Counterfeit Products in the Supply Chain ( Part 1 ) Breakout Session: 11:40 AM – 12:40 PM Doris H. Gray, Esq. Senior C

2. Counterfeit Products in the Supply Chain(Part 1)Breakout Session: 11:40 AM – 12:40 PMDoris H. Gray, Esq.Senior Contracts ManagerAvnet, Inc. This presentation represents the views of the speaker and not Avnet, Inc. These materials should not be construed as legal advice or opinion. The contents are intended for information purposes only. Anyone needing specific advice should confer with an attorney.

3. Industry’s Perspective: “Ain’t Nothing Like the Real Thing” [1] [1] “Ain’t Nothing Like the Real Thing” was a popular R&B song released by Tammy Terrell and Marvin Gaye on the Tamla label in 1968.

4. Counterfeiters… Use counterfeits to launder drug money Avoid paying taxes Violate state and federal anti-counterfeiting laws Violate patent and copyright infringement laws Violate state and federal anti-fraud laws Selling Counterfeits Is A Crime

5. U.S. Government Anti-Counterfeiting Statute, 18 USCS § 2320 Prohibits intentionally trafficking Prohibits knowingly using a counterfeit mark $250,000 fine and up to 5 years imprisonment STOP ACT – Stop Counterfeiting in Manufactured Goods Act, H.R. 4279 would permit: Criminal remedies against counterfeiting Civil forfeiture of counterfeit products Civil forfeiture to any property used to commit a violation Selling Counterfeits Is A Crime

6. Merchandise Bearing American Trademark – 19 USCS § 1526 It shall be unlawful to import into the US any merchandise of foreign manufacture if such merchandise…bears a trade-mark owned by a citizen of…the US and registered in the Patent Office by a person domiciled in the US. Fastener Quality Act, P.L. 101-592 Requires that fasteners in critical applications conform to their specifications and provides for inspection, testing and certification of fasteners. Selling Counterfeits Is A Crime

7. Counterfeits Linked to Terrorism • FBI linked the bombing of the New York Trade Center in February 1993 to sell of counterfeits • Interpol testimony in July 2003 to House Committee on International Relations linked counterfeits to Al Qaeda and Hezbollah

8. Selling Counterfeits Is Not A Victimless Crime • Loss of US jobs • Loss of brand reputation • Loss of revenue • Injuries and deaths • Increase in trade deficits • No product warranties or after sale services

9. Definitions of Counterfeit • Wikipedia – A counterfeit is an imitation that is usually made with the intent to deceptively represent its • content or origins. • Semiconductor Industries Anti-Counterfeiting – • A counterfeit is a: • Substitute or unauthorized copies of a product • A product in which the materials used or the performance of the product has been changed without notice by other than the original manufacturer of the product • A substandard component misrepresented by the supplier

10. Bureau of Industry and Security – A counterfeit is anelectronic part that is not genuine because it meets one of the 5 criteria: Is an unauthorized copy Does not conform to the Original Component Manufacturer’s (OCM) design, model and/or performance standards Is not produced by the OCM or is produced by unauthorized contractors Is an off-specification, defective or used OCM product sold as “new” or working Has incorrect or false markings and/or documentation Definitions of Counterfeit (cont’d.)

11. How Widespread is Counterfeiting? U.S. Losses as a % of total loss worldwide of $500B/Yr: • IT Industry: 20%/Yr • Computer S/W: 2%/Yr • U.S. Income: 40%/Yr Factoid: 80% of all Counterfeits are produced in China Sources: Alliance for Gray Market & Counterfeit Abatement (AGMA) Business Software Alliance World Customs Organization Department of Homeland Security

12. Buy from authorized distributors Drastically limit buying from brokers or independent distributors Require testing on all broker-acquired parts Implement a 100% inspection program for all returned products Ways to Combat Counterfeiting

13. Immediately report counterfeit products to Government-Industry Data Exchange Program (GIDEP) Provide Customs and Border Protection officials with information and resources to detect counterfeit shipments Adopt new anti-counterfeiting technologies and markings Ways to Combat Counterfeiting

14. Unique Identification (UID) – DOD announced a new policy for identifying items it purchases New anti-counterfeit Technology: encryption, coded markings, RFID tags and laser markings 3M has developed a new range of innovative and highly efficient counterfeit-proofing products. 3M Deutschland GmbH, Identification and Converter Division, e-mail: dstruwe@mmm.com Sources: 45 No.29 Gov’t Contractor ¶317 Rochester Electronics White Paper and “Grey Marketers – Insidious Image Thieves” by 3M Innovation Network Ways to Combat Counterfeiting (cont.’d)

15. The worldwide market for semiconductors in 2006 was $245B 60% of semiconductors are used by computer and telecommunication companies 1% of semiconductors are used by the military Original Component Manufacturers (OCMs) sell directly to customers or through indirect distribution channels Source: Rochester Electronics White Paper The Market for Semiconductors

16. How Counterfeit Electronics Get Into the Supply Chain • Asian counterfeiters “pass off” commercial grade semiconductors and usedsemiconductors as military grade semiconductors • Counterfeits are then sold to “mom and pop” brokers • Counterfeits are sold to military contractors

17. Counterfeit Semiconductors Invade the Military Market • BAE’s SE&IS division reported to GIDEP only 45 incidents of counterfeiting • Justice Department is investigating how counterfeits entered their supply chain • BAE has restricted its purchases to original chipmakers and authorized distributors “except in very limited circumstances.” Source: BusinessWeek, October 2, 2008 http://www.businessweek.com/magazine/content/08_41/b4103034193886.htm?chan=top+news_top+news+index+-+temp_top+story

18. There are several market factors that make counterfeiting attractive: The need to replace obsolete or discontinued parts The profitability of the parts counterfeited Products shortages Source: Rochester Electronics White Paper Why are Semiconductors Susceptible to Counterfeiting? Factoid: 45% of all semiconductors are manufactured in Asia

19. Bureau of Industry and Security (BIS) is conducting assessment covering discrete electronic components, ICs, bare and assembled circuit boards: To quantify reported counterfeits To document industry and government practices To identify best practices Response to BIS’ survey was required by law Survey was very extensive covering: Inventory control Counterfeit handling and notifications Reasons for and cost of counterfeits Anti-counterfeit practices Certification BUREAU OF INDUSTRY AND SECURITY Factoid: Seizures of counterfeits in 2006 rose 83% to $155M Source: Department of Homeland Security

20. November 21, 2008 GCMC Conference: Counterfeits and the Industrial Base Mark H. Crawford Senior Analyst Industrial Base Studies Office of Technology Evaluation

21. Bureau of Industry & Security (BIS) MISSION: Advance U.S. national security, foreign policy and economic interests. BIS develops export control policies, issues export licenses, prosecutes violators, as well as monitors the capabilities of the defense industrial base.

22. OTE Industry Assessments -Background • Under the Defense Production Act of 1950, ability to assess: • Economic health and competitiveness • Defense capabilities and readiness • Enable industry and government agencies to: • Monitor trends and benchmark industry performance • Raise awareness of diminishing manufacturing and technological capabilities • More than 50 industry studies & 125+ surveys

23. Counterfeit Electronics Study -Goals • Assess the impact of counterfeit electronics on U.S. supply chain integrity, critical infrastructure, and industrial capabilities • Recommend best practices to mitigate risk to U.S. supply chain • Study sponsored by Naval Air Systems Command with support from Semiconductor Industry Association (SIA)

24. Counterfeit Electronics -Broad Definition • An electronic part that is not genuine because: • An unauthorized copy • Does not conform to original OCM design, model, and/or performance standards • Not produced by the OCM or is produced by unauthorized contractors • An off-specification, defective, or used OCM product sold as "new" or working • Has incorrect or false markings and/or documentation

25. Counterfeit Electronics Study -OTE surveys distributed • 5 separate but related surveys targeting: • Microchip & discrete electronic manufacturers – 106 • Electronic board producers/assemblers – 37 • Distributors and brokers of electronic parts – 144 • Prime contractors and subcontractors – 147 • DOD arsenals, depots, and DLA – 48 • 482 total survey participants

26. Counterfeit Electronics Study -Survey Objectives • Each survey contained approx. 80 questions • Scale and scope • Past problems and impact • Internal procurement policies and protocols • Testing, inspection, and inventory management • Post-identification procedures • Industry and government best practices Tried to keep questions uniform across surveys.

27. BIS Counterfeit Electronics Survey – Preliminary Data

28. Total Counterfeit Incidents:OCMs, Distributors, Board Assemblers 2005 - 2008

29. Counterfeit Incidents by Product Resale Value:Overall (2007)

30. Counterfeit Incidents by Product Resale Value: Distributors (2007)

31. Counterfeit Incidents by Type (2007)

32. Percent of Counterfeit Incidents Involving In/Out of Production Products 2005 - 2008

33. How Companies Are Uncovering Counterfeits (2007)

34. How Companies Are Uncovering Counterfeits: OCMs (2007)

35. How Companies Are Uncovering Counterfeits: Distributors (2007)

36. Percent of Companies With Documented Cases of Counterfeits Sold by Specific Entities

37. Top Countries Suspected/Confirmed to be Sources of Counterfeits* * Each company was asked to provide their top five suspected countries

38. Counterfeits Damaging a Company’s Reputation • OCM Comment: “With counterfeit goods in the market, purchasers are not sure if they received genuine or fake goods, so they tend to avoid the brand entirely.” • Distributor Comment: “When distributors or brokers trade in counterfeit parts the entire industry’s reputation is tarnished with a ‘guilty by association’ mentality.”

39. Top 10 Reasons Identified by All Companies for Counterfeits Entering the U.S. Supply Chain

40. Pre-Stock Testing By Type of Supplier(Distributors and Board Assemblers Only) Only 56% of Distributors and Board Assemblers test products they purchase before placing them in inventory.

41. Percent of Distributors Conducting Pre-Stock Testing

42. Percent of Board Assemblers Conducting Pre-Stock Testing

43. Percent of Companies Performing Inventory Audits for Counterfeits

44. Contractor Testing Problems • Four companies had problems with Non-U.S. contractors concerning improper management or theft of electronic scrap after testing. • 17 companies, 41% of those employing testing contractors, had problems with U.S.-based firms concerning faulty or forged testing. • The parts were cleared by the testing house, but were later found to be counterfeit by the customer. This is an area that deserves further analysis.

45. Steps Taken After Notification of a Counterfeit Incident: OCMs

46. Steps Taken After Notification of a Counterfeit Incident: Distributors

47. Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers

48. Steps Taken After Possession of a Counterfeit Part

49. Who Ya Gonna Call? 56% of OCMs, 65% of Distributors, and 75% of Board Assemblers DO NOT KNOW what authorities to contact when they encounter counterfeits. 71% of distributors tell customers to contact their firm if they encounter a counterfeit product.

50. “Fun” Facts • Only 38% of surveyed companies maintain a database to keep track of counterfeit incidents. • 63% of these companies are distributors. • 67% of Circuit Board Assemblers co-mingle identical parts from multiple suppliers in the same bin. • Only 14% of distributors do the same. • 40% of companies stated that they find it difficult to identify counterfeits. • However, 61% of companies find it easier to identify counterfeits today than they did five years ago.