HTC's Beats by Dre in MOG Acquisition Talks

Last week, Beats Electronics obtained a restraining order against several copyright and trademark infringing websites alleged to sell counterfeit headphones. The lawsuit, filed July 9, ordered an injunction in Illinois against these online outlets and is the fifth such complaint filed by Beats this year. As well as highlighting the recently Apple-acquired brand's ongoing struggle with phony products, the suit is a fascinating look into the sophisticated distribution network of counterfeiters spread throughout Asia.

Beats says the defendants are an interrelated group of Chinese counterfeiters working together to manufacture and sell phony products, but it is virtually impossible for the company to learn the defendants' identities or exact interworking. 

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According to people familiar with the matter, counterfeit products bearing Beats' trademark logo will often be mass manufactured, almost exclusively in Asian countries, then sent to distributors and retailers, functioning similarly to a legitimate business but in the black market. In the instance of this lawsuit and the several before, Beats is addressing websites using the company name such as www.ilovebeatsbydrdre.com, as well as nabbing the same website design and copyrighted images from the official Beats by Dre website. However intertwined these stages of manufacturing, distribution and sales might be, is unclear. 

In each industry, counterfeit goods are measured on an A-C grade scale, where A's are the most legitimate and are often sold for nearly the same amount as the authentic product, and C's will bear the brand logo but barely resemble any of its actual products. In the case of Beats, those C-level headphones might cost just $10-$15. 

"The overwhelming success of the Beats brand has resulted in its significant counterfeiting," the suit states. As such, just as with Louis Vuitton bags, Gucci belts and Diesel jeans, customers want the luxury brand without the luxury price — a hunt that will lead some to counterfeit goods. And, though manufacturing counterfeit headphones may not be quite as easy as copycat clothes, the high demand and profit margin makes it worthwhile.

In this most recent lawsuit, Beats demands all profits from these sales, plus damages or $2 million for each use of the Beats trademarks and $100,000 for each infringing domain. As the company is able to attach assets in U.S.-based financial institutions to satisfy the court's judgment, in the four suits filed previously Beats has been successful in getting judgements and freezing Paypal accounts to receive at least a portion of these funds. Beats would not disclose the total amount received, but said it has been "substantial" and that money seized goes back into the company's enforcement budget to continue its attack on infringers. 

As well, Beats has been successful in getting about 3,000 domain names transferred to the company's ownership since September 2013 through four lawsuits.

But Beats' anti-counterfeiting efforts do not stop at the U.S. border. Across the Pacific, there is a system of informants and private investigators collaborating with on-ground investigations. The company's global brand protection department will regularly collaborate with foreign law enforcement to conduct raids against companies creating counterfeit goods, making arrests and seizing goods. 

"In most countries it's illegal to sell counterfeits," said Negin Saberi, Beats' Director of Global Brand Protection. "So in addition to the civil legal system like our cases in Illinois, we are able to use the criminal system and work with law enforcement locally to do raids of stores, of warehouses, of manufacturing sites to see seize the counterfeit products and get them destroyed. And when we engage in that process, because counterfeiting is illegal, we are able to have arrests as well."

With Beats' growth has come the need for increased protection efforts against counterfeit goods and the trademark and copyright infringement that go along. In 2012, following split with Monster, sources say Beats made a concerted effort to move the efforts in-house for better control and more effective results. 

Simultaneously, the company's growth has been rapid and the success in expanding its business and brand recognition has been unparalleled by any other consumer headphones company over this time. As the lawsuit states, "Beats and its authorized retailers and partners have expended tens of millions of dollars annually on advertising, promoting and marketing featuring the BEATS Trademarks. … Beats' savvy marketing, innovative headphone designs and cutting-edge sound have lead to unprecedented growth in the headphone industry. A mere four years ago, $59 million worth of premium headphones (those priced $99 and up) were sold in North America. In 2012, sales ballooned to $850 million, and nearly two out of three pairs of headphones carried Beats' authorized iconic 'b' logo."

The company's cultural weight and influence is well-known, but seeing its celebrity reach in the new court documents is striking. From both solicited and unsolicited endorsements, musicians including will.i.am, Lil Wayne, Lady Gaga, Nicki Minaj, David Guetta, Justin Bieber, P.Diddy, Miley Cyrus, Eminem, 2 Chainz, Zedd, Zendaya, Kendrick Lamar, and Ellie Goulding are all mentioned in the suit for having been associated with the brand.

"Counterfeit products are of inferior quality," said Saberi. "Counterfeiters do not invest the time and resources, research and development or comply with consumer safety laws that real consumer electronics companies are dedicated to providing like Beats. Counterfeiters are just making something that steals the consumer's money – the product doesn't sound right, won't be durable and may not be safe."

In a white paper study that's cited in Beats' lawsuit, it's estimated that all websites like the defendants receive tens of millions of visits per year and to generate over $135 billion in annual online sales. It states, as well, the U.S. government seized over $1.26 billion in counterfeit goods in 2012, up from $1.11 billion in 2011. Such counterfeit goods are also estimated to contribute to tens of thousands of lost jobs for legitimate businesses and broader economic damages such as lost tax revenue every year.

"It is so important to police our brand because we don't want our consumers to be tricked," said Saberi. "We don't want them to pay top dollar — or any dollars — to then get a fake, inferior product."