Building a robust offline anti-counterfeiting programme: China focus

Introduction

It would be very unusual for a luxury brand or indeed, any brand or business, not to strive to exploit its well-known status and the financial rewards that accompany it. However, global recognition and large profits unwittingly attract copycats and counterfeiting is an acknowledged part of being successful. Infringers do not want to emulate obscure fashion items, vehicles and consumable goods, for who would buy those products? China, with its growing global economic profile, has also created a growing market for counterfeit luxury goods and until 2019, its first-to-file trademark registration system created a favourable environment for bad-faith filings. Many consumers purchase counterfeit goods deliberately, paying less for what they hope will look expensive, while other consumers will be confused by the fake goods and remain unaware that these are not the high-status originals that they believed they were paying good money for.

Detecting infringers and their distributors remains problematic, with actual sales taking place on the city streets, as well as in markets and small shops. Occasionally the counterfeiters will operate a fake store in the name of a well-known brand, which recently happened to Ermenegildo Zegna, in a Wuhan outlet.¹ Detection rates are often as low as the punishments that have historically followed successful trademark action. Given the challenges that trademark holders face, it is essential to operate a robust offline anti-counterfeiting programme, which is not only cost-effective, but allows trademark holders to deal efficiently and effectively with infringement of their rights. This article will demonstrate how such a strategy operates in practice.

The starting point

The starting point for a robust anti-counterfeiting programme is knowledge of the risks of brand infringement and how best products can be protected. There are sophisticated anti-counterfeiting technologies, such as QR codes, blockchain or tags, which are used to track products, with the code or tag being scanned each time the goods change hands so that the customer can trace its origin and history. The information can then be placed into the brand’s database, to be shared with government agencies and other stakeholders. However, this requires a high level of technological expertise on the part of the brand and the consumers and may be less helpful with bricks-and-mortar sales. If the brand has technological awareness, it can engage with the AliBaba Task Force, or Taobao to identify counterfeit goods and the manufacturers and distributors who are engaged in the infringement, through data analysis, which can then be relayed to the appropriate law enforcement agencies.

The role of the intellectual property lawyer

A successful business will ensure that it engages local IP lawyers, who can advise on all the aspects of brand protection. China has an increasingly strong and effective IP system, but conducting litigation in the courts can be daunting, especially for foreign companies, as the proceedings and legal documentation are almost always in Chinese. Businesses should not assume that lawyers only advise on the registration of rights and infringement action, as they can offer an extensive service of global brand protection and advice. A good lawyer not only prepares for and conducts the infringement action in court, but can register trademarks, investigate the counterfeiters, arrange raids and generally provide advice on strategic moves to counteract existing and future infringements.

Basic protection strategies

Before considering the formalities of registration and litigation, trademark holders can take simple steps to protect their brands by assessing how they conduct their business. When a product is taken to market, it is exposed to designers, manufacturers, retailers and in-house staff who have access to information that they may have the means to copy. Incorporating confidentiality agreements into contracts with those who engage with all the steps that get the products to consumers, will reduce the exposure of confidential information to a tried and trusted few and will reduce their knowledge of the products and processes that can lead to infringing activity. Document flow should be reduced to the lowest possible level.

Conducting an internal brand audit is similarly important. This should include an assessment of contracts for the management of the supply chain and distribution channels, with awareness of the retail destination of the goods, such as online marketplaces and bricks-and-mortar stores. Funding for expert assistance should not be underestimated and should be budgeted for at the outset. Professional investigation services are able to monitor trade shows and major retailers, conduct audits and investigations of manufacturing sites, and make test purchases from apparently legitimate sales sites. Not only is prevention cost-effective, but if infringing activities are strongly suspected, there will also be a need for swiftly accessible funding for legal fees and customs bonds to detain suspected infringing goods.

Protecting the brand

Of crucial importance in any anti-counterfeiting programme and a prerequisite to any remedial action is the registration of IP rights such as trademarks. Businesses should plan well ahead and identify which trademarks are important in China and ensure that they are registered with the China Trademark Office by a local lawyer, who will have reviewed the brand and potential trademarks and will have advised on the appropriate classes for registration.² This will be more cost-effective than litigation, and trademark registration provides a ten-year period of protection, which is renewable. Foreign businesses should be aware that their trademarks should also be registered in Chinese transliteration, as failure to register only in Roman characters will expose them to the risk of a competing or infringing trader registering an identical or similar mark in Chinese characters. Having the transliteration registration will be a key aspect in the enhancement of the image and profitability of the brand, as a trademark that is used informally in a regional language, could adversely affect that brand. A strong programme of protection will also include the registration of the trademark with Customs, the benefits of which are considered below.

China’s Trademark Law sets out the process for registration in Articles 2 to 9, which is relatively straightforward, especially with legal assistance. Since the Fourth Amendment of the law in 2019, the practice of trademark hoarding and filing, a result of the first-to-file system, has been addressed, with the introduction of Article 4, which provides that bad faith trademark registration applications not for use shall be rejected. Trademark squatting and hoarding has adversely affected foreign brands in particular, when launching new products, or when pursuing trademark strategies, as they have been unable to enforce their rights through administrative and judicial litigation, even following a protracted period of appeals. An example of this involved Manolo Blahnik, the Spanish shoe designer, who spent 22 years involved in litigation to invalidate a squatting trademark registered in China, in bad faith, by a footwear entrepreneur.

Evidence

On 13 January 2023, the China National Intellectual Property Administration (CNIPA) issued Draft Amendments to the Trademark Law for public comment. While aspects of the draft legislation will benefit trademark owners in their fight against counterfeiting, such as the mandatory transfer of maliciously filed trademarks to the genuine owner³ and a right to compensation for a genuine trademark owner, based on malicious squatting,⁴ it will increase the amount of evidence that the right holder will need to collate. Central to the draft law is the concept of ‘use’, only permitting the trademark owner to apply for registration of trademarks that are being used or in respect of which, there is an undertaking to use it at the time of the application.⁵ This may require an undertaking as to use to be filed with new applications. Further, a declaration of use is required when filing and every five years thereafter.⁶ Failure to comply would result in the CNIPA cancelling the trademark or declaring it abandoned. This places a large evidential burden on the right holder, as there is a limitation on reapplying.⁷ This is a provision that could have serious implications for a brand that should be addressed by any anti-counterfeiting strategy. The CNIPA will undertake random spot checks on trademark owners to ensure their compliance with use, and it is advisable to retain an evidential file of use, and to be able to confirm the authenticity of any declaration as to its use, or face cancellation.

The importance of retaining properly recorded evidence cannot be over estimated. Brand owners should seek appropriate advice and prepare files that set out all products and brands, registration details and usage, based in China, as well as globally. Trademarks should be registered and updated and the files should include manufacturers, distributors, importers and exporters, as well as actual and potential customers of the brand. If potential customers can be identified, it may also be possible to identify where they shop, thereby locating outlets for infringing products.

If infringement has occurred, or is suspected, the pertinent question will be how to protect key markets and new markets from infiltration. The specialist lawyer will need to know whether the infringers, actual or suspected, are individuals or organisations and which entity is the primary cause of the illegal activity, if known. It may be that there are several smaller players or one major player and the activity might have occurred solely in China or in other jurisdictions. Evidence should be gathered to identify patterns of infringement if possible and where the infringing products are, or may be imported from, or exported to. When assessing the impact of any potential infringement, lawyers should consider the potential period until it becomes a major threat to the client’s business and poses a serious threat to their stability, taking into account, their profitability and reputation, the most crucial factors in the establishment and maintenance of a successful brand. To draw as full a picture as possible, the strategy should encompass a sophisticated anti-counterfeiting review programme, beginning with a review of any past enforcement actions, including those that were unsuccessful, so as to identify valuable information that may have gone unidentified or been forgotten. Such fine detail can assist investigative efforts to locate and identify the infringers and their activities. Collating a full file of evidence allows the brand owner to move very quickly to enforcement proceedings, if required. Generally, only evidence that is notarised by a Chinese notary public will be allowed by Chinese courts and other administrations, so it is important that notarised proof of an infringement is obtained when the illegal activity becomes apparent.

Choice of enforcement action

With a dual system of IP enforcement, brands may select administrative remedies or judicial remedies, in addition to the protection that Customs can provide, if an IP right is registered with them. In selecting the appropriate enforcement mechanism, it is essential to assess what is intended to be achieved through the enforcement. The administrative route is faster and less expensive than the judicial route and is perhaps more appropriate if time is of the essence in stopping the illegal activity. In some cases the threat of proceedings may be sufficient to stop the infringement, or it may be possible to mediate with the counterfeiters to reach a solution. Civil judicial proceedings offer the option of preliminary injunctions, compensation and if appropriate, punitive awards of damages. Where the value of the infringement is sufficiently high to be considered serious, or exceptionally serious, criminal action may be taken by the Public Security Bureaus (PSBs).

Customs action

China is one of the few countries Customs may check, block and seize counterfeit goods being exported, as well as imported. This can be a very effective anti-counterfeiting tool. Customs protection is available where the trademark is filed with the General Administration of Customs in China (GACC), whose rules are set out in the Regulations on Customs Actions Against Infringement of Intellectual Property Rights (the Regulations),⁸ which were last amended in 2018 and the Measures for Implementation of the Regulations (GACC Measures),⁹ which were also last amended in 2018. Trademark owners can apply to have their rights protected¹⁰ and apply for their rights to be archived with Customs.¹¹ This simple procedure enables Customs to access the right holder’s information via intranet and confirm those recorded rights during routine inspections. If they suspect that a consignment of goods contains infringing products, they may detain the shipment and seek confirmation from the registered owner that they are authorised, following notification of suspected infringement, which will include the identity of the exporter. Again, it is essential that the right holder retains a full file of evidence, and a database or ‘white list’ of authorised vendors, importers, exporters and agents, as they should be sufficiently organised to verify the authenticity of the products within three business days from the date of notification by Customs to confirm whether the goods are counterfeit. Customs protection is also available where the rights are not filed at Customs, but there is less protection for the trademark owner, as it is more difficult to trace the right holder for verification of authenticity of the products without filing and they may not have authorised their seizure. Further, Customs may be less proactive where the trademark has not been filed with them.¹²

Strategically, a robust trademark owner will retain sufficient funds to be able to issue swift instructions to Customs to commence enforcement measures against the exporter, as the owner will be required to secure a bond, as a guarantee for storage and disposal of the infringing goods, as well as the associated costs of an improper seizure.¹³ The bond is usually assessed in relation to the declared value of the goods,¹⁴ but it is good practice to have sufficient financial resources available to be able to meet any bond requirements. The trademark owner may either pay a cash bond in yuan into the designated account of Customs, for each customs notice, or set up a general bond with the GACC, using the approval letter to confirm the seizure. In the absence of infringement or a confirmation, where the detention of the goods has been made by Customs ex officio and the trademark has been recorded, Customs has 30 working days to investigate. If the infringement cannot be confirmed in that time, the right owner has 50 working days to bring the case to court and to inform Customs of the court’s notice of seizure of the goods. Where the right holder has made an application to Customs, they have 20 working days to bring the case to court and to inform Customs of the court’s notice.¹⁵

The Customs procedure is an essential part of an enforcement strategy, although Customs can only issue a fine to the infringer of up to 30% of the value of the counterfeit goods or up to 50,000 yuan for a failure to truthfully declare the goods or the documentation, which does not constitute a sufficient deterrent to illegal activity. The Customs procedure is best used as an additional level of protection. On 22 April 2022, the GACC released the Typical Cases of Intellectual Property Protection by China Customs in 2021. This highlighted the seizure of IP-infringing products of well-known brands such as Apple, Samsung, Ugg, Disney and Huawei. For example, between January to March 2021, Nanjing Customs seized 1,700 batches of blankets, clothes and shoes, infringing 19 trademarks belonging to Disney and Ugg, and in November 2021, Guangzhou Customs seized 5,492 pairs of earphones and 300 electronic watches infringing the Apple logo, in addition to 1,000 pairs of earphones infringing the exclusive right of Xiaomi Technology Ltd, to use the trademark MI.

Administrative enforcement

If a brand owner seeks a relatively swift and affordable remedy for infringement, they can apply to the Administration for Market Regulation (AMR), which is charged with the enforcement of Trademark Law and Competition Law and which is the most popular enforcement option in China, because of its relative simplicity of use. The penalties that can be imposed include an order for immediate cessation of the infringement, the confiscation or destruction of the infringing goods, including any tools mainly used in their manufacture or to forge the representations of the registered trademark. Further, Article 60.2 of the Trademark Law provides that if the illegal turnover was at least 50,000 yuan, the AMR may impose a fine of not more than five times the illegal turnover. If there was no illegal turnover, or the illegal turnover was less than 50,000 yuan, it may impose a fine of not more than 250,000 yuan. In cases where the trademark infringement is committed at least twice within five years or another serious circumstance applies, heavier penalties will be imposed.¹⁶ The disadvantages of the administrative system is that there is no provision for the payment of compensation for the trademark holder, the fines are generally low and therefore ineffective as a useful deterrent. However, a final decision of the AMR can be presented as evidence of infringement in any subsequent civil judicial action. The administrative route should be seen as an option in any anti-counterfeiting strategy, but it falls short when damages or injunctive relief are the preferred remedies.

Civil enforcement

Injunctions

Where a brand owner opts for civil judicial enforcement of their trademark rights under Article 60 of the Fourth Amendment of the Trademark Law,¹⁷ they have the benefit of applying for both preliminary and final injunctions.¹⁸ Final injunctions are available following a finding of infringement, but preliminary injunctions are less common and are governed by Article 7 of the Provisions of the SPC on Several Issues Concerning the Application of Laws in Cases Involving the Adjudication of Action Preservation in Intellectual Property Disputes (the Provisions),¹⁹ which codified the existing practice. Unlike in many jurisdictions, Chinese courts will not grant ex parte relief unless they are satisfied that the alleged infringement will have a significant impact on the right holder and there is a need for urgency.²⁰ The right holder must therefore be in a position to prove that their application falls into one of the six situations deemed to be urgent.²¹ Even if the situation seems urgent, an order is not guaranteed, with the overriding requirement being that the threat of infringement is time-sensitive, requiring an interim injunction within 48 hours. This is an arbitrary time limit and may be sufficient to permit the infringer to complete the infringement.

Any clued-up brand will have sufficient awareness of the injunctive procedure to make an application for relief at the earliest opportunity, which will avoid the court refusing the application on the basis of unjustifiable delay. There should also be proof of the validity and stability of the trademark, showing that there are no pending invalidation proceedings and the likelihood of infringement and satisfying the ‘factual and legal basis’ of the application. The evidential burden is a high bar to overcome, requiring proof that the infringement will cause irreparable harm to the right holder, and the court will need to be satisfied that on balance, the harm suffered by the applicant will be more significant than that suffered by the infringer, if the injunction is imposed. Under the new Provisions, there is no bar to a preliminary injunction when arbitration proceedings are ongoing, so it may be advisable in certain cases to begin this process to attempt a settlement.

As with any anti-counterfeiting measures, injunctions require financial planning, as a bond equating to the damage that the infringer could sustain as a result of the injunction order, including the proceeds of the infringing products, storage and any other reasonable expenses, must be posted.²² Further, if the court finds that the injunction application has been wrongfully made, including where the right owner fails to file a civil action within 30 days of the injunction order, the alleged infringer may be entitled to compensation from the owner. Provided that the right owner can justify an injunction, this can often bring a swift end to infringing activities.

Damages

The 2019 Trademark Law Amendment increased the level of damages that the courts could award to the right holder for infringement. This was accompanied by an increase in the amount of punitive damages that could be awarded. Robust trademark owners will take full advantage of these provisions to bring a civil action, potentially providing them with substantial compensation and also deterring further infringement.

The Civil Code of the People’s Republic of China, which came into effect on 1 January 2021, allows punitive damages where there is intentional infringement and the circumstances are serious.²³ The court must be satisfied that the infringer purposefully knew that, or was reckless whether, their conduct would cause harm. If the right holder ensures that the evidence that they submit is properly collated and prepared, they should be able to fulfil this test. To convince the court that the infringement occurred in serious circumstances, the evidence should demonstrate that the infringer was a professional infringer, with the illegal activity being on a large scale, of excessive duration and with a high level of profits. The court will consider if there was any risk to personal safety, the environment or the public interest.

It is good practice for a right holder to act quickly once infringing activity becomes apparent by issuing warning letters and notices to cease and desist. If the infringer ignores the warnings, or fails to comply with preliminary injunctions, it will be evidence of bad faith infringement.²⁴

Right holders’ actual financial losses have been notoriously difficult to prove, but since 2019, Article 63 of the Trademark Law has permitted compensation to be determined by an alternative to provable loss based on multiples of the licensing fee for the trademark. This sum can also be used in calculating an award of punitive damages, based on one to five times the loss, or the multiple of the fee, if it can be proved that the infringement was in bad faith and the circumstances are serious. The burden of proving the loss falls upon trademark holders, who must use their best efforts to prove the losses, but the court may order infringers to produce any books and materials that they have relating to their illegal activities. However, the court may order compensation based solely on the evidence provided by the right holder and if that evidence is not as clear of persuasive as it could be, the right holder could receive a lower award than they could have been entitled to had their evidence been professionally presented. It may also lead the court to order statutory damages not exceeding 5 million yuan. While this may be a high award for some brands, the real loss could be far greater, so a robust counterfeiting strategy would ensure that the real loss can be established.

According to the Draft of the Fifth Amendment to the Trademark Law, the new Article 22 will contain a list of circumstances that will be presumed by the courts to indicate that a trademark application has been made in bad faith and that will serve as a basis for compensation. There will also be provision under Draft Articles 45 to 47, for the mandatory transfer of the maliciously filed trademark, to the genuine owner, with compensation being available under Draft Articles 83 and 84, for the losses incurred by the owner as a result of the trademark squatting activities and any malicious litigation against the true owner.

Criminal action

For the sake of completeness, brand owners should be aware of the availability of criminal enforcement against trademark infringement. The Procuratorate will handle court proceedings, but criminal cases are investigated by local PSBs, which investigate serious or exceptionally serious cases, with penalties including fines and custodial sentences of up to ten years.²⁵ The courts will primarily focus on the value of the infringing counterfeit goods to determine severity. The PSBs will participate in cases, for example, by conducting raids. Brand owners can also issue private prosecutions, but these are extremely rare and can be difficult to bring before the courts. Criminal proceedings may benefit the public at large and offer a deterrent effect. However, the brand owners will not recover the compensation or punitive damages that are available under the civil law.

Conclusion

China offers trademark owners a strong, efficient and effective enforcement regime, but brands must also help themselves and instigate a robust anti-counterfeiting strategy, which will enable them to move swiftly once infringement is suspected, thereby being in the best position to stop the illegal activity, obtain the best financial outcome possible and protect their profits and reputation. First rights owners should also ensure that they have a strong portfolio in China, ensuring that all of their intellectual property rights are registered, covering all the goods and services in their interests.

¹ Zegna was successful in its trademark action and was awarded an unprecedented level of damages by the Wuhan Intermediate People’s Court, which was the result of their robust anti-counterfeiting strategy.

² China uses the International Classification of Goods and Services under the 1957 NICE Agreement, which provides that a separate trademark application must be filed for each class in which the applicant wishes to obtain protection.

³ Ibid, arts. 45-47.

⁴ Ibid, art. 83.

⁵ Ibid, art. 5.

⁶ Ibid, art. 61.

⁷ Ibid, art. 21(3).

⁸ The Regulations on Customs Actions came into force in 1995 and were amended in 2003, 2010 and 2018.

⁹ The GACC issued the Measures for Implementation of the Regulations in 2004, which were amended in 2010 and 2018.

¹⁰ The Regulations, art.4.

¹¹ Ibid, art. 7. Customs will also retain a list of authorised licensees.

¹² There are two sets of customs protection mechanisms, one is ex officio, while the other is by application. Recording the trademark right with Customs enables ex officio seizure notices to be issued to right holders and to seek confirmation of the infringement and seizure. If the right is not filed with the GACC in advance, right owners may still file an application with the local Customs requesting protection, but they would have to provide details about the suspicious shipment, which is difficult to collect in practice.

¹³ The bonds must be paid via cash or a bank guarantee and brands that regularly experience customs seizures can file a general report with the GAC to avoid having to post bonds ad hoc. If the value of the goods is very low, the GAC may waive the bond.

¹⁴ If the value is 20,000 yuan or less, the bond equals the value of the goods; between 20,000 and 200,000 yuan, it is 50% of their value, but if the value exceeds 200,000 yuan, the bond is capped at 100,000 yuan.

¹⁵ It may not always be necessary to pay an additional bond.

¹⁶ If parties sells goods that they did not know infringed the exclusive right to use a registered trademark and can show that they were obtained lawfully, the Department for the Administration For Market Regulation shall order the cessation of sales, Article 60.2 of the Trademark Law.

¹⁷ The Trademark Law of China, Fourth Amendment was issued in 2019.

¹⁸ Ibid, art. 60.3.

¹⁹ These Provisions came into effect on 1 January 2019.

²⁰ Urgency is defined under Articles 103 and 104 of the Civil Procedure Code as amended in 2021

²¹ The situations deemed to be urgent are (1) the right holder’s trade secret is about to be illegally disclosed, (2) a personal right such as a publication right or privacy right is about to be infringed, (3) the intellectual property right in issue is about to be illegally disposed of, (4) the right holder’s IP will suffer infringement in time-sensitive occasions, such as trade fairs, or (5) other situations calling for an immediate injunction.

²² Although the court can set a high bond, there is flexibility in the type of security that will be accepted, such as real estate, cash or an approved guarantee.

²³ The Civil Code of the People’s Republic of China, art. 1185. Article 123 specifically permits punitive damages for trademark infringement.

²⁴ See the Guidelines on the Determination of Damages and Statutory Damages in Disputes over Intellectual Property and Unfair Competition, issued by the Beijing Higher People’s Court on 21 April 2020. Bad faith infringement also includes counterfeiting registered trademarks, squatting or free riding on well known trademarks, or use of well known trademarks on identical or similar goods, as well as destroying or covering up evidence of infringement.

²⁵ 11th Amendment to the Criminal Law of China, 2020.