitability.

    “Second, it seems that what is being said is that there is no market for counterfeits in developing economies because the people have no money. How exactly is that a shock or news? Counterfeits to to where there is a market. ”
    If there is no money to be made in these markets, how can the ‘terrorism’ or organized crime be funded by it? Or are you claiming that all of the money made in ‘counterfeiting’ is in developed markets that already have strong IP regimes?

    *I question somewhat the usage of counterfeit on the grounds that in many cases, the software, music, film, etc. is identical to legitimate copies because it is digital, and consumers and vendors are both aware of the illicit nature.

  13. “I also like how you say my claims are baseless when it comes to terrorism and drugs. It isn’t as if I made this stuff up. So are you saying that President Obama is lying? Are you saying that Secretary Locke is lying? Are you saying that all of the career people at the Patent Office are lying? Are all of the career people at Customs lying? Are the FBI and other law enforcement agencies lying? Exactly how big does the conspiracy go? ”
    The most likely cause is bad intel and research methodologies. Given poor data, poor conclusions will be drawn. It’s widely held that bad intel was largely responsible for the US involvement in Iraq. Lying may not be an entirely accurate description, since they would believe what they are saying in many cases.

  14. You really think there is no money in pirated software, pirated DVDs and pirated CDs? I find it hard to believe you can make such a statement.

    Given that all of the evidence readily available suggests you are wrong I think it is up to you to provide proof.

    What readily available evidence?

    Think of all of the drug busts you’ve read about in the newspapers. Have any of them mentioned finding CD/DVD replication equipment on site, or large numbers of illicitly copies of Audio/Video/Software discs? None of them have, because no equipment was found, nor were any discs found.

    That’s because drug gangs aren’t into money losing operations, and large scale music/video/software counterfeiting is a great way to lose money. There are just too many legitimate vendors selling at extremely low prices (or giving the stuff away) to make counterfeiting profitable.

    Consider your local gas station. It probably sells ITunes cards. So does your grocery store. And your pharmacy. And the hardware store. How do they compete with The Pirate Bay? Better selection, better quality, better buying experience. You can compete quite well with free as Apple has proved.

    Or consider Libre Office. Why would anyone want to buy Microsoft Office when you can download Libre Office for free, and it works better than Microsoft Office (if you don’t believe me, try passing files various versions of Microsoft Office – a very frustrating experience – Libre Office is more compatible with Microsoft Office than Microsoft Office is).

    Sure there is some small scale counterfeiting going on. Very small scale. Five and Dime store stuff, nothing bigger.

    In other words, U.S. Commerce Secretary Gary Locke is full of the brown stuff I used to have to shovel when I was growing up on the farm. As a farm boy, I know that stuff all too well, and can recognize it a mile off.

    Wayne

  15. I gather from the lack of response that no one has anything further to say. I do want to make a couple of points:

    1) Gene isn’t lying – he has been feed misinformation.

    2) Commerce Secretary Locke isn’t lying either, he’s been feed misinformation.

    3) So who is feeding government officials incorrect information of this magnitude?

    4) What sanctions will be taken against whoever is lying to Commerce Secretary Locke?

    Those are serious questions, and deserve serious answers.

    Wayne

  16. Secretary Locke said: “[W]hen over 80 percent of all software installed on computers in China is counterfeit and when first-run movies continue to appear on rogue web sites as soon as they show up in the theaters – then we know the problem is still grave.

    But according to Bobby, there is nothing wrong with China’s actions if they allow that in China.

    Pause. Think.

  17. “Secretary Locke said: “[W]hen over 80 percent of all software installed on computers in China is counterfeit and when first-run movies continue to appear on rogue web sites as soon as they show up in the theaters – then we know the problem is still grave.”

    But according to Bobby, there is nothing wrong with China’s actions if they allow that in China.

    Pause. Think.

    Ah, but we already know that Secretary Locke is incorrect about drug cartels being involved in large scale counterfeiting of video/software/audio media, whether it’s because he’s been mislead, or because he is lying.

    So how do we know that he isn’t incorrect about the amount of counterfeit software being used on Chinese computers as well? I have friends in the industry over there, and the biggest growth market right now is for Android based products, and since Android is Open Source, it isn’t counterfeit (note that I’m also writing professionally for a computer industry publication at the present time).

    As to first run movies showing up on ‘Rogue Websites’, no one has yet proved that this is causing the industry any losses. In fact several people that I know are using The Pirate Bay as a distribution system for their movies, including Nina Paley for ‘Sita Sings the Blues’, and Hanna Sköld for ‘Nasty Old People’. Sorry for not providing links, but Gene has Word Press set to hold comments with links, and since I know he’s traveling this week, it’s easier just to tell you to search for the movie names on Google since I don’t know if he’s in a place where he can easily moderate comments.

    Wayne

  18. This may get held, but since it’s Friday, it won’t be that big a deal. A new report has been released, and according to it Canada’s Piracy Rate is at an All Time Low.

    Now at this point you have to start wondering why is Canada’s piracy rate is at an all time low, and if Canada is among the 15 lowest piracy countries in the world, that Secretary Locke’s department keeps putting Canada on the Annual Special 301 Report. Could it possibly be that the report is driven by political rather than scientific findings? If it is driven by politics, why attack the one of the United States oldest and most reliable trading partners? Doesn’t this seem to be counter-productive?

    I’ll leave you to ponder this. Oh, and while you are pondering this, you might want to read this as well. Yes, that’s my name in the first paragraph. The CRIA mentioned is the Canadian Recording Industry Association, the daughter industry to the Recording Industry Association of America. I’m not on their Christmas Card list anymore. In fact if Graham Henderson, the President of the CRIA had Tony Soprano on speed dial, I’d probably be wearing concrete overshoes right now :)

    http://torrentfreak.com/cria-watches-massive-music-piracy-crisis-devastate-unknown-band-110404/

    Note that I didn’t linkify it, I’m trying to avoid the comment getting held for moderation. And no, this isn’t a complaint. I do the same thing on my own Word Press blogs.

    Wayne

  19. Here’s another comment about the fun and games in Washington, US Swaps Constitution for Big Content. It’s interesting how us foreigners can spot this, but most Americans seem blind to it.

    Wayne

  20. @Wayne

    Most “foreigners” get a view of the U.S. that is mostly skewed on matters as this. No blame, but often is accepted without question as being fact. It is a shame that better information isn’t what reaches people outside the U.S.

    Some U.S. law makers sell out Americans for rich war-chest for voting time, true. I for one are not “blind” to that fact nor am I standing for it. Legal fights go on because of millions of contributed dollars that I will guess you may be aware of ? but if not, is spent every year on fighting lawmakers in Washington over laws as those we’re talking about here and others as well. Sad the problem continues.

    To continue a problem isn’t a solution. Americans if they would stop the piracy and their buying too, would make a point about such laws giving content owners powers that are using customers money to lobby the laws. Dead consumer buying soon such money would dry up and consumers should spend that money on better things then laws that screw them.

    Americans need to wakeup and understand what rights are and those they have to stop lawmakers from selling out — what American consumers spend their money for. IP ownership isn’t the sole right of those with access to Washington — nor should it ever be !

  21. [...] been aggressively protecting themselves against counterfeiters (see Culture of Indifference and One Grave Problem). There are also new technologies aimed at helping industry fight counterfeiting, for example see [...]