Intellectual Property Rights Infringement in Mexico: Why this is no longer an issue of informal commerce and how it has evolved - Uhthoff

Intellectual Property Rights Infringement in Mexico: Why this is no longer an issue of informal commerce and how it has evolved

By Saul Santoyo and Jose Luis Ramos-Zurita

Uhthoff, Gomez Vega & Uhthoff, S.C.

What do Lady Gaga and “Los Tigres del Norte” -the famous Mexican norteño music band ensemble-, have in common with notable people like Steve Jobs, René Lacoste, Carolina Herrera, Coco Channel, Jean-Louis Dumas-Hermes, giant Swiss pharmaceutical company Hoffmann-La Roche and even Mikhail Kalashnikov? If this was a pop quiz the answer would be easy: you can find several of their products ready for sale at the same place, the very famous (infamous?) neighborhood of Tepito in downtown Mexico City.

If you have the opportunity to visit the maze of narrow streets and alleys that conform Tepito, you could easily buy Lady Gaga’s “The Fame Monster”, any or all of Los Tigres del Norte 30-plus record discography, iPhones, iPads or the recent “Snow Leopard” operating system, boxes of Tamiflu anti-viral and Xenical (Orlistat) weight-loss pharmaceutical drugs, designer sport shirts and shoes, silk scarves and ties, women’s handbags and perfumes, and even customized AK-47 assault rifles, all of them readily available at incredibly low prices without the need to overcome some of the most “inconvenient” purchase restrictions such as a physician-issued prescription or a firearms permit.

Where else in the world can you find the products listed above and more, all at almost incredibly- discounted prices and without any legal obstacles?, but the bad news is while all of such items are very cheap, they are also fake goods that do not possess the quality, reliability and desired effects of the original products, notwithstanding the fact that they are illegal and arrive at the final consumers via a long trail of serious crimes that more often than not end up hurting the very same people that buy them, a situation that repeats with more or less the same characteristics in the “Silk Alley”(1) of Beijing, some dark areas of Moscow(2) and other equally infamous places in certain Latin American countries (notably the border area(3) between Argentina, Brazil and Paraguay).

The above shows only a small part of a much larger counterfeiting and piracy problem, one has increasingly been recognized as one of the most serious global issues, and although this illegal phenomenon is still underrated by some countries, the value of international trade in physical counterfeited and pirated products represent a billionaire industry of at least USD$500 billion, according to some rather-conservative estimations(4).

Negative impacts of IPR infringement are wide-ranging, creating significant costs for governments, international trade and economies. These costs have direct negative impacts on individual businesses, employees and consumers.

IPR infringement causes huge economic losses not only for IPR holders but to all related legitimate businesses, creating significant costs for Governments and economies(5), as it affects international trade by distorting prices, dissuades the creation of employment and discourages foreign investments(6). This problem also poses an incredible threat to health and safety of the general population, and deters innovation and growth in much-needed areas that would help improve not only abstract macroeconomic figures but several specific key areas of country development.

As a recently leaked discussion paper(7) about the Anti-Counterfeiting Trade Agreement (ACTA) circulated among industry insiders and government negotiators from the US, Japan, Switzerland, Canada, the European Union, Australia, Mexico, South Korea, and New Zealand shows, such paper included all of these negative effects and added “verifiable significant loss of tax revenue” to the litany of problems that are either linked or directly originated by this illegal-goods trade.

In this context and according to the International Monetary Fund(8), Mexico is considered to have the fourteenth-largest economy in the world, a position that is the result of high rates of economic growth during the last two decades, but unfortunately it also shares the dubious distinction of being included in the top-list of countries that produce and consume the largest amount of counterfeited and pirated goods(9).

Although notable evolution in public policies and reforms to an ever-modernizing legal system resulted in attracting foreign investments and encouraged companies to establish successful businesses within the country constitute key factors on the growth and evolution of Mexican economy, its negative aspects have also propelled Mexico into becoming a “paradise” for counterfeited and pirated items.

There are several reasons that account for the explosive growth of the trade in IPR-infringing goods in Mexico, part of the explanation could be traced back to the effect produced by changes(10) on the Mexican economic system that started on the 1980’s, when Mexico adhered to the then- existent General Agreement on Tariffs and Trade (GATT) and began opening the country’s economy; this provoked significant economic growth and expanded the availability of articles that had been previously restricted due to the former economic and foreign trade policies, because until 1986 Mexico had a closed and centrally planned economy which was overly protective of local trade and manufacturers.

The above can be represented by the fact that until 1985, most middle-class kids(11) were unable to buy a pair of Nike shoes at any Mexican store and such items had to be acquired either abroad or at flea markets or informal selling points that used to sell illegal imports, as was also the case with electronic articles, candies, consumer products and apparel, to name a few examples; in short, there was a newly formed demand that needed to be supplied, same and that was initially met by street vendors and flea markets retailing contraband or stolen, albeit original, products.

With the uprising of China as a manufacturing powerhouse in the late 1990’s and the advent of the “IP-powered economy” (particularly regarding the consumer-perceived value of desirable brands of goods in several industry sectors), the outburst of counterfeited goods that are now available almost anywhere in the world was ensued.

Furthermore, economic and social transition also provoked a transformation on the political organization that freed space to citizens, economy and political parties, modifying the relationship between government and society(12), but as centralized power declined it also allowed the expansion of criminal activities that were controlled and limited by traditional methods used by previous government administrations.

As an outcome of the above, the trade of counterfeited and/or pirated merchandises account nowadays for approximately 8% of Mexico’s Gross Domestic Product (GDP), and some studies(13) show that together with other high-impact illegal activities like illegal drug trafficking, this figure grows to be almost 17% of the Mexican GDP, a measure that shows the enormous relevance of the illegal activities associated with the trafficking of counterfeited and pirated goods.

Such above figures reflect the perception that most people have regarding this phenomenon: the vast majority of the Mexican population thinks that buying pirated and/or counterfeited items is, at the very best, a “necessary evil” since counterfeit items and the people that provide them provide an alternative access to articles that otherwise would be reserved to the upper economic classes due to the relative high prices of such goods, but this is not necessarily true since there are counterfeited products that are neither expensive nor exclusive and, on the other hand, pose a substantial threat to the consumers’ health and safety as this is the case of anything from pharmaceutical drugs, mass-consumer products, cosmetics, processed foods, automobile parts, airplane supplies and electrical/electronic components.

In addition to the above and contrary to the general belief that this illegal phenomenon is a “victimless crime”, the truth is that counterfeited and pirated goods produce a direct damage not only to the companies and/or individuals that suffer the illegal copying of their IP rights, but to the economy and, as we shall see ahead, could be serving to finance much serious crimes that seriously affect the general public, including illegal drug trafficking, high-profile assassinations and outright social violence, weapons contraband, sexual slavery, kidnapping and, in some documented instances, terrorism(14).

The above-mentioned felonies contrast with the huge demand that counterfeited articles have today in Mexico and the somewhat permissive attitude that the general public has regarding this issue, as one of the most recent studies sponsored by the American Chamber of Commerce/Mexico showed(15) that an estimated 88% of the Mexican population has acquired, at least once, a pirated and/or counterfeited product.

Furthermore, that same study also demonstrated that the most affected industry sectors are Music and Film Industries (CD/DVD formats), clothing and footwear, software, accessories and luxury items, cosmetics, cellular phones and electronic goods, toys, cigarettes and alcoholic beverages and pharmaceuticals.

Taking into account the above-described facts, what is the true dimension of the problem and what are the consequences of the “evolution” of the counterfeits/piracy trade into an industry, same that has been constantly transforming from being little more than a relief valve for unemployed people that sold small amounts of illegally-obtained products as a means of survival, into a series of huge criminal networks with global outreach that raise enormous profits that are sometimes diverted into more seriously dangerous activities.

Power vacuum, political inexperience/incapacity, the incipient demand of consumer products by the lower-income Mexican population, and of course the breakout of China as a mega source of substandard and cheap products, were way too far appealing for organized crime to let this business opportunity pass.

According to several papers and press reports that have addressed the connection(16) between organized crime and the trafficking (production, distribution and sale) of counterfeit and pirated goods(17) is fueled by several factors:

a) The high profit/low risk ratio these activities represent;

b) The large amount of resources needed to effectively combat this matter given the wide presence of counterfeited items in the Mexican market; and

c) The social prevalence and, in some cases, tolerance or acceptance of IPR-infringement goods commerce, as a means of satisfying diverse necessities.

Regarding the first of the above-mentioned facts it is very important to bear in mind that an example can be found in several of Mexico’s City flea markets or in, some downtown areas, right on several informal selling stands right on the street: the total cost(18) a gentlemen’s silk tie bearing counterfeit “Hermes” designs has an average price of MXP$350.00 (equivalent approx. to USD$27.50), but that same tie was purchased wholesale in Guangzhou, China for approx. USD$4.50, a price that includes transportation and import costs; this represents USD$23.00 of profit that equal a revenue of 610% that is obtained free of taxes, in cash, and with minimum risks involved because counterfeiters normally use a relatively elaborate scheme of ghost intermediaries and paper-front entities that prevent them from facing an indictment should a shipment be detected and seized by Mexican authorities.

Following the above, it is important to point out that while counterfeiting in a large scale (be it importing, transporting, distributing, housing, producing and selling counterfeits) is deemed a serious Federal Crime by Mexican Law, there is a limited amount of resources -human and otherwise- to combat this phenomenon that can be observed almost everywhere in the country (Mexico is considered to be among the largest markets where IPR infringing goods are either manufactured, imported, distributed, or sold, only behind China, Russia and some other Asian countries), which adds to the fact that there are other serious issues such as the escalade in violence recently generated by the combat to organized crime and drug trafficking, a situation that has consumed a significant amount of the available government assets devoted to the combat of criminal activities.

In direct connection to the above-referred facts and as stated before, in the late 1980’s Mexican informal economy changed from selling illegally imported or smuggled -but original- goods into importing, distributing, manufacturing and selling IPR infringing items in a large scale, a change that was noticed and seized by organized crime syndicates, same that were coming out of a profound transformation process themselves, as the recent political and social changes of Mexico(19) helped in the perceived growth that is allegedly one of the factors of the crime-related violence our country has experienced recently in some areas, specially in the northern portion of the territory.

Another aspect, that is important to explain the increasing participation of organized crime syndicates on the trade of counterfeit goods, is the historical shortcomings of the Mexican justice system, some of which motivate the general public to refrain informing authorities if a person has been the victim or has seen a crime due to the lengthy and cumbersome procedures, lack of trust in authorities, plus the fear of retaliation from criminals, together result in that an estimate of only 22% of criminal conducts are actually informed to the authorities(20), and out of such figure less than 1% of criminals gets sentenced(21), due to several factors that include corruption and lack of proficiency of State Prosecutors(22), which adds to numerous cultural issues that hinder the enforcement of property rights in general(23).

All of the above facts motivated a recent and increasing involvement of organized crime syndicates in the traffic of counterfeited and pirated goods(24), a change that some authors see as “natural” due to the extent and effective power that some of such organizations regarding illegal activities in certain areas(25) and a result of the recent changes in security and public policies, notably the “war against drugs” of President Felipe Calderon, which has forced criminals to move towards “lower profile” illegal activities(26) while still obtaining a huge profit out of their illicit businesses(27).

Notwithstanding the severity and complexity of these issues, there is hope for IPR holders that are affected by counterfeiting activities in Mexico and are willing to take the necessary steps to protect and enforce their property, as several recent cases demonstrate:

One of such examples is what the U.S. government called as “Operation Holiday Hoax”(28), which on December, 2009, resulted in the seizure in Mexican territory of more than 272 tons of counterfeit goods performed by Mexican Government officials with the aid of intelligence provided by U.S. Customs officers; this operation also provided the information to further advance in the investigations regarding criminal networks of counterfeiters and bootleggers that used sophisticated methods to import and distribute fake goods into Mexico, the U.S. and several other Latin American countries.

Furthermore, the collaboration between IPR holders and government agencies helped Mexican Customs Authorities obtain the 2010 “Yolanda Benitez Award” presented by the World Customs Organization (WCO) (29,30), due to the success on enforcing and protecting IP rights on Mexican borders, same that resulted in record-setting seizures in the last few months.

As the last two examples show, Mexican legal system provides several options to effectively enforce and protect IP rights, depending on the specific characteristics of the case at hand, i.e. how the infringement was and/or is still being done and the goals that the legitimate owner pursues, same that should include the means to put an immediate stop to the infringement conducts and establish the basis for the recovery of the damages suffered.

In order to effectively deal with this matter, IP owners must first realistically determine the risks and actual threats that piracy and counterfeiting present to their businesses, since each product and/or service has unique characteristics that should be addressed specifically, and thus this assessment should be done on a case by case basis.

Once the potential or actual damages caused by counterfeiting activities are identified, it is mandatory to assess, from a cost/benefit point of view, the results that are to be achieved, either by attacking one of the many aspects of the problem at a time, or by designing a comprehensive, tailor-made anti-counterfeiting program that may last for several months or years, or even be an all-out permanent effort based on the close collaboration of the competent government authorities.

Eventually, the enforcement and protection efforts should provide positive results that should allow the IP owner to reinstate control of the market place with their genuine products. Still, it is important to mention that, even when reaching this goal, IP owners should continue to monitor the presence of counterfeits and enforcing their IP rights, thus adopting a zero-tolerance campaign towards counterfeiters.

If you wish to know more about available enforcement options and maybe take actions to protect your IP rights, we can only recommend to seek professional counsel and, as said before, establish a commitment with one of your company’s most valuable assets: your IP rights portfolio.

Pie de página:

1.- “In the land of counterfeit”. Jeffrey Sheban, The Columbus Dispatch November 25th, 2007.- http://www.dispatch.com/live/content/local_news/stories/2007/11/25/Fake_1.ART_ART_11-25-07_A1_8E8I5ID.html

2.- “Russians able to fake it like no one else”; Kim Murphy, The Seattle Times July 15, 2006 .- http://seattletimes.nwsource.com/html/nationworld/2003128478_fakerussia15.html

3.- “The Tri-Border Area: a profile of the largest illicit economy in the Western Hemisphere”, Rachel Brown, Task Force on Financial Integrity & Economic Development blog, June 15, 2009.- www.financialtaskforce.org/2009/06/15/the-tri-border-area-a-profile-of-the-largest-illicit-economy-in-the-western- hemisphere/

4.- “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, Moises Naim; Doubleday, 2005.

5.- “The Economic Impact of Counterfeiting and Piracy”, OECD, June 4th, 2007, DSTI/IND(2007)9/PART4/REV1

6.- “The Economics and Management of Global Counterfeiting”, Derek Bosworth and Deli Yang, Paper submitted to the Sixth World Congress on Intellectual Capital and Innovation, September 2002.

7.- Decision of the European Parliament to transparent the negotiations and state of play on ACTA.- www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+MOTION+B7-2010-0154+0+DOC+XML+V0//EN&language=ES

8.- http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

9.-  “2010 Special 301 Report on Intellectual Property Rights”; United States Trade Representative, April 2010.

10.- Started by president Miguel de la Madrid in 1984 and later continued by president Carlos Salinas de Gortari until 1994, Mexico changed its public policies in economy, trade and legal matters via signing a number of international treaties and agreements such as GATT, TRIPS, NAFTA and amended its Constitution and several Federal Laws to comply with its new internationally acquired commitments.

11.- This situation actually happened to both authors, as in 1985 they were 13 and 11 years old, respectively.

12.- “Otra explicación”, Luis Rubio quoting Marcelo Bergman’s investigations regarding social changes and criminality in Mexico and Latin America, Reforma Newspaper, Editorial pages, August 29, 2010 edition.

13.- “El Sistema de Propiedad Intelectual en México: Logros y Retos”, White paper of the American Chamber of Commerce/Mexico, May 2010, Mexico.

14.- “The links between intellectual property crime and terrorist financing”, Text of public testimony of Ronald K Noble, Secretary General of Interpol, before the United States House Committee on International Relations One hundred eighth congress, July 16th 2003.

15.- American Chamber of Commerce/México, “3ª Encuesta de Hábitos y Consumo de Productos Pirata y Falsificados en México”, November 2009, Mexico.

16.- “Godfathers and Pirates: Counterfeiting and Organized Crime”, Wolfgang Hetzer, European Journal of Crime, Criminal Law and Criminal Justice, Vol. 10/4, 303–320, 2002.

17.- “Crimen Organizado y Piratería”, Clausio Ossa Rojas, Revista de Derecho Informático Alfa-Redy, No. 049, agosto 2002.

18.- Based on the information obtained in the course of the different case-matters handled by the authors and on direct interviews to several street vendors in Mexico City.

19.- Op. cit. Luis Rubio.

20.- Cuaderno 8 del ICESI: “Victimización, Incidencia, y Cifra Negra en México”, ICESI, A.C.; México, 2009.- www.icesi.org

21.- “Estadísticas de seguridad pública y eficiencia en México”, Arturo Arango, Cristina Lara, Et. Al; Colegio de Investigadores en Seguridad Pública en México.- www.seguridadpublicaenmexico.org.mx/crisada/estadistica/eficiencia.htm

22.- “Mas detenidos y menos sentenciados, la Corte no “encubre” a criminales”, Jesús Michel Narváez, El Sol de México, August 29, 2010.- www.oem.com.mx/elsoldemexico/notas/n1742556.htm

23.- “Violación de los derechos de propiedad”, Isaac Katz, El Economista, October 4th, 2010.- http://eleconomista.com.mx/foro-economico/2010/10/04/violacion-derechos-propiedad

24.- “Los Zetas y La Familia, también metidos en en piratería, contrabando y tala clandestina”, La Crónica de Hoy, September 27, 2008.- www.cronica.com.mx/nota.php?id_nota=387643

25.- “La Violencia y el crimen organizado en México”, Carmen Esthela Prieto; Suite 101, September 10, 2010.- http://politicamexico.suite101.net/article.cfm/la-violencia-en-mexico

26.- “Piratería crece y se diversifica ante la crisis”, Francisco Gómez y Maria de la Luz González; El Universal, March 1st, 2009.- www.eluniversal.com.mx/notas/580396.html

27.- “Lava dinero a través de la piratería, el crimen organizado”, Uno Más Uno, July 16, 2010 .- www.unomasuno.com.mx/index.php?option=com_content&view=article&id=2135:lava-dinero-a-traves-de-la-pirateria-el-crimen- organizado&catid=115:justicia&Itemid=514

28.- “Operation Holiday Hoax nets more than $26 million worth of counterfeit goods”, U.S. Immigration and Customs Enforcement Press Release, December 14, 2009.-http://www.ice.gov/pi/nr/0912/091214washingtondc2.htm

29.- “Mexico was awarded the 2010 WCO Yolanda Benitez Trophy”, World Customs Organization Press Release, June 26th, 2010.- http://www.wcoomd.org/press/default.aspx?lid=1&id=220

30.- “WCO awards Mexican government”, Mexico The News, October 5th, 2010.- http://thenews.com.mx/articulo/wco-awards-mexican-govt-10625

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