Italy's Fashion Houses Wake Up to the Impact of Counterfeit Goods

Mario Boselli, scion of a textile empire that dates back to 1586, thinks he's found a way to outsmart the counterfeiters who have plagued the Italian fashion industry. A large, courtly man in his sixties, Boselli sits in his showroom in Milan, surrounded by racks of avant-garde clothes. He explains how his company makes a sophisticated synthetic fabric called Jungle for Gianni Versace. Suddenly, he gets up and returns with a swath of the intricately patterned jersey fabric. "It's difficult to copy," says Boselli. "The printing process is too expensive."

According to Boselli, who also heads Milan-based Camera Nazionale della Moda Italiana, the leading fashion trade group in Italy, designers have been racking their brains to thwart counterfeiters. Some are even starting to imbed microchips in products like handbags and blouses, he notes. Despite their best efforts, however, most haven't been able to outwit the counterfeiters.

Of course, fakes are hardly new in the world of designer fashion, but the problem lately has reached epidemic proportions. The First Global Congress on Combating Counterfeiting reported in 2004 (the latest year for which it has figures) that trade in counterfeiting goods has reached $450 billion globally. And in Italy alone, the market for counterfeit products is valued at $6.4 billion, of which 60 percent comes from clothes and other fashion products, according to the Milan-based Italian Institute Against Counterfeit Goods (INDICAM). The group estimates that Italy has lost more than 40,000 jobs in the past decade because of lost sales attributed to counterfeits. According to the Associazione Imprese Italiane Alta Gamma (commonly called Altagamma), a Milan-based association of high-end Italian makers of designer goods, the worldwide production of fakes has jumped 1,700 percent since 1993. So it's clear that Italy has compelling reasons to safeguard its legendary fashion sector, the only industry in which the economically pressed country still has global supremacy.

What's more, the quality of the fakes themselves has changed. They used to be poorly made, and easy to spot. But the newer counterfeit goods are made in modern Asian factories, with astonishing speed and precision. And they're not only found on the streets, but in shops in chic resort areas and near tourist attractions. "Instead of producing 500 bags a week, [Chinese manufacturers] are making 25,000 a week," says Armando Branchini, Altagamma's secretary general.

There are plenty of reasons why the Italian high fashion industry finds itself overwhelmed. For starters, both the design houses and the Italian authorities have been slow to react to the counterfeiters. For at least a decade, there has been grudging acceptance of fakes in the marketplace: Designers, unthreatened by the poor-quality imitations, regarded them as minor nuisances; and law enforcement agencies had other priorities besides waging war on behalf of makers of luxury goods.

But now, faced with better fakes, the industry and the Italian authorities are taking the fight more seriously, pursuing criminal charges against counterfeit producers, using customs to monitor illegal shipments, and raiding producers and sellers of fake goods. In addition, some designers are trying to find creative ways to make their products more difficult to copy.

However, none of these methods has significantly stemmed the tide of illicit luxury goods. The problem, say some industry experts and lawyers, lies less with the available remedies and more with the structure of the Italian fashion houses; they tend to be secretive, eccentric and driven by a single personality. To win the war against counterfeiters, the Italian design industry has to be better organized, more unified and run in a much more businesslike way -- in other words, winning the battle convincingly would require a whole revamping of the anachronistic world of Italian high style. In many ways, the organizational shortcomings of the fashion houses serve as a metaphor for the struggling Italian economy as a whole. What was once a strength -- the independent, family-based business -- has become a liability in an age of meticulously managed global brands.

For example, the design houses almost never band together in pursuing a counterfeiter, even when a container full of fakes is discovered in customs. Companies will instruct their lawyers to proceed only when the quantity of fakes is significant (about 100 pieces), says Flavia Cassara, a lawyer at the Milan law firm Rapisardi, which specializes in intellectual property. While part of the reluctance is logistical -- it's rare to find a big cache of fakes of just one designer, because each shipment usually contains an assortment of fake Pradas, Fendis, Guccis and the like -- the psychological barrier is higher. The fashion houses guard their secrets closely, and are loath to expose their weaknesses to rivals. "The only way to fight [the counterfeiter] is for the companies to work together -- but they won't," says Cassara.

The danger posed by counterfeit goods to the Italian high fashion industry is twofold: They don't just cut into sales; they sabotage the exclusive image and brand of the company. "Counterfeits are a major nightmare," says Giorgio Brandazza, co-director of the master's program in fashion at Milan's Bocconi School of Management, Italy's leading business school. A former chief operating officer of Calvin Klein Asia, Brandazza explains that companies spend millions to create an aura of exclusivity around their luxury products, which becomes difficult if the goods are too easy to purchase: "Part of the mystique for consumers is the difficulty in buying."

Until about three years ago, many designers claimed that counterfeits did not really eat into their market, because the copies were inferior and only attracted buyers who couldn't afford the real things. But in recent years, with the advent of digital technology, some copies have become quite good -- and costly. "There are different levels of counterfeits," says Stefania Saviolo, the other co-director of Bocconi's fashion program. She cites an example: At Forte dei Marmi, a tony resort on the Tuscan coast, well-done counterfeit handbags are readily available through private, word-of-mouth sales and even on the streets. These knockoffs, aimed at wealthy consumers, typically sell for $300; the real versions retail for $1,300.

The luxury watch market is particularly hard-hit. The industry estimates that two-thirds of the luxury timepieces sold online and in shops around the world are fakes, says Frederic Lejosne, managing director for Italy of Gucci Watches, a division of Gucci Group N.V. "We could have twice the sales [but for the counterfeit market]," adds Lejosne. The big problem for oft-copied watch brands like Gucci, as well as the prestigious Swiss makes, is that the imitators have become exceptionally good. "I can't even tell the difference at times; they get every detail -- right down to the gift box," says Lejosne. The result is that Gucci watch buyers, unlike those who buy Gucci handbags, are sometimes unwittingly buying fakes, and that hits the company directly, explains Lejosne.

After years of lackadaisical enforcement of anti-counterfeiting measures, the Italian government is getting somewhat more serious. Until a few years ago, Italian authorities considered counterfeit crimes "secondary," says Francesca Negri, a lawyer with Rapisardi. But there's growing evidence, often cited by industry watchdogs like the Washington, D.C.-based International AntiCounterfeiting Coalition Inc. and Interpol, that organized crime and even some terrorist organizations use the counterfeit channel to launder money. As a result, says Negri, prosecutors are now investigating counterfeiters more aggressively.

Moreover, there are also new laws in Italy aimed at curbing counterfeits. In 2003 Italy introduced the "Made in Italy" legislation to ensure that only goods actually made in the country could bear the label. Negri says that the law affords a greater degree of IP protection. Last year Italy even enacted laws that fine consumers several times the retail price of the originals for buying illicit designer goods. Though there were some well-publicized incidents of tourists being slapped with hefty fines in Venice and the Riviera when the law was first enacted, the statute, Negri says, is seldom enforced.

Having tough anti-counterfeiting laws on the books, yet not enforcing them, is typical of Italy's ambivalent attitude, say critics. "We have good laws in Italy, but they are not always applied," says Branchini of Altagamma.

So far, the most effective tool in stemming counterfeits is enlisting Italian custom officials to monitor incoming shipments -- especially those from Asia. (INDICAM estimates that 70 percent of counterfeits sold in Italy come from Asia, with China in the lead, followed by Korea, Thailand and Taiwan.) Companies, through their lawyers, are establishing direct links to custom officials, according to Lorenzo De Martinis, a partner in the Milan office of Baker & McKenzie. "You have to react immediately once you get a call from customs about suspected goods," says De Martinis, who represents Giorgio Armani and the youth brand Guru.

Tracking counterfeit goods and intercepting them at the border is expensive and time-consuming. So some frustrated designers are beginning to tap their own creativity to thwart fakes. They're working on the products themselves, in an effort to make copying the designs more difficult, as Boselli's fabric company does for Versace.

Other designers are using the fickle nature of fashion itself in an attempt to thwart copiers. In the hot young designers segment, in particular, companies are changing designs quickly -- giving them a three-month lifespan -- and betting that counterfeiters can't keep up, says Baker & McKenzie's De Martinis. As an example, he cites his client Guru, a hugely successful clothing brand in Europe that's owned by Jam Session Srl, a company based in Parma, in Italy's prosperous Emilia-Romagna province. Though its T-shirts with their distinctive daisy motif put the Guru label on the map, the company doesn't always go after counterfeiters of that design, because the "daisy is already considered old-market," says De Martinis. The essence of fashion, he adds, is "all about change." (Guru declined to comment.)

But what are the odds that fashion and luxury goods companies can outsmart the fake professionals? If what goes on in the luxury watch market is any indication, counterfeiters are still ahead of the game. At the annual watch trade fair at Basel, Switzerland, in the spring, counterfeiters regularly photograph the watches on display and reproduce them, down to the last detail, in less than a week's time, says Gucci's Lejosne: "I guarantee you what's shown at the start of the show will be selling outside of the trade grounds or on the Internet by the end of the fair."

For the moment, at least, Italy seems to be losing the battle with counterfeiters. "You can put serial numbers on your products, put holograms on them, send for the police -- but at the end of the day, there's not much you can do," sighs Brandazza. "It's part of the game."

Others in the fashion trenches are not quite as fatalistic about Italy's struggle against the counterfeit trade in the long run. In the next ten years, predicts Gabriel Cuonzo of the Milan law firm Trevisan & Cuonzo, who represents various fashion clients, the fashion houses will finally join together, pooling information and anti-counterfeiting efforts.

Maybe. But to get there, the fashion houses will have to adopt a more global outlook. Big egos might be dominating the Italian fashion industry for the moment, but that will inevitably change as the industry matures. "The fashion business in Italy is on the verge of changing from a business model focused on individuals to one with a global approach," says an optimistic Cuonzo. If the counterfeiters in China are running their operations with large factories and 24-hour operations, the days of running a fashion empire on the whims of one individual are probably over. "Fighting counterfeits is a business problem and requires a business approach," says Cuonzo. "Sooner or later, you need to think like a multinational."

Source: law.com