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Amazon Has a 'Notorious' Counterfeit Problem

David Waihiga

Oct. 12, 2019

Despite efforts to combat the sale of fakes on its online-selling platforms, the matter could still evolve into a significant fiscal liability.
It's a label some would interpret as a compliment. But when the American Apparel & Footwear Association included some e-commerce venues operated by Amazon.com ( NASDAQ:AMZN ) on its "Notorious Markets" list for 2019, it wasn't meant in a good way. By "notorious," the AAFA is referring to a market's use for the sale of counterfeit goods.
The complaint isn't an unfamiliar one to investors, who have seen rivals like Alibaba ( NYSE:BABA ) eBay ( NASDAQ:EBAY ) and other consumer-facing outfits subjected to similar (and understandable) efforts. Indeed, given the wild West nature of the highly anonymous internet marketplace, counterfeits are often considered just another part of the landscape. Yet Amazon.com may be more liable in the matter than consumers and investors might presume.
What the AAFA said
"While we are happy to have seen increased engagement with Amazon on brand protection issues during the past year," said AAFA president Rick Helfenbein, "that engagement regrettably has not translated into a discernible decrease in counterfeits of our members' products on Amazon's marketplaces."
The Amazon e-commerce sites that haven't done enough to satisfy the American Apparel & Footwear Association are the UK's amazon.co.uk, amazon.ca (Canada), and, for the first time, Amazon's French e-commerce platform, among others. The organization also asked the U.S. government's trade representative to consider its U.S. shopping site a facilitator of sales of counterfeit goods.
It's not a new challenge, nor a small one. A 2017 estimate suggests the global market for counterfeit goods had reached $1.2 trillion, and it takes more than $300 billion worth of revenue away from brands that have to compete with fakes. The U.S. Government of Accountability Office found in 2018 that two out of every five products purchased online was counterfeit.
The damage goes beyond lost sales, however. "Counterfeits hurt our member brands and consumers when sold domestically, just as much as when they are sold overseas," explains Helfenbein.
The question of where -- or even if -- to lay the blame is proving a tricky matter, though. Amazon's sales platform is open to third parties. Monitoring them is difficult, increasingly so as they better learn how to sidestep the scrutiny the company has put in place. Amazon can't be held liable as long as it makes a reasonable effort to protect brands with goods being offered at its marketplace.
Or maybe it can.
No place to hide anymore
It's a matter Amazon has been able to sidestep, until early this year. In its full-year report for 2018, filed with the SEC in February, the e-commerce giant finally conceded: "We also may be unable to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. ... To the extent any of this occurs, it could harm our business or damage our reputation and we could face civil or criminal liability for unlawful activities by our sellers."
It's relatively boilerplate language. But it's language Amazon had no interest in adding to its filing before now, even though counterfeits have been a problem for years.
It's also a concern that has garnered interest, or at least lip service, from the leader of the free world. In April of this year President Donald Trump signed a memo directing a more concerted effort to quell the sale of counterfeit goods in the U.S. While his chief concern was protecting the intellectual property of the nation's technology players, the move was a victory for all counterfeiting victims. It's an effort that will also, at least indirectly, put more pressure on Amazon.
But how much?
The counterfeit problem clearly isn't going to fade away. In fact, it appears to be worsening, which could eventually cost Amazon some big bucks.
Amazon spent more than $400 million in 2018 to combat fakes, and more than once has sued its own third-party sellers for selling fake goods. Yet an unnamed American Apparel & Footwear Association member commented in conjunction with the newest "notorious" list:
It has become increasingly frustrating to justify any kind of partnership on the brand protection side, with Amazon. We received timely responses and follow up all throughout the Brand Registry set up process and immediately after. Since then, responses are slow, if we receive a response at all.
As for the extent of the "civil or criminal liability" on the table should Amazon fail to satisfy brand names being affected, the matter is fuzzy. For perspective, though, attorneys for the Negg-brand egg peeler just won a $175 million settlement against the makers of counterfeit versions of the kitchen gadget.
That judgment was against a third-party seller rather than Amazon itself, but it hits close to home. And last year, home and kitchen brand/retailer Williams-Sonoma ( NYSE:WSM ) did sue Amazon.com directly, claiming the e-commerce player's private label furniture division copied a Williams-Sonoma design for a chair. Williams-Sonoma sought damages of up to the maximum reward of $2 million per piece. The suit was intended more to make a point than make money, but the point was well made.
Amazon could afford a couple of those suits, but with more than 12 million products listed for sale on all of its sites, it's unlikely it could catch all of the fakes . Even if only a few sneak through, the cost could get real big, real fast. Brands have already demonstrated a willingness to take legal action.
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