In today’s complex global marketplace, the integrity of supply chains is not just a logistical concern—it is crucial for business success and consumer trust. Companies increasingly grapple with the widespread issue of counterfeit goods, a threat that drains revenue, damages brand reputation, and poses risks to consumer safety. Enter blockchain technology, an innovative solution that offers more than just the authentication of supply chains; it promises to revolutionise business operations. This article explores the legal complexities and implications of integrating this transformative technology to ensure supply chain authenticity.
The Legal Landscape of Counterfeit Goods
According to the latest data from the Organisation for Economic Co-operation and Development (OECD) published in 2019, counterfeit products significantly affect the European Union, constituting 6.8% of all imported goods. This issue is not confined to Europe; globally, counterfeit and pirated goods accounted for approximately 3.3% of worldwide trade, or USD 509 billion, in 2019. These counterfeit items not only cost businesses billions in lost revenue but also endanger consumer safety.
The European Union has established a comprehensive set of regulations to combat counterfeiting, including EU Trademark Regulation 2017/1001, the IP Rights Enforcement Directive 2004/48/EC, and Customs Regulation 608/2013. While these are pivotal steps, the advent of blockchain technology offers an additional layer of security, ensuring more transparent and unchangeable records.
What is Blockchain, Simply Put
Imagine a digital notebook that is not kept in just one place but is instead copied across a network of computers. This notebook is what we call a “blockchain.” Whenever a new entry is made, like noting who owns a certain item, it gets securely locked into place. This locked-in entry then becomes visible to everyone who has access to this network of notebooks.
What makes blockchain special is that it is decentralised, meaning it is not controlled by a single entity or location. Instead, it exists across many computers. This setup ensures that no single entry can be changed without affecting all the other entries that came after it and without everyone agreeing to the change. So, it is incredibly difficult for anyone to cheat the system or create fake records.
Ensuring Product Authenticity
Now, imagine buying a designer bag or an expensive bottle of wine. Normally, you would rely on brand labels, tags, or certificates to make sure it is the real deal. But all of these can be faked. With blockchain, the moment that bag or bottle leaves the factory, its details get recorded in this secure and transparent digital notebook. When you buy it, you can simply scan a code with your smartphone to see its entire history—where it was made, who owned it before, and so on. Because blockchain records are very secure, you can trust that this information is accurate.
This makes it extremely difficult for counterfeiters to sell you a fake product, because they cannot mimic the blockchain’s secure and transparent history of the item. In essence, blockchain is like a super-secure, transparent history book for products, ensuring that what you buy is genuinely what it claims to be.
While it might be technically challenging, it is not impossible for a scammer to build a counterfeit smart tag by mimicking a genuine one. However, scanning this fake tag would reveal the history of the actual item tied to the original tag, thus exposing the counterfeit.
This dual layer of protection—smart tags and blockchain—makes it extremely difficult for counterfeiters to successfully pass off a fake product as genuine.
Blockchain in Action: Real-World Applications
Blockchain has found utility in various sectors like luxury retail and healthcare. For instance, the AURA Blockchain Consortium, comprising industry giants like LVMH, Prada Group, and Cartier, leverages blockchain to authenticate luxury items.
Similarly, EBSI-ELSA, an initiative by the European Union Intellectual Property Office (EUIPO), aims to safeguard supply chain authenticity through blockchain. After real-world testing with brands and logistics operators, EUIPO showcased the promising results of EBSI-ELSA in Alicante. Slated to be an open-source platform by the end of 2023, it will integrate with existing tools to help identify counterfeit goods more efficiently. By 2024, the objective is to harmonise intellectual property (IP) authentication across all stakeholders, thereby fortifying legal frameworks and operational efficiencies.
Legal Considerations for Integrating Blockchain
As companies consider leveraging a private or permissioned blockchain within their supply chain, they must grapple with complex governance issues to ensure smooth implementation and administration. Traditional legal agreements often serve as the overarching framework to outline rights and responsibilities, decision-making processes, and levels of centralised control among participating entities. Key questions that need to be addressed include: who will maintain the blockchain, how will access permissions be granted, and what consensus mechanisms will be employed to validate transactions. Data ownership is another critical governance aspect that demands careful consideration. The intricacy of these governance issues often scales with the number of participants, making it essential to address them early in the adoption process. By proactively tackling these governance questions, companies can lay a solid foundation for effective and legally sound blockchain integration.
Challenges in Providing Authenticity
While blockchain offers robust security features, it is not infallible. For instance, while the technology itself is secure, the data fed into it may not be. If counterfeit goods are mistakenly entered into a blockchain-based authentication system, those goods become ‘authenticated’ within that blockchain, misleading consumers and stakeholders. Brands must implement stringent quality control measures at the data entry points to ensure that only genuine products are included in the blockchain.
Moreover, while blockchain is a powerful tool for proving the provenance of a product, it does not inherently protect against the physical tampering of the good itself. Additional security features, like tamper-evident packaging, are still needed to offer a comprehensive anti-counterfeit strategy.
Data Privacy Concerns and Compliance with Relevant Laws
When integrating blockchain into supply chain operations, organisations must consider data privacy regulations like the General Data Protection Regulation (GDPR) in the European Union. Blockchain’s immutable ledger poses a challenge for data deletion, which could potentially clash with the GDPR’s “right to be forgotten.” Additionally, cross-border data sharing through blockchain needs to comply with jurisdiction-specific data protection laws, which can vary significantly from one country to another.
If personal data is involved, a potential solution is to store personal data in separate off-chain databases (which are not immutable), with the blockchain merely containing pointers that link the users to the off-chain data. Doing so may sacrifice some of the benefits of blockchain. Implementations involving personal data must be carefully constructed to comply with applicable data privacy laws.
Liability and Risk Allocation
In a blockchain-enabled supply chain, multiple parties are involved in the validation and recording of transactions. Should an issue arise—like the recording of false information or a system error—it could be legally challenging to determine who is liable. Traditional contracts often do not cover decentralised operations, so new forms of agreements may be needed to allocate risks and responsibilities among participants.
Blockchain promotes transparency by its very nature, which can be both an advantage and a legal risk. Increased transparency can potentially facilitate anti-competitive behaviors, like price fixing, by making it easier for companies to access each other’s information. To mitigate this risk, brands should consult with legal experts to ensure that their blockchain initiatives comply with anti-trust laws and guidelines.
As with any technology, the ethical implications of blockchain should not be overlooked. For example, in the sourcing of raw materials, transparency is key. However, exposing the details of suppliers might put them at a competitive disadvantage, raising ethical concerns that must be navigated carefully.
Intellectual Property Rights
Another layer of complexity in the blockchain sphere is the subject of intellectual property rights. Given that blockchain technology itself can be patented, and copyrighted material may be stored within the blockchain, a nuanced legal landscape emerges. Companies must carefully consider not only how to avoid infringing on existing intellectual property rights but also how to protect their own intellectual assets incorporated into the blockchain. This is particularly relevant when dealing with proprietary versus open-source platforms. In the case of proprietary technology, it is crucial to clarify who will own the intellectual property and what rights non-owner participants will have with respect to it. By proactively addressing these intellectual property considerations, companies can better navigate the legal intricacies of integrating blockchain into their operations while safeguarding their own valuable assets.
Choice of Law and Forum
As blockchain systems often span multiple jurisdictions, the question of which legal framework applies becomes a critical consideration for companies. Deciding on the choice of law and forum is an essential part of contractual agreements between participants in a blockchain supply chain. It clarifies what jurisdiction’s laws will govern in case of disputes and where such disputes would be adjudicated. Given the decentralised and cross-border nature of blockchain, this becomes especially complex and essential to settle early on. Establishing these legal parameters up front can save participants time, resources, and potential legal complications down the line. Therefore, companies should take great care in specifying both the governing law and the forum for dispute resolution in their blockchain agreements to ensure a clear legal roadmap for all parties involved.
Blockchain technology offers an innovative way to tackle the global counterfeit market. By enabling more secure, transparent, and immutable records, blockchain can significantly enhance the integrity of supply chains. However, its integration into business operations is fraught with legal complexities, from governance challenges to compliance with data privacy laws. Organisations looking to harness the power of blockchain must consider these legal aspects meticulously to lay a strong foundation for its effective and responsible implementation. With proper planning and execution, blockchain can indeed revolutionise supply chain management, driving economic value while also bolstering consumer trust.
This article is for general informational purposes only and should not be construed as legal advice