Parasitic copying is unfair play

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1 Parasitic copying is unfair play Toy Industries of Europe (TIE) has developed this document following the European Commission s call for comments on its retail market monitoring report, Towards more efficient and fairer retail services in the internal market for The Commission s report has identified a number of problems that affect the smooth functioning of the internal market in terms of growth and innovation. In this document, we will focus on parasitic copying, one of the issues identified as impeding the internal market from achieving its full potential. We seek to explain that parasitic copying is an issue for the consumer and industry alike. As long as unscrupulous traders exploit gaps or absence of legislation, imitators will build their success at consumers and companies expense. TIE fully supports the EU objective to complete the single market and boost competition. As a strong supporter of free trade, TIE believes that competition is key to drive our companies success. However, competition is good as long as it is fair. Therefore, TIE s position has always been that all companies should meet their obligations to prevent any likelihood of confusion between products, to avoid an unreasonable exploitation of another s efforts and to avoid confusing the purchasing public. An internal market that is more efficient and fairer for all economic operators must protect branded products against unfair practices such as parasitic copying, which undermines investment in innovation and limits growth. 1. Parasitic copying Parasitic copies also often referred to as look-alikes, knock-offs or slavish imitations represent an ever growing problem in Europe. Copiers have realised that the protection of intellectual property rights (IPR) has improved in recent years. Their response has been to intentionally develop products which are similar to the original so as to avoid directly infringing any trademarks, design rights or copyrights. Brand owners in the toy industry face an ever increasing problem from traders producing look-alike toys. Parasitic copiers closely imitate many but not necessarily all of the distinctive marketing properties of a brand, for example the colour and shape of the packaging, the layout and design of the label, the concept and style of the advertising and promotion, and the design of the product itself. The end result conveys a similar appearance to the original, the effect of which is to mislead the consumer into believing that the parasitic copy has the same quality, the same source of innovation and the same set of values as the original brand. In European jurisdictions, brand owners have little protection against these traders who deliberately design around intellectual property rights. There is no uniform rule or EU-wide legislation regarding parasitic copying. Legislation differs widely between Member States. These variations are compounded by the poor application of rules where they do exist. Given the diversity of rules on parasitic copying, the environment in which our companies operate is unpredictable. These diverging national rules lead to the fragmentation of the internal market, the distortion of competition and the increased risk of circumvention by copiers who are aware that the chances of being prosecuted are almost inexistent. Parasitic copying dissuades branded manufacturers from investing in innovation, which hampers the optimum growth of both economic operators, particularly SMEs, and the internal market. Boulevard de Waterloo Brussels Tel Fax VAT BE

2 2. A problem for consumers and business Parasitic copying takes unfair advantage of the goodwill attached to popular brands. Parasitic copiers deliberately design and market their products and packages in a similar manner to branded toys and seek to mislead the consumer into believing that he or she is buying a high-quality original. The toy industry s innovative capacity and investment in R&D are our biggest added values, allowing our companies to compete globally. Undermining such efforts simply undermines our industry. Parasitic copiers are modern industrial robbers and they must be stopped. The cost is paid by the consumers and industry alike Parasitic copying misleads consumers As parasitic copies are lookalike products, the consumer is often confused into buying the copy, thinking it is the genuine article due to the similarity of the product and packaging. Often, the child discovers the mistake when they receive the toy as a gift. Consumers are therefore misleadingly encouraged to think that parasitic copies are produced by trustworthy manufacturers and are of the same quality as the recognised brand. Consumer protection policy requires that consumers are able to make clearly informed decisions in selecting their purchases. Significant numbers of consumers confirm that they have purchased parasitic copies in error and other consumers mistakenly believe that copy products are made by the brand manufacturer. In 2003, Zapf Creation, a German toy company, conducted a survey involving 549 German households with daughters aged between three and ten years old. 99.6% of the respondents knew the doll BABY born marketed by Zapf Creation, even if only by name. 80% of those who knew the BABY born doll had already bought some BABY born products. Of those customers, 7.1% accidentally bought a product from the competition whereas their initial intention was to buy a BABY born branded product. When asked about the reasons of the confusion, the consumers said that the similarity of the packaging was most confusing. The child who received the gift discovered the mistake in 58% of the cases. However, in more than 90% of cases the misleading copy was kept. A 2006 survey 1 of over 1,000 consumers in the UK showed that only 19% of interviewees said they could recognise a genuine brand from a look-alike. This study also stated that, in the UK, one in two consumers had bought a look-alike in the 12 months prior to the report. The illustration below shows that parasitic copies are very similar in their packaging, colours and size, which are key features that confuse the customer. 1 Counterfeiting luxury: Exposing the myths, research carried out by Ledbury and published by Davenport Lyons,

3 Some similarities In some jurisdictions, this is likely to be an infringement, in others, it is not Cost to industry The results of a 2007 study 2 by the European Commission Directorate General for Enterprise on the effects of counterfeiting on SMEs found that parasitic copying was the second main source of concern to SMEs regarding IPR infringement, following design infringement. Parasitic copies adversely affect investment in innovation. Copiers do not incur the costs of new product development such as product failure, novel packaging development, design decisions, and advertising that are borne by fair competitors. They therefore have an unfair advantage over those competitors who trade fairly. Copies are often sold at a slightly lower price than the original brand since the producer bears few of the costs borne by the original brand manufacturer. The deliberate use of similar design and marketing methods combined with sale prices which are lower than the branded toys constitute parasitic behaviour, which dilutes the image of a brand. Leading brands have to work hard and invest over time to earn the loyalty of their consumers. A consumer who buys a parasitic copy believing it is that brand but finds it to be inferior will lose confidence in the original brand. Parasitic copying therefore damages the reputation of a brand and leads to reduced sales volumes for the branded manufacturer. Parasitic copying is a form of unfair competition that damages fair, healthy competition. It results in loss of sales for genuine manufacturers, loss of investment in R&D, diminishing innovation and ultimately the destruction of jobs. Brand owners who find that their brands are widely copied also incur additional costs of legal investigation and action. 2 Effects of counterfeiting on EU SMEs and a review of various public and private IPR enforcement initiatives and resources, European Commission Directorate General for Enterprise and Industry,

4 The Unfair Commercial Practices Directive only covers business-to-consumer issues. However, parasitic copying is also a business-to-business problem: the brand manufacturer needs to be able to take action against the manufacturer or seller of parasitic copies. The Zapf and Davenport Lyons surveys show that the number of consumers who potentially face a risk of confusion is considerable. The latter notes that in the UK, 50% of consumers bought a look-alike product in the 12 months prior to the survey. By extrapolation, the potential impact of parasitic copying on a highly competitive industry such as the toy industry could be very damaging. The above-mentioned studies show that the risk of consumers being mislead can be very high and the potential impact of parasitic copying on the toy industry is substantial. 3. A legal perspective 3.1. EU-wide legislation The continuing lack of a uniform rule or EU-wide legislation on unfair commercial practices such as parasitic copying in business-to-business relations and the coexistence of different national regulatory frameworks prevents the internal market from achieving its full potential as it deters investment in innovation by branded manufacturers. It is difficult for manufacturers to deal with the complexity of existing national rules. In some jurisdictions, parasitic copying is an infringement, in others, it is not. The result of this piecemeal approach is that a branded manufacturer may be able to bring proceedings against a parasitic copier in one Member State but be unable to act against the same parasitic copy in another or, if he can take action in both, he may receive two completely contradictory judgments. Many copiers know that the chances of being prosecuted are almost inexistent. The single market does not function consistently for the honest trader. Although the IPR Enforcement Directive makes reference to this ever-growing problem, it does not really address the issue, nor does it call on the Commission to assess whether measures should be taken to counter the problem of products constituting parasitic copies Existing Intellectual Property Rights The safest way to protect a brand is for toy producers to register the trademarks they apply to their toys and additionally, if possible, to register new designs. While most jurisdictions have national laws to protect these rights, it can be costly for toy producers to acquire this form of registered protection. Such registrations unfortunately do not protect against parasitic copying Unfair Competition With no registered or unregistered IPR upon which they can rely, brand owners only have their national laws on unfair competition to which they can turn. The requirements needed to prove parasitic copying/unfair competition vary throughout the EU making it difficult for manufacturers to apply a consistent enforcement strategy. 4

5 At EU level, there are no specific provisions relating to unfair practices between businesses. Whilst the Unfair Commercial Practices Directive affords protection for consumers, it does not address the serious ongoing problem of business-to-business unfair practices which continue to leave manufacturers vulnerable to parasitic copying. This directive bans unfair, misleading or aggressive practices used by businesses when dealing with consumers. A blacklist of unfair commercial practices bans the following practice in business-to-consumer relations: Promoting a product similar to a product made by a particular manufacturer in such a manner as deliberately to mislead the consumer into believing that the product is made by the same manufacturer when it is not. The above blacklisted practice must also be banned in business-to-business relations. Parasitic copying should be recognised as an unfair business-to-business commercial practice and should be uniformly treated across the EU with effective, efficient and timely enforcement measures available to all companies. 4. What needs to be done Protecting and enforcing our rights is a daily challenge for the toy industry, particularly due to the number of SMEs that do not have the necessary resources to dedicate to this matter. Despite the success of TIE and other brand owners in campaigning for a high level of IP protection and working together in the fight against counterfeiting, much still remains to be done. TIE believes harmonised EU legislation is necessary to outlaw this blatantly unfair practice. Parasitic copying is at once a consumer protection issue, a competition issue and an IP issue. However, its complexity does not mean it should not be addressed. Parasitic copying must be recognised as an unfair marketing practice that deters innovation and product development and creates the risk of confusion among consumers. We believe that at least a minimum level of harmonisation in criminal law is necessary to combat the professionally organised circles of copiers. Any strategy failing to apply strong criminal sanctions will not succeed in discouraging counterfeiters. Parasitic copying is a major challenge to be addressed in the transition towards a more efficient and fairer internal market. About TIE Toy Industries of Europe (TIE) is a trade association for the European toy industry, which comprises over 25% of the total world toy market. The toy industry is highly international and is one of the most dynamic business sectors in Europe. Around 80% of the sector is composed of small and medium sized enterprises (SMEs) which have less than 50 employees. Members of TIE include corporate companies as well as national associations from Bulgaria, France, Germany, Italy, the Netherlands, Spain, Sweden, the UK and the Nordic region. TIE membership is open to both corporate companies with a presence in Europe and national associations from European Union Member States (including candidate countries). 5

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