Your Supplier Sold You a Counterfeit Product: Now What?

September 10, 2013

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Discovering counterfeit products in the supply chain can create a quagmire of legal and logistical challenges for a manufacturer. It is a problem that is becoming shockingly more commonplace. Knowing how to respond is critical to protect one’s business and customers. 

Last week, IMT wrote about the challenges of finding stolen intellectual property (IP) in the supply chain -- a related but distinctly different problem. IMT spoke with a global authority on the topic, Tokyo-based Arthur M. Mitchell III, senior counsel of White & Case and the former general counsel of the Asian Development Bank. Mitchell is also lead author on a report that’s considered a standard work on the topic.

Mitchell warned that the issue of unauthorized IP in supply chains is one that will, unfortunately, proliferate in coming years, and that if a company has a long global supply chain, it is at increasing risk of what he termed “steep legal and reputational ramifications.”

The key difference between stolen IP and counterfeit products in the supply chain is the level of deception. A product that uses stolen IP is largely a problem of permission and licensing. However, a counterfeit product is not what the buyer thinks it is.

For example, in the pharmaceutical industry, a medicine that infringes on a patent will most likely work as expected -- the formula is legitimate, just used without permission. However, counterfeit pharmaceuticals might not be medicine at all. Even if it is, it may not have been produced with the same accountability and standards as legitimate products. As a result, consequences are far more unpredictable.

In May 2012, the Senate Committee on Armed Services released what industry analyst Stephen Ezell called “a disturbing report" on the extent to which counterfeit electronic parts had infiltrated the U.S. defense supply chain. The report documented "1,800 cases of suspected counterfeit electronic parts being deployed on a wide range of weapons systems, including anti-submarine aircraft and helicopters, cargo planes, and missile defense systems,” he noted. Mission computers controlling missiles “contained suspected counterfeit memory devices, which if they failed while deployed would have compromised the entire missile defense system.”

Both unauthorized IP and counterfeit products carry ethical and legal considerations, but a counterfeit product raises a higher degree of concern about performance, safety, and quality. As such, the consequences could be far more serious.

A study of the issue of counterfeits in the supply chain from international business consultancy IHS highlights how much more severe counterfeiting is in such industries as aviation or pharmaceuticals, where lives are literally placed at risk.

Mark Snider, founder and president of ERAI, a privately held global information services organization based in Naples, Fla., underlined the point when he told IHS, “Just one counterfeit part incident poses risk ranging from catastrophic brand and financial damage to costly disruptions such as a halt in production or engineering work associated with a major redesign.”

What should a business do if it suspects it has been sold counterfeits? A study from Distribution Insider (DI) recommends notifying the supplier first. Steve Schultz, director of strategic planning and communications for Avnet Logistics in Phoenix, told DI, “A legitimate broker will want to know if there is a problem with supply.” If the supplier seems unconcerned, the buyer will want to take that into consideration for any future dealings with them.

It’s important to also contact the manufacturer of the brand in question as it may have ways of determining authenticity -- and again, a reputable business will do everything it can to protect its brand. After that, if necessary, contact legal authorities.

Of course purchasing directly from OEM, or from resellers officially licensed by the manufacturer, rather than third-party brokers, is by far your bottom-line protection. John Sullivan, director of worldwide security and corporate flight operations for Texas Instruments in Dallas, told DI that when it comes to counterfeited TI items, "Our formal stance is that unless you bought it from us, we are not going to help you. But, if we have a long backlog for a product, we have a better understanding about why someone might go to a broker.”

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