On Lookout for Fakes : Gumshoeing Counterfeit Products

Imitation, as Tonka Corp. discovered, can be an unwelcome form of flattery.

Manufacturers in East Asia in 1984 began copying the design of the Minnesota toy maker’s Go Bots line--toy action figures that fold into miniature robots or vehicles--and thereby capturing millions of dollars in illegal sales.

So, late that year Tonka turned to Jack Fox of Sherman Oaks, who left a job as a toy company executive to start his own firm--one to counter the counterfeiters.

Within weeks Fox had dozen of people around the country wandering through stores looking for Go Bots imitations. It was the first step in a process that would include letters demanding that the stores stop carrying the fakes, lawsuits against those that refused to comply and attempts to locate the source of the imitations, believed to be plants in Taiwan.

International Web

In just over a year, Fox, 56, has spun an international web of detection.

He runs a private intelligence network that, he said, includes several hundred informants and investigators. On a given day they may be flipping through racks of Michael Jackson T-shirts at a Los Angeles flea market or searching back alley garbage cans in Taiwan for refuse from Go Bots copies.

Based in North Hollywood across from Universal Studios, Fox’s Commercial Counterfeiting Control is one of about 10 private U.S. firms that specialize in damming the flow of fakes.

Fox calls counterfeiting a “growth industry.” The International Anticounterfeiting Coalition, a San Francisco-based group, says counterfeiting kept 130,000 Americans out of work and cost more than $20 billion in lost sales during 1985.

In what industry and government observers view as an ominous trend, counterfeiters no longer copy only fancy consumer goods like Jordache jeans, Gucci bags and Cartier watches. Medicine, mechanical components and pesticides are new targets of the piracy.

Electron Tubes Resold

In a case that resulted in a lawsuit, used electron tubes re-stamped with a phony trademark were sold to Delta Airlines for use in the navigational systems of its jetliners. Counterfeiters also have marketed inferior brake linings and sub-potent birth-control pills.

In addition, counterfeiting of seemingly harmless products has caused damage more serious than loss of revenue to a company. A dozen fifth-graders in Pomona suffered chemical burns from handling caustic stuffing in a bogus Cabbage Patch doll.

“These people are stealing,” Fox said. “Why should somebody come along and be able to copy what’s in somebody else’s mind? I just go after them and take their kneecaps.”

Fox is a jovial, Brooklyn-born, ex-investigative reporter for the New York Post and CBS News. His career in the toy industry and journalism departs from more traditional routes to combating trademark and copyright infringements, according to James L. Bikoff, an attorney who is president of the anti-counterfeiting coalition. Most gained experience as private detectives or federal law enforcement agents.

“Anti-counterfeiting takes a very specialized kind of expertise,” Bikoff said.

Fox studied journalism at New York University and cut his teeth as a New York Post reporter, breaking the story of an Army private who, because he had been an aide to a U.S. senator, received preferential treatment at Ft. Dix, N.J.

The private was G. David Schine. The senator was Joseph R. McCarthy. The case was a prominent part of the 1954 Army-McCarthy hearings, which led to the censure of McCarthy.

Worked for Mattel

Later, Fox worked for six years as director of marketing and public relations at Mattel Inc., the Hawthorne-based toy company.

“A toy would be going famously,” he said of his days at Mattel. Then, because of the competition from counterfeiters, “all of a sudden it would drop dead.”

He started his anti-counterfeiting business in September, 1984. Now, Fox controls the network of what he calls “spotter-shoppers.” At clients’ requests, they make buying sweeps through stores and flea markets.

Most spotters are corporate merchandisers who routinely visit stores to check on the sales of their products, he said. They watch for fakes as a sideline and are paid a bounty of $50 to $100 for each discovery.

Fox described some shoppers as “everyday people with a special interest in the products,” citing doll collectors as one example. Others belong to charitable or civic organizations that receive the same bounty.

Clues to the phonies come in several forms: Labels of jeans are carelessly attached, toy packaging comes with smeared or discolored lettering and so-called “white-van operators” who drive between flea markets and impromptu street sales offering bargains such as designer watches discounted by 80%.

Occasionally, phonies are easy to spot, as was the case last year with a bungled batch of Michael Jackson watches from Taiwan.

‘Face Was White’

“The drawing on the face of the watch was good,” Fox recalled. “But there was one problem. Michael Jackson’s face was white.”

Fox distinguishes between two kinds of phonies: counterfeits and knockoffs. Counterfeits are look-alikes that include some facsimile of the trademark or label. Knockoffs do not copy a product’s labeling but mimic the design, an infringement of the manufacturer’s copyright.

When spotters find suspicious goods, they call Fox. He directs private detectives to make purchases. (Fox himself is not a licensed private detective.) Affidavits are signed recording the time and place of purchase, and the client verifies that the goods are counterfeits.

In the Go Bots case, about 400 stores were surveyed and 36 were found to be selling imitation products, according to Tonka. “Cease-and-desist letters” were sent to all 36, a lawyer for the toy company said, and five lawsuits eventually were filed against retailers and importers.

The client decides what legal measures to pursue. A threat to sue the store usually works, attorneys for several of Fox’s clients said.

“Most of these infractions were blatant,” said Joe Joyce, Tonka’s general counsel. “We never had to go to trial on any of these cases.”

If a letter does not work, a company can seek a court order forbidding the retailer from continuing to sell the fakes. Sometimes police seize the bad goods under state and federal anti-counterfeiting laws.

Finding the Sources

More difficult, Fox and his clients conceded, is tracing the counterfeit goods to their sources. Fox estimated that 90% of counterfeits and knockoffs come from overseas, most from East Asian countries such as South Korea, Taiwan, Hong Kong, Singapore and Malaysia.

“Our goal is to get to the manufacturer, not necessarily the retailer, who may not know what he’s buying,” Joyce said.

Among those doing the legwork overseas, Fox said, are former Customs, State Department and federal drug enforcement agents. Some are engineers in local industry. Most are expatriate Americans, often with close contacts to foreign government and police officials. But Fox also counts some former Asian police officials among his contract detectives.

Fox runs a lean in-house operation, with only one other permanent employee. The strength of his business comes from his shopping network, which he said he thinks is unique among anti-counterfeiting strategies.

“I’ve got more eyes out there than anyone else,” he boasted. “It’s my concept.”

A one-shot buying sweep, in which 20 stores are checked in each of 20 cities, costs a client about $10,000, Fox said. Ongoing coverage, including periodic sweeps, computerized data searches for suspected counterfeiters and consulting contacts overseas, earns him an annual retainer of about $25,000. Investigative work by licensed detectives costs extra.

Fox said he has nine clients on retainer and that he has done dozens of sweeps since launching his business.

Anti-counterfeiting specialists say money is central to mobilizing informants. Sanitation workers are paid to comb trash from suspected counterfeiting factories, and manufacturers are rewarded for tips on their counterfeiting competitors.

‘That’s Their Business’

“I don’t want to know how they get their information,” Fox said of his investigators. “That’s their business.”

There is sometimes an undercover-cop side to anti-counterfeiting work. One of Fox’s competitors, private investigator Bill Ellis, keeps 11 investigators behind a false showroom in Los Angeles, a deception that he said allows them to buy fake merchandise in “sting” operations.

Ellis, 50, said he also has set up a noontime sandwich service to gain entrance to factories suspected of manufacturing counterfeit goods. His technique includes printing up menus and delivering food for a week or two while evidence is gathered. “When we crash them, we remind them that there’s no free lunch,” Ellis said.

David S. Woods, 28, a New York City private investigator who specializes in anti-counterfeiting, said each of his five full-time investigators has a different ethnic background. “It affords us the flexibility to go into different areas, especially here in the melting pot of New York,” he said.

Woods, like Fox, was not a professional investigator before he started his firm five years ago. He was an auto mechanic before that. “I was getting very bored,” he said.

Of course, many companies do not look to such private agencies to protect their valuable copyrights and trademarks. The Coca-Cola Co., for instance, has a legendary in-house investigative department that sends between 20 and 30 employees around the country looking for violators--ranging from restaurants accepting orders for Coke and then serving Pepsi to novelty shops selling “Coke” cans designed to store the illegal drug, not the drink.

Work Called Lucrative

But the private anti-counterfeiting experts say that there is enough demand for their work to make it quite lucrative.

“It’s kind of an ‘in’ crime to be working on,” Ellis said.

The companies that are victims of counterfeiting say the faked goods cause them a variety of problems. A market flooded with cheap copies weakens the snob appeal of expensive goods. Fake-makers can undercut prices because they exploit other companies’ research, development and advertising. Fakes also often use inferior materials and workmanship.

Producers of food and medicine see counterfeiting as especially menacing.

In 1984, counterfeiters struck G. D. Searle & Co., filling drugstore shelves nationwide with more than 1 million sub-potent birth control pills made in Panama, according to some estimates.

Searle was alerted when pharmacists reported complaints of irregular menstrual flows and mid-cycle bleeding from women taking the pills, company spokesman Mark Brand said. Other druggists noted that the pills appeared bloated and that the word ‘Searle’ was misspelled on packaging.

Bogus pills pulled from pharmacies still trickle in to Searle, and the company has filed a trademark infringement lawsuit against a New York drug wholesaler accused of distributing the pills.

More recently, bogus antibiotic capsules packaged as drugs from Eli Lilly & Co. found their way to pharmacies. Pharmacists were tipped off by the slightly misshapen capsules, but chemical tests showed that the drugs posed no health threat and contained the proper antibiotics, Eli Lilly spokesman John Purcell said. A New York drug wholesaler ordered a recall Sept. 23.

Wines, Whisky Copied

Counterfeiters have also copied wines and Scotch whisky, shampoos and perfumes and Chinese- and Mexican-style convenience foods.

Congress in 1984 passed the Trademark Counterfeiting Act, setting a maximum penalty of five years in prison and a $250,000 fine for manufacture or sales of counterfeit goods. Corporations may be fined up to $1 million.

Subsequent convictions can bring penalties of up to 15 years in prison and fines of up to $1 million for individuals and $5 million for corporations. Also, the law permits victims of counterfeiting to collect triple damages in civil cases.

The California Legislature in 1983 and 1984 increased financial penalties and established prison terms for manufacturing or intentionally selling counterfeit goods. The state went beyond federal statutes by setting jail terms and fines for those convicted of producing or selling a counterfeit good that causes death or serious injury.

But few cases have been brought under the new statutes because of lack of enforcement manpower and companies’ hesitancy to seek criminal prosecutions.

Federal law enforcement officials are quick to acknowledge that companies should rely primarily on private investigations and civil remedies for counterfeiting. The Department of Justice reports that it has prosecuted just five counterfeiters under the strengthened law, mainly producers of designer clothes and watches.

“Companies will probably get quicker results if they use their own attorneys,” said Julian Greenspun, deputy chief for litigation for the department’s criminal division. “If a case can be handled satisfactorily by a private attorney in this area, it should be.”

Prosecutors Avoided

Woods, the New York detective, said many clients prefer to pressure violators privately because once a case goes to a prosecutor, “it’s out of the client’s control.” Prosecutors are looking for a conviction, but the client-victim is more interested in getting to the source of counterfeit goods and stopping it, he said.

With a private investigation, “we’re able to cut a deal immediately and go to the next step. We have a lot more flexibility,” Woods said. “The name of the game is getting back to the source.”

Any case that comes to trial also poses a threat to the legitimate manufacturer. “A judge can invalidate your trademark just by ruling it’s not unique enough,” Ellis said. “All these judges are unknown factors.”

Fox said he similarly prefers using the criminal sanctions mostly to persuade distributors of fake products to cooperate--both by discontinuing sale of imitation goods and naming their suppliers. “When you tell someone they’re facing five years in the slammer, they gulp very deeply,” he said.

Fox said he has traced the imitation Go Bots toys to 10 plants in Taiwan and that he passed his evidence on to Tonka and to Taiwanese officials. He also helped produce a booklet for U.S. Customs agents describing the trademark design of Tonka toys and forwarded tips from overseas about incoming shipments of the Go Bots knockoffs.

In a series of seizures, most at West Coast ports, customs agents have confiscated about 4 million of the knockoffs, according to Tonka officials.

None of the anti-counterfeiting experts are worried that success in such cases will dry up fakes and put them out of business.

“Counterfeiters don’t necessarily quit; they just switch products,” Ellis said, describing the anti-counterfeiting war as “like the revenuers and the moonshiners.”

Indeed, Tonka recently found that some of its other products--its well-known trucks and “pound puppies”--had inspired imitators.

Fox figures the future of his business is secure.

“I use the old W. C. Fields axiom,” he said. “Anything worth having is worth stealing.”