IP-Enforcement Programs: Identifying and Quantifying Losses Caused by Knockoffs and Infringement

IP Enforcement Program: Quantifying Losses Caused by Infringement

Identifying Losses Caused by Knockoffs and Infringement

This is the second in a 7-part series providing comprehensive analysis of designing, implementing, and optimizing an intellectual property (IP) enforcement program that stops loss of market share and profits due to knockoffs, piracy, and other forms of IP infringement.  This program stresses the importance of intellectual property rights in protecting market share. 

At Step 1, we focus on quantifying the harm (monetary or otherwise) currently being suffered to establish a baseline against which the IP-enforcement program can be measured.  Quantifying the harm also allows for the calculation of an approximate return on investment (ROI) for the program.   As discussed in later posts, ROI is an important factor not only in program design but also the implementation (Step 4) and optimizing (Step 5) stages. 

Before we discuss how to quantify the losses caused by knockoffs and infringement, here’s a short summary of the entire series, which provides step-by-step guidance on developing and implementing an IP-enforcement program:

Step 1:  Identifying and Quantifying Losses Caused by Knockoffs and Infringement

Step 2:  Marshaling Intellectual Property Assets to Combat Knockoffs and Infringement

Step 3:  Designing the IP-Enforcement Program to Increase Market Share by Stopping Knockoffs and Infringement

Step 4:  Implementing the IP-Enforcement Program

Step 5:  Optimizing the IP-Enforcement Program with Metrics

Step 6:  Growing Future Market Share through Proactive IP Strategy

See our initial post, Importance of Intellectual Property Rights: Increasing Market Share Through Stopping Knockoffs and Infringements for a complete overview of the series. 

Identifying and Quantifying the Harm from Knockoffs

Beginning with the end in mind is essential to designing an effective IP-enforcement program.  This aim should start with an analysis and quantification, if possible in dollars, of the losses incurred by knockoffs and infringements.  For some losses like diverted sales, the calculation can be straight forward:

  • total volume of diverted sales equals lost revenue,

  • the IP owner’s lost profits equals total lost revenue multiplied by profit margin,

  • the infringer’s ill-gotten revenue equals total diverted sales, and

  • the infringer’s ill-gotten profits equal total revenue of diverted sales multiplied by the infringer’s profit margin. 

Because infringers are not burdened with research and development costs and other expenses, their profit margins tend to be higher than product manufacturers.  This is why many IP-assertion plaintiffs seek the infringer’s profits under the Lanham Act (15 U.S.C. § 1117(a)-(c)), Copyright Act (17 U.S.C. § 504(b)), and Patent Act (35 U.S.C. § 284) or seek statutory damages. 

The type of losses experienced by businesses due to knockoffs is widespread and tends to evolve over time as technology progresses presenting new opportunities for ill-gotten profit.  Examples of losses include lost sales, leads diversion, initial interest confusion, angry customers, misdirected complaints or reviews, confused customers, damage to goodwill and reputation, misdirected product returns, higher pay-per-click bidding costs, reduced margins, and even theft of customer credit card numbers. 

Generally, for most businesses, a specific pain point leads to a discussion of how to stop the losses.  For example, this could be infringing use of trademarks to divert leads and sales by potential customers seeking a brand online.  In other words, this is a “lost sales” scenario.  A closer investigation may reveal misdirected reviews or complaints about the infringer’s knockoff product by third parties believing to have purchased the brand’s authentic product.  While this type of harm is harder to “quantify,” it is real nonetheless. 

Contrast this with the typical counterfeit storefront scenario, where bad actors create a fake website, landing page, or social media page by scraping the content from a brand’s website.  On the fake storefront, branded products are offered at an 85% off sale, orders are accepted, and credit card numbers are taken.  But no product ships.  This generally results in the brand owner experiencing a deluge of by unhappy “customers,” who not only didn’t receive any product, they also had their credit card numbers stolen.  Like the previous example, the brand owner has suffered diverted sales and harm to their goodwill.  The owner also has to contend with a potentially large number of people that are unhappy about not receiving the product and later learning their credit card numbers stolen.  Thus, the harm calculation has different elements. 

Different Types of Harm and Losses Caused by Infringement

In addition to the different type of losses caused by infringement, there are numerous ways bad actors can engage in knockoffs and infringement. The following is only a short summary of the potential infringement:

  • domain name registration theft or infringement,

  • trademark or copyright infringement in website content and meta tags,

  • social media,

  • pay-per-click ads and landing pages,

  • unauthorized resellers,

  • gray market goods,

  • online platforms,

  • counterfeit websites and physical products, and

  • software piracy. 

For some businesses, the knockoff/infringement is sold by a competitor that sees a profit opportunity in a similar product or service.  While this product may not be truly a “knockoff” or lead to confusion about the source of the product, it can still result in substantial lost sales, particularly if the competitor can offer the product at a lower price or has a much larger marketing budget.  To ward off competitors, businesses should consider obtaining patent protection for new and innovative products or services.  This allows the business to stop others from making, using, offering for sale, selling, and importing a product or service covered by the patent. 

Dollarizing the Losses to Establish a Target ROI

While not a requirement, quantifying the losses allows for the calculation of the enforcement program return on investment (ROI).  It’s a best practice to at least do rough estimates of the losses even without complete information or the ability to actually quantify the totality of the losses.  Put another way, the process of determining loss estimates has value even if the end calculation is off.  This is because the calculation can be modified to be more accurate with future information and it serves as a possible baseline to measure the program’s success over time.   

As an example, if a typical infringer causes $5,000 in quantifiable losses plus an unquantifiable amount of intangible harm, a program that stops each infringer with an average program cost of $3,500 per target is a significant economic “winner.”  If the program costs $7,500 per infringer, then a determination must be made about the amount of the intangible harm suffered and other considerations like stopping future infringers.  These “unquantifiable” harms may be sufficient to justify the program.  Having established clear goals or outcomes for the program will aid in this determination.

At some point, an IP-enforcement program should reach diminishing returns where the value of the avoided harm relatively matches the cost of the program.  At that point, the program has reached steady state where further investments may not yield a greater dollarized return.  This analysis includes an assumption that the program must be self-funding.  For some businesses and legal departments, that is not always a program goal.  This determination should be made or at least discussed upfront in the program design stage. 

Next Step – Gather IP Assets to Combat Knockoffs

At this point, we have made at least a preliminary analysis of the types of harm being suffered, the types of infringement, and the places were the infringement occurs.  From this analysis, we have a preliminary ROI to begin designing the program as well as potential program goals or outcomes.  In our next step, we will gather all of the intellectual property assets as well as secured additional IP registrations, if needed, as a preliminary step before designing the initial IP-enforcement program.  See IP-Enforcement Programs: Marshaling Intellectual Property Assets to Combat Knockoffs and Infringement for our discussion of the next step in the process.

Access the E-Book “Increasing Market Share Through Stopping Knockoffs and Infringement”

We have condensed the six steps into a graphical E-Book that provides a summary of developing effective IP Enforcement Programs along with tips, techniques, frequently asked questions, and mistakes to avoid.  You can access a complimentary copy of the E-Book by clicking here. 

You may also be interested in the following posts on the importance of intellectual property in enforcement programs:


For more information about IP-enforcement and anti-counterfeiting programs, see our Anti-Counterfeiting and Luxury Brand pages. You can access additional information on our Brand Protection Strategies and Resources page.

About the Author

Through prosecuting over 1,000 intellectual property (IP) enforcement actions, Darin M. Klemchuk advises clients on proactive IP and an anti-counterfeiting programs to stop diverted sales, market place erosion, and other harms faced by businesses. You can learn more about Darin’s practice and view his curriculum vitae at his bio page. If you want to send Darin a message, then visit our contact page.

This post has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2022 Klemchuk LLP

Blog, Law, Anti-Counterfeiting, IP Litigation, TrademarksDarin M. Klemchuk