Jacob Schindler

Chinese enterprises with a record of IP infringement may soon have that fact reflected in their credit histories. The latest indication came in December, when the country’s chief administrative body, the State Council, included the idea in its “Opinion on Building a Strong IP Nation”, a blueprint for future reforms. Respect for intellectual property is set to become just one variable in a wide-ranging “Unified Social Credit System”, aimed at enhancing information-sharing between government agencies and deterring dishonest business practices. On a practical level, if implemented the system could make it easier for law enforcement and brand owners to identify and focus their resources on repeat offenders.

An English-language press release posted on December 22 highlighted the credit score proposal, announcing: “Any intentional infringement on intellectual property will become part of the credit history of a person or an enterprise.” In the original document, the idea appears in a section titled “Establish and improve early warning preventive mechanisms for IP protection”, suggesting that one of the key benefits of such a system could be to allow IP owners and law enforcement to identify potential infringers at an early stage based on past activity. But no further details on the scheme or its implementation are provided. That leaves plenty of questions, notes Joe Simone of Simone IP Services in Hong Kong: “The new proposal sounds nice. But defining ‘intentional’ raises interpretational issues. What standards will be used to determine if a party is acting intentionally?” Other open questions include whether the records will extend beyond counterfeiting to include other trademark and patent infringement and criminal as well as administrative penalties.

The Unified Social Credit system is still in the planning and trial stages, but authorities hope it will be up and running by 2020. The impetus may have been China’s lack of a uniform credit reporting system for financial purposes, but the system proposed by the government is quite a bit more far-reaching than that, and will also function as a database allowing various government agencies to centralise information on legal entities. Enterprises are already being issued 18-digit codes which are to replace the separate registration numbers that previously identified them to agencies like the Administration for Industry and Commerce (AIC), tax authorities, and customs officials. According to a research note from Simone IP Services, some local AICs, including Beijing’s, already have searchable databases for registered companies showing past administrative penalties issued by AICs, IP administrative bodies, tax authorities and others. This is helpful from a research perspective, but we don’t yet know how the history of penalties might play into the more traditional credit reporting function of the system – in other words, could a history of counterfeiting activity make it more difficult for a company to get a loan?

Interestingly, the State Council summary mentions that persons as well as enterprises will be affected credit-wise by any history of intentional infringement. The unified social credit system for individuals is not yet being put into practice by the government; instead, a handful of private companies, including Alibaba’s Sesame Credit, are trialing their own schemes. Eventually, the plan is reportedly to build a government-maintained credit history for each individual that includes everything from tax payments to traffic tickets. While many say China needs to develop credit ratings to grow as a consumer economy, critics have labeled the proposed score “Orwellian” due to the broad range of factors it will consider. Again, it is not clear whether this will merely be a way for official bodies to collate and share information, or whether IP administrative penalties levied against individuals could affect their ability to borrow in the future. If it’s the latter, it would have obvious applications to trademark enforcement given the tendency of individual counterfeiters to liquidate companies when caught and subsequently set up new legal entities.

A planning outline for the social credit system makes clear that counterfeiting is one of the main issues it hopes to address. It is included on a list of social ills alongside food safety scares, tax evasion, commercial swindles and academic impropriety that the government admits have been difficult to stamp out. It concedes that these problems “cannot be stopped in spite of repeated bans” and “there is still a certain difference between the extent of sincerity in government affairs and judicial credibility, and the expectations of the popular masses.”

At the moment there are more questions than answers as to what the social credit system will look like, but it could be a potentially encouraging development for companies affected by counterfeiting. In Simone’s view, “Any kind of database that includes information on infringers is useful on a few levels.  Most importantly, it helps us to identify repeat offenders, and as a result we can then decide to spend more resources investigating if we think they are still up to no good.  And the existence of a system like this can of course help to generate deterrence.  But just how much remains to be seen.” 

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