Dealing with counterfeiting in China is an uphill battle, but a strategic and well-thought-out action plan can help to alleviate stress and misunderstanding
In the once-small farming town of Yiwu, beans and rice were cultivated and people tended to their fields and livestock with care. Great personal attention was given to quality, so that only the very best produce was sent to market. But one day, someone discovered that it was profitable to reproduce and sell counterfeit goods. At first, this notion was received with scepticism and doubt. However, as this individual started to bring in revenue for his illegal dealings, others began to follow suit. Shovels and hoes were exchanged for sewing machines and leather goods. The momentum snowballed. Yiwu is now the centre of the illegal counterfeiting trade in China. More than 30,000 stores sell over 100,000 different goods. Experts estimate that of the total goods sold in Yiwu, more than 90% are counterfeit. While no figures have been made available for over 17 years, it has been reported that last year Yiwu earned over $1.7 billion – more than most multinational companies make in China on an annual basis. The once quiet and sleepy farming town is now something that dozens of other villages across China are trying to emulate. Yiwu is certainly an extreme situation – counterfeit goods flow through the town seemingly unchecked. What is more notable is that the majority of counterfeit products in China do not even originate from Yiwu. Nonetheless, China’s illegal counterfeiting industry is of major concern to the global IP industry. When a rights holder first discovers that it has a potential counterfeiting problem, it needs to act. However, in formulating an enforcement and anti-counterfeiting strategy, methodical and efficient action trumps brute strength. IP identification The first step when implementing or formulating an anti-counterfeiting strategy is to identify the importance of your IP rights. Many rights holders protect rights in China that they are not using or capitalising on. For many, IP rights are incredibly important and the mere prospect of infringement can trigger a wide range of emotions. But it is imperative that rights holders leave their emotions at the door when dealing with counterfeiting in China. Distancing themselves from the personal attack on their IP rights makes it easier for rights holders to structure a prudent and effective enforcement plan. When deciding whether a particular IP right is worth enforcing, one must consider its importance in the Chinese market. Rights holders are often quick to litigate or spend unnecessary resources to resolve a situation quickly. While this may be necessary in certain instances, it is helpful to take a figurative step back from the situation and coolly evaluate the worth of the IP right. From a business standpoint, many IP rights are not necessarily of value or even utilised in China. Many rights holders have vast IP portfolios – partly as a defensive measure – and often the majority of patents and trademarks are not being used in China. In such circumstances the rights holder must consider whether it wishes to throw good money after bad in an attempt to solve the problem. Before making this decision, it is essential to identify the IP right from a practical and business standpoint. Some questions to consider include the following: • If my business is not using this mark, will it in the near future? • Do we plan to capitalise on the Chinese business market with this mark and, if so, when? • In which international markets are we using the mark? Once some of these questions have been answered from a business standpoint, it will become easier to make the tougher business decisions during the following phases of an anti-counterfeiting strategy. Identifying the infringer A great deal of resources are spent annually attempting to shut down infringing websites and combat sellers of infringing goods. While these offer positive victories for rights holders, outright attacks on any and all infringers may not be the best anticounterfeiting strategy over the long term. Looking at the infringement problem from a strategic position can often shed light on the actual situation and allow for realistic and positive decisions. Take the example of an apparel company doing business in China, the United States and Europe, which has been the victim of hundreds of websites selling counterfeit goods bearing its trademark. Most would proceed by sending hundreds of cease and desist letters to the various websites, and then attempt to contact the internet service providers and request that they take down the websites in question. While this may yield a cosmetic victory, it does little to resolve the underlying counterfeiting issue. In today’s global economy many companies have strict IP budgets, which are spread thinly across dozens of essential markets. When situations arise that require major financial expenditure to combat a wave of counterfeit sellers, rights holders are often confused about where exactly they should start. The answer usually involves sending warning letters followed by the onerous process of trying to shut down the offending websites. A great many resources are used to clean up the spilled milk and little is left to attack the actual source of the problem. A knee-jerk approach may bring immediate short-term results, but will do nothing to stop the sale of counterfeit goods Kangxin Partners PCwww.WorldTrademarkReview.com August/September 2014 World Trademark Review 105 Meeting relevant authorities Anti-counterfeiting efforts are of major importance to China, as it continues to foster investment and confidence in the market. Additionally, China is a party to all major IP conventions; there is thus great international pressure to improve the IP climate in China. While the various legal and administrative bodies unequivocally wish to uphold and implement the law, they are often overwhelmed due to their workload. An important local company in a foreign jurisdiction is often just another applicant in China. However, many officials are very open to meeting face to face and learning more about a given situation. Such meetings have been arranged in the past and the results have been immensely positive. The different agencies are interested in learning about particular situations and are usually flattered when companies take the time to travel to China to meet with them. Additionally, putting faces to names and forming personal relationships is always beneficial. It can help to create a personal attachment and perhaps assist in achieving continued positive anti-counterfeiting results in China. Moreover, several rights holders conduct regular training sessions for Customs and the AIC. During these training sessions, the rights holders can describe their product and discuss their trademarks. They can work with the relevant enforcement body to assist it in distinguishing genuine goods from counterfeits, and to further the global understanding of their brand or product. Such training sessions have been extremely successful – not only do they create awareness of potential problems that might be encountered, but they also foster a personal duty for officials in China to do all they can to assist in enforcement efforts. Conclusion Dealing with counterfeiting in China is an uphill battle, which can be daunting and potentially intimidating. Although the road may not be easy, a strategic and wellthought-out action plan can help to alleviate stress and misunderstanding. There are always positive options available. Often, taking a moment to assess the situation from a practical and business approach will pay dividends. WTR for alternative and more devious ways to sell the counterfeit goods, meaning that the rights holder has to work harder to put a stop to the situation. Further, from a legal strategy standpoint, notifying the seller through a warning letter hinders website notarisation and investigation efforts. In order to proceed with anti-counterfeiting litigation or administrative action, Chinese law mandates that evidence be notarised and submitted before the court or relevant authority. Warning letters are entirely negative in this regard, as they put the seller on notice, preventing notarisation and ultimately the collection of evidence. Evidence collection is extremely challenging under normal circumstances, and when the illegal seller is aware of potential action, investigation becomes near impossible. The vast majority of notarised evidence is obtained through onsite investigations. Without appropriate evidence, legal action is impossible. Therefore, when identifying relevant infringing parties, it is essential to determine whether future action will be taken. If so, certain prudent measures need to be undertaken in order to ensure that this will remain possible. from continuing – meaning that similar action will need to be taken again. As a corollary, spending the resources on the back end to find and investigate the producer(s) of counterfeit goods, identify and map out the distribution channels, and take action to stop the illegal activity at the outset can be far more successful. A back-end approach is not for the faint of heart. While resources are spent trying to solve the problem, the illegal sale of counterfeit products will likely continue in the interim. However, if a rights holder can look at the issue dispassionately and take a long-term view, this may potentially be of more benefit then merely attacking the immediate sellers. This strategy can also be combined with other efforts – such as customs action to prevent goods from leaving China or working with the Administration for Industry and Commerce (AIC) to shut down manufacturers and potentially have their business licences revoked. Taking practical steps Without question, the ultimate goal is to prevent infringement activities and to halt the sale of counterfeit goods. However, if the action plan outlined above is not the right approach for the rights holder to take and there is a more urgent need to halt the sale of the counterfeits immediately, then a methodical and intelligent game plan needs to be implemented. Many are quick to suggest sending cease and desist letters to all sellers of counterfeit goods. It seems as though this has become the standard response any time a counterfeiting issue arises. However, there are arguments that this approach can actually hinder a long-term anticounterfeiting strategy. While a standard letter threatening legal action may scare away small retailers for the time being, it also puts them on notice that their legal activities have become apparent to the rights holder. Some argue that this is a good thing. However, while this may be true in minor cases, there is no long-term benefit to sending such letters. When a seller of counterfeit goods receives a letter from a rights holder, it is immediately put on notice that someone is aware of its illegal activities. Such notification does not create a sense of sympathy and wrongdoing – instead, sellers become more diligent in their undertakings and work harder to cover their tracks. They may agree to stop selling counterfeits on a particular website for the time being, but this swiftly becomes a game of cat and mouse. The seller looks Country Correspondent: China Aaron D Hurvitz Of foreign counsel firstname.lastname@example.org Aaron D Hurvitz joined Kangxin Partners, PC in 2009 as of foreign counsel and is responsible for advising Kangxin’s foreign clients on IP law in China. Mr Hurvitz frequently gives lectures around the world, focusing on anti-counterfeiting and IP enforcement, and provides advice on doing business, licensing technology and commercialising intellectual property in China.