Beats Sues Counterfeiters Ahead of Acquisition By Apple

Andrew Burton/Getty Images

Andrew Burton/Getty Images

Beats Electronics, the premium headphone maker that is in the process of being acquired by Apple (NASDAQ:AAPL), is suing Chinese counterfeiters in what will likely be one of its last actions as an independent company. While Apple is paying $3 billion to acquire Beats Electronics and Beats Music, the company has filed a lawsuit that alleges it is losing as much as $135 billion in annual sales to Chinese companies that are selling fake Beats headphones, reports AppleInsider.

“This action has been filed by Beats to combat online counterfeiters who trade upon Beats’ reputation and goodwill by selling and/or offering for sale unlicensed and counterfeit products featuring Beats’ trademarks,” stated Beats Electronics in a filing obtained by AppleInsider. “The Defendants create [fake internet storefronts] by the hundreds or even thousands and design them to appear to be selling genuine Beats products, while actually selling low-quality Counterfeit Beats Products to unknowing consumers.”

Genuine Beats headphones typically sell for hundreds of dollars, with some special edition versions of the headphones costing as much as $600. Although it is unknown what the company’s typical margins on the headphones are, the high cost and popularity of the products makes it an attractive target for counterfeiters. According to IDC data cited by The Carlyle Group, Beats Electronics held a 64 percent share of the $100-plus premium headphone market in the U.S. last September.

According to the court documents seen by AppleInsider, Beats Electronics accuses the counterfeiters of running a complex operation that uses specialized methods to avoid being discovered by law enforcement. Counterfeit Beats products are shipped “in small quantities via international mail to minimize detection by U.S. Customs and Border Protection,” noted Beats Electronics in its filing.

Per the filed documents, Beats Electronics is seeking an import and sales ban on the counterfeit Beats products. The company is also asking for all of the profits that the counterfeiters have made from the sale of fake Beats headphones. Although it appears clear that the counterfeiters are breaking the law by selling fake products, it is less clear how Beats Electronics will obtain compensation since many of the companies are presumably based in jurisdictions beyond U.S. law enforcement’s reach.

However, while Beats Electronics will likely never see the profits that the counterfeiters have already made from selling fake headphones, the company may be able to hamper the counterfeiters’ abilities to sell their wares. As noted by AppleInsider, Beats Electronics is also seeking control of the domain names that are associated with the sale of counterfeit Beats products. A similar lawsuit that Beats Electronics filed last year resulted in the seizure of “1,472 domain names, 50 PayPal accounts, and 14 ‘online marketplace accounts,’” reports AppleInsider.

Apple announced that it was purchasing Beats Electronics and the Beats Music streaming service in May, in a deal that will also bring company co-founders Jimmy Iovine and Dr. Dre on board at Apple.  Many industry watchers believe Apple was primarily interested in acquiring the subscription-based Beats Music service in order to bolster its faltering iTunes download sales. There is no indication that Beats Electronics’ recently filed lawsuit will have any impact on the upcoming acquisition.

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)

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