Trade in counterfeit products has long been a major economic challenge for various industries around the world.

According to the Global Brand Counterfeiting Report 2018, the 2017 counterfeit market is estimated at USD 1.2 trillion. At the same time, studies predict an increase in the turnover of all counterfeits by 2020 to USD 1.82 trillion. In turn, The Visual Capitalist () notes that the sale of counterfeits in 2018 caused damage to the global economy in the colossal amount of USD 323 billion. The amounts of taxes not received by states due to counterfeit trade are no less impressive as well. Thus, according to the EU Intellectual Property Office (EUIPO), the EU member states lose about EUR 15 billion in annual tax revenues due to this issue.

The amounts are impressive, aren't they? The most unacceptable thing in this regard is that the damage is caused not only to end consumers, but also to the interests of legitimate producers and right holders.

Statistics indicate that the lion's share of such offenses concerns large international corporations and, in turn, well-known brands. The world community has recently gained considerable experience in combating this problem, including through technologies. These include QR-marking of goods, RFID and NFC identification, hologram application, online tracking of consignments, etc. But is technology alone enough to stop or at least reduce the counterfeiting of branded goods? Unfortunately no, as practice shows.

In my opinion, effective counteraction to mass violations is possible only within the procedural law framework and in close cooperation with the State. Manufacturers believe that the most popular and effective way to protect their rights in Ukraine is to enter IP information into a special customs register. The next most popular option is commercial and civil litigation, which also have certain tools to protect the rights of legal producers. However, practice shows that these methods hardly have any effect on the manufacturing and marketing of counterfeit products within the country. Sometimes they are even ineffective, eliminating only the result of illegal activities rather than their cause and effects.

At the same time, manufacturers often neglect criminal law as an effective tool to stand against counterfeiting, although such disregard is not justified, as a fairly wide list of effective and time-tested means of preventing and immediately stopping the manufacturing and selling of counterfeits opens up to businesses.

Illegal use of a trademark or brand name is a criminal offense and results in prosecution by the State. In particular, the effective Criminal Code contains an article establishing liability for illegal use of a trademark, brand name and qualified indication of origin.

Therefore, an investigator in a pre-trial investigation has the right to carry out a number of overt and covert investigative actions. With regard to counterfeiting, the most typical 'models' for joint actions of law enforcement agencies and business is as follows:

  • A controlled purchase of counterfeit products
  • A search at the place of sale, manufacture or storage of counterfeit products.
  • Seizure of counterfeit products or equipment for their manufacture.
  • Attachment of seized property and other assets of the offender.

However, despite the importance of these actions, business representatives may reasonably question how exactly these investigative and procedural actions can help the brand right holders to protect their revenues and intangible assets?

Firstly, an investigation will be conducted as part of criminal proceedings not only regarding the actual sale of counterfeit products, but also regarding their manufacture for sale. A search will be made for counterfeit packing and storage points, manufacturing facilities, persons involved in the manufacture, sale and storage. The starting point for this is a controlled purchase, which allows recording the fact of the offense, the person who commits it, and other information required as further evidence in criminal proceedings.

This investigative action is covert, hence the requirements for the relevant grounds are much higher than usual. For instance, it is possible only in cases where a serious or especially serious crime is being prepared or committed in relation to extremely valuable goods or in large quantities.

Secondly, following the controlled purchase, a search is carried out on site, the goods are seized, and the manufacturing facilities are sealed. Then the court immediately considers the investigator's request for the attachment of the seized counterfeits, all the equipment they were made with and sometimes all the warehouses they are stored in.

Then, if grounds are available, the judge attaches the property with a ban on its use. This leads to a complete blockade of counterfeiting, whereupon any activity related to the manufacture and distribution of counterfeit products becomes impossible.

 Thirdly, a pleasant bonus, which is also a kind of safeguard against further illegal activities, is the destruction of all counterfeit products and sometimes of the equipment it was manufactured with. However, this is possible only in the case of a guilty verdict explicitly stated in the court decision.

By way of example from my practice, an international company owning a well-known brand was selling its exclusive product in Ukraine. The product quickly gained the trust of business and was in great demand among consumers. However, after some time, the company began to suffer catastrophic losses due to falling demand and, consequently, sales. As it turned out, the market was flooded with counterfeits. The first thing the company did was to initiate numerous lawsuits against the sellers of counterfeits. However, as soon as it managed to win a commercial dispute and stop a dealer from selling counterfeits, others appeared.

Things proceeded in that train until the relevant criminal proceedings were initiated and operative measures revealed an underground workshop for the production of counterfeits. Later, after a whole complex of investigative actions, the illegal activity of the identified workshop was stopped. As a result, the level of sales gradually went up, and confidence in business began to recover.

Therefore, with the above-described investigative and procedural actions, companies can achieve the following goals:

  • seizure and destruction of counterfeits,
  • complete blockage of the counterfeit manufacturing process,
  • attachment of offenders' assets.

Apart from that, to meet another objective, which is no less important for business, the Criminal Procedure Code provides for the compensation for damage caused by a criminal offense. To recover damages caused by the illegal use of a trademark or brand name, victims have the right to file a civil lawsuit against the offender, which is part of criminal proceedings and is resolved as part thereof along with a guilty verdict issued.

Also, all the evidence collected in the course of investigation will be automatically used to prove the validity of the claim. This greatly simplifies and speeds up the evidentiary process. According to the law, not only direct damage but also lost profits, non-pecuniary damage as well as damage to a company's business reputation shall be compensated. A forensic examination is conducted to identify the specific amount of damages.

At the same time, it should be noted that offenders will also be interested in the prompt compensation of damage, as this may be taken into account by the court when issuing a verdict and, to some extent, when deciding whether to discharge the offender from criminal liability. However, the decisive role in this case will be played by the decision of the rightful brand owner, who is unlikely to make advances to the offender without full compensation or even a public admission of guilt and an apology.

To sum up, criminal law and process contain quite effective institutions to combat counterfeiting. The range of possibilities in criminal proceedings is much wider than in civil and commercial litigation. With its help, a company, whose rights have been violated, can not only recover all the damage caused by such an offense and collect a solid evidentiary base, but also completely stop the manufacture and distribution of counterfeits as well as withdraw the already sold things from circulation.

Mykola Nychyporuk

Associate, attorney-at-law at Arzinger