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Brazil: Shifting Trends For Manufacturing Counterfeits

by José Henrique Vasi Werner

February 24, 2016

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José Henrique Vasi Werner

1. NEW ROLE ON GLOBAL ILLEGAL MARKET

In the upcoming decades the world will probably witness a deep change in the fields of counterfeiting and piracy.

China will leave behind the current philosophy of copying famous trademarks and will adopt a line of deconstruction, re-engineering and enhancement technologies with their own brands, which will make it the largest economic and technological power in the world.

Without no doubt, this phenomenon will happen under the Chinese magnitude, sponsored by the growing economy and the huge active population, hungry for formal work and looking forward for the progress rewards.

Believe it or not, the causes for this phenomenon are already in course.

There is a lot of international pressure for greater protection of intellectual property rights in China. Slowly, but gradually, China is moving towards internal legalization procedures, training, equipping and structuring of its local Patent and Trademark Office, surveillance bodies and enforcement agencies.

Although China is far from leaving its global leadership position as the largest producer of fake products, this leadership tends to be gradually shared with other countries. Huge losses of Chinese factories, due to global actions to fight piracy and spontaneous growth of the counterfeit industry in other countries, including Brazil, shall contribute to that.

As a matter of fact, in the last 10 years, Brazil already played a similar role to China, due to the growth in the number of factories with the capacity of supplying the domestic market with tens of millions of counterfeit products. Beyond that, in certain types of industries, Brazilian factories are already exporting counterfeit products for the Americas and other countries across the globe.

Social, Political and Economic crisis are drastically aggravating this problem. Local companies previously “surfing” the unreal waves of a Brazilian acceleration are now experiencing hard times, some of them with no options rather than shutting down their businesses.

The surviving factories, still with their manufacturing facilities and with some know-how in certain types of products are finding new ways to keep businesses alive, even if this new trend means breaking the existing IP laws.

Indeed, over the past five years there has been a "boom" of local illegal industries dedicated to the production of famous brands, especially in the sectors of clothing, luxury goods, accessories, shoes, school supplies, auto parts, beverages, pharmaceuticals, amongst others covering high value-added products.

Indeed, whole illegal poles emerged in recent years and those previously known grown in unimaginable proportions and now became major centers of manufacturing and distribution of illegal goods.

2. MOST AFFECTED INDUSTRIES

The following list describes in a non-exhaustive way some of the growing illegal sectors at this very moment.

2.1. Luxury Goods

There are many different areas in Brazil dedicated to produce counterfeit luxury goods, but one of them specifically stand out from the others, due to the high concentration of these type of factories in comparison to those that are involved in legal activities.

The interior of Sao Paulo, notably Franca and surrounding cities were targeted more than twenty times by a well-known Brazilian producer of hand bags and shoes throughout two consecutive years (2011 and 2012).

The local producers are tireless and very insistent and they frequently migrate to other brands after they notice that some IP Owners are being more active in detecting and tackling illegal factories.

In any event, piracy levels involving the above mentioned Brazilian company went down from 75% to less than 15% after two years of intense work in the area.

Curiously right after the conclusion of the above mentioned anti-piracy campaign, a very famous French producer of luxury goods started to see the number of counterfeit handbags with its trademarks increasing exponentially and these numbers are still multiplying over the years. 

2.2. Headwear

Apucarana is located in the interior of Parana State and it is well known as the “cap capital” in Brazil.

Out from the estimated five hundred factories actively operating in that city, 95% are involved somehow with the counterfeit cap production.

City incursions in the past two years by the world largest cap manufacturer, including raids organized by the end of August 2015, managed to tackle more than 22 illegal factories and to seize more than 3 million counterfeit caps and raw material used in the production process.

Organized crime, local millionaires, state police officers arrested (including the head of the local State police department), connection with three different states from Brazil were some of the challenges faced while organizing local operations in that region.

Fortunately, levels of piracy went down to around 15% and migration to other brands was also seen in this case as well. The more the IP Owner hits the counterfeiters the best is the result in terms of migration.

2.3. Footwear

If someone is looking to buy cheap or fake footwear the right address to do that is Nova Serrana, in the interior of the State of Minas Gerais.

There are other regions in Brazil that also produce counterfeit footwear, including Franca, in Sao Paulo with primary focus on leather shoes, but Nova Serrana factories for a long time lead the illegal business of famous sneakers production.

Local business is far from being handled from amateurs. Multi-state illegal organizations have been identified during the last raids organized in that region, indicating that the strong capillarity of the local industry, since the counterfeit products are distributed Nation-wide

In a city with 80% of the factories involved with illegal activities at some level, specific strategies are needed to enforce IP Rights. Political connections and informants spread all over the city are capable of destroying an entire investigation/ intelligence works if a complaint is addressed to the city enforcement authorities.

The same migration process is true with respect to Nova Serrana.

2.4. Clothing Articles

The South region of Brazil, mainly the States of Rio Grande do Sul and Santa Catarina are the hot spots for manufacturing counterfeit clothing articles.

Even being located far away from the most important Brazilian capitals these two regions have capacity of production of millions of illegal products to be distributed throughout Brazil, being very price competitive and also delivering high quality products.

Raids in that region are directly affected by innovative, but not necessarily welcome theories admitting penalty reductions, abbreviation of time in jail, suspension of criminal procedure, minimum penal law, etc.

In any event, very strong police authorities and certain public prosecutor groups guarantee the effective enforcement, but full attention is needed in the following stages.

2.5. Car and Motorcycle Parts

Some States located in the Southeastern and Center regions are dedicated to produce replacement parts for car and motorcycle industries.

Not only trademarks but industrial designs are reproduced and/or copied by unauthorized companies.

Some of these companies are very well structured and big enough to distribute to the Brazilian market and also to export products to South America and other foreign countries.

2.6. Consumer Products

A vast category of products, from stationery, passing through backpacks, transfers, key rings, up to costumes and party items are produced in large scales while IP Owners try to sell them through legal license agreements granted to local companies.

Since the 90ies, entertainment industry is seriously affected by consumer products piracy.

Entertainment companies anti-piracy program are still the largest in Brazil with thousands of targets annually and tons of products seized.

2.7. Toys

All kinds of toys, excluded the ones in which there are intrinsic technology involved are being manufactured in Brazil.
 
An example is a city called Lagoa da Prata, Minas Gerais State where most of the local factories are dedicated to produce plush toys.

Of course, balls, plastic toys, action figures, masks, and other types of toys have local factories producing millions of products for local consumption.

2.8. Pharma Products

Due to the severe penalties applied to pharma counterfeiting (considered as heinous crimes in Brazil with penalties reaching 15 years in jail), it is still possible to find counterfeit pharma products being manufactured in Brazil.

These factories are mostly located in the backyard/ underground of “family houses” and they make use of rudimental methods to produce illegal pharma products in Brazil.

In the majority of the cases, active ingredients are imported from Paraguay, China and India and they are finished in Brazil for local distribution.

2.9. Cosmetics and Sanitary Products

Similar to pharma products, cosmetics and sanitary products are subject to the same legislation applied to pharmaceuticals.

Even so, there are many factories established in Brazil producing counterfeit products of these categories.

The modus operandi is practically the same (backyard/ underground of “family houses”) with very simple methods.

2.10. Beverages

The Northeastern Region of Brazil has the largest incidence of falsified alcohol beverages, notably Whisky and Vodka.

The high concentration of the illegal industry in that region is due to the fact that in the Northeast is located the largest consumer market for these kinds of alcoholic beverages in Brazil.

The factories use original bottles discarded to refill them with unknown liquids and sell them as genuine.

Again, this activity is considered heinous crime in Brazil and is subject to penalties up to 15 years of imprisonment. Even so, there is no indication that this crime is losing momentum from the last two years to now.

2.11. Raw Material

After the depreciation of our currency in more than 60% within the last two years, factories dedicated to manufacture counterfeit products in Brazil are also trying to order raw material from local companies.

As a result, recent raids organized for different kinds of industries, identified and tackle many different factories involved in the production of raw materials for national illegal companies.

It is really an interesting movement from the industry that is trying to run from the crisis and also from the devaluation of our currency rate replacing old Chinese companies for Brazilian companies in order to save money and improve logistics.

Of course, most of these raw material factories are tackled together with the manufacturers of fake products and need to explain the association for committing a crime and also accusations of criminal organization.

2.12. Software

Entire malls located throughout the country are the birthplace for software piracy in Brazil.

Besides selling hardware, these malls divided in hundreds of different stores also sell illegal software already installed in computers or even illegal keys for registering them.

Thousands of recent actions organized by one of the world largest Software Company revealed that Brazil is still an important source of software piracy and new modalities of the crime, such as cloud storage, links and other remote applications, will certainly become a challenge for IP Owners to identify and tackle infringers. 

2.13. Music

Although music piracy has experimented recent reductions due to the decreasing on CD sales, recent incursions in Sao Paulo on behalf of an important Gospel Music producer identified many different illegal CD factories still in activity and burning millions of CDs from different Recording Industry Companies.

The reason for that is probably the lower Brazilian social classes that still buy CDs encouraging the illegal factories to maintain their production.

3. HOW TO FIND POTENTIAL TARGETS

The path to protect intellectual property and fighting counterfeit in the near future, will necessarily involve investment in intelligence, especially the investigative work of companies and individuals to gather information about potential factories.

So far, being Brazil a major consumer of counterfeit goods, enforcement was facilitated by the massive presence of illegal products – mostly imported – in the local market. But with the new framework, many of the offenders will no longer be in the public eye or the authorities, but cloistered in their factories and illegal labs.

Therefore, more than ever it is essential to align the intelligence work developed by private companies so that offenders may be identified, located and submitted to the appropriate legal sanctions.

3.1. Onsite Intelligence & Investigation

The use of investigators is necessary in Brazil to make trap purchases and to investigate the location of the manufacture and distribution of counterfeit goods. 

Identifying potential targets is certainly the number one priority for IP Owners so as to start an effective anti-counterfeiting plan.

Very complex cases like the ones mentioned in the Chapter 2 above, demand more than a simple trap purchase to be successfully concluded. In these cases a full immersion is needed, which mean that the investigator has to live for a while in a targeted place in order to obtain addresses, identify individuals involved, learn about the infringers logistics, etc.

Fortunately, there are some counsels in Brazil that have their own in-house investigation team. The benefit of this arrangement is that the actions of the investigators are under the supervision of lawyers who are regulated by the Brazilian Bars and who have ethical and fiduciary obligations to the client.
 
On-site investigation, background check, proof obtainment, sample acquisition, cross-information, among other activities are other common methods used to this end.

Moreover, since information regarding importers/ exporters and possible manufacturers and distributors of counterfeit products are not easily available, preliminary raids are advisable to shake the market, thus unveiling valuable information on factories and distributors.

Actually, the simple presence of the IP Owner enforcement team at the market place is positive to raise information and lead it to manufacturers, warehouses, distributors and importers.
 
The evidence obtained during the market survey can be used for the elaboration of a plan of seizures that would allow a precise and forceful response against the infringers. 

3.2. Online Intelligence & Investigation

Besides the on-site investigation, sometimes the information regarding a target or an organized crime activity is available in the internet. If this is the case, the investigators must have skills to filtrate the information accordingly in order not to miss any detail or recommend a false positive case.

One of the main goals of the internet intelligence is to identify real online infringement cases in order to allow later procedures for noticing and taking down.

Additionally, not less important is to enable an online investigation to become an onsite case by physically identifying a target so that it can be later tackled by regular enforcement initiatives. 

4. HOW TO ENFORCE TARGETS

4.1. Criminal Prosecution

Criminal remedies are much less time consuming and also less expensive than civil injunctions and civil actions.

Depending on the IP right involved, criminal procedures can be used as the basic instrument on anti-piracy campaigns.

A. Police Raid

Police raid is a type of search and seizure procedure conducted by the police under the police inquiry. This means that, technically, police raid is an administrative act conducted by the Police Authority.

However, since it is actually part of an investigation procedure aiming the confirmation of a crime, it became appropriate to define it as a criminal procedure.

For the purpose of investigating crimes against intellectual property, the main goals of the police inquiry would be seizing all counterfeit products (including all instruments or objects related to the criminal activity), identifying the individuals responsible for the crime and producing a forensic expert examination on samples in order to confirm the criminal activity.

After collecting the required pieces of evidence, the police inquiry is ready to get concluded.

Therefore, as mentioned before, the entire procedure is indeed very fast and direct, which means that for the majority of the IP crimes this is the best option to handle anti-piracy programs and/ isolated actions.

Needless to say that, due to compliance rules (FCPA, UKBA and BACL – Brazilian Anti-Corruption Law) the IP Owner has to carefully select its counsel in Brazil so that he can move away from illegal requests and even modify the strategy accordingly.

B. Criminal Injunction

Criminal injunction is another modality of search and seizure and it is carried out by a Judge. In principle, only material strictly necessary for evidencing the crime will be seized.

However, criminal procedure rules set forth in the Brazilian Industrial property Law allow the IP Owner to request the seizure of all counterfeit products (including all instruments or objects related to the criminal activity).

Moreover, the criminal injunction has the same goals of the police inquire (identify the individuals responsible for the crime and produce a forensic expert evidence to confirm the criminal activity).

Contrary to the police inquiry that admits raids against many different targets under the complaint, the criminal injunction is limited to one or two targets, according to law practice.

In any event, the forensic expert in this case is very strong since it is elaborated by experts indicated by the Judge, while in the police inquiry the exerts are generally from the State Forensic Institutes.

C. Complaint Addressed to the Public Prosecutor

Complaints addressed to the Public Prosecutor are always a possibility, especially if the police authority is not reliable or if there is any possibility of compliance violation.

Parallel to that, State Public Prosecutors have special units against the organized crime, which means that for the most complex and sensitive cases this could be an option for IP Owners to tackle companies and individuals associated to commit crimes.

4.2. Civil Litigation

Civil litigation is the only legal remedy available in Brazil to allow IP owners to obtain repair of damages, due to the counterfeit activity.

Generally are most indicated to be taken against individuals or legal entities provided with assets that are able to endure the claimed damages, and this does not occur frequently in cases of piracy.

Civil Judges tend to grant restraining orders whenever the likelihood of prevailing on the merits and the risks of irreparable harm are demonstrated. "Ex parte" injunctions are also available and are commonly applied. The courts often afford actual and statutory damages.

Damages can be claimed when: (a) the benefits that would have been gained by the injured party if the violation of his rights had not occurred; (b) the benefits gained by the perpetrator of the violation of the rights; (c) the remuneration that the violator would have paid to the proprietor or the aggrieved party for a license which would have legally permitted him to exploit the subject matter of the rights.

 

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José Henrique Vasi Werner

Partner, Lawyer, Industrial Property Agent

He has a postgraduate degree in Criminal Law and Criminal Procedure from Estácio de Sá University. He is legal Dire[...]

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