The Ethics of Counterfeiting in the Fashion Industry: Quality, Credence and Profit Issues Brian Hilton Chong Ju Choi Stephen Chen ABSTRACT. One of the greatest problems facing lux- ury goods firms in a globalizing market is that of coun- terfeiting. The purpose of this paper is to analyze the different types of counterfeiting that take place in the fashion industry and the ethical issues raised. We argue that the problem partly lies in the industry itself. Copying of designs is endemic and condoned, which raises several ethical dilemmas in passing judgment on the practice of counterfeiting. We analyze the ethical issues in a number of different types of counterfeiting encountered in the fashion industry. We conclude with some obser- vations on the general implications for ethics in intellec- tual property rights. KEY WORDS: fashion, business ethics, marketing, counterfeiting Introduction In this paper we examine the ethical issues involved in counterfeiting in the fashion industry. We argue that the problem partly lies in the industry itself. Copying of designs is endemic and condoned, which raises several ethical dilemmas in passing judgment on the practice of counterfeiting. As illustrated by several recent reports in the press, the problems are extensive, growing and global. For example, according to the European Commission, customs seized almost 85 million counterfeit or pirated articles at the EU���s external border in 2002 and 50 million in the first half of 2003 (European Commission, 2003) while the U.S. customs made over 6,500 seizures in 2003 worth over $94 billion (International Anti- Counterfeiting Coalition, 2004a). Worldwide the International Chamber of Commerce estimates that seven percent of world trade is in counterfeit goods and that the counterfeit market is worth $350 billion (George W. Abbott and Lee S. Sporn, Trademark Counterfeiting 1.03 [A] [2] quoted in International AntiCounterfeiting Coalition report, 2004b). In some countries, such as the United States, such problems are compounded because their legal system only protects functionality and not design or style. In other countries there is not even this level of pro- tection (Belhumeur, 2000). There is either no formal Brian Hilton is currently on the staff of the Australian National University���s National Graduate School of Business. He has responsibility for its programme of global collaboration. He has written extensively on international business in the new knowledge-driven age. He specializes in the impact of such changes on the state especially the tenability of its role in defence and security issues now that the ICT revolution and globalization has fuzzied the significance of traditional geo- political boundaries. In this he is particularly interested in the complementarity that drives the very distinct ethics that drive respectively public servants and entrepreneurs. Stephen Chen is a Senior Lecturer at the National Graduate School of Management, Australian National University. He has an MBA from Cranfield School of Management and a PhD from Imperial College, London. Previously he has taught at City University, Manchester Business School, Henley Management College and the Open University and was a visiting associate professor at the Anderson School of Management at UCLA. His research interests include the management of knowledge and intellectual property, en- trepreneurship, innovation, and the business-society interface. Chong Ju Choi is presently Dean and Executive Director of the Australian National University���s National Graduate School of Management. His areas of research are international business, knowledge and creativity management and com- parative business systems. His research papers have been published in journals such as: Journal of International Business Studies, Management International Review, Human Relations, Organization Studies, Economica, Journal of Knowledge Management. Journal of Business Ethics 55: 345���354, 2004. �� 2004 Kluwer Academic Publishers. Printed in the Netherlands.

legal protection for design or functionality or what little protection there is is incapable of being en- forced either through incompetence or corruption. This ensures that it is very difficult in practice, if not in theory, to enforce any rights that exist. It is always possible to find a country where one can manufac- ture blatant copies or counterfeits with no fear of falling foul of the law. As industries have globalized their distribution and production operations, counterfeiting has be- come easier and easier to sustain and is a problem affecting a whole range of industries worldwide. No entirely reliable figures exist for such a clandestine trade but the best estimates available place it at some 3���6% of world trade, with sectoral estimates quoted as follows: watches (5%), medicine (6%), perfumes (5%), aircraft parts (10%), toys (12%), music (33%), video (50%), software (43%) (OECD, 1998). In its annual ������Special 301������ review, the office of the U.S. trade representative (USTR) identified more than 30 countries as centers for counterfeiting and piracy and estimated that American industries lose $200 billion��� 250 billion a year to counterfeiting (The Economist, 2003). The industry we will focus on is this paper is high- end clothing and accessories that derive a sig- nificant proportion of their market value from brands and reputations of designers such as Dior, Versace, Chanel, etc. This is one of the most highly publicized sectors where counterfeiting is rife. According to the International Anti-Counterfeiting Coalition about 18% of the $98 million of counterfeit products seized by U.S. Customs in 2002 were made up of fashion-related items: apparel, sunglasses, watches, handbags and headwear.1 It should also be noted that the figures are probably an understatement of the problem as many cases do not reach the public domain and action is not taken in many cases. There have been a few cases of successful prose- cution, such as Tommy Hilfiger���s suit against Goody���s Family Clothing Inc. for $11 million2 and the case of the U.K. counterfeiter ordered to pay back more than ��354,000 after police discovered more than 100,000 labels and packaging for 52 different designer brands, including Nike, Adidas and Armani, in a raid.3 However, in most cases offenders are rarely prosecuted and in some cases they openly sell fake goods. For instance, boutiques that sell fake designer goods at a fraction of the normal retail price are now available in many cities worldwide. In most cases the damages awarded against counterfeiters are relatively minor and in many cases authorities may decline to prosecute offenders, placing the onus on copyright owners to take action.4 Other cases are settled outside the legal system and do not enter the public domain. For example, where the counterfeiting involves a ������legitimate������ producer, fashion houses simply stop using them rather than take them to court. As in other innovation businesses (Fassin, 2000) ethical issues can arise in fashion at different stages of the innovation process such as disputes over intel- lectual property rights, confidentiality of informa- tion, marketing and finance. One of the authors has been active in fraud investigation in the fashion industry and has informally interviewed a number of colleagues in the industry. What follows is an analysis of the ethical issues that surfaced in the course of this work. We start by explaining the concept of cre- dence goods and discussing the role of credence in the fashion industry. We then analyze the ethical issues in a number of different types of counterfeiting encountered in the fashion industry. We conclude with some observations on the general ethical implications of intellectual property rights. Concept of credence goods A key concept in our paper is the idea of ������credence goods������ (Ekelund et al., 1995 Emons, 1997). These are goods whose quality is difficult to assess before or after purchase and use. Many luxury products fall in this category. Technically unsophisticated consumers cannot be certain of their quality even after purchase. Their value is dependent on the credence given to them by others, e.g. the designer���s or distributor���s reputation and their use by a particular set of con- sumers, the fashionable. Advertisers use such repu- tations or standing with a sub-class of consumers as a powerful part of their advertising strategy. The opu- lent, successful consumer, who is admired for her wealth, power, or celebrity status, endorses a product by using it and so doing implies it has utility to them and, by inference, others aspiring to their lifestyle. Credence goods can be viewed as lying at one end of a spectrum determined by whether quality can be assessed before or after purchase or never. This spectrum starts with what we call ������search goods������ 346 Brian Hilton et al.