China’s large manufacturing base and inconsistent IP enforcement have long made it one of the primary sources of global counterfeit and knock-off goods. In 2015 China’s official Xinhua news agency estimated that over $45 billion in fakes were available on Alibaba’s various e-commerce websites. That same year, US customs statistics indicated that 88% of fake goods seized in the United States (by value) originated in China.

For enterprising Chinese counterfeiters, trademark squatting remains a tried-and-true tactic for making easy profits. Unlike most common law jurisdictions, China is a first-to-file jurisdiction, with trademark rights awarded to the party that files first, rather than on the basis of prior use or intent to use. Exploiting this, Chinese trademark squatters will commonly register marks of both foreign and local companies, intending to force the rightful owner to purchase the mark back from them.

A more recent and concerning trend is the growing use of websites and social media to market infringing products to a global audience. These sales channels represent a significant new risk for rights holders and a sharp contrast from the days before e-commerce, when infringing goods were largely limited to domestic sales through traditional brick-and-mortar outlets and local markets.

The online problem is exacerbated by China’s sophisticated manufacturing base, which allows counterfeiters to quickly manufacture knock-off products at low cost for domestic and international distribution.

These risks, along with the country’s status as one of the world’s largest consumer markets, make China an essential component of any company’s global IP strategy – even if that company is not active there. Fortunately, if companies take a number of proactive steps, many of these IP risks can be mitigated.

Legal framework

The laws protecting intellectual property across the administrative, civil and criminal spheres 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 judicial opinions.

The Product Quality Law and 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, Paris and Nice Conventions, as well as the Madrid Agreement and Protocol. It is also a member of the World Trade Organisation – making it subject to the Agreement on Trade-Related Aspects of Intellectual Property Rights – as well as the World Intellectual Property Organisation.

Enforcement

Although China is notorious for its level of IP violations, the country does provide a number of increasingly effective enforcement mechanisms for rights holders to protect themselves through administrative, civil or criminal channels.

Administrative channels are the most frequently used, but the benefits they afford in terms of time and cost savings are often tempered by the relatively low fines issued, which may not act as much of a deterrent to determined counterfeiters. However, for small-scale targets, administrative channels are usually sufficient.

For larger or more persistent targets, rights holders should consider following an administrative enforcement action with a parallel civil or criminal suit, depending on the violation. This is particularly true if the rights holder seeks damages, which cannot be awarded through administrative enforcement proceedings. 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.

Government bodies involved in administrative and criminal IP enforcement include:

  • the administrations for industry and commerce (AICs) (China’s primary market supervision, regulation and enforcement officers);
  • the quality technical and supervision bureaux (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 Copyright Protection Centre of China (oversight and administration of copyright registrations);
  • the State Intellectual Property Office (SIPO) (patent examination and enforcement); and
  • the Trademark Office (TMO) (responsible for trademark examination and oppositions). A related body, the Trademark Review and Adjudication Board, oversees trademark rejection appeals, invalidation applications and appeals of other TMO decisions.

Border measures

Chinese Customs has established an IP recordal system to facilitate the enforcement of IP rights at the border. 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 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 terms of increased seizures.

Customs recordals can be completed online for Rmb800 per recordal (around $115) and are valid for up to 10 years, provided that the underlying IP rights do not expire during that time.

Criminal prosecution

For trademark enforcement actions, foreign brands have long relied on the assistance of local AICs and quality technical and supervision bureaux, 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 that, among other things, assess administrative fines calculated on the basis of the infringer’s illegal turnover.

One issue that must be overcome is the 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 for producing counterfeit goods (approximately $7,250) and Rmb150,000 for reselling 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 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 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.
  • 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. In a worst-case scenario, 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;
    • 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.
  • 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 (eg, emails and banking records).

Rights holders should diligently follow up with authorities, by phone and in person, and should consider having a representative present for key meetings to communicate the company’s strong interest in the case. At all stages, rights holders should offer to assist the authorities with their investigations, including through supplemental private investigations or legal opinions.

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 demanding just compensation, 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.

Unlike in most western jurisdictions, Chinese civil suits do not guarantee access to an infringer’s records and there is little to no risk to an infringer in simply refusing to turn over any documents (although provisions now 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 if a bond (amount specified by the court) is posted.

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

Anti-counterfeiting online

Online counterfeiting is now one of the most significant issues facing rights holders in China. In 2015 the SAIC criticised Alibaba after a survey from the China Consumers Association showed that only 37.25% of examined goods on Taobao.com were genuine. Although this statistic has not been verified by empirical studies, the fact that it was used by the government suggests that the true numbers are of similar magnitude.

Chinese counterfeiters have proven particularly adept at using the Internet to gain product ideas, through 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 sourced, the counterfeiters will arrange for local 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 (eg, the popular WeChat platform), and perhaps using this faux-company to solicit distributors or franchisees for further distribution.

Fortunately, Chinese e-commerce sites have developed fairly efficient online takedown mechanisms for foreign companies that can show the required 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 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 larger vendors, the following enforcement actions may be considered in cities where vendors are concentrated:

  • pressing local AICs 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 or civil cases;
  • filing asset preservation actions to seize money in infringers’ 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.

Preventive 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 offered in China, defensive filings 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. This is usually done by phonetic translation (eg, Di-shi-ni for Disney) or 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 Xing-ba-ke for Starbucks, which combines the Chinese word for ‘star’ (xing) with a transliteration of ‘-bucks’. Care should be taken to ensure that the 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 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 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, such as MarkMonitor, NetNames or YellowIP.

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