Does Etsy have a counterfeit products and copyright infringement problem? A new report blasts the company for lacking effective enforcement. Let’s take a look.
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Etsy has been the darling of online marketplaces over the past couple of years, growing on all fronts, from revenue to buyer and seller metrics.
The Covid-19 pandemic certainly helped catapult Etsy into the mainstream further. Especially in the early days of the pandemic, when face masks were hard to find and enterprising sellers listed handmade cloth masks on Etsy.
Like many others in ecommerce, growth on the Etsy platform has decelerated over the past year. But it has not crashed such as eBay, which lost most of its Covid-19 era active user and revenue gains within one year.
Even Amazon is rightsizing its ecommerce platform, slowing new fulfillment warehouse openings, reducing staff, and implementing other cost-cutting measures to return its retail division to pre-pandemic profitability.
In that regard, Etsy has been an outlier among major online marketplaces because while sales growth may have been slowing, the company exited the height of the pandemic much better than many of its peers.
But a new report from longtime short-seller Citron Research (Citron) may push Etsy to introduce drastic changes to its business that could significantly impact sales and potentially boot thousands of sellers off the platform.
Etsy – A Criminal Enterprise?
Citron claimed in its report that Etsy is “the largest organized clearing house for counterfeit goods in the world while not only allowing the behavior but encouraging it and promoting it by selling placement and status to the millions of sites that regularly violate copyright laws.”
Furthermore, “Citron believes Etsy is walking on eggshells with the FTC, DOJ, SEC, Customs and Border Protection, and the multitude of brands whose trademarks are being stolen and exploited daily.”
Andrew Left, Citron Research Founder & Executive Editor, compared Etsy to New York’s Canal Street, famous for bargain shopping and counterfeit luxury products.
Just a few months ago, the NYPD seized more than $10 million of fake luxury goods on Canal Street.
Left believes Etsy has been getting away with it for too long, being a virtual ‘Canal Street’ which “has hit ridiculous levels,” but without the legal consequences.
The big issue he explains is that Etsy is not only allowing the sale of counterfeit goods, but it is double-dipping on fees by permitting sellers to purchase keywords of brand names to drive sales to their products.
That means, Etsy is making a commission on the sale as well as collecting advertising revenue from sellers with products that violate intellectual property (IP) rights by brand owners.
Furthermore, he says the problem is so obvious that “Etsy behavior is bordering on criminal as it knowingly or negligently sells trademarked keywords to counterfeiters.”
In an interview with Yahoo Finance discussing the report, Left added it’s not a few pieces slipping through, but “it seems inherent to the business.”
How Big Is the Problem?
Citron’s report provided examples using popular brand names such as Nike, Rolex, Disney, and others demonstrating the scope of the infringing activity on Etsy.
But since this report was published a few days ago, I decided to do my own searches on Etsy’s platform. I was interested in learning if anything had changed since Citron called out the marketplace.
Here is what I found:
- “Disney” – 1M+ items with the Disney brand name.
- “NFL” – 157K+ items with the NFL brand name.
- “Nike” – 141K+ items with the Nike brand name.
- “Gucci” – 66K+ items with the Gucci brand name.
- “NASCAR” – 31K+ items with the NASCAR brand name.
- “Cartier” – 21K+ items with the Cartier brand name.
- “Rolex” – 15K+ items with the Rolex brand name.
This doesn’t look good, does it? To be clear, just because Etsy’s search found a listing with a brand name doesn’t mean it always found a counterfeit product.
But it was easy to find many counterfeits within the search results, some of which appeared to be of good quality with top reviews.
In some cases, sellers were using licensed materials turning them into new products, apparently believing that makes their goods legal. But that is a false belief.
One final note about this search test. I tried to find a product with an Etsy logo, but couldn’t find one at all. Hmm….?
Why Did Citron Research Publish This Report?
Normally, the Wall Street types don’t wake up one morning and decide they’ll publish a report on a company, good or bad, without having skin in the game.
Andrew Left has been a notorious short seller, meaning he invests in companies he believes are overvalued, hoping the stock will go down, turning a profit for him.
Left has been a controversial figure on Wall Street, publishing market commentary for two decades, often criticizing management or even calling out companies for fraudulent activities.
According to Institutional Investor, 50 companies covered by Left’s research firm Citron became targets of regulatory intervention.
When Yahoo Finance asked him this question in a follow-up text message after the interview, he replied: “lol.”
Make out of it what you will, Andrew Left’s accusations are not wrong, as can be easily verified by searching for major brand names on the Etsy marketplace.
Etsy defended itself in a statement to Yahoo Finance, “Counterfeit items, fraud and other illicit practices are explicitly prohibited on Etsy, and our dedicated teams work diligently to remove listings that violate our policies.”
But, to put it bluntly, the search results speak for themselves, and maybe its “dedicated teams” are overwhelmed by the scale of the problem?
What Does This Mean for Etsy?
Fundamentally, Etsy has a big issue. But the marketplace is not alone, as counterfeits are a problem systemic with online marketplaces.
Take Amazon and eBay, for example. These two have been fighting counterfeit and illegal items for what seems like forever.
However, in contrast to Etsy, they appear to have taken a more proactive approach trying to control the issue.
Some people may disagree on the last point, but consider that Amazon and eBay have way more listings than Etsy, it’s a matter of ratio.
In 2020, Amazon formed its Counterfeit Crimes Unit. Despite the unit’s government-sounding name, it’s a department within Amazon that partners with brands and law enforcement agencies to identify individuals and companies selling counterfeit products on its platform.
This unit is in addition to tech-based tools the company utilizes that monitor its marketplace for potentially infringing and dangerous products.
Of course, that hasn’t stopped all counterfeits and bad products from making it on Amazon. But in May 2021, Amazon claimed it blocked over 10 billion products from being listed on its platform in 2020.
Not everything Amazon blocked probably involved counterfeit products, but still, the big number highlights the scale of the problem Amazon and marketplaces in general face.
eBay has been fighting the same battle. The most visible program to sellers has been its Verified Rights Owners (VeRO) department, which enables vetted brands to submit Notices of Claimed Infringement (NOCI), forcing eBay to remove the listings.
Some sellers who received VeRO notices may believe it was eBay enforcing its policies, but in reality, it’s the IP owners or their representatives that request that action.
When eBay receives a valid NOCI, it must act and take down the reported listing(s) to maintain its ‘safe harbor‘ standing, which limits its exposure to lawsuits from rights owners.
But just like Amazon, it has been beefing up its marketplace monitoring to keep its platform as clean as possible. Yet, many counterfeits still make it through.
To help boost its compliance actions, eBay revealed earlier this month it acquired 3M Shield, a company that developed marketplace compliance solutions that should strengthen its efforts.
So, while Amazon and eBay have been in the news frequently about counterfeit products on their platforms, Etsy has largely avoided that spotlight.
Yet, it seems Etsy knows it has the same issues, as it too has a portal for IP rights holders to report infringing listings.
But it appears the company is less proactive in blocking or removing potentially infringing listings on its own.
And this might be the big differentiator Citron is emphasizing in its damaging report on Etsy.
Is Etsy turning a blind eye to this problem because so many of its sellers, including star sellers, are selling unlicensed and fake products? Maybe…
While the company has a policy prohibiting the sale of such merchandise — even publishing a guide for sellers explaining the issue in detail — there appear to be far too many infringing listings on the platform.
It does seem to support Citron’s claim that Etsy isn’t doing enough to stop the illegal behavior on its platform because it would take a financial hit.
While equating Etsy to criminals selling fake goods on Canal Street is a bit of a stretch, there is no doubt Etsy has to do better.
Since Etsy has been called out and the Citron report negatively affected its stock price when it was released, the marketplace may have to become more proactive in its enforcement of illegal items.
What Does This Mean for Etsy Sellers?
In short, a major site-wide cleansing by Etsy could entangle thousands of top and long-time sellers. For example, I found one clearly infringing listing from a top seller with over 300,000 sales!
I also found numerous individual listings (hundreds before I quit looking) with sales in the thousands that offered infringing products.
A site-wide enforcement action by Etsy could knock thousands of sellers off the platform, resulting in a huge financial hit on sellers and on the company.
The latter, Etsy would have to explain to investors. Today, the company will report its fourth quarter and full-year 2022 financials. Will this topic come up in the earnings call later in the day?
Stay tuned, it seems too big to ignore now!
Here is the full report on Etsy issued by Citron Research.
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