Introduction

China’s large population and vast manufacturing base present both opportunities and heightened risks for rights holders, including those not currently distributing their products or services in the country. These risks arise from certain characteristics of the Chinese trademark system.

Arguably the most important way in which Chinese practice differs from that in most other countries is its strict first-to-file system for trademark registration. Under this system, trademark rights are awarded to the party that files first, rather than on the basis of prior use or intent to use. Exploiting this, Chinese trademark squatters commonly register marks of both foreign and local companies, with the intention of forcing the true owner to purchase the mark from them. Quite often, these squatters will extract a high amount of compensation due to the true owner’s need to quickly secure evidence of ownership to facilitate advertising, sales and sourcing with trade partners in China.

In some cases, squatters will invest in production and sales using the copied brand – effectively making counterfeits that are difficult to stop without recourse to protracted and expensive legal procedures or an even bigger pay-off to the counterfeiter.

Meanwhile, a sophisticated manufacturing base and an IP rights enforcement regime in a constant state of flux provides ready opportunities for trademark squatters to freely produce counterfeit goods and distribute them domestically and globally – increasingly through online sales. Worryingly, the ease with which counterfeits can be traded online has heightened demand for such goods and made it increasingly difficult to stop them.

Its dual status as the world’s manufacturer and its largest and most promising consumer market makes China an essential component of any company’s global IP strategy, even if that company is not currently active there. Fortunately, if companies take a number of proactive steps – properly registering their intellectual property, establishing basic monitoring systems and prosecuting known offenders – many of these risks can be mitigated.

Legal framework

Various laws in China provide for administrative, civil and criminal remedies in counterfeiting and piracy cases. These include the Civil Code, the Tort Law and the Criminal Law, as well as provisions in IP-specific laws such as the Trademark Law, the Copyright Law and the Patent Law, and their respective implementing regulations and related judicial opinions. A number of other laws include IP-related provisions, such as the anti-counterfeiting and falsified trademarks provisions found, respectively, in the Product Quality Law and the Anti-unfair Competition Law.

At the international level, China is a signatory to most major IP treaties, including the Berne, Paris and Nice Conventions, as well as the Madrid Agreement and Protocol. It is also a member of both the World Trade Organisation and the World Intellectual Property Organisation.

IP enforcement in China takes place through administrative, criminal and civil channels. Which of these channels should be used depends on several factors, including cost, effectiveness and the nature of the infringer and its activities.

Administrative channels are the most frequently used, but the benefits they afford in terms of cost and time savings are often tempered by the relatively low fines, which do not act as much of a deterrent. Rights holders should therefore consider following up on any administrative enforcement action by pursuing a parallel civil or criminal suit, depending on the specific violation. Consultation with local counsel will be helpful here, as they often have a stronger grasp of the local political state of play and likely effectiveness of a particular course of action.

The diverse government bodies involved in administrative and criminal IP enforcement include the following:

  • the administrations for industry and commerce (AICs), which are China’s primary commercial regulators tasked with market supervision, regulation and enforcement. AICs operate at each rung of the administrative hierarchy, ranging from the State AIC to provincial and municipal AICs;
  • the quality technical and supervision bureaux, which are empowered to enforce laws relating to product quality and labelling;
  • the public security bureaux (PSBs) and public prosecutors (procuratorates), which, respectively, investigate and prosecute criminal activities. The principal avenue for criminal law enforcement is to report crimes to the PSB (ie, the police) for initial investigation, followed by handover to public prosecutors for criminal prosecution. Initial reports may be made by administrative units, such as AICs, or by individual citizens or concerned rights holders;
  • the General Administration of Customs, which is responsible for supervising cross-border shipments of goods, including goods destined for both import and, uniquely in China, export;
  • the Copyright Protection Centre of China, which oversees and administers copyright registrations;
  • the State Intellectual Property Office (SIPO), which oversees and administers Chinese patent filings and enforcement; and
  • the Trademark Office (TMO), which oversees and administers Chinese trademark filings and issues decisions in trademark oppositions. (A related body, the Trademark Review and Adjudication Board (TRAB), oversees trademark rejection appeals, invalidation applications and appeals of other trademark decisions from the TMO).

Border measures

Chinese Customs has established 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 to obtain its assistance.

Customs recordal is available exclusively online and covers:

  • trademarks registered in China;
  • patents (including designs, inventions and utility models) issued by SIPO; 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 and ask the rights holder to confirm whether the goods 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, prosecution.

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

Customs recordals can be completed online for Rmb800 per recordal (around $125) and are valid for up to 10 years, provided that the underlying IP rights do not expire during that time.

Criminal prosecution

Local AICs and quality technical and supervision bureaux have long been relied upon by foreign brands as the go-to agencies for trademark enforcement. They have authority to act against both counterfeits (use of identical trademarks) and infringements (use of a similar trademark). They 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 infringers’ illegal turnover.

However, several laws provide for criminal liability against counterfeiters once the wrongdoing crosses certain monetary thresholds. For instance, the Criminal Law provides that the threshold for criminal liability is Rmb50,000 for producing counterfeit goods (approximately $8,000) and Rmb150,000 for reselling counterfeit goods.

Investigations into IP crimes will 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 AICs, quality technical and supervision bureaux 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:

  • Share information on common targets with competitors/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.
  • Approach the police for informal advice and support at an early stage in the investigation process, rather than on an urgent basis. If they have the time and inclination, the police may take over the investigation themselves. Worst case, they may provide advice as private investigations progress. They should also be more inclined to assist once the time comes to conduct raids, detentions and investigations into related parties, emails and bank accounts.
  • File the following types of evidence, ideally collected in the presence of Chinese notaries, with the police – both 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;
    • sound and video recordings in which the infringer brags about the scope of his or her business; and
    • photos and maps of the location where fakes are kept.
  • When working with local administrative authorities on raids, make clear to them your interest in having the case transferred to the police. If appropriate, encourage them to invite the police to attend the raid action and conduct seizures of materials that the AICs lack the authority to seize, such as emails and banking records.
  • Diligently follow up with authorities, by phone and in person. Have a representative present for key meetings to project the company’s strong interest in the case. Offer help at all stages, including through supplemental private investigations or legal opinions.

The key is to maintain good working relations with the local police and other enforcement officials. While effective and sustained enforcement of China’s criminal IP provisions has long been a challenge, Chinese enforcement agencies are becoming increasingly attentive to the concerns of foreign rights holders and IP enforcement authorities, local police and prosecutors 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 for IP infringements. Generally, these permit a rights holder to bring civil suit against an infringer and demand just compensation for an infringement, injunctions halting further infringements and other civil relief.

Civil suits may be carried out for a number of reasons: 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 currently ambiguous and impeding administrative enforcement.

Chinese civil suits do not guarantee access to an infringer’s records – as would the law in most Western jurisdictions – and there is little to no risk to an infringer in simply refusing to turn over any documents at all (though there are now provisions that allow a negative inference to be drawn 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 provided that a bond (amount specified by the court) is posted.

To maximise damages, rights holders may also consider conducting a range of notarised purchases or mini-AIC raids against retailers, wholesalers and online traders involved in the infringement to help demonstrate its true scope (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

Although China has progressively strengthened its online enforcement activity, it has not kept pace with the meteoric growth of web-based counterfeiting. As such, online trafficking of counterfeit products remains a big problem. Fortunately, in certain regions (Hangzhou, Wenzhou, Yiwu), the police have been notably proactive and online enforcement has slowly but perceptibly begun to improve.

To mitigate the risk of online counterfeits, rights holders should consider pursuing a takedown programme targeting those platforms most likely to feature counterfeit goods, such as the popular online platforms Taobao, Ali-Express, 1688 and JD.com. An effective programme targeting these sites should focus on:

  • achieving prompt takedowns of as many first-time offenders as possible;
  • ensuring that the platforms deal with repeat offenders as harshly as possible, principally through termination of their accounts; and
  • having more serious repeat offender cases investigated by the platforms and, ideally, by the authorities as criminal cases.

In carrying out this strategy, 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 present data demonstrating the scope of infringement on the platforms in question, including, if appropriate, results of test purchases that illustrate the extent of the counterfeiting (versus trade in genuine product) at various price levels. As with criminal investigations, rights holders may want to consider working in conjunction with other brands. 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 enforcement actions, rights holders may consider the following strategies in cities where vendors are concentrated:

  • asking local AICs whether they are willing to seek access to email and banking records, identify the infringer’s location and work together to develop an appropriate enforcement response;
  • filing civil actions seeking ex parte evidence preservation of important records to build criminal and/or civil cases;
  • filing asset preservation actions to seize money in infringers’ accounts; and
  • approaching the local PSB for support in conducting in-depth investigations into more serious targets.

Rights holders should be aware that 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

Foreign brand owners should adopt a number of steps to ensure that their brand is sufficiently protected in China. These include the following.

File as early as possible, even if the brand is not 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 being offered in China, defensive filings to deter counterfeiters are a necessity.

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. Usually this is done either by phonetic translation (eg, Dishini for Disney) or by directly translating the foreign brand name into its equivalent Chinese (as Apple has done with Pingguo). In certain cases, the two methods can be combined, such as Xingbake for Starbucks which combines the Chinese word for ‘star’ (xing) with a transliteration of ‘-bucks’. Care should be taken to ensure that the Chinese language mark’s pronunciation works across China’s many dialects.

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 co-exist in a given class so 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, particularly to muddy the waters when enforcement authorities come knocking.

Regularly monitor 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 are identified, a watch list can be developed for those attempting to register copied marks. Investigations into those infringers (who may well be making use of those marks in their businesses) can be conducted to provide support to oppositions of preliminarily approved marks, or three-year non-use cancellation applications and/or bad faith invalidations against already-registered marks.

Obtain copyright registrations

Proof of copyright ownership for logos and stylised versions of word marks can come in very handy, both in oppositions against infringing trademarks and against counterfeits bearing those marks – particularly where the rights holder does not have a registration for the logo/stylised mark. Although copyright is typically protected immediately upon the work’s creation, it is strongly recommend that rights holders obtain a Chinese copyright registration certificate for relevant works. Applications can be filed with the Copyright Protection Centre of China (under the National Copyright Administration) and obtained quite 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 extrinsic evidence of ownership must be translated, legalised and notarised. 

Dan Plane and Scott Livingston

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