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Anti-counterfeiting in China: a game of wits

Kangxin Partners PC

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China June 26 2014

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 [email protected] 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.

Kangxin Partners PC - This article first appeared in World Trademark Review.

For further information please visit www.worldtrademarkreview.com.

Kangxin Partners is a large firm with over 500 staff.  Our services include patents, IP consulting, trademark, IP enforcement, copyright and IP training. We represents Chinese and international firms from start-ups to Fortune 500 multinationals from our offices in Beijing, Tianjin, Qingdao, Xi'an, Wuhan, Hangzhou, Guangzhou and DongGuan. If we can be of assistance, please visit https://en.kangxin.com/ or email to [email protected]


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