Crime and punishment: IP sanctions and deterrence

Some intellectual property infringements are crimes. Everybody thinks so. No one would argue that a counterfeiter who sells poison in place of a legitimate pharmaceutical product is anything other than a criminal. Indeed, that counterfeiter would probably be guilty of several crimes in addition to counterfeiting. He might expect a lengthy jail sentence, and he’d probably receive it. Most people would support this punishment.

But ask the proverbial ‘man in the street’ whether the trader at his local market selling suspiciously cheap branded shirts deserves to go to jail for his efforts, and you might get a different answer. And what about his customers? Are they criminals too? What about the person who runs the market?

Depending on where you are in the world, the seller of counterfeits, the buyer and the person who hosts the illegal sale (physically at least) might all be criminals. And that doesn’t even consider the role of the person who made the fake goods in the first place.

Thankfully perhaps, there is a difference, at least in the world of intellectual property, between something being a crime according to the statute, and it being treated as such. It would be a rare prosecutor who showed an interest in the man who sold 30 rip-off T-shirts because someone offered him a box for next to nothing, though many companies would argue that that is exactly what should happen.

At the threshold

The US is often seen as a leader when it comes to dealing with counterfeiting, as a pioneer in criminal enforcement. But while it is true that counterfeiting and piracy offences in the US can carry severe penalties (up to $2 million in fines and 10 years’ imprisonment), in practice, such sentences are extremely rare.

Vaughn Volpi, chief strategy officer at brand and IP protection company PICA, explains that even in the US, where it is broadly accepted that counterfeiting should be dealt with severely, it is not always the case.

“Even here, they have thresholds,” he says. “The US attorneys in the major cities have unwritten thresholds for economic crimes that they’re willing to prosecute. If it’s a straight up IPR crime, it often doesn’t meet the thresholds. It’s a sad testament to how burdened the legal systems are around the world, but this is often the way it is.”

That said, it’s clear that IP crime is being taken ever more seriously in the US, as the government becomes uncomfortably aware that in the absence of a thriving industrial infrastructure, IP is now the nation’s key export. It is US research, not US manufacture, that keeps the country competitive on a global scale. Add to this a recognition of the links between intellectual property crime and other offences (people trafficking, terrorism, money laundering and even drugs), and it’s easy to see why the government would be concerned.

“The US is often seen as a leader when it comes to dealing with counterfeiting, as a pioneer in criminal enforcement. But while it is true that counterfeiting and piracy offences in the US can carry severe penalties (up to $2 million in fines and 10 years’ imprisonment), in practice, such sentences are extremely rare.”

Volpi explains that IPR enforcement is “very often done on a state-by-state basis.” Federal laws have been in place for some time, but haven’t always been enforced. These state laws still include things such as wilfulness clauses, requiring proof of intent in criminal cases. No judge is likely to convict if the defendant can show that he didn’t know what he was doing. And on a federal level, the case normally needs to be worth a considerable amount of money, or linked to organised crime of some sort, for prosecutors to show any interest.

Global problem

Just as many countries have followed the US in developing their IP laws, so many face the same problems when enforcing their criminal aspects. In Europe, where there have been proposals for a new IP enforcement regulation, the spectre of disharmony hangs over enforcement attempts.

Any European-wide criminalisation of IP offences runs the risk of diverse enforcement, where a defendant in the UK might get a different deal from one in Greece. Individual European countries have their own rules and enforcement priorities at the moment, and it would be very difficult to harmonise these.

In many countries, such as Italy and France, purchasing a counterfeit product is itself a crime, though that doesn’t seem to stop people doing it. Especially when the activity is on a small scale, it’s unlikely that local law enforcement will intervene.

In China, criminal prosecution is rare in the absence of serious aggravating circumstances (such as a risk to public health or a relatively high level of monetary damages).

Laura Wen-yu Young, a partner at Wang and Wang, explains that proving crime is especially difficult: “The statute has a fairly high bar on what you have to be able to prove. It’s hard to provide all the evidence that is needed all the time—for example, it’s hard to prove a counterfeiter’s illegal earnings. It’s much more likely that a case will be handled through administrative action.”

While a judge can order a criminal defendant to produce records at trial, judges often accept weak excuses and defendants routinely respond inadequately. China has no provision for disclosure in criminal cases, and even if it did, there’s no guarantee that proving illegal gain would be any easier.

After all, counterfeiters are unlikely to be keeping accurate books detailing their various illegal transactions. And proving a company’s loss because of a counterfeit product is no easier, since it’s difficult to attribute loss to a specific counterfeit product when there may be several in the market, and it’s very hard to show that other factors (e.g. a slowing economy) weren’t responsible for a loss.

Chinese law outlines fixed thresholds below which an infringement won’t be considered criminal. These provide a measure of certainty to businesses, at least in the sense that they know that below a certain financial level, there is no point trying to bring a criminal case. But on the other hand, the thresholds provide carte blanche to low level counterfeiters, who know that the worst they can face is administrative action, and removes the ability of small companies who are victims of counterfeiting to gain criminal redress.

There is scope in China and other jurisdictions to bring criminal prosecutions privately, but as Young explains, that may be fraught with difficulty “It’s good to be independent on the one hand, but the counterfeiters don’t take it as seriously as when the authorities prosecute. Often the counterfeiters have serious muscle behind them, and you may not want to tangle with them. It could be dangerous. So you’d normally bring it to the procuratorate (public prosecutor) and persuade them to take the case.”

No easy answers

One of the main purposes of any criminal law is deterrence. But where intellectual property is concerned, it’s difficult to see how effective a deterrent the law is. Vincent Volpi, CEO of PICA, points out that “you can be criminally prosecuted now on the state and federal level, and in international courts, but the chances you’re actually going to do jail time are slim to none.”

He adds: “At the end of the day, you’re talking about a crime that can be more lucrative than drug trafficking, but you’re not really facing jail time. The worst thing that can happen to you is you get a criminal record, a suspended sentence, probation, and maybe a fine, restitution or confiscation of assets, not all of which are likely to be possible.”

Harley Lewin, partner at McCarther & English LLP in New York, agrees, further underlining the difficulties facing law enforcement in this area. “The really significant development in the last five to 10 years has been that the paradigm of anticounterfeiting cases has shifted dramatically,” he says.

“IP crime will remain as long as there is a market for it, or until the deterrence effect of criminal punishment is great enough to discourage offenders.”

“Several things at the same time dramatically altered the landscape of criminal activities: global trade meant the flow of product on a global basis accelerated—and then there was the Internet. That permits criminals to do business together without knowing each other. You have groups that engage in specific activities and don’t engage in the rest. From the criminal standpoint, that means criminals operate without borders, while laws stop at the borders.”

But Lewin argues that things are changing. “I think there is a global consensus,” he says. “Most of the major governments have learned that this is a high cost to them, and to their people. The [Anti-Counterfeiting Trade Agreement] ACTA effort has been an effort to specifically address this, and is trying to make more uniform enforcement worldwide.”

Ultimately though, IP crime will remain as long as there is a market for it, or until the deterrence effect of criminal punishment is great enough to discourage offenders. And that’s a long way off.

Politics and culture

IP crime has at least three causes: the public demand for counterfeit (read cheap) products; a lack of will or resources to deal with counterfeiters; and the relatively high benefit to risk ratio of the crime. But if you can deal with the demand side, then the others become moot.

Lewin says: “Public education needs to be increased, and companies need to bite that bullet and go public with these issues. You can’t arrest the problem to death. As long as there’s a market, there will be people who want to fill demand.”

That’s true, but there are examples of public education drives that have been successful. “Nobody would have said the US government could have got most of its population off cigarettes in a decade, but they have,” Lewin says. “If you can do that, it is evidence that top-down leadership can resolve problems.”

Changing the culture may take time, but efforts are underway and public perceptions are, slowly, shifting.

In the political sphere, things may be more difficult. Taking China as an example, Vaughn Volpi says: “China isn’t going to do too much about this issue unless it benefits China. The way you make that happen is by leveraging other trade incentives to persuade them to change.”

But as Lewin points out, counterfeiting employs something like 120 million people in China. “You’d put an awful lot of people on the street if you tackled it, and you’d have to spend a lot of political capital to do it,” he says. “Ultimately, it changes when governments have an interest in making it change, and when that interest overwhelms the others.”

There are examples of countries that used to have serious problems with counterfeiting and piracy, but have solved them. Taiwan, for example, is no longer a haven for this kind of activity. As Young explains, that’s because there are now a lot of inventor companies that want to enforce their rights. Now China is not Taiwan, but perhaps a similar thing might happen.

As countries that host large counterfeiting industries continue to develop, eventually research-based intellectual property might become as important as it is in the US. And when that happens, the incentive will be there to crack down.

Until then, it doesn’t really matter what criminal laws various jurisdictions have in place. Counterfeiting and other IP crime happens on a global scale. Global consensus and co-ordination must be key to dealing with it.