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• C. Causes and Effects

• Intellectual Property Policy

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• Theft of Intellectual Property

• Consultant's Report

C1. There are two principal causes of piracy and counterfeiting:

1. Profitability, that is the business profit to be made out of producing and distributing counterfeit product, and the ability to make use of copies of a desired product at less cost than if genuine product is purchased.
2. Prestige, that is the desire amongst consumers to use, and to be seen to be using, famous brands.

C2. The most common pirate and counterfeit goods are software, music, films, apparel, footwear, perfumes, watches, spare parts and pharmaceuticals.

C3. There are five reasons why piracy and counterfeiting is conducted on a commercial scale:

1. Profitability, in that pirate and counterfeit product can be produced and sold for much less than the cost of the genuine product but still at a considerable return, either by pitching the price just below genuine product, or alternatively by pitching it very much lower and selling a much larger quantity. Either way, the return to counterfeiters and their distributors can make a greater profit than the producers and distributors of legitimate products.
2. The lack of effective intellectual property law in many jurisdictions, coupled with the lack of resource and/or the high cost in enforcing such intellectual property laws as may exist.
3. The ease of replication, whether by applying famous brands to cheaply made product such as clothing and perfume, or the relatively tiny cost of production of high value items such as software available on CD-ROM.
4. The difficulty of detection, especially with counterfeit CDs which can easily be made to look genuine to ordinary consumers.
5. A public perception that piracy and counterfeiting are low-grade harmless crimes. Theft of intellectual property is not yet considered to be equivalent to other property crimes, such as theft of personal property, or trespass to land or fraud. There is an attitude amongst some persons that piracy and counterfeiting are merely "commercial offences" unlike other property offences which are regarded as crimes. This is enhanced while penalties are lower, and while pecuniary penalties do not reflect the loss to the owner of the intellectual property or the profits able to be made by counterfeiting.

C4. There are numerous costs to individuals and the community generally as a result of piracy and counterfeiting.

C5. The costs to those businesses whose products are pirated and counterfeited include:

1. Loss of sales and, where the law or law enforcement is inadequate, a barrier to entry into some markets.
2. The possibility of product liability, at least until the manufacturer is able to prove that the defective product is not its responsibility because it is counterfeit.
3. Loss of goodwill to a brand if it becomes known that there is a risk of purchasing counterfeit product.
4. The expenses of protecting product as far as possible against piracy and counterfeiting, of investigating and seeking out potential counterfeit activity, and of litigation and other legal enforcement.

C6. The costs to countries whose products are pirated and counterfeited include:

1. Loss of potential exports and loss of potential employment.
2. Discouragement of research and development.
3. Loss of taxation and excise revenue.
4. Enforcement costs falling on the community.

C7. The costs to those countries in which piracy and counterfeiting occur include:

1. Loss of opportunity for foreign investment because of a suspicion that the investment will be negated by competing counterfeit activity.
2. Loss of foreign exchange and employment because of competing counterfeit activity.
3. Discouragement of inventiveness because of competing counterfeit activity.
4. Loss of taxation and excise revenue.

C8. In addition there are also costs in human terms, including for example the following:

1. Consumers pay too much for product believing it to be genuine when in fact it is counterfeit.
2. Consumers are duped into purchasing inferior product, which for example may not be as durable, may not work probably, or in the case of counterfeit spare parts may in fact be a danger to life.
3. Because counterfeiting activity is clandestine, the proprietors of businesses involved in this are more likely to exploit their employees.

C9. Examples of the potential for human suffering include:

1. In 1990, 109 children died after taking fake branded pharmaceutical product which contained paracetamol and an industrial solvent.
2. In 1995, 45,000 lbs of counterfeit baby formula were seized by the F.D.A. in California, which could have lead to allergic reactions or malnourishment.
3. The reported discovery of counterfeit metallic fasteners in the United States space shuttle.

C10. To an extent the impact of counterfeiting depends on the product.

C11. In the case of complicated manufactured products such as complete motor vehicles the cost of replicating is considerable, as the cost of production of a motorcar is not much less for a counterfeiter than for the manufacturer of the genuine product. Also the larger and more complicated the product, the more visible is the counterfeit activity. There are however savings to the counterfeiter in research in development, advertising and promotion, and after sales warranty, which are necessarily part of the purchase price of the genuine product.

C12. At the other end of the spectrum is software where the cost of production is a fraction of the retail price of the genuine product. The cost of producing a CD-ROM might be as little as five dollars or less (depending on the product run and amortisation of the cost of the machinery) whereas the retail price for powerful business software could well approach $1000. That retail price takes into account the considerable investment in the writing of the software, its testing before release, promotional costs, and after sales service and technical support, and even a contingency for product liability. None of these costs will be met by the counterfeiter.

C13. Somewhere between might be a music CD where again the cost of production is small but the counterfeiter does not have to pay any royalty to the artist, and does not have to pay anything towards promotion, nor the gamble associated with funding new and ultimately successful local talent. New products for counterfeiters are the video CD and DVD (digital video disk) where the potential profit is greater because of the higher price of the genuine article. Provided many thousands of copies can be sold, counterfeiting of software and music and films is most efficiently done by manufacturing CDs. These can be made to look identical to the originals, certainly sufficiently close to deceive consumers and enforcement agencies. Recordable CDs are more useful for pirate copies which are not intended to look identical. While recordable CDs are not yet able to be made as cheaply, technology will in the future make this a more competitive form of piracy.

C14. Another example is counterfeit branded clothing. Here the clothing can be of less a quality and therefore cheaper to make than the genuine product. There is no cost to the counterfeiter for promotion, nor towards the cost of design and any after sales service for repairs for faulty product.

C15. In the case of counterfeit spare parts there is no cost to the counterfeiter in product development, stocking, or after sales service. Where the component is a brake pad, a helicopter rotor or a jet engine turbine blade, the lower quality may not become apparent until after a catastrophic failure. Even assuming a supplier to sue can be found, there will be no insurance or other funds to compensate. Similar considerations arise with counterfeit pharmaceuticals.

C16. The Consumer Guaranties Act is useless against the typically clandestine nature of the vendor of counterfeit product. Counterfeiting therefore harms service orientated retailers.

C17. Another form of piracy is the unauthorised loading of software onto computers for sale. Sometimes the consumer is aware of this and is therefore a party to the piracy. In other cases the consumer believes that the software purchased with the computer is legitimate, and is therefore defrauded.

C18. Clearly counterfeiting is much more serious for high value low cost items such as for example powerful business software available on cheaply replicated CD-ROMs, and where the inadequacy of the product could be dangerous to life such as with spare parts and pharmaceuticals.

C19. It is believed internationally that counterfeiting is used as a source of funds by the underworld, particularly in places such as parts of East Asia and Eastern Europe where law enforcement is weak. There is not yet much evidence of this in New Zealand, except that Police intelligence suggests that film and video piracy and counterfeiting amongst Asian groups here is becoming more prevalent. There is a likelihood of links between immigrants from such countries and their homelands facilitating the import of such goods.

C20. Examples of underworld involvement internationally, supplied by the Anti-Counterfeiting Group based in the United Kingdom, include:

1. The Islamic Extremists linked to the World Trade Centre bombing in New York reportedly raised cash for the outrage which caused death and $millions of damage by selling counterfeit t-shirts.
2. A convicted gang leader of the violent Vietnamese gang "Born to Kill" (BTK) admitted to earning over $13m from his counterfeit watch enterprise. He is now serving three consecutive life sentences for murder. BTK was allegedly involved in importing illegal immigrants and soliciting prostitution.

C21. The cost of a machine to counterfeit CD-ROMs is currently about NZ$1 million, so the investment is high enough to interest organised crime.

C22. It appears that most counterfeit goods sold in New Zealand originate overseas as costs of manufacturing are generally higher in New Zealand. Most counterfeiting which occurs in New Zealand is false branding by screen-printing of clothing, the clothing itself being imported from Fiji or Asia.