Trademark Infringement & Counterfeit MI Products: What Happens Next?

Both are growing problems as manufacturers learn about protecting their name – the hard way…

Jose Ferro is at the Music China Show in Shanghai, and he finds himself at a LTD guitar booth. That’s to be expected. After all, he is a vice president of ESP, which makes LTD. But he stands and stares in disbelief because here’s what he could not have expected: It’s not his booth – but another one.  Yet it is their name on the banner, their logo on guitars. And being China, it’s all perfectly legal.

“When I got the phone call and saw the pictures, I was just knocked out – how could this happen?” asks an incredulous Matt Masciandaro, ESP president. “How could someone blatantly do this and not know that we’d be at that trade show, a show we’ve been to since its first year?”

“If something has value, there’s always somebody out there trying to figure out how to steal it,” Harold “Hap” Kuffner states. The venerable industry insider has been going to China since 1983, and today is owner of Kuffner International, a company that acts as a consultant on international export distribution in conjunction with being a source liaison for MI companies. “For as long as I’ve been going to the People’s Republic of China, it’s always been a problem. But today you go shopping in the markets, and you can see it’s the leisure products that are becoming increasingly prevalent – the golf clubs, guitars… and it’s not just U.S. brands being copied but European ones as well.”

It’s as corrosive as it is controversial. A few major MI companies whose battle on this issue is well documented choose not to comment for this article. Lawyer Ron Bienstock says that many don’t even want to bring this issue up to their end-users, which is troublesome: “You need to let people know if they see one of your $179 [products] for $15, that it’s not the real thing.”

A Fake Martin Guitar

An Expensive Problem

A recent raid on a Chinese factory yielded 100,000 packages bearing the D’Addario Guitar Strings’ logo. The company has spent more than $750,000 on legal fees and undercover investigations combating the problem. Everything about this problem is expensive – save the fines: there was a $3,500 fine handed down for that particular perpetrator.

Crack in Fake Martin Guitar

Jim D’Addario personally went on one of the more egregious websites, Alibab.com, and bought a Music Man guitar for $200. He immediately proclaimed it “a piece of garbage.” Adding insult to injury, he notes it got into this country with no problems and no tariff. When this story surfaced, Wang Baodong, a spokesman for the embassy of the People’s Republic of China, told Newsday that the Chinese government considers intellectual property rights to be of “great importance,” but said it is “a relatively new issue to China, which opened to the outside world 30 years ago.”

During a search of the premises used by one of England’s largest online platforms, British investigators seized hundreds of forged branded equipment purporting to have been made by Sennheiser and Monster Cable – the largest number of counterfeits of this kind ever confiscated in the UK.

And Sennheiser, too, has had their problems in China, specifically the Guangdong province where fake versions of their products – along with Harman, Shure, and Audio-Technica – were seized in large-scale fake goods dens. Over 1,200 items falsely marketed with those trademarks were found. Operating under the name “New Dynamics Audio Equipment Factory,” this group sold large quantities of counterfeit audio equipment under famous brand names online. By the time the case was cracked, sales had already reached $1.8 million RMB, nearly $300,000 US.

Schecter Guitars have been targeted as well. President Michael Ciravolo says it’s tough trying to get a legal firm out of China to help. “We pay a lot of money each year to trademark our name, body shapes, headstock, and bought as many website names in other countries as possible.”

Two Kinds of Fake

Kuffner explains there are two separate issues: One is the counterfeiting of instruments and music instrument products. This is when somebody makes replica instruments and sells them as the real thing. Outlining the situation in a historical context, the problem is compounded by the fact that, since the 1960s, companies discovered it was easier and easier to move factories overseas. The quicker and easier they could be moved, the more MI manufacturing became “more like making t-shirts.”

“Guitar and amp electronics are American inventions. Millions are sold a year, so there are factories worldwide that are willing to make copies.” In today’s global economy these products are less expensive to make in places like China, and with CnC machines readily available, it’s “easier for people to cross that line.”

Asian-based online operations are the most prominent distributor of bogus products, and he notes in the last few years Hong Kong “based” operations actually come from another area in the region, but their websites are routed through that part of the world in the hopes that it gives them a hint of respectability.

“I’m a musician,” says lawyer Ron Bienstock. “These companies are people who I know and have been friends with for 30 years.” His firm Bienstock & Michael is a full-service entertainment and intellectual property law firm. They represent 200 instrument companies. His take is that the root of today’s situation goes back to the 1970s, when the vast majority of instrument making was in the states. When quality began to slide during that decade (think CBS owning Fender, think Gibson in turmoil), Japanese companies started gaining a foothold in this country with their guitars. This evolved into American companies increasing their production overseas – first Japan, then South Korea, then throughout the rest of Asia. “Guitars got better and cheaper, and when you think of what kind of instrument you can get with $300 today compared to back then, it’s amazing. But all these great, inexpensive instruments came with a price.”

The price? It opened a Pandora’s box of counterfeiting.  Both he and Kuffner are careful to distinguish the difference between a counterfeit – where someone gets a hold of a good CnC and cranks out similar looking instruments – with a more brutal assault: the wholesale company-jacking that is happening to trademarks in China.

Recently Martin Guitars  had very public meetings with congress on the topic, and Senator Bob Casey (PE – D) has met with owner Chris Martin. He declared: “Pennsylvania businesses are telling me that unfair trade practices by the Chinese have harmed their ability to compete, and job losses substantiate those claims. The lack of protection on the part of the Chinese hurts Martin and countless other businesses and workers. China must address intellectual property rights infringements and currency undervaluation.”

Chris Martin was also featured on Fox News. Some of this publicity must be working, because the intellectual property rights issue (in which companies who make handbags, watches, movies, etc., are also victim) has been brought to the top. In January, President Obama personally brought the issue up with Chinese President Hu Jintao during a meeting.

The Alternative Universe of Chinese Trademark Law

“We’ve been a part of almost every trademark case in the business,” Bienstock says. “Peavey, ESP, Schecter, Hoshino, and Fender” to name a few. His experience goes back to the early 1980s with Fender headstock intellectual property rights – but even then, “[MI company] owners didn’t take it seriously, didn’t see the growth curve.” But the consequences are serious, because if someone registers your trademark before you do in China, it’s technically not a counterfeit product. “They are making a product under your name, which they now own in China.” Nothing keeps them from exporting under that name, either.

With American companies moving manufacturing overseas, things got complicated. Those who were partners with U.S. companies would apply for the trademark of the brand they were working for to protect them – sometimes with good intentions, sometimes not so good; but it could end badly for the U.S. manufacturer. One manufacturer reported that a former distributor there filed for trademark protection of their name under the guise of “helping” them in Brazil. But that was fairly quickly and easily resolved.

Greg Paul, vice president, corporate operations at C.F. Martin, has the same story to tell as ESP, only it happened a few years earlier. At the 2008 China Music Show, they discovered another Martin booth – same script logo, similar looking guitars from a distance and, according to the Chinese government, completely legitimate.

Paul explains that in the U.S. and most countries, all you have to do is prove a longtime use of a trademark. This can be anything from trademark documents from the country of origin or even advertisements or things of that nature, something the 178-year-old company would have no problem doing. However in China, it’s first come, first serve. “This was not an innocent mistake. And this is not counterfeit. If a Chinese company applies for your trademark before you do, it’s truly a big problem.”

Masciandaro says they’ve seen some counterfeiting, and he’s not fond of seeing similar-looking $3,000 models going for $300. But the says that “pales to what has happened” with trademark heisting, specifically the LTD part of the ESP brand. While the company had filed for protection of their ESP lines, unbeknownst to them their LTD line of instruments was left venerable thanks to the Chinese government’s unique take on such matters.

“That was our mistake,” he sighs. “We did not have the LTD trademark protected, too. So this other company jumped in and created a company called LTD, filed for trademark authority, and got it.” Today ESP, working with Bienstock & Michael, filed for cancellation of the Chinese’s LTD trademark and they are in the process of getting the Chinese government involved. “In our view, it’s fraudulent,” Masciandaro says. “And we have to show them that it is, and we are, and the cancellation is in progress.”

Sounds simple, but it’s not. In fact, it’s so complicated that technically, if they try to sell their own guitars in that country, the Chinese LTD company has the “right” to stop their shipments at the ports. “It sounds like an alternative universe.”

Interestingly, the Chinese LTD didn’t try that hard to clone specific models. But the logo and name is enough to do damage. Also, even if those instruments don’t make it out of the country it’s still bad because, “we are just starting to grow in that country.”

Masciandaro says this unexpected, costly, and time-consuming legal problem is badly timed. “This company has been growing a lot, and now we have 40 distributors around the world covering 60 countries, so now we’re filing for trademark protection in every possible country. This was a big wake up call to us, and hopefully a wake-up call to others. ”

Counterfeiting

When 35 Gibson guitars were seized at Oakdale Music is 2007, it was big news. The owner claimed he didn’t know they were fakes. But that might be a rare example of counterfeits of that number getting to the states and going through a dealer.

Kuffner notes, “I don’t see container loads” of counterfeit products coming into the country. But in addition to the foreign-based online operations, some are squeaking by and turning up in yard sales, Craigslist, and eBay.

“The counterfeit problem isn’t growing per se, and I see it staying at a certain pace and not become pandemic,” Bienstock states. “It’s at a stage where most people in MI understand it, particularly the solidbody guitar makers, where it’s often a matter of bolting on a neck and getting it out the backdoor [of a foreign factory]. In general, Customs and Homeland Security has been good about stopping large amounts from coming into the states.”

About that backdoor: Unfortunately, some of these are of decent quality because they are produced by “friends of the factory” – almost as if in a 24 hour shift, those made in the first 12 hours are for the U.S. company, the second half for those “friends.” “That’s why you need people present, people living in China or Indonesia who can be on the factory floor.” To keep counterfeiting at a minimum, you need to have good sourcing, get to know those building your instruments, and have solid manufacturing agreements.

Levy’s Leathers is another company in the business that has reported counterfeiters. Their Chinese distributor, Ivan Music, reported that customers were commenting that similar looking Levy products were being bought at a much lower price. In addition to the products, the violators also took to reproducing Levy’s POP materials and display hangers. They hired the law firm Baker & McKenzie to curb the alleged counterfeiters. According in a statement from Levy’s, the firm will begin by reviewing China-based online auction websites that serve as platforms for intellectual property infringements.

“It’s an ongoing issue, and it’s running rampant,” says Schecter’s Ciravolo. “Other companies are taking more of a beating than us, but fakes are coming up. I have a person on staff searching online for them.”

Ciravolo says that in this competitive market, most guitar companies have instruments made at multiple factories, and that’s a source of the problem. Say a manufacturer approaches a factory in Asia about making instruments. But during the test trials, the instruments aren’t up to the manufacturer’s quality or liking, so no long-term deal is made. “Then sometimes, even though you get your samples back, they just keep making them. They don’t follow U.S. law or general ideas of business ethics… that’s how it’ll start.” It’s his view that a lot of these factories don’t have enough legitimate business, so they turn to making illegal products to fill their production schedule. “It’s bizarre, and almost a full-time job trying to police it.”

While their instruments have long been made in South Korea, they did try some Chinese companies, but none of them met their standards, and today many of their instruments are made in Indonesia in factories run by South Koreans. Surveying the scene, he says some of what is happening is a head-scratcher: “Some of the stuff that pops up isn’t even a specific Schecter model – it’ll have like a Strat body and/or be in a color we don’t even make. It’s become a weird game to stay a step ahead of them, and you don’t get real help from the Chinese consulate.”

But few of these counterfeit Schecters make it to the states. “Every now and then we get a question from someone who says they bought this guitar on eBay, and it turns out it was shipped out of Hong Kong. We usually turn it over to Ron [Bienstock], and he gets that site shut down though it likely pops up later under a different name.”

He’s not amused by the situation. “Legally, China doesn’t give a ____ about it. They make a mockery of trademarks and patents, and it means nothing to them… I guess I’m hounding China, but the fact is the lion’s share of the problem is coming from that country. I’m proud we’re not giving our money to them any more.”

“Hate seeing anybody get burned”

D’Addario got into a situation where they were fighting both trademark and counterfeit issues, due to a law firm clerical error. They put in their application for a Chinese trademark, but it never was processed. Then a Korean counterfeiter who owns a factory in China stepped in and took it. After four years of litigation, the Chinese court decided in D’Addario’s favor.

But John Burke, D’Addario’s General Council, says there are little problems in the States. “If a dealer purchases from one of our authentic distributors, it’s not a problem. We only encounter a counterfeit string problem when a dealer goes online and buys bulk strings because they see them advertised online.” (But a few counterfeit strings are getting out of China, partly because customs doesn’t inspect packages where the value is $50.)

As for China itself, seven out of ten “D’Addario” strings are deemed counterfeit. “We’ve done two surveys in the last three years, and it confirmed our early results,” Burke says. “We’re trying to gather information to conduct raids on factories where they are being made.” This takes detective work. First, an operative has to go into a shop and start asking questions, an adventure in itself. “Sometimes when you ask for D’Addario strings, they come right out and ask you: ‘Do you want the real ones or the fake ones?’”

It’s easy to spot the counterfeit strings: the ball ends are different, they easily break, and they just feel and sound inferior. But Burke says the counterfeiters have gotten crafty about one telltale sign – price. Even in China, consumers became worldly enough to be suspicious of extremely low prices. “But now counterfeiters are smarter and pricing their strings closer to ours, and the fakes are harder to distinguish, especially online.”

While all who were interviewed for this report no doubt regret the loss of a single sale, they were all united in being concerned with what that the buyer ends up getting. “The sad part is that [these Martin guitars] are poorly constructed,” says Greg. “It has a very heavy, nasty finish on it, there are construction defects, and cracked backs.” Chris Martin keeps one of these in his office, but everyone there is hesitant to even pick it up as its condition is such that it might fall apart simply through handling of the instrument.

Kuffner points out that some of these end customers don’t even know what they are buying. “You have a parent at a yard sale and there are copies of C.F. Martins and they don’t know the difference or have a reason to suspect.”

So how naive are these buyers? “I have to laugh at some of these websites,” Bienstock says. “And I gotta say, if I’m 14 years old and I see a PRS for $299 on a site called elcheapoguitars.com and the description is clearly not professionally written, as in ‘must most beautiful guitar seen call today now’ … come on!”

“I would hope that the American consumer is a little smarter,” Ciravolo says. “We put as much information on our website as possible to guide them away from imitations. We take a lot of calls and try to help people through it… honestly, I just hate seeing anybody get burned.”

Burke: “D’Addario has been making strings for many, many years, and we’re experts at it. But they can duplicate our packaging. Then a new player who hears that our strings are the ones to buy, and their first experience is bad. We lose a customer and they have a bad experience.”

“Our consumers in the states are educated enough to know about our product to know when something is not a real LTD,” says Maciandaro. “But knowing it’s not the real thing, maybe they’ll still take the fake one! It’s like buying a ‘Rolex’ on the streets of New York.”

What’s Next

Everyone interviewed for this report said the single most important thing dealers can do in educating their customers about counterfeits is repeating the mantra, “If it sounds too good to be true, it most probably is.”

“It’s important that end users know they need to go to an authorized dealer for any particular guitar they want,” Paul says. “That’s the best way to ensure that the instrument he or she purchase is the true thing.”

“Our message to consumers is starting to resonate,” says Burke. “An educated customer is our best customer, and that is our approach to marketing and advertising to alert customers of this problem. We have to protect our brand equity.” Reminding their customers that all D’Addario strings are made in the U.S. offers an antidote. “If you go online and XYZ Manufacturing is the source, that should tip you off that they aren’t authentic.”

Another tool is media. D’Addario had a public meeting with Senator Chuck Schumer (D-NY), who got an earful about how the problem is hurting American family-owned businesses. “Within 24 hours, I had gotten an email from the vice-president of the website alibaba.com saying they had removed 421 counterfeit ads from their website.” They also report success with their “Play Real” campaign, launched in 2010.

“Let’s be clear, nobody at Martin has a conflict with competition,” Paul emphasizes. “But we’re continuing our legal pursuit to get [the Martin] Chinese trademark, and raising this issue on the political side,” Paul says. “You’re going to see many instrument companies communicate more with their representatives to push our government to end this particular practice.” Yet “it’s slow going, and many say the [Chinese] legal process is stacked against us.

“Then again, if our brand is old enough for protection, I don’t know whose is!”

Martin, D’Addario, and others were going to be part of NAMM’s advocacy fly-in this month [May], where this issue will be raised to congress. Paul says that by raising awareness of this issue, different MI companies sharing their experience and try to get some momentum for change.

In addition to an educational campaign, there’s a political one.

“Other government’s worldwide have to understand that it cost a tremendous amount of money to protect a trademark everywhere,” Kuffner says. “There should be a way that an inventor, a designer, a small company, can be easily recognized internationally.” Once this happens, it’ll make for a better, fairer system.

“I do think the Chinese government will make a greater effort to reign in counterfeiting, because if they don’t, people will just start to think everything that comes out of the country is junk,” Burke says. “So they have a vested interested. But it’s not a problem that is going away quickly or easily.” On the horizon, he sees the Chinese middle class emerging, and as they do they will come a demand for higher-quality products, and thus have less patience for inferior product. This will cause the people to seek out authentic ones.

“China gets the finger pointed it a lot on these issues, and it’s a shame because right now the market in that country for MI/pro light and sound products is growing,” Kuffner says. The middle class is growing, and so is the interest in western-style music. “You have a growing market of 1.3 billion people sharing a border with India, which has another 1 billion people, and so the marketing for modern electronic musical instrument will continue to grow. On the other hand, not everybody has the money to buy the highest end [instrument]. So there’s always going to be people figuring out how to copy – that idea is as old as humankind.”

“Any manufacturer of any size should be sophisticated about intellectual property,” Bienstock advises. “As a bass player, I want these companies to be around! Those who don’t register their trademark may eventually be in a situation where 20, 30 percent of the product being sold in the world is not from you, and that could be enough to make you go out of business.”

But what if – if – the Chinese government isn’t particularly interested in working too hard at shutting these rogue companies who pop up and also – if – U.S. politicians aren’t that willing to give the problem any more than lip service …

“All of that is true to some extent,” Bienstock admits. “It’s very tricky for us as a country as we’re borrowing trillions of dollars from China. Meanwhile, we’re always emphasizing the value of maintaining your intellectual rights. And the smaller you are, the more important it is – your brand is who you are.”