Legal framework

China is a major battleground in the war against counterfeits. Its ‘triple-track’ anti-counterfeiting system distinguishes its framework from those of many other countries. If a trademark is infringed in China, three options are available:

  • Criminal liability may be imposed if the infringement constitutes an IP crime;
  • The trademark owner can initiate a civil action against the infringer to seek an injunction and compensatory damages; and
  • As part of ex officio actions or on request, the administrative authorities may take administrative action against the infringer, including a fine, disciplinary warning, confiscation of goods bearing infringing trademarks or suspension of business.

Executing strategies under this multi-dimensional framework requires clear knowledge of the market, the enforcement bodies and the investigation network, as well as focus and persistence.

Major laws and regulations

The Trademark Law is the core legal text for trademark protection. The Trademark Law and its Implementing Regulation came into effect on May 1 2014. The Anti-unfair Competition Law is also useful, as it requires all competitors to act under the principles of “honesty and credibility”. Article 5 of the Anti-unfair Competition Law provides that business operators may not use inappropriate means when conducting business, such as counterfeiting other parties’ registered trademarks or distinctive marks.

The Criminal Law sets down criminal liability for trademark infringement. Between 2004 and 2011 the Supreme People’s Court (SPC), the Supreme People’s Procuratorate and the Ministry of Public Security jointly issued various judicial interpretations and opinions to clarify criminal prosecution and liability standards in this area. Separate judicial interpretations have also been issued specifically targeting counterfeiting drugs and sub-standard goods.

China is not a common law country, but leading cases increasingly influence how local courts render decisions. The SPC and key provincial courts review and release key IP cases every April. Further, the government has vowed to publish all court decisions and IP-related penalty decisions in order to increase transparency. In addition, each administrative agency has promulgated various administrative rules to strengthen trademark protection.

China is a member of the World Trade Organisation (WTO) Agreement on Trade-Related Aspects of IP Rights (TRIPs). Debate is ongoing over whether the existing legal framework is in full compliance with TRIPs – an issue which fell under the global spotlight when the WTO ruled on a dispute relating to the Chinese IP system in 2009.

Diverse enforcement bodies

The administrative authorities are on the frontline of the anti-counterfeiting fight in China. The Administration for Industry and Commerce (AIC) is the primary enforcement agency, especially with regard to distribution channels. The Technical Supervision Bureau (TSB), under the State Administration of Quality Supervision, Inspection and Quarantine, may take the lead against underground factories or manufacturers where infringing products fail relevant quality standards or violate labelling requirements. The General Administration of Customs can initiate ex officio or on-request actions against imports and exports of counterfeit products.

If an administrative investigation reveals that the trademark infringement may constitute a crime, the police will carry out a criminal investigation and bring the case to the people’s procuratorate for criminal prosecution. Rights holders may also attach civil suits to such criminal proceedings for civil damages.

In practice, rights holders must work effectively with the authorities and police to ensure a smooth transfer process.

Border measures

Customs deals with imports and exports of counterfeit products. In particular, Customs not only tackles imported counterfeit goods, but also checks and seizes counterfeited goods intended for export.

If the rights holder discovers any imminent imports or exports of counterfeit products, it may apply to Customs for detention providing proof of its legitimate rights, evidence of infringement and a bond to cover potential damages.

While Customs may act ex officio, rights holders are encouraged to register valid trademarks with Customs in accordance with the Customs IP Rights Protection Regulation and its Implementing Regulation. Any change regarding the status of the registered trademark right must be filed with Customs within 30 business days of such change. The customs database is easily accessed online.

If Customs discovers any suspicious imports or exports that might infringe trademark rights that have been registered with it, it may demand further information regarding the use of the registered trademarks. If the importer or exporter fails to provide such information, Customs will notify the rights holder. The rights holder then has three working days to file an application for detention and provide adequate security if it wishes the goods to be detained and investigated.

For imports or exports that are suspected of trademark infringement, the Implementing Regulation permits the rights holder to provide a general bond of at least Rmb200,000 to cover detention applications for up to one year.

Criminal prosecution

While administrative enforcement is efficient and flexible, criminal enforcement acts as a powerful deterrent against counterfeiting. Pursuant to Articles 213 to 215 of the Criminal Law, counterfeiting activities with aggravating factors may constitute crimes punishable by a fine and/or imprisonment. Thus, the administrative authorities will transfer cases and preliminary evidence to the local public security bureau for criminal investigation.

The following counterfeiting activities constitute criminal infringement of a registered trademark punishable by a fine and imprisonment for up to three years:

  • activities involving illegal business revenues of Rmb50,000 or illegal earnings of Rmb30,000;
  • infringement of at least two registered trademarks and involving illegal business revenues of Rmb30,000 or illegal earnings of Rmb20,000; or
  • activities involving other aggravating circumstances.

The following aggravated counterfeiting crimes shall be punishable by a fine and imprisonment of between three and seven years:

  • activities involving illegal business revenues of Rmb250,000 or illegal gains of Rmb150,000;
  • infringement of at least two registered trademarks and involving illegal business revenues of Rmb100,000; or
  • activities involving other aggravating factors.

According to State News Office statistics, the number of cases transferred from the administrative authorities to public security bureaux has increased by 5%, suggesting that the Ministry of Public Security has stepped up its activities and there is now more cooperation and information sharing between public security bureaux and administrative enforcement authorities.

Civil enforcement

A rights holder is entitled to bring a civil action against an infringer and demand just compensation. More companies are adopting this approach to recoup enforcement expenses and deter counterfeiters.

Before filing suit, the rights holder may request interim injunctions and the preservation of property if it can prove that the infringement would cause irreparable damages if not stopped immediately. An injunction to preserve evidence before filing suit is also available.

Scope of trademark infringement

The Trademark Law 2014 expanded the scope of trademark infringement to include the following activities:

  • using a mark that is identical to the registered trademark on identical goods without the rights holder’s approval;
  • using a mark that is similar to the registered trademark on identical goods, or using a mark that is identical or similar goods to the registered trademark on similar where such use is likely to cause confusion without the rights holder’s approval;
  • knowingly selling goods bearing an infringing trademark;
  • counterfeiting or making signs using a registered trademark or selling such signs without authorisation;
  • replacing a registered trademark on goods and reselling such goods without the rights holder’s authorisation;
  • deliberately facilitating or assisting another party’s infringing acts; or
  • causing any other prejudice.

The Trademark Law added facilitating or assisting another party’s infringing acts as a new type of trademark infringement. A rights holder may now pursue not only individual counterfeit vendors, but also storage and marketplace management companies which knowingly assist or allow counterfeit product sales. In recent years several well-known brands have established successful precedents by initiating such claims.

Jurisdictional issues

First-instance civil IP cases involving foreign parties are generally handled by intermediate courts and appointed first-instance courts. The high people’s courts have exclusive jurisdiction over cases including a foreign element or a value of more than Rmb200.

Appointed first-instance courts have jurisdiction over cases with a value of less than Rmb5 million, or between Rmb5 million and Rmb10 million where both parties reside in an area that is subject to the jurisdiction of the higher courts.

All other first-instance IP cases are subject to the jurisdiction of local intermediate courts. The specialist IP courts in Beijing, Shanghai and Guangzhou have jurisdiction over appeals involving trademark infringement in their respective regions. The Beijing specialist IP court started accepting cases on November 6 2014.

New defence

The Trademark Law introduced a new defence for trademark infringers, exempting them from compensation liability if the rights holder does not actually use the registered trademark. Pursuant to Article 64, the rights holder must prove actual use in the past three years or actual damage caused by the infringement; otherwise, the infringer may not be liable for infringement. This is good news for legitimate rights holders facing ‘trademark squatting’. Applicants register other parties’ trademarks in bad faith by taking advantage of the Chinese first-to-file system; the legitimate rights holders may then be forced to buy back or fight to invalidate such marks. The new defence may shield legitimate parties from attacks by bad-faith trademark applicants.

Remedies

The Trademark Law expanded the remedies available to rights holders. According to Article 63, the amount of compensation shall primarily be based on:

  • actual damages suffered due to the infringement;
  • where actual damages cannot be gauged, the infringer’s actual gains; or
  • where neither of the above can be ascertained, multiples of licensing fees.

In case of malicious or repeat infringement of trademarks, the court may treble the compensation. Where none of these factors can be ascertained, the people’s court may grant compensation of up to Rmb3 million. The compensation shall also include reasonable expenses incurred to stop the infringing acts.

The burden of proof does not fall entirely on the rights holder. Where the rights holder has used its best efforts to present evidence and the infringer possesses relevant evidence such as financial books and other records, the court may order the infringer to provide all relevant evidence. If the infringer refuses or provides false books and materials, the court may refer to the rights holder’s claim and evidence to determine the compensation.

The Chinese courts now appear willing to grant larger damages awards to rights holders.

Administrative measures

For some years, rights holders have found administrative raid actions to be a cost-efficient way to tackle counterfeiting. The local AIC may act quickly on notification of potential trademark infringement. The documentation requirements are less complicated and time consuming than for court proceedings, although local AICs and the TSB sometimes increase these requirements to mitigate the risk of judicial reviews. Rights holders must verify the specific requirements in different localities.

One ongoing concern regarding administrative enforcement is the lack of sufficient deterrents and the interference of local protectionist groups. Therefore, rights holders should evaluate carefully whether, when, where and to what extent their enforcement programmes should rely on administrative enforcement.

AIC action: At county level, local AICs may take action against counterfeiting ex officio or at the rights holder’s request. During investigations or raid actions the AIC can interview and investigate relevant parties, inspect materials, conduct inspections and examine and confiscate items used in infringing activities.

Based on preliminary evidence, the AIC must determine whether the mark being used or manufactured is identical or similar to the rights holder’s registered trademark and then set the corresponding punishment, which may have strong evidentiary value in subsequent civil or criminal litigation.

The Trademark Law significantly increased the administrative fines that the AIC may impose on trademark infringers. Under Article 60, the AIC can:

  • demand immediate cessation of the infringement;
  • confiscate or destroy counterfeit goods and tools mainly used in manufacturing counterfeit goods and forging registered trademarks;
  • impose a fine up to five times the infringer’s illegal revenues if the revenues are more than Rmb50,000, or a fine of up to Rmb250,000 if the illegal revenues are less than Rmb50,000; and
  • impose a harsher penalty in case of repeat infringement within five years or other aggravating circumstances.

In case of dispute over compensation, the rights holder may request the AIC to mediate between the parties or bring a civil action to the people’s court.

The AIC may also use the Anti-unfair Competition Law to pursue counterfeiters; this law has a lower evidentiary burden, which is sometimes preferable.

TSB action: The TSB is another major anti-counterfeiting fighter. The rights holder may also report to the local TSB branch regarding counterfeit or inferior goods. The enforcement authorities and approach are very similar to those of the AIC, except for the focus on manufacturing sectors. In some localities, TSB officials are considered more professional because of their expertise in dealing with issues of sub-standard quality.

Trend towards transparency and disclosure: Due to the severe impact of counterfeiting activities on the market, the Chinese authorities are prioritising anti-counterfeiting campaigns nationwide.

In February 2014 the Office of National Leading Group on the Fight Against IP Rights Infringement and Counterfeiting, which reports directly to the State Council, promulgated a regulation requiring all administrative enforcement authorities to disclose information on administrative cases involving counterfeit products and IP infringements. From June 1 2014, all administrative authorities above county level must disclose any administrative decisions against counterfeiting within 20 business days of issue.

The group further pushed for the establishment of a ‘blacklist’ mechanism and a platform on which companies could check the integrity of their IP rights. This platform would allow a rights holder to access information and evidence of repeat infringement easily, and demand higher compensation. In the long term, these mechanisms may help to prevent counterfeiting.

Anti-counterfeiting online

Online sales of counterfeit goods pose a serious threat to rights holders in all sectors. Due to the unique characteristics of online trading, it is particularly hard to enforce IP rights against online counterfeiting.

Monitoring illegal websites

Traditionally, the local AIC could only detain or confiscate counterfeit products, and could not shut down online stores. While the online distribution channels remained, counterfeit product vendors could continue to carry on business. Further, it was sometimes difficult to ascertain the proper enforcement body for cross-regional cases.

In light of these practical difficulties, the State AIC and the Ministry of Information released a co-signed decision supporting the establishment of an interdepartmental cooperative mechanism targeting illegal websites. The ministry and local telecommunications administration authorities have the technical ability to shut down illegal websites.

According to the decision, all levels of the AIC and the telecommunication administration authorities shall share relevant information (eg, company registration information and website registration records) and fully support enquiries. In urgent cases, the AIC may request a telecommunications administration authority in writing to take emergency measures to cut off online access. The decision also sets down general procedures.

Where it is necessary to shut down a website permanently, the telecommunications administration authority shall take over from the AIC and take further measures, such as:

  • cancelling the website owner’s permit or record;
  • informing corresponding service providers to cut off online access or suspend the domain name; and
  • adding websites to the blacklist.

Online trading platforms have also become more engaged in anti-counterfeiting. They are encouraged to establish internal anti-counterfeiting mechanisms, which may include the stricter review of vendor qualifications and open information channels.

New agencies targeting online trading platforms

In November 2014 the Guangdong Food and Drug Administration announced plans to establish a new supervisory agency in Shenzhen specifically targeting online trading platforms. The new Food and Drugs Network Supervision Unit will have jurisdiction over all online food and drug counterfeiting activities across China, but Guangdong Food and Drug Administration will be the escrow manager.

The announcement echoes ongoing attempts by various state authorities and may set an example to follow in other areas targeted by counterfeiting activities.

Criminal evidence and procedure rules

In July 2014 the SPC, the Supreme People’s Procuratorate and the Ministry of Public Security co-issued a judicial interpretation elaborating on the criminal procedural rules for internet crimes, including online counterfeiting, with the aim of resolving difficult issues surrounding jurisdiction and evidence collection and examination.

Preventive measures/strategies

Brands that are new to the Chinese market should register their trademarks and their Chinese counterparts as early as possible. China has a first-to-file registration system which may frustrate foreign rights holders when they discover, by the time they plan to launch on the Chinese market, that the marks that are well known in their countries have been registered by trademark squatters.

Brands without a solid in-house team are encouraged to take more creative enforcement action and push hard for policy changes. In regard to online counterfeiting, rights holders should fight for online trading platforms to be fully accountable for implementing effective self-policing mechanisms and monitoring illegal vendor activities. Rights holders may also aggressively seek orders for evidence and property preservation against online vendors and demand full reimbursement of losses and expenses. Further, online payment providers such as Alipay must fully comply with court orders in freezing funds in infringers’ account.

To win the anti-counterfeiting battle, rights holders must learn how to act effectively in groups, through industry associations or in coalitions. Victory requires a true partnership between brands and enforcement authorities.

Jing He

Binxin Li

Han Jinwen

This article first appeared in World Trademark Review. For further information please visit www.worldtrademarkreview.com.