Flood of Knockoff Merchandise Triggers a Wider Crackdown across US ; Local Law Enforcement Is Now Making 'Counterfeit Chic' Seizures, but Should Taxpayers Pay to Protect Corporate Bottom Lines?

Article excerpt

It's become known as "the Watson's Flea Market Raid."

It began at the peak of the sales day, when local police and corporate officials wove through the crowd of bargain-hunters like buyers with badges. They inspected the merchandise, comparing serial numbers on the products with computerized lists from the manufacturers - and confiscated carton after carton of fake Red Monkey jeans and knockoff Timberland boots.

Allegations of selling stuff that purported to be something it wasn't landed 20 people in handcuffs that day, on charges of breaking state and federal licensing and trademark laws.

"It's good that they get rid of people who undercut ... legitimate dealers," says Catherine Scott, a necklace-maker who witnessed the raid two weeks ago. "But the flip side is there are fewer customers, because the knockoffs are what drew people to the market."

Traditionally, the counterfeit-goods trade has fallen under the purview of federal authorities, but that's changing. At the Watson's raid and in other crackdowns, local and state law officers are taking the initiative, in part because the counterfeit industry has become so large - worth $200 billion a year to US corporations - that crime-fighting backup is needed.

Intellectual property rights seizures in the US rose 72 percent between 2005 and 2006, and the value of seized apparel rose from $8 million to $10 million during that time. Seizures of footwear were up by $3.6 million last year, with 89 percent of those goods coming from China, according to the US Customs and Border Protection Agency.

"We're seeing an increase in seizures and an increase in enforcement, but also in the volume of goods coming through," says Travis Johnson, general counsel for the International Anti- Counterfeiting Coalition (IACC), an industry group based in New York.

Everyone agrees that trade in "counterfeit chic" has exploded over the past five years, expanding to include many more products and flooding the US market. Not everyone is united, though, on what to do about it. Manufacturers want an even more aggressive attack on patent and copyright violators, citing billions of dollars in lost sales. Others, however, suggest such crackdowns can go too far, impeding free enterprise, crimping artistic license, and even devoting too many taxpayer dollars to protecting the market position of corporations.

Many economists trace global counterfeiting from the open-air markets of Shanghai to places like Watson's Flea Market on the fringe of the Tar Heel capital, a sprawling, dusty yard that on weekends becomes a sort of low-income Mall of America. Some 15,000 people pack in to browse what state officials say is $1 million in counterfeit designer jeans and Kate Spade handbags.

The Watson's raid was the biggest in a series of flea-market busts organized by North Carolina's secretary of State, Elaine Marshall. Infractions of trademark and intellectual- property law caught the state's attention a few years ago, when licensed NASCAR vendors complained that fake Jimmie Johnson and Matt Kenseth hats and gear were being sold at races. Since then, officials have cited concern about public health and public safety, as counterfeiters expanded into appliances and other electrical products and even baby formula and pharmaceuticals.

What's more, counterfeiting undercuts states' tax revenues, because counterfeiters don't pay sales taxes on their illicit gains. In a 2004 report, New York State's comptroller said the state lost about $1 billion in tax revenues from counterfeit goods. Such reports are helping to drive enforcement efforts in North Carolina.

"Global competition is hard on us, and counterfeiting is another hardship. Legitimate businesses with licenses are saying, 'I'm paying taxes and following the rules, and I'm getting ripped off,' " says George Jeter, spokesman for Secretary of State Marshall. …