23 Apr
2020

Procedures and strategies for anti-counterfeiting: China

SIPS

Procedures and strategies for anti-counterfeiting in China

China’s large manufacturing base and inconsistent IP enforcement make it one of the primary sources of global counterfeit and knock-off goods. In 2018, US customs statistics indicated that 54% of fake goods seized (by value) originated in mainland China.

For enterprising Chinese counterfeiters, trademark squatting remains a fertile means of adding to their profits. In that regard, and although the 2019 version of the Trademark Law mandates refusals of trademark applications filed in bad faith where there is no intent to use those marks, applicants are not required to submit evidence of use or intent to use at the application stage, unlike in most common law jurisdictions. In addition, as a first-to-file jurisdiction, trademark rights are awarded to the party that files soonest, not that uses the trademark first. Exploiting this system, Chinese trademark squatters commonly register vulnerable marks of both foreign and local companies, either using the pirated mark as cover for their own counterfeiting or hoping to extort a high assignment fee from the rights holder if it wishes to use its own mark.

A more concerning phenomenon is the use of e-commerce and social media sites to market infringing products to a global audience. These sales channels represent a massive risk for rights holders and offer a sharp contrast from the days before e-commerce when counterfeit and grey-market goods were largely limited to traditional domestic sales and local export-focused markets.

This problem is magnified by China’s sophisticated manufacturing base, where counterfeiters can quickly manufacture knock-off products at low cost for domestic and international distribution.

These risks, along with China’s status as one of the world’s largest consumer markets, make it an essential front in any company’s global IP strategy – even if that company is not active in China. Fortunately, through proactive steps, many of these risks can be mitigated.

Legal framework

In addition to IP-specific laws (eg, the Trademark Law, the Copyright Law and the Patent Law) and their respective implementing regulations and judicial opinions, the Civil Code, the Tort Law and the Criminal Law also contain IP-specific provisions. The 2019 E-Commerce Law contains provisions that permit e-commerce platform operators to be held liable for IP infringements occurring on their platforms – although only if certain criteria are met. Unfortunately, however, these provisions are not overly helpful in addressing sales of counterfeit items.

The Product Quality Law and the Anti-unfair Competition Law also provide important IP provisions for (among other things) anti-counterfeiting and falsified trademarks, respectively.

At the international level, China is a signatory to most major IP treaties, including the Berne Convention, the Paris Convention and the Nice Agreement, as well as the Madrid Agreement and Protocol. It is also a member of WIPO and the World Trade Organisation – making it subject to the Agreement on Trade-Related Aspects of Intellectual Property Rights.

Enforcement

Although China is notorious for its level of IP violations, it does provide a number of potential enforcement mechanisms for rights holders via administrative, civil or criminal channels (some more effective than others).

Administrative channels are most frequently used, but the benefits that they afford in terms of time and cost savings are often tempered by the relatively low fines assessed against pirates, which are unlikely to deter determined counterfeiters. While administrative authorities have recently been willing to issue significantly higher penalties (eg, in 2018, the Guangdong Higher People’s Court affirmed a fine of Rmb260 million ($37.5 million) imposed by the Shenzhen Market Supervision Bureau (MSB) against a copyright-infringing video-sharing platform), high fines remain the exception, not the rule. In most cases, administrative fines do little to deter repeated offences, and do nothing to compensate affected rights holders, who need to file separate actions to obtain any form of compensation.

In that regard, and particularly in relation to larger or more persistent targets, rights holders should be prepared to follow administrative enforcement actions with parallel civil or criminal suits, depending on the nature and scale of the violation.

The government bodies involved in IP enforcement include:

  • the MSBs, formerly the administrations for industry and commerce (China’s primary market supervision, regulation and enforcement officers);
  • the quality technical and supervision bureaux (QTSBs) (product quality and labelling law enforcers);
  • the public security bureaux (PSBs) and public prosecutors (procuratorates) (investigation and prosecution of criminal activities, respectively);
  • the General Administration of Customs (supervision of imports and exports of goods in China);
  • the China National Intellectual Property Administration (CNIPA) (trademark and patent examination and enforcement, as well as geographical indications), the administrative body that now includes the Trademark Office (TMO) (responsible for trademark examination and oppositions), and the Trademark Review and Adjudication Board (in charge of overseeing trademark rejection appeals, invalidation applications and appeals of other TMO decisions); and
  • the Copyright Protection Centre of China (oversight and administration of copyright registrations).

Border measures

Chinese Customs has regulations and systems to facilitate the recordal and enforcement of IP rights. While not technically mandatory, as a practical matter, recordal of IP rights with Chinese Customs is critical in obtaining its assistance.

Customs recordal is available exclusively via Customs’ online portal, covering:

  • trademarks registered in China;
  • patents (including designs, inventions and utility models) issued by the CNIPA; and
  • any copyrightable subject matter, provided that the work is deemed protected in China.

Once recorded, a rights holder may apply to Customs to seize identified potentially infringing goods or Customs may seize potentially infringing goods on its own initiative.

If customs officials detect suspected infringing goods, they will detain these goods and ask the rights holder to confirm whether they are fake. Verification must be given within three working days of receipt of notice (sometimes less, depending on the customs office). If the rights holder confirms that the shipment is authorised, Customs will release the goods. However, if the rights holder confirms that the shipment is counterfeit, Customs will seize the goods subject to the rights holder’s payment of a bond.

Customs will conduct only limited investigations into the circumstances behind most infringements. However, if the quantity of goods is high or if the infringer is a repeat offender, it may carry out more in-depth inquiries, sometimes in cooperation with the local PSB. For more serious cases, the entire file may be transferred to the PSB for formal investigation and, hopefully, criminal prosecution.

The likelihood of customs seizures may generally be increased by providing regular training for customs officials in key ports. Customs is considered a model enforcement agency in China and investment in training normally pays direct dividends in increased seizures.

Customs recordals can easily be completed online and are valid for up to 10 years, provided that the underlying IP rights do not expire during that time (with recordals for trademarks needing to be renewed when the underlying trademark registration is renewed).

Criminal prosecution

Foreign brands carrying out trademark enforcement actions have long relied on the assistance of local MSBs and QTSBs, each of which has the authority to act against counterfeits (use of identical trademarks) and infringements (use of a similar trademark). These entities regularly conduct raids on behalf of foreign rights holders and issue penalty decisions which, among other things, assess administrative fines calculated on the basis of the infringer’s illegal turnover.

That being said, most brand owners agree that the real deterrent to IP infringement lies in criminal prosecution. In that regard, one issue that China has still not overcome is the continuing use of monetary thresholds found in various laws that must be met before criminal liability can be pursued against counterfeiters. For instance, the Criminal Law provides that the threshold for criminal liability is Rmb50,000 ($7,250) for producing counterfeit goods and selling counterfeit goods.

Investigations into IP crimes typically commence following the rights holder’s report of the suspected crime to the local PSB. PSBs may also receive cases transferred to them by MSBs, QTSBs or Customs. In either circumstance, the PSB has discretion over whether to accept and investigate a given case. If a police investigation has been initiated and it is found that a crime has been committed, the police will transfer the case to the relevant procuratorate for prosecution.

In some circumstances – particularly where resources are limited – the police may investigate a crime but refuse to act or to refer the case to the prosecutors (or the prosecutors themselves may refuse to act). In such cases, private criminal prosecution may be available under limited circumstances (eg, where the victim has sufficient evidence to prove a criminal case).

Before or during the criminal investigation, rights holders can increase the chances of a successful criminal prosecution by doing the following:

  • sharing information on common targets with competitors and fellow victims – by adding together an infringer’s revenues from separate cases, the chances of prosecution, larger fines and heavier custodial sentences can increase dramatically;
  • approaching the police for informal advice and support at an early stage in the investigation process, rather than on an urgent basis (ie, just before or during the raid). If they have the time and inclination, the police may take over the investigation themselves. In a worst-case scenario, they may provide advice as private investigations progress. Ideally, the police are more inclined to assist once there is strong initial evidence of a crime having been committed, particularly via product seizures, emails and information on bank accounts;
  • filing the following types of evidence, ideally collected in the presence of Chinese notaries along with the police, to highlight the seriousness of the case and to project an image of reliability:
    • reports confirming prior sales or production;
    • evidence of purchases of the same item from multiple vendors in multiple regions;
    • audio and video recordings in which the infringer brags about the scope of his or her business; and
    • photographs and maps of the location where fakes are kept; and
  • when working with local administrative authorities on raids, businesses should make clear their interest in having the case transferred to the police. If appropriate, the administrative authorities should be encouraged to invite the police to attend the raid action and conduct seizures of materials that the MSBs lack the authority to seize (eg, emails and banking records).

Diligently following up with authorities, by telephone and in person, and having a representative present for key meetings to project the company’s strong interest in the case also help. Finally, brand owners should be ready to offer additional help at any and all stages, including through supplemental private investigations or legal opinions.

The key is to maintain good working relationships with the local police and other enforcement officials. While effective, sustained enforcement of the criminal IP provisions has long been a challenge. Chinese enforcement agencies are becoming increasingly attentive to the concerns of foreign rights holders and are now better trained to deal with these types of complaint.

Civil enforcement

As with the numerous provisions on criminal liability for IP infringement, China also has a broad range of laws permitting civil suits. Generally, these permit a rights holder to bring a civil action against an infringer and demand compensation for an infringement, injunctions halting further infringements and other civil relief.

Civil suits may be carried out for a number of reasons, including:

  • to seek compensation;
  • as part of a larger enforcement campaign;
  • to create deterrence (even without compensation); or
  • where clarification is needed on an issue of law that is ambiguous and impeding administrative enforcement.

Chinese civil suits do not guarantee access to an infringer’s business records, and there is little to no risk to an infringer from refusing to turn over any documents (with the exception of a burden-shifting negative inference that may be drawn against it in such cases). However, there are provisions for court-ordered evidence preservation, which – if permitted by the court – may provide rights holders with an avenue to collect important information for use in a lawsuit. Rights holders may also consider filing an asset preservation request targeting the defendant’s assets, which may be granted if a bond (in an amount specified by the court) is posted.

To maximise damages, rights holders may also consider conducting notarised purchases or mini-MSB raids against retailers, wholesalers and online traders involved in the infringement, to help demonstrate its true scope (final administrative punishment decisions can also form the basis of a civil suit). Rights holders should also provide evidence of use and fame of their mark in China and internationally.

Anti-counterfeiting online

Online counterfeiting is clearly one of the most significant issues facing rights holders in China. Counterfeiters have proven particularly adept at using the Internet to steal product ideas, by either visiting brands’ official websites or discovering new products featured on sites such as Kickstarter or offered through Amazon third-party sellers.

Once a product idea has been imitated, counterfeiters can readily manufacture the product themselves or arrange for a local manufacturer to put it into production, and then use China’s increasingly global e-commerce network to promote their goods to an international audience. They may even attempt full-on identity theft, seeking to replicate the foreign company’s trademarks, visual distinctiveness and products on websites or social media accounts, and perhaps using this faux company to solicit distributors or franchisees for further distribution.

Fortunately, Chinese e-commerce sites have developed relatively efficient online takedown mechanisms for foreign companies that can demonstrate relevant registered IP rights. For domestic sites such as Taobao, Tmall and 1688.com, online takedowns can be carried out by relying on Chinese patent and trademark registrations. For international sales sites, such as AliExpress or Alibaba, copies of the company’s overseas registration certificate can be relied on for takedown applications.

For prolonged takedown campaigns, it is recommended that rights holders hold face-to-face meetings with the platforms to explain the nature of the problem and request tailored solutions. Rights holders should also present data demonstrating the scope of infringement on these platforms, including (if appropriate) results of test purchases that illustrate the extent of the counterfeiting at various price levels.

To lower enforcement costs, rights holders may also consider working in conjunction with other brand owners. This could take the form of joint investigations of serial infringers or a division of labour to monitor and attack counterfeiters appearing on certain platforms.

For larger vendors, the following enforcement actions may be considered in cities where vendors are concentrated:

  • pressing local MSBs to seek access to email and banking records, identify the infringer’s network and location, and to work together to develop an appropriate enforcement response;
  • filing civil actions seeking ex parte evidence preservation of important records to build criminal or civil cases;
  • filing asset preservation actions to seize money in infringers’ identified accounts; and
  • approaching the local PSB for support in investigating more serious targets.

Most takedown strategies disappoint because they fail to secure compliance. As such, the effectiveness and value of these programmes may be increased by closely monitoring for repeat offenders and quickly highlighting them to the trade platform. It is also helpful to select one or two high-value targets each month for deeper investigation and action. The trade platforms and police will likely provide more proactive support if they see a regular flow of information and interesting new cases.

Preventative measures/strategies

File as early as possible, even if the brand is not actively used in China

Because China is a first-to-file jurisdiction, foreign brands should ensure that they have applied for the necessary marks as early as possible. Even if a product or service is not currently offered in China, defensive filings in key classes to deter counterfeiters are essential.

Choose a suitable Chinese language mark

When registering a mark in China, rights holders should ensure that they have covered both their foreign language mark and its Chinese equivalent. If the product has been known in China for some time, locals may have already coined their own version of the foreign brand name. This should be adopted, provided that it is acceptable and available for registration. Otherwise, a company will need to pick an appropriate Chinese version of its brand (see A Guide to Creating Chinese-Language Trademarks at www.sips.asia).

Note class-wide specifications

China’s domestic classification system breaks down the Nice Classification into similarity sub-classes, whose importance is regularly overlooked by foreign filers. Under this system, identical marks can coexist in a given class, as long as they do not specify goods or services in the same sub-class. Rights holders should ensure that specifications are as broad as possible to avoid leaving gaps for squatters eager to gain a trademark registration certificate for the foreign mark.

Regularly monitor the Trademark Office Gazette and online database

Rights holders should conduct regular searches of key classes in the Trademark Office Gazette, as well as periodic all-class searches of the TMO’s online database, to identify infringing marks in the pipeline. Once counterfeiters have been identified, a watch list can be developed for those attempting to register copied marks. Investigations into those infringers (which may well be making use of those marks in their businesses) can be conducted to support oppositions of preliminarily approved marks, three-year non-use cancellation applications or bad-faith invalidations against registered marks.

Obtain copyright registrations

Proof of copyright ownership for logos and stylised versions of word marks is helpful, both in oppositions against infringing trademarks and against counterfeits bearing those marks – particularly where the rights holder has not registered the logo or stylised mark. Although copyright is typically protected immediately on the work’s creation, it is strongly recommended that rights holders obtain a Chinese copyright registration certificate for relevant works. Applications can be filed with the Copyright Protection Centre of China and obtained quickly – usually within one to two working days (with payment of a surcharge) – where expedited processing is required.

Enforcement without a registration certificate usually proves difficult, as evidence of ownership must be translated, legalised and notarised.

Periodic monitoring

Once IP rights have been secured, companies should consider periodic online monitoring of popular e-commerce sites and social networking platforms, including Tencent’s WeChat app.

If the problem is minor, online takedowns can be pursued against counterfeiters based on the IP rights mentioned above. However, if the problem is more severe, further investigation may be necessary to pursue source manufacturers – perhaps through additional civil or criminal action.

In extreme cases, consideration may need to be given to engaging a global online policing consultant.

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Dan Plane