One Grave Problem: Counterfeiting, Piracy and IP Theft

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.