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Perfect storm for counterfeits: why Brazil needs to be on the international radars

by José Henrique Vasi Werner

February 07, 2019

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The economic recession, among other factors, has created conditions for a sharp increase in counterfeit products in Brazil’s physical and virtual marketplaces – making policing an urgent requirement for many brands.

“Has Brazil blown it?” With this inflammatory headline – accompanied by an image of the famous Christ the Redeemer statue falling from the skies – The Economist magazine in September 2013 described the beginning of what “became the greatest recession of the century”, according to the former Brazilian Minister of Economy Henrique Meirelles.

Curiously, a mere four years earlier, in November 2009, the same magazine bore on its cover an image of the same statue taking flight from Corcovado Peak under the strapline: “Brazil takes off”. This previous prosperity was based on a significant increase in the price of commodities (from raw materials to agricultural products) from the late 1990s to early 2012, boosted by growing demand from China.

With its economy heavily dependent on exports, Brazil enjoyed a boom during this period and was one of the last countries to feel the effects of the 2008 economic crisis. At the end of the Lula administration in 2010, the country registered a GDP growth rate of 7.5%, the largest expansion since 1986. However, this success had to end. The economic recession, together with multiple other factors, served to create a perfect storm, which caused ideal conditions for counterfeit products in the Brazilian real and virtual marketplaces.

Economic recession

A major external factor in this development was the deceleration of the Chinese economy. This, coupled with falling commodity prices, all contributed to rising unemployment in Brazil.

Internally, errors in public policies reduced the growth capacity of the Brazilian economy and generated a high fiscal cost. Signs of a strong recession were already apparent in 2014, when GDP growth slowed to 0.5%. In 2015, the economy contracted by 3.8% – the worst recession since 1990 – during the Collor government. In 2016, GDP suffered another sharp fall (3.6%), which made the recession the worst in Brazil’s history. The crisis also contributed to record unemployment levels – this peaked in March 2017 with a rate of 13.7%, more than 14 million people.

This economic crisis was accompanied and intensified by a political crisis, which resulted in many demonstrations and riots against the government throughout the country. Dilma Rousseff, who had been re-elected for her second term, was removed from office for good in August 2016 when the impeachment process against her was completed; this led to her deputy, Michel Temer, assuming the presidency, though he too was the target of protests.

By 2016, the effects of the economic crisis were largely felt throughout the population, which had to adapt to this new financial reality. According to a survey conducted by the National Confederation of Industry in that year, almost half of interviewees had begun to use more public transport, while 34% had no health insurance.

If on the one hand the recession affected consumption and purchasing power, on the other, it was an opportunity for the orphaned commodity industry and Brazilian industry in general to redirect their efforts towards a brand new sector in which the prices are extremely competitive, consumers are avid for new products and where it is easy to avoid both state bureaucracy and extortionate taxes: the counterfeit market.

Over the past decade thousands of factories in Brazil have dedicated themselves to producing counterfeits – not only because of disruption to the international business chain resulting from the world economic crisis, but also because these companies finally realised that they could produce goods for domestic customers and create their own national business chains by manufacturing illegal goods.

Human factor

Parallel with this development, it is undeniable that the huge Brazilian population (nearly 210 million people) is a goldmine not only for brand owners but also for counterfeiters – who are always searching for new markets.

Due to the economic crisis, Brazilians are enjoying counterfeit products not only because of their low prices, but also due to the prestige that they carry out while reproducing famous brands. It is estimated that 73% of the Brazilian population bought counterfeit products in the past 12 months. Among these buyers, classes A and B were the most active group when the purchases involved luxury goods, articles of clothing, apparel, headwear and footwear.

Inevitably, such behaviour encourages both illicit products and the informal market. In fact, statistics suggest that around 55% of the economically active population has found informal work in Brazil. Parallel with this, counterfeit products are bestsellers in the informal market, with sales topping 88%.

Geographic factors

Another important element contributing to this perfect storm is the vast border that Brazil shares with 10 other countries in South America (16,886km) and its huge coastline of 7,491km. This continental size makes Brazil one of the most important players in the illegal trade both in South America and globally.

Although in recent years Brazil has become an important producer of counterfeit products, it is still the final destination for counterfeits coming from Asia, Africa, India, Paraguay, Uruguay, Argentina, Chile, Bolivia, Venezuela, Panama and others. Of course, this also facilitates links with other organised crime, such as drugs and weapons trafficking.

Products from China can reach Brazil directly or through routes that involve Paraguay, Uruguay, Argentina, Chile, Bolivia, Colombia, Venezuela or Panama. Brazil is also used for the transit of products coming from China with a final destination of Paraguay.

In the south of Brazil, a region called the Tri-Border Area – where Brazils shares borders with Paraguay and Argentina – is witness to a dangerous influx of counterfeit products from those two countries into Brazil.

In addition, the presence of another country close to that region – Uruguay, which is also an intermediary for products in transit to Brazil – is aggravating the situation even further.

Legislation

Trademark protection is regulated by the Brazilian Constitution, the Industrial Property Law (9279/96), the Paris Convention (as amended in Stockholm), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and the August 1995 Protocol for the Harmonisation of Rules Regarding Intellectual Property within Merco¬sur in the area of Trademarks, Indications of Source and Denomina¬tions of Origin.

Patent protection is regulated by the Constitution, the Industrial Property Law, the Buenos Aires Pan-American Convention 1910, the Paris Convention 1883 (as reviewed in Stockholm in 1967) and TRIPs. Although the enforcement of TRIPs was disputed before the Brazilian courts in 2000, all the provisions of this agreement came into force.

Copyright protection is regulated by the Constitution, the Civil Code, the Copyright Law (9610/98), the Berne Convention, the Universal Copyright Convention 1955 and the Washington Copyright Convention 1946. Software protection is provided by Law 9609/98.

Although Brazilian IP laws are in line with IP legislation around the world, there is still much more to do in order to update and improve certain aspects of the Brazilian IP regime. A clear example of that necessity is the current criminal sanctions against individuals who commit crimes against industrial property (ie, patents, industrial designs, trademarks and unfair competition, among others). Indeed, patent and trademark owners are being harmed by weak legislation in which the statute of limitation for crimes against trademarks and unfair competition, for instance, is extremely short, making it difficult for rights holders to carry out criminal prosecution against the individuals responsible for these crimes.

Bill 333/1999 is still pending before the National Congress, meaning that there remains an enormous legislative gap with profound and negative consequences for enforcement related to those rights.

Local production

There has been a steep growth in the number of factories with the capacity to supply the domestic market with tens of millions of counterfeit products. Beyond that, in certain types of industry, Brazilian factories are already exporting counterfeit products to the Americas and elsewhere around the globe.

The economic recession has drastically aggravated this problem. Local companies that were previously surfing the unreal waves of Brazilian acceleration are now experiencing hard times, some with no option but to engage in illegal trade or shut down altogether.

The surviving factories, which boast brand new, modern machinery and the know-how to produce certain types of products, have thus found new ways to keep their businesses alive. Unemployed workers have finally had the chance to find new jobs in these illegal factories – workers who do not have their labour benefits duly paid are the engine powering the counterfeiting industry.

Indeed, over the past 10 years there has been an explosion of local illegal industries dedicated to the production of counterfeit versions of famous brands, especially in the clothing, luxury goods, accessories, shoes, school supplies, auto parts, beverages and pharmaceutical sectors – among others that cover high value-added products. Whole illegal centres have emerged in recent years and those previously known have grown to unimaginable proportions and become major centres for the manufacture and distribution of illegal goods.

Multi-sector counterfeiting industry

From footwear to headwear, Brazilian counterfeit factories are becoming so well organised that now they are recognised according to their geographic locations. The most well-known illegal hubs are the headwear, shoe, luxury goods and clothing articles industries. For headwear, Apucarana (located in the interior of Parana State) is known as ‘cap city’. Out of the estimated 500 factories actively operating there, 95% are involved with the counterfeit production of headwear.

City incursions in the past five years by one of the largest cap manufacturers resulted in more than 60 illegal factories being tackled and the seizure of more than 5 million counterfeit caps, as well as the raw materials used in the production process.

Organised crime, local millionaires, the arrest of state police officers (including the head of the local state police department) and overlapping jurisdiction for three different states were some of the challenges faced by rights holders trying to organise enforcement actions.

The most significant concentration of illegal footwear manufacturing, meanwhile, is the city of 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, which focuses primarily on leather shoes, while factories in Nova Serrana lead in the illegal business of manufacturing counterfeit versions of famous trainers.

Local business is far from being handled by amateurs. Multi-state illegal organisations were identified during the last set of raids in that region. There were indications of robust distribution networks, since counterfeit products were being distributed nationwide.

In a city where 80% of the factories are involved with illegal activities at some level, specific strategies are needed to enforce IP rights. Political connections and informants are capable of destroying an entire investigation if a complaint addressed to the city enforcement authorities is leaked.

There are many different areas in Brazil dedicated to the production of counterfeit luxury goods, but one stands out from the rest due to the high concentration of illicit factories in comparison to those that are involved in legal activities. The interior of Sao Paulo (notably Franca and surrounding cities) has been targeted more than 20 times by a well-known Brazilian producer of handbags and shoes over two consecutive years (2011 and 2012). The local producers are tireless, however, and frequently migrate to other brands after they notice that some rights holders are being more active in detecting and tackling illegal factories. Counterfeiting levels involving the aforementioned Brazilian company fell from 75% to less than 15% after two years of intense work in the area. However, this was matched by a corresponding rise in counterfeit handbags bearing the trademarks of a famous French producer of luxury goods.

Another important illegal industry sector is located in the south of Brazil, mainly in the states of Rio Grande do Sul and Santa Catarina – the counterfeit clothing industry. Even though they are located far from the most important Brazilian cities, these two regions have the capacity to produce millions of illegal products to be distributed throughout Brazil. The counterfeits are extremely competitive with regard to price and quality.

Raids in that region are directly affected by innovative but not necessarily welcome theories with regard to penalty reductions, shorter jail sentences, suspension of criminal procedures and minimum penal law. While strong police authorities and certain public prosecutor groups guarantee effective enforcement, more attention is needed in the subsequent stages.

After the depreciation of the Brazilian currency by more than 60% within the last two years, factories dedicated to manufacturing counterfeit products in Brazil are also trying to order raw material from local companies. Recent raids have therefore identified and tackled many different factories involved in the production of raw materials for illegal companies. Of course, most of these raw material factories are tackled together with the manufacturers of fake products and need to explain their association with this crime, as well as accusations of criminal organisation.

Physical market

The immense network of local industry producing counterfeits and the steady stream of imported counterfeit products demand local distribution networks to ensure that illicit goods reach consumers. With clear niche specialisation depending on where the distribution market is located, consumers can easily find whatever they want provided that they go to the right place.

The extraordinary range of illegal products on offer, together with the lack of enforcement in some areas, facilitate the growth of certain distribution centres or trade areas, both formally and informally.

Besides the emerging digital market, a significant proportion of the Brazilian population still prefers to make purchases in the real world, signalling that this type of illegal market will never disappear and will always represent a serious threat to rights holders.

Online market

Copyright violations, trademark infringements, domain name misappropriations and the massive trade in counterfeit products are the most common illegal activities carried out in Brazil. Online IP infringement is no longer restricted to Mercado Livre. Entire portals, websites and social platforms (eg, Facebook and Instagram) are now part of the problem as well. The lack of obligation for content providers to shut down illegal websites, pages and links has contributed to the exponential growth of online traders.

Parallel with that, superficial strategies used by rights holders are having the unintended consequence of encouraging online infringers to continue their illegal businesses. Online anti-counterfeiting programmes restricted to notice and takedown solve the problem only temporarily, since the infringers usually resume or restart the same infringement under a new name, page, link or website.

Unfortunately, deeper and more effective strategies that might allow the identification of physical addresses for online infringers and more meaningful enforcement are put aside, justified by the same rhetoric of cost reduction and improved statistics.

In any event, rights holders’ own efforts to list counterfeit products being traded online tend to identify only the small players. The challenges of discovering national or international sources, distributors and buyers, obtaining physical addresses for them and identifying and defining the liabilities of internet service providers are still gigantic.

Enforcement

A proper legal system should mean that rights holders stand a reasonable chance of enforcing their intellectual property. Unfortunately, well into the 21st century there are still enforcement authorities in Brazil that confuse patents and trademarks, while others are totally unaware of the damages caused by IP violations or even consider that such violations result in minor harm only.

In light of this, the expected trend would be further specialisation at the courts, the Public Prosecutor’s Office and the state, federal and military police. However, in a completely counter-intuitive development, the state police recently shut down two of the three existing police departments dedicated to fighting counterfeiting in Brazil.

The salvation for brand owners is the surveillance and ex officio work developed by Customs. This results in thousands of products seized each year and the dedication of certain administrative forces that, due to their specialisation, have managed to coordinate significant seizures over the past few years.

Border protection

Brazilian Customs does not maintain a centralised IP rights database. In addition, there is no standard procedure throughout the country for the seizure of goods at the border. Therefore, a palliative solution has been developed: the filing of an inspection request before the General Department of Customs Administration (COANA), including a list of IP rights and a request to trigger surveillance for illegal imports. In order to amplify the effects, such requests can also be directed to major Brazilian ports and airports to overcome any lack of communication between COANA and the local customs authorities.

In addition to such written requests, rights holders are keen to organise meetings with customs authorities in order to explain their concerns and make them familiar with the intellectual property being infringed. Constant training programmes are also needed to keep customs officials up to date and to remind them that imports of counterfeit products are still a major issue.

The confidentiality of customs matters also serves as a barrier to obtaining clear and straightforward information related to importers. In certain cases, rights holders are obliged to obtain a court injunction just to discover the name of the importer and allow its subsequent civil or criminal prosecution.

The recession is aggravating the lack of investment in human resources and technology. Such investment would contribute to reducing the burden of border protection, which ultimately will always be insufficient due to the large size of Brazil.

The fact that border protection legislation is so out of date is also a major problem. Retentions and seizures limited to cases involving trademarks and copyrights provide insufficient protection for rights holders, which also need remedies against patent and industrial design infringement, parallel imports and unfair competition practices.

Corruption

A dangerous liaison between Sao Paulo state police and local counterfeiters which guarantees protection against investigations and raids in the area is just one of the many examples of how counterfeiters and their criminal organisations are using corruption to maintain growth and keep their path free of obstacles. This corruption is hampering US and European companies, and their attorneys in Brazil, from organising official investigations and seizures.

Lack of international pressure

While the Office of the US Trade Representative (USTR) maintains its diplomatic position of keeping Brazil on the Watch List instead of the Priority Watch List, there is little chance of effective change.

USTR representatives need to have a more realistic picture of IP protection in Brazil, including the deficiencies listed above with regard to anti-counterfeiting and brand protection, as well as other aspects related to corruption, enforcement and legislation. Only then can Brazil react with a positive agenda and start to implement effective responses to the problem.

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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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