With the cosmetic beauty industry valued at US$532bn worldwide (according to a 2019 report by retail researcher Edited), the beauty industry is growing at a rate far greater than ever before. It’s no surprise that this industry offers gargantuan profits for businesses all around the globe. But, as the general sale of personal beauty products has increased and continues to increase year by year, the same can be said about replicated counterfeit cosmetics – now a considerable industry in itself.
Aside from the obvious health risks that counterfeit cosmetics pose to consumers, fake makeup also represents considerable legal risks – especially in the new age of e-commerce – for cosmetic brand manufacturers, merchandisers, and retailers alike. To that end, the in-house legal teams in this industry are of paramount importance.
The growth of knock-offs
Given the mammoth financial opportunities counterfeit makeup offers, it’s no wonder that counterfeiters are taking advantage of this growing market. Although precise figures for black market sales are hard to come by, Statista reported that the counterfeit cosmetic and personal care industry cost retailers €1.9bn in 2015.
‘At the core of all counterfeits, it’s very economic. It’s a very dark forum of competition,’ says Corey Judson, in-house lawyer at Huda Beauty.
‘Makeup is very unique to counterfeiters because it’s very quickly transformational. People really like that quality of it: to go, within a matter of minutes, to feeling much more beautiful. It’s almost intoxicating. To do that at a very cheap price point motivates counterfeiters whilst motivating the counterfeit market.’
The surge of bloggers now sharing tutorials on social media platforms such as Instagram and YouTube has transformed the means by which shoppers find new products and interact with cosmetic brands. This means that social media platforms are no longer for social sharing alone, but are now closely tied to the direct consumption of products.
But just as social media is playing a key role in the cosmetics ecosystem, so too is it helping fuel the industry’s black market. According to Red Points’ 2018 research, social media contributes to over 50% of counterfeit cosmetic sales. Facebook alone constitutes a whopping 42.1% of those counterfeit sales (with eBay and Instagram following suit at 30.4% and 9.2% respectively).
‘Social media purchasing is a huge trend right now. You can find your favourite makeup YouTuber or Instagram artist and buy their makeup products from them directly. Counterfeiters can then comment on an Instagram or YouTube post saying “Check out my site” for these materials and they’ll have similar materials to what the artist is using in a good video and they’ll link it to counterfeit cosmetics. Within just one click, you’re exposed to buying counterfeit for an artist that you really like and that you’re following on Instagram,’ comments Judson.
Huda Beauty is emblematic of the cosmetics industry in the 21st century. The eponymous founder initially launched a beauty blog before eventually launching her own cosmetics line, amassing 40.9 million followers on Instagram, 3.78 million subscribers on YouTube, and earning roughly $30m in 2018. But as a brand in part borne out of the successful leveraging of social media platforms, it must also grapple with a black market that is making use of the same platforms, but for the wrong reasons.
‘As prolific as our Instagram account is, we have tens of thousands of comments on every single thing we post. Our social media team regulate the comments for a lot of different reasons, and counterfeits are definitely one of them. We often comb Instagram and Facebook for new counterfeit products. They show up quite quickly, so we have a really good relationship with the social platforms. We petition them to take certain sites, pictures and videos down – it’s a big deal for the platforms too that this material, for integrity, is not showing up on their website either. They’re very reactive with us,’ explains Judson.
‘I think one of the things that is driving the popularity of counterfeits is the ease of transactions – it’s very simple for a consumer to just go online and shop for a deal that’s too good to be true, so it’s probably counterfeit,’ comments Ashli Weiss Uğurlu, legal counsel for intellectual property, marketing and advertising at Benefit Cosmetics.
‘Online sales are driving the popularity of counterfeits. It’s easy for a seller to hide the fact that the goods are counterfeit by using an image of an authentic product.’ With counterfeiters increasingly relying on the use of e-commerce to sell and distribute counterfeited goods, particularly on online marketplaces – auction and trading websites such as eBay, Alibaba and Amazon in particular – counterfeit cosmetics are flooding in from all over the world. This means that companies whose products are the subject of counterfeiting often have weak legal recourse when it comes to penalising counterfeiters.
Dangerous business
The personal damage caused by knock-off beauty products cannot be ignored. Fake cosmetics are generally produced under unregulated, unsanitary and contaminated conditions. Given the nature and intended uses of the product, effects of contaminated fakes can be devastating, with reports of rashes, infections and permanent scarring not uncommon.
‘I never know what’s in a counterfeit product, and that’s what scares me,’ comments Weiss Uğurlu.
‘We’ve done tests with counterfeits and they’ve come back with arsenic and asbestos, impure talc. It’s really scary,’ says Judson.
‘When you buy a Deciem product, there’s a lot of science going into creating the formula and selecting the ingredients used,’ says Dan Johnson, general counsel at Deciem, which owns and operates more than 10 beauty brands worldwide.
‘We take a lot of care to make sure that if you are buying a product from us you are getting a top-notch quality product. You lose all of this when selecting a counterfeit product.’
The harm generated by counterfeit cosmetics is not only limited to health risks for the consumer: by stealing respected brand trademarks, black market counterfeiters deny brand companies their entitled revenue stemming from decades of market research and development and billions of dollars spent on the final product.
‘Counterfeits in general have a negative economic effect. There’s fewer taxes collected from rights holders, fewer jobs, lots of lost revenue,’ notes Piotr Stryszowski, senior economist at the OECD’s Public Governance Directorate. Stryszowski manages the OECD task force on countering elicit trade.
Counter-counterfeiting
As e-commerce continues to revolutionise the way consumers shop, the barriers standing in the way of brands getting their product into consumer’s hands have never been lower. Unfortunately, this applies to illicit manufacturers also. In light of that, how can cosmetics brands protect their profits, reputation, and the safety of their customers? The answer namely concerns copyright and trademark rights.
‘Trademarks and customs are the bread and butter of counterfeit defence and enforcement,’ notes Judson.
‘We’re adamant about registering our trademarks and copyrights globally. If a counterfeiter is using our registered trademark, this is a direct infringement,’ says Weiss Uğurlu.
Trademark rights are usually considered to be distinctive to each nation or jurisdiction in which they are acquired. Cosmetics companies and brands usually obtain international trademark rights, which encompass a variety of rights across several countries and jurisdictions. However, as noted by the International Trademark Association, ‘the existence and enforceability of these rights are unique to each country or jurisdiction and, generally, not interdependent.’
‘We have a very large trademark portfolio. Protecting our rights is extremely important because our packaging is very simple – it’s not that hard for somebody to create confusingly similar packaging, so we are very quick to be in market, enforcing our legal rights to make sure that the assets that we have invested in and are building, are protected,’ comments Johnson.
But the efficacy of legal protections is contingent on being able to identify infringers in the first place – a difficult proposition when markets are being flooded with fakes by small-scale operations run from countries without robust intellectual property protections, if the origin is known at all.
‘The key is really understanding that counterfeiting is naturally going to occur and then catching it,’ Johnson continues.
‘Once you identify that, there are tools to enforce your rights. The challenge is that if the people who are doing it are a fly-by-night operation, they will just shut down operations and move on somewhere else. But my sense is that, if you’re aware of it, and it’s an operation that’s big enough where the person doing it has real financial weight behind them, then you can get some traction.’
‘The biggest issue that we’re facing is identifying the individual behind the counterfeit online seller account,’ notes Weiss Uğurlu.
‘It’s difficult, because a counterfeit online seller often uses fake information for their name, address, phone number, etc. Accurate personal information is crucial in the development of a case. The data we collect is passed off to law enforcement, who depend upon the accuracy of the information, so that they either continue building the case or move forward with a raid and/or prosecution.’
Enforcement, however, is only one component of the anti-counterfeiting effort.
By making cheaper and often hazardous black-market products, counterfeiters also cause substantial harm to the brand of companies whose products they counterfeit, and curtail consumer loyalty as a consequence. In recognition of the impact that fake products can have on a brand’s reputation, leading cosmetic brands have now increasingly taken specific measures to combat the growing prevalence of counterfeit products.
French heavyweight (and parent company to Benefit Cosmetics) LVMH is one of the world’s most counterfeited brands. LVMH boasts a huge intellectual property department based in Paris, employs over 250 agents globally, and manages over 12,000 intellectual property rights comprising trademarks and copyrights. Thousands of anti-counterfeiting raids are performed on behalf of LVMH each year, with such teams working with both national and international law enforcement agencies to uncover counterfeiters.
And the effort begins even earlier than that, according to Judson at Huda Beauty, who says that educating customs agents globally has proven to be an effective first line of defence for brand companies seizing counterfeits.
‘Customs are the first ones to intercept international trade – especially when things are suspiciously coming from China and India. It’s a great initial defence when making sure these things don’t spread onto the market,’ he notes.
‘We file our registered trademarks and provide training to customs offices in several countries to help officers recognise and seize counterfeits that may cross through their borders,’ explains Weiss Uğurlu.
‘We also work with law enforcement and attorneys in various countries to prosecute counterfeiters both criminally, which can include seizing counterfeit products in warehouses or at storefronts, and through civil cases, where we rescind some of the funds that sellers made through counterfeit sales.’
Judson agrees: ‘Once we have the Huda Beauty trademark, the first thing we do is take it to customs. We make sure they’re aware of it. Last year, I went to Saudi Arabia and completed a three-city tour of training customs officials on how to differentiate genuine Huda Beauty products from the counterfeits. It was very successful – we started getting a lot of notifications from them after that.’
Fake beauty
However, legal protections that allow companies to enforce their rights differ hugely from region to region.
‘There are lots of differences when it comes to consumer protection, penalty schemes, or when it comes to even protection of right holders, but unfortunately these differences are exploited by counterfeiters who know how to target these weak spots when choosing their operations,’ comments Stryszowski.
‘We have the same general goals and objectives with counterfeiting enforcement, but the procedure behind doing that is wildly different country to country. And so that’s kind of the importance of having really good trusted local counsel throughout the world that can advise on the particulars of enforcement in that country,’ notes Judson.
‘Within Benefit Cosmetics, we will take a case pretty much anywhere,’ explains Weiss Uğurlu.
‘For the most part, the major economies of the world have laws in place to criminally enforce against the sale of counterfeit, but it’s helpful to know which government agency to partner with and the nuances of each. For example, in China we partner with the AIC or PSB, in the UK we reach out to Trading Standards, and in the US we have had great help from local law enforcement and HSI. In addition to maintaining relationships with individuals within each of these agencies, some helpful nuances include knowing the different monetary threshold of counterfeit sales for an agency to take the case, and the differentiating factor of your product that the agency is keen towards, for example, is there a healthy and safety hazard tied to your product?’
Johnson at Deciem echoes this sentiment: ‘We have global trademark protections and we have local partners that are really helpful in understanding cultural and legal challenges and opportunities, but I just find that we need to be very understanding of unique attributes of different jurisdictions, and one-size-fits-all doesn’t always work given the dynamics of each jurisdiction.’
Bargain hunt
Regardless of the ever-increasing expense necessitated by fake cosmetics and the dangerous safety risks that they pose to consumers, there is still a gap between the ambitions of various regulatory frameworks and the resources committed by agencies around the world to achieving them.
‘There is legislation in most cases addressing the counterfeit problem in detail. But what we are lacking are the efficient resources needed to be put into enforcement, and ensuring that necessary agencies will be capable of addressing counterfeits through efficient collaboration and information exchange,’ says Stryszowski.
There are several reasons as to why enforcement isn’t always top priority for those agencies on the front line of tackling counterfeit cosmetics.
‘The competing priorities of existing agencies that are in charge of anti-counterfeiting relates to the lack of enforcement. They have other things to do.
‘Take customs for example: they have a long list of things to focus on, like revenue collection and checking for narcotics. Their working day is only 24 hours, so they only have a specific amount of time and resources to tackle counterfeiting as an issue,’ says Stryszowski.
‘The second problem is that effective action against counterfeiting requires international collaboration. Right now, we don’t see efficient collaboration channels between dedicated agencies in countries who would be working solely on counterfeiting on a daily basis and actually trading information swiftly and coordinating the action in an efficient way,’ he adds.
‘It’s not something that I see as being a top priority for government or regulators. They seem to be more concerned about the claims we are making about our products. But, it goes without saying that we are grateful and willing to collaborate with governments. Working collaboratively with governments and regulators is a really important issue, but it also depends on the local government to see where it fits in with their priorities as well,’ says Johnson.
The creation of such an international collaboration forum may be a long way off.
‘If we see collaboration happening, it will be in certain areas related to anti-counterfeiting actions. For example, here at the OECD, we are working on addressing the problem of misuse of free trade zones. But it’s hard to really animate and then coordinate a general anti-counterfeiting enforcement action,’ notes Stryszowski.
Education
It is in the interests of cosmetics brands to educate consumers on the counterfeit market – not least of all because the purchase of counterfeit goods can be illegal, as it is in the United States. Furthermore, if consumers can be shown how to identify and avoid fakes themselves, a large part of the market for knock-offs will disappear.
‘We at Deciem also have a “Customer Happiness” team, which is a resource that consumers can contact and ask about any suspected counterfeit products. We also encourage customers to buy products directly from Deciem, to ensure the product they are receiving is genuine,’ explains Johnson.
‘The benefit of doing that is if you raise with them an outlet that’s not valid, then it’s on our radar. And then we can act on it as well. Being aware is the key to being safe. A bit of scepticism should be always there when you go to an unknown store and you see a damaged box of cosmetics, or when you go online and check out a website of an unknown origin with cosmetics at an astonishingly low price,’ suggests Stryszowski.
‘Always buy from an authorised retailer. If you’re unable to buy from an authorised retailer, stay away from deals online that are too good to be true. In other words, if you’re seeing a product marked down more than 50% from retail price, that’s a red flag right there that something is wrong with this product,’ adds Weiss Uğurlu.
‘If a consumer suspects the product is a counterfeit, they must not use it. For example, if you got a pill from a pharmacy and it didn’t look right, you would never just take it – the same thing is true for cosmetics,’ states Judson.
‘The number one thing is to know the retail channels. Huda Beauty only sells in a handful of retailers and our own online store. So there’s basically a 0% chance that retailer will also be selling counterfeit product. So if you’re at the right retailer, you shouldn’t have to worry at all.’
‘So long as they don’t buy it, they don’t create a market for it – and if there’s no market for it, it’s not going to be produced in the first place. I think what people don’t internalise a lot with counterfeits, is that when you buy them, you’re supporting a business that inherently engages in illegal activity. If what they’re producing is illegal, the business they run is illegal. It’s not just that you’re getting a discount, but you’re actually contributing to a really terrible cycle of crime.’