In lower Manhattan, the diagonal crisscross of 19th-century streets creates a number of oddly shaped blocks. One of them is a pie slice of ramshackle buildings carved into being by the intersection of Canal, Walker, Centre and Baxter Streets. Here, on an average day last year, 32 storefronts opened to the bustle of the sidewalk. Inside were 150 workers, unpacking boxes and calling out prices amid the din of traffic. The shops were open 10 hours a day, seven days a week. None of this was unusual for Canal Street, a seemingly endless tourist trap of keychain racks, CD stands and T-shirt stalls. Certainly, it was nothing worthy of the newspapers.

At least, it wasn't until the predawn hours of Feb. 26, when a battalion of police officers stormed the gated storefronts with bolt cutters and pry bars, slapping bright orange "Closed by Court Order" notices on the bricks. A tractor-trailer truck idled nearby. Soon, its cavernous interior echoed with the thump of industrial grade trash bags landing one by one, bursting with handbags, scarves, shoes and accessories bearing the most expensive brand names in the world: Dolce & Gabbana, Coach, Louis Vuitton, Prada. By the time the raid was over, the cops would haul off $1 million of merchandise.

And every last thread of it was counterfeit.

Ersatz goods selling on Canal Street isn't exactly news in New York, even though Mayor Mike Bloomberg staged an impressive photo op amid a mountain range of purses. But the size and stealth of the raid on what cops called "Counterfeit Triangle" seemed to verify a change that many in the brand community have sensed for some time. Counterfeiting is no longer a localized nuisance akin to Three-Card Monte games. Thanks largely to the deadly combo of the recession and the surge of e-commerce, it's fast becoming an epidemic threat to global trade, garnering headlines and the serious attention of local and federal law enforcement.

Simply put, not only is there a lot more phony stuff out there, but it's better made, easier to get, fetching higher prices and taking a bigger chunk out of brands' earnings -- as much as $250 billion annually, according to the International Anticounterfeiting Coalition. The U.S. government seized more than $270 million of counterfeit merchandise in 2008, a 38 percent increase over the previous year. The value of the goods seized spiked by 100 percent in the same period. According to a 2009 study by the CMO Council, more than 29 percent of senior-level marketers now believe that more counterfeit products are "flooding the market," and you don't have to look far for proof. "There's no question we're seeing counterfeits proliferating into all sorts of products and channels that we haven't seen before," says Alan C. Drewsen, executive director of the International Trademark Association (INTA). "The seriousness is increasing."

So is the fear. "There's a growing concern about the number of counterfeits in the marketplace," says Milton Pedraza, CEO of the Luxury Institute, whose own recent survey of wealthy consumers aged 18-39 showed that 72 percent of them believe that the buying of counterfeit merchandise will continue to grow in the coming years.

The glut of fakes has triggered an unprecedented response in the business community -- from stepped-up efforts by brands to protect their trademarks to the possible passage of a trade treaty that might regulate e-commerce across international borders. But the problem shows no sign of abating. To complicate matters, the rising profile of counterfeit goods has raised some uncomfortable questions within the brand community itself, including how much of the responsibility brands bear for fighting the problem and even, to some degree, for having helped to create it.

The Recession Factor
The forgery of brand-named goods -- luxury ones especially -- is nothing new. Georges Vuitton, son of luggage maker Louis Vuitton, first developed canvas monogrammed with the company's famous interlocking "LV" in 1896 for no other reason than to discourage Paris counterfeiters knocking off his family's brand. But modern counterfeiting has reached the global proportions that would surprise even Mr. Vuitton, and there are several reasons why it's at epidemic levels today.

Foremost is the economy. "The aspirational consumer who was buying real luxury still covets that luxury -- but he can no longer afford it," Pedraza says. Valerie Salembier, svp and publisher of women's fashion magazine Harper's Bazaar and a leading voice of the anti-counterfeiting movement, agrees. "We're living in a very complicated economy right now," she says, and a good many shoppers "want more for less."

Brand executives know it. According to the CMO Council, nearly 33 percent of senior marketers in the U.S. believe that "a softer economy is encouraging more knockoffs and fakes." Those in Europe are even more pessimistic. London-based intellectual property firm Marks & Clerk has found that 97 percent of senior brand officials in the U.K. fear that the recession will increase counterfeiting activity. The finding was part of a white paper titled "Brands Report 2009," which also revealed that 80 percent of executives consider brands to be at greater risk due to both the recession and the growing profile of e-commerce.
Indeed, says Marks & Clerk attorney and intellectual-property expert Pamela Withers, it's those two forces acting in consort that have made the counterfeiting problem particularly intractable. "In the current climate, low-price fake goods will be of increased interest to consumers looking to make their money go further," she says. Add the Web as a limitless, unregulated vehicle to do that, Withers says, and you've got a runaway train for counterfeits.



The same Wild West quality of the Internet that makes it so enticing to shoppers is also why it's most terrifying for upscale brands, most of which have little hope of foiling the sale of a fake handbag made in China and bought by a customer in South Carolina from a Web site based in Estonia. It's probably no surprise, then, that 75 percent of brand executives surveyed by Marks & Clerk believed that stronger protections are now needed to safeguard brands in the online world.

Another contributing, yet controversial, factor stems from the choice of many brands to not only produce mass-market extensions of their high-end lines that are far easier to copy (as Pedraza puts it, "a lot of luxury brands have massified") but also shifting some or all of the manufacturing to the Third World (and China especially, where 81 percent of the world's counterfeit goods now originate, according to the Department of Homeland Security). When a luxe brand entrusts its production to a factory in Asia, it obviously saves money. But it also furnishes the factory owner with all the know-how he needs to produce knockoffs if he wants to. By producing lower-end lines requiring less fine craftsmanship and then making them in poorly regulated countries, brands have inadvertently fertilized the very soil from which counterfeits now sprout like crabgrass.

"As major brand owners have expanded, it's taken a while for them to vet the best business partners in these regions," observes INTA's Drewsen. "We hear about legitimate business partners making products for brands and then running a night shift where the goods going out are made on the same machines, but they're counterfeit and unauthorized."

Genuine Imitations
Recently counterfeits were piled atop a conference room table at INTA's midtown Manhattan offices. Candice Li, the organization's anticounterfeiting external relations manager, picks through the assemblage of brand-name shirts, sneakers and fashion accessories, and retrieves a pair of Italian-designer amber tortoise sunglasses that, were they legit, would retail in Saks for $500. But the ones she's holding sell for $5. Li can rattle off the telltale signs immediately: the strange lettering on the inside of the arm, the color that's just a little bit off. "It's little things," she says. "But your average consumer might not know them."

Probably not. In fact, the quality of counterfeits has gotten so good that even savvy shoppers are often duped. It's a reality that's no doubt a big reason why brands that might have dismissed knockoffs in the past have undertaken aggressive measures to confront them now. Just don't expect them to talk about it. Louis Vuitton, L'Oréal and Hermès were among the upscale fashion companies that either declined comment or failed to respond to repeated interview requests for this story.

But their actions speak loud enough. According to a fact sheet distributed by Louis Vuitton (one of the 50 haute nameplates in the empire of Paris-based LVMH), the company conducted more than 7,600 anticounterfeiting raids globally in 2007. Its lawyers commenced more than 24,000 lawsuits, and its e-investigators successfully shut down more than 750 Web sites trading in bogus Vuitton merchandise. For its part, Abercrombie & Fitch has set up a special Brand Protection feature on its Web site that urges consumers to report suspected knockoff clothing to either a toll-free hotline or a dedicated e-mail box. Abercrombie, too, declined repeated requests to comment for this piece.

One brand that's not fearful of speaking up is Swiss watchmaker Les Cubeurs, which in April introduced a laser-engraved "watermark" onto its watch crystals using what it calls "invisible digital ink." "Some have described this as a James Bond feature," says CEO Rik Vandborg via e-mail from his office in Geneva. "The watermark is invisible to the naked eye, so what is the point? Most people will do whatever it takes to protect their family -- especially in the United States. That is just what I am trying to with this new technology for the Les Cubeurs family."

The point, actually, is more than metaphorical. Only authorized dealers can detect the mark with the use of special glasses -- and only then when the watch hands are aligned to a specific time of day. "It makes it easier for us to track if we are being copied, by whom, from which country and for us to size up the problem in general," Vandborg explains. "That is all I will say about this issue to prevent the wrong people reading this article and get any ideas that would hurt us in the future."

To Tell the Truth
Meanwhile, others are focusing attention on the most critical end of the supply chain-not the counterfeiters, but the customers. This year the Federation of Swiss Watches unveiled "Fake Watches Are for Fake People," a global campaign that's currently running in various media, mainly online. Three different ads feature the same striking image of a fake watch displayed on a plaster mannequin's wrist. The caption reads: "Be Authentic. Buy Real." Says Federation president Jean-Daniel Pasche: "We hope to make consumers sensitive to the damages caused by counterfeiting and to convince them to renounce fake products."



But is it reasonable to expect consumers who are getting a convincing-looking $7,000 Rolex for $35 to "renounce" such purchases? According to Valerie Salembier, it is -- assuming brands use the starkest facts to teach the consumer and, of course, assuming the shopper has a conscience. Salembier fronts a crusade known as Fakes Are Never in Fashion that teaches shoppers that when they buy counterfeit, they also contribute to domestic job loss, underwrite child labor and even finance terrorist groups -- facts that are "absolutely unknown" to the average consumer, she says. "Harper's Bazaar can't change legislation," Salembier adds. "But we can do one thing well, and that's educating consumers. If you don't tell the end user that this is not a victimless crime, things will never change."

And indeed, the Web site FakesAreNeverInFashion.com presents anecdotal evidence that consumers often do change when they learn the full story of counterfeit goods. "If women knew anything about how their fake bags were made," posted one woman from L.A., "they would think twice before buying one." Another from Seattle wrote: "I own several of these bags...[and] I am horrified." And another post from a woman in Baltimore reads: "Fakes Are Never in Fashion has convinced me to never buy a counterfeit item again."

It's estimated that the sale of counterfeits costs three-quarters of a million American jobs each year. But, in this post-9/11 decade, the bigger surprise to consumers is likely to be the counterfeiting link to terrorism. In 2003, Interpol announced the findings from several investigations of counterfeit-goods trafficking in the European Union. In multiple cases, police followed the money trail from sales of fraudulent merchandise in Europe all the way to the coffers of, among other groups, Hezbollah and al-Qaeda. "At first, I shied away from this topic," INTA's Drewsen says. "But there have been enough cases that there does seem to be a link. What we're finding is that the business model for counterfeiting is better than the distribution of drugs. The profits are high, and the penalties are lower."

Yet, even when presented with shocking evidence of the social evils behind what they buy, consumers don't always respond with their shopping. For example, between 1986 and 1995, when anti-fur campaigns were at their peak, sales of fur fashion fell from $1.8 billion to $1.2 billion. On the other hand, in the early 2000s when the "blood diamond" issue was all over the news -- including photos of Sierra Leonians whose arms had been hacked off by armed rebels -- the brisk sales of diamonds in the U.S. barely slowed.

Here Comes the Law
That mixed picture may account for why brands seem undecided over the value of public-education messaging as a means to combating counterfeiting. According to the CMO Council, more than 26 percent of CMOs indicate that running "genuine and authentic" marketing and merchandising campaigns are an effective way to combat brand piracy. And nearly the same number are contributing funds to public-education campaigns created and distributed by trade associations. But brands' level of commitment to these measures leaves some doubt as to their faith in the effectiveness. According to the same survey, more than 27 percent of companies spend less than $100,000 yearly on protecting their brands and an equal number spend nothing at all. A serious budget for the effort -- say, more than $5 million -- can be found in only 2.7 percent of the brands out there.

According to the Luxury Institute's Pedraza, recession-fueled cutbacks are to blame for figures like these. "With the cost-cutting that's occurred [in many companies] this year, brands are not doing as much as they can do," he says. That apparently includes massing their support behind trade organizations that are often effective organs for getting the anticounterfeiting message out to consumers. Rochelle Bloom, president of the Fragrance Foundation, says that while much of the fashion industry has banded together over issues like this, "the fragrance industry is not speaking with one voice. We've tried to get to them, but they have other things on their plate."

Like, say, lawsuits. That many brands don't seem to put much faith in public-education initiatives doesn't indicate they don't consider counterfeiting to be a serious problem; it may just be that they see it as a legal problem. Consider this finding from the CMO Council survey: 38 percent of brands assign anticounterfeiting efforts to their legal departments and only a little more than 15 percent see it as a function of marketing.

Intellectual property firm Marks & Clerk also questioned brands on this issue and found that 80 percent of respondents believed that any progress made to educate consumers about counterfeiting can be easily undone by recessionary forces. In other words, a bargain speaks louder than morality. And so the push continues on the law-enforcement front. While 40 percent of U.K. brands agreed that companies should allocate more resources to fight counterfeiters, a far greater number -- 56 percent -- called for penalties to be imposed on secondary markets like eBay. Further, 61 percent called for the creation of a new, powerful "cybercrime authority" to deal with the sale of fakes, especially on eBay.



That brands are pinning their hopes on the law more than on marketing is also evinced by the high expectations for the passage of the Anti-Counterfeiting Trade Agreement (ACTA). In talks since 2006, ACTA "aims to establish international standards for enforcing intellectual property rights" among member nations-which include the U.S. and 27 member stations of the E.U. -- including civil and criminal enforcement, border protection, and, significantly, "copyright infringement and the sale of counterfeit items on the Internet." The plurilateral agreement represents the best hope yet for a global policing of the counterfeit trade, but many hurdles remain. Though more countries have entered the talks since the 2006 preliminary session, one essential nation-China-is not among them.

Nonetheless, ACTA is a start, and major proponents like INTA are "optimistic" about its passing, according to Drewsen. At the very least, the agreement's very existence "shows a kind of worldwide focus on the [counterfeiting] problem had has not been the case before. The time has come," he adds, "for a treaty like this."

With any luck, it has, though for now it's done little to stem the illicit trade down in Counterfeit Triangle. One day after the police raid, the imitation handbags, scarves and watches had all reappeared.

EBay: Bid at Your Own Risk

In the story of counterfeiting, you simply can't find a better Hatfield/McCoy scenario than eBay-nor is there a better example for some brands' belief that the job of policing counterfeits ultimately belongs not to them, but to the channels doing the selling. Many luxury brands contend that eBay is a free-for-all that gives fakers a perfect sales platform. eBay counters that its Web site is  merely a "host" for auctions, and it bears no legal duty to protect trademarks.

Courts have agreed -- mostly. In July of last year a French judge ordered eBay to pay $63.1 million in damages to LVMH for permitting the auction of fake goods (eBay is appealing the award). Except for that singular victory, however, brands have not fared well at the bench. Most recently, the London High Court threw out a suit brought by L'Oréal. The bench followed a precedent set back in 1986, when tape-recorder brand Amstrad was cleared of infringement charges for the copyrighted music that consumers taped using its machines. In addition to L'Oréal, Vuitton, Tiffany and Dior have also had their cases dismissed. Some legal experts predict this latest ruling from London will effectively end suits against eBay.

That hasn't stopped luxury brands from claiming that eBay is still not doing enough to police its auctions. It's a contention that John Pluhowski, eBay's vp of corporate communications, dismisses. "We devote more resources to fighting counterfeits than most brands," he says. "We invest more than $20 million a year and have some 2,000 employees worldwide involved in monitoring our site... to fight fraud." Pluhowski pointed out that his site shut down nearly 2.1 million listings and suspended 30,000 sellers of suspect goods in 2008, a year that the site hosted 2.7 billion auctions total. "Today," he says, "99 percent of all items listed on eBay have no suspicion of [being] counterfeit."