IP Theft: Crowdfunding sites are being harvested by Chinese counterfeiters

It should surprise no one to learn that the Chinese factories which are engaged the production of counterfeit goods produce goods which are identical or indistinguishable from the originals. The factories are engaged in intellectual property theft (IP theft) and are building their products by reverse engineering a product then creating the counterfeit version, or creating the counterfeit product by stealing the design plans. Now a seemingly new wrinkle in the acquisition of product specifications has evolved.

But is it really new? Chinese counterfeiters have been harvesting ideas from crowdfunding sites for quite some time, and warnings aplenty have been made to entrepreneurs and inventors to protect their intellectual property from IP theft.  For example, in January 2013, The Guardian reported on  how "Using crowdfunding sites could destroy your nascent business idea."  So let's back up a bit, before we go forward and share some cases of IP Theft from crowdfunding sites, that date back well over half of a decade.

What is crowdfunding?

To take a paragraph from The Guardian,

“Crowdfunding sites such as KickStarter, have grown in popularity. The concept is simple – you have an idea, formulate the logistics of the plan, and then upload the idea to a crowdfunding website, where millions of potential investors can scrutinise it, and if they like it, pledge to invest in the project. If the project raises the target capital, the funds are automatically transferred, and the idea becomes a reality. If the target is not met, no money is transferred, so no investors lose out. Essentially it's Dragon's Den (UK TV's equivalent to Shark Tank) for the internet generation, leveraging the almost perfect liquidity of the online marketplace”.

Do I really need to protect my idea from ID Theft

The Guardian goes on to provide some excellent advice to individuals or startups which are creating hardware, protect your intellectual property from IP Theft by using the tools available to you prior to taking your idea public. Patent it!  So remember, patents are granted to novel inventions. Trade secret protection are granted to those concepts which have not been publicly disclosed. Absent a patent in place, litigating against another's similar or identical product may be an uphill battle (consult with your legal counsel on this topic) after having presented your idea on a publicly available crowdfunding site.

PROTIP: Always take steps to protect your creative idea prior to sharing in a public manner. Use of Non-Disclosure Agreements prior to private sharing go a long way toward demonstrating that appropriate steps have been taken to protect your trade secret. IP Theft is real. Use the tools available to you to protect your intellectual property, to include filing for a patent prior to seeking crowdfunding.

What if your idea is infringing on the intellectual property of another. There is a difference between infringement and IP theft.  The example from The Guardian, discusses Formlabs, a team of PhD students, managed to raise just under $3m (£2m) to commercialise an accessible 3D printer. But the virtual high fives soon turned sour as an established company, 3D Systems, sued them for patent infringement. The suit was ultimately thrown out, but not after a significant amount of legal entanglement. This is not to say don't pursue the idea and dreams, but be aware of the need to defend your creativity in the courts.  (NOTE: This case is included in the Netflix documentary, Print the Legend.)

Then, that which is at the root of this posting. Stealing the idea and taking it to market. As discussed in the co-authored book Secrets Stolen, Fortunes Lost, Preventing Intellectual Property Theft and Economic Espionage in the 21st Century, counterfeit goods accounted from more than $250 billion per annum and has since seen an increase to more than $450 billion (using 2013 figures).  My co-author, and I specifically call out the motivation of these individuals who harvest ideas.

EXCERPT: In most instances, the motive to pirate or counterfeit is simple: “economic greed”—to manufacture and sell goods without the overhead and costs incurred by the rightful owner of the IP. Thus, they are able to bring a product to market that is manufactured, marketed, and sold at a fraction of the cost borne by the original manufacturer. Innumerable examples exist; we offer a selection, across many industrial sectors. Additionally, given the infrastructure necessary, it is not surprising the most robust enterprises have ties to organized criminal networks.

The Guardian shares the 2010 story of Scott Wilson was congratulated for successfully raising $942,578 on KickStarter to launch the TikTok Lunatik watch kit, a sleek new aluminium watch strap, which converted an iPod Nano into a touchscreen watch. The design and trade mark had not been protected. It proved immensely popular. Copycat imitations began to spring up around the web. The market is now flooded with fake Lunatik watches.  And in 2016, Lunatik's innovation continues to be targeted by counterfeiters who are knocking off their products, most recently the  Lunatik: Taktik Extreme Cell Phone Cases.

A dive into the archives of IP Theft, shows us that Lunatik was not to be the last entity who lost their idea off of Kickstarter.  Take the case of the Pressy Button. In August 2013 it raised seven times its goal with more than 28 thousand contributors. By October 2013, they were faced with competing against themselves, as the Pressy Button was being counterfeited and marketed by a Chinese entity. Read, the January 2014, Tech Node piece, Crowdfunding sites makes copied-in-China even easier: All is needed is a Photoshopped image which details in depth the means by which Pressy Button became a victim of IP Theft.

Then in 2015, a Canadian inventor had their tale of woe detailed in WifiHifi, Crowd Funding Cloning, where their new fangled Anton strainer bowl which they had place on Kickstarter was purloined by a Chinese counterfeiter and then it shows up on Alibaba's Taobao shopping site.

Which brings us to the 2016 case of one Yekutiel Sherman, an Israeli entrepreneur who designed and created a smartphone case which unfolds into a selfie-stick.  Clever indeed. As detailed in multiple media outlets (see below for links), the Shenzhen, China counterfeit manufacturers lifted his idea directly out of Kickstarter (as they did in 2010 to Lunatik) and not only beat the Sherman to market, they undersold him by a factor of five.  The counterfeiters had no R&D costs to recoup, therefore their pricing was cost of production plus margin. Now it remains to be seen, if Sherman has the ability to dive into Shenzen's electronics market, Hauqiangbe (HQB) market and have the Chinese intellectual property authorities pull the knock-off from the shelves of the HQB wholesalers..

Sadly until retailers outlets, like Alibaba work together with manufacturers to keep counterfeit goods out of the portals, we will see this continue. Indeed, the Chairman of Alibaba Group, Jack Ma was quoted in the Wall Street Journal, as having said, "Fakes 'Better Quality and Better Price Than the Real Names.'"  Ma clearly signalling that he isn't going to upset his rice bowl to protect the intellectual property of manufacturers from IP theft.

As noted in Secrets Stolen, This vector is on a near vertical growth path, and until governments and industries unite in both reactive and proactive steps, the criminal elements will always have the upper hand and the loss of intellectual property will continue.  In sum, the case of Sherman is catching the attention of media, the sad reality, its been a reality for quite some time. Company's large and small must protect their infrastructure, their sharing of information in public manner and protecting their competitive advantage and revenue preservation through the implementation of security programs.

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Additional Reading 

The above originally appeared on the Prevendra Blog and is shared with permission.

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