STRATEGY

Fighting Fakes

It's not just Gucci and Rolex. These days, counterfeiters will knock off pretty much anything.
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When counterfeits of Uniweld's manifolds started hitting the shelves in Saudi Arabia in 1999, David S. Pearl II was dumbfounded. His devices are designed to test refrigeration and air conditioning compressors, and counterfeiters had duplicated everything--from the exterior of units to the documentation included in the packaging, which was emblazoned with an American flag.

But the bogus products had significant defects, such as leaks and lousy accuracy, and were causing problems for customers who thought they'd purchased the real thing. Uniweld, based in Fort Lauderdale, Fla., has been making tools for heating, air conditioning, and welding systems since 1949 and is no stranger to doing business overseas; it has offices in Canada, Equador, and Lebanon. Thanks to a strong demand for air conditioning, the Middle East is an especially robust market. The fake manifolds, which sell for 30% to 50% less than the usual $60 wholesale price, were taking a toll--not only in lost sales but also in terms of Uniweld's reputation. "It was a horrible blow," says Pearl, who runs the company with his brother Douglas and his father, David, Uniweld's founder.

Mention fake products and most people think of Gucci bags, software, and Hollywood movies. But pirates these days are knocking off everything from pharmaceuticals to shoe polish. In 2005, piracy cost U.S. businesses an estimated $250 billion, according to the U.S. Chamber of Commerce.

The Pearls had never considered that their products for refrigeration technicians might be knocked off, and they were uncertain about how to proceed. Their first move was to change from two-color printed white boxes to full four-color packaging that was supposed to be harder to copy. "It took them only six months to duplicate it," Pearl says. Most galling of all, because the fakes came with copies of the actual documentation--including the company's contact information--Uniweld was stuck fielding complaints when the fakes failed to perform.

Uniweld figured the knockoffs were coming from somewhere in China. But who was importing them into the Middle East? The company undertook an investigation. It began by asking everyone who was even remotely connected to the HVAC industry in the Middle East if they could identify the source of the fakes. No one, including a former Saudi Arabian distributor who had been let go recently, had a clue.

Uniweld hired a Saudi law firm to register its trademarks throughout the Middle East, something it had never done before. But the fakes continued to hammer sales, costing as much as $1 million a year in lost revenue. In 2002, the Pearls finally got a break, when a local industry insider fingered that former distributor in Saudi Arabia. In 2003, the Pearls filed suit in Saudi court, demanding reimbursement for lost sales. (Fortunately, the man was Palestinian; had he been a well-connected Saudi, he might have been able to continue with impunity.) The case has proceeded slowly.

Then in 2004, Uniweld's new regional salesman, an American fluent in English and Arabic, was attending the Big Five, a major industrial show for the Middle East that takes place in Dubai. Four people, none of them authorized distributors, offered to sell him phony Uniweld manifolds. The Pearls were alarmed--the fakes had spread beyond Saudi Arabia. They called the Dubai offices of their attorneys, who advised them to send technicians undercover as buyers, purchasing phony manifolds from various shops in Dubai as evidence. The technicians came back with the evidence, and the attorneys sent cease and desist letters to those distributors and gathered the evidence to use in the legal proceedings in Saudi Arabia.

The Pearls are monitoring the trial from Florida. While no fakes have appeared in their other territories, the phony manifolds can still be found in Dubai. Lost sales and legal expenses combined have added up to several million dollars, and although sales have rebounded, full recovery is slow. "We've been working hard to regain the market, but it's not easy," Pearl says. "The only way to survive is by being constantly vigilant."

Resources

Go to the World Intellectual Property Organization for advice on protecting inventions and trademarks from piracy. The U.S. Patent and Trademark Office offers help with filing patents and finding an IP lawyer at stopfakes.gov/smallbusiness.

Last updated: Feb 1, 2006

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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