Hookah manufacturer Reza Bavar should have been overjoyed when a federal jury in Los Angeles returned a $2 million verdict this month in a counterfeiting case regarding knockoffs of his products.
But his previous experiences fighting businesses that have stolen his intellectual property have left Bavar feeling defeated, despite his recent success in court.
“So often you go through the process of suing a company only to find out they’re insolvent or to have them declare bankruptcy,” said Bavar, founder and chief executive of Beverly Hills’ Kaloud Inc.
It’s a pattern that has become all too familiar for the Iran-born entrepreneur and other manufacturers fighting to protect their livelihoods from being swept away by a flood of fraudulent products, mostly from Asia. The problem has been exacerbated in recent years by online shopping websites, such as those operated by Chinese e-commerce titan Alibaba Group Holding Ltd.
“Without exception, manufacturers are experiencing losses due to counterfeit products,” Bavar said.
The problem impacts companies of all sizes. For consumer products giants such as Mattel Inc., Guess Inc., and Skechers USA Inc., the sheer size of their market presence breeds copycats trying to make money off globally recognized brands. The scale of their operations, however, allows them to have sophisticated loss-prevention teams that track dozens of potential counterfeiters and work with foreign officials to catch knockoff goods at the factory level before they enter the supply chain.
For smaller manufacturers with fewer resources such as Kaloud, different tactics must be employed. In the recent case, brought against Anaheim hookah wholesaler Shisha Land Wholesale Inc., Bavar set up a personal sting operation to catch the company selling knockoffs designed to look almost identical to his Lotus hookah pipe.
Kaloud and Shisha Land Wholesale dispute how exactly the sale in question happened, but U.S. District Court Judge Gary Klausner ruled there was “uncontroverted evidence” showing the products Shisha was selling were counterfeit. Of particular note was Shisha packaging labeled with Kaloud’s trademarked slogan: “Designed with Love [in the Heart of a Baby Unicorn],” though it misspelled “Unicorn” as “Unicom.”
Local problems, global issue
Considering the $2 million windfall awarded by the jury is more than Kaloud’s $1.5 million annual revenue, Bavar has a lot riding on Shisha’s financial future.
However, even if the company remains solvent and pays the full amount owed, Bavar said that number would hardly mitigate the damage knockoff products inflict on his company’s bottom line. Development costs on the Lotus pipe tallied about $600,000 alone, while the company has shelled out $400,000 in legal fees pursuing counterfeiters.
“And it’s not just expenditures,” Bavar said. “Our revenues have also been hit. Counterfeits have probably cost us more than $5 million in lost income streams.”
The Kaloud case is a small part of a massive global problem.
Counterfeiting is estimated to cost companies around the world about $1.8 trillion in sales every year, according to the International Anti-Counterfeiting Coalition. And Los Angeles is not only home to many victims of counterfeit goods – it’s also a hub for those seeking to move them.
The region has the largest number of manufacturing jobs in the country. According to U.S. Department of Labor statistics, more than 500,000 people are employed by manufacturers in the region. Companies that employ the workers are naturally some of the hardest hit by the proliferation of copycat products.
The city is also the single largest entry point for counterfeit goods. The U.S. Customs and Border Protection Service estimate that close to 45 percent of all counterfeit goods enter the country through the Port of Los Angeles – not a surprising statistic when China and Hong Kong account for some 80 percent to 90 percent of faux name-brand products.
Web of deceit
Cargo containers packed with knockoff Louis Vuitton bags and Nike Air Jordan sneakers are still a menace to manufacturers, but direct-to-consumer internet sales of counterfeit goods are a growing concern.
Alibaba has come under particular criticism for not doing enough to abet the flow of illicit products to consumers. The manufacturing community, which lobbies for stronger anti-counterfeiting measures through the International AntiCounterfeiting Coalition, cried foul when the organization admitted Alibaba as a member in April. High-profile brands such as Tiffany & Co., Gucci, and Michael Kors renounced their association with the coalition as a result.
Comments made this month by Jack Ma, Alibaba’s chief executive, further inflamed the situation.
“The problem is the fake products today are of better quality and better price than the real names,” he said at an investors summit in China on June 14, according to a report in the Wall Street Journal. “They are exactly the same factories, exactly the same raw materials, but they do not use the names.”
Ma has since tried to walk back his remarks, but manufacturers and entrepreneurs continue to be pessimistic about Alibaba’s commitment to rooting out counterfeit goods on its site.
“It’s a dangerous thing for (Ma) to have said and incredibly irresponsible,” said Amir Tehrani, an angel investor who was the city of L.A.’s entrepreneur-in-residence until last year.
Tehrani, who also co-owns Carson-based kitchenware company Tabletops Unlimited Inc., said the online marketplace is now ground zero for manufacturers in their fight with counterfeiters.
Kaloud’s Bavar has first-hand experience of this trend as well. For example, he received an email from Alibaba as part of a direct marketing campaign two years ago advertising a knockoff version of his company’s Lotus pipe. He also discovered the same product displayed on the front page of Alibaba’s flagship e-commerce site, Taobao.
“I couldn’t believe the product had become that popular and that Alibaba was pushing it through their marketing channels despite our efforts to take down counterfeiters on their site,” Bavar said. “The site is famous for acting like a Hydra; when you cut out one counterfeiter at least two more rise up in its place.”
