IP Focus: Sophisticated counterfeiters and stronger enforcement

Chinese and foreign companies need to employ anti-counterfeiting strategies as actions against companies with registered intellectual property can be difficult

Issue: July/August 2013

Contrary to what many people believe, the open manufacture and sale of counterfeit products is becoming uncommon in China. However, the losses caused to both foreign and Chinese companies from sophisticated counterfeiting operations and infringement increases every year. Strategic development of intellectual property rights and active enforcement will reduce the risks from these counterfeiters, infringers and growing competitors.

Every year, many Chinese companies maliciously register intellectual property and take advantage of the reputation of other companies to frequently sell sub-quality products. Increased investment in prosecution and enforcement provides long-term benefits in protecting the reputation of brands and supports current operations and future expansion in the growing Chinese market. If a suspected counterfeiter or infringer is found and not investigated and challenged, there is a very real risk that its business could grow larger and larger, making it increasingly difficult to challenge its use in the future.

Chinese government agencies and courts have recently become more active in enforcing intellectual property rights, especially in eastern China. When companies file complaints and do enforcement work, government agencies are also more likely to pay attention to their trademarks. In recent months, our firm has regularly been contacted by local Administration of Industry & Commerce (AIC) officials and the Public Security Bureau requesting verification that seized goods were counterfeit after they had conducted raids. Previously, raid actions prior to the filing of formal complaints were less common.

Unfortunately, but understandably, the government is also enforcing and recognising rights secured by savvy counterfeiters. Chinese companies and individuals have applied for and registered millions of trademarks, patents and domain names. Many of the intellectual property rights secured are similar to, or identical with, those developed by known companies, their competitors or even their business partners. The former counterfeiters then become the legal rights owners and cancelling their marks and invalidating their patents is often challenging. Anti-counterfeiting actions against these companies with registered trademarks and other intellectual property becomes more difficult, although we are also increasingly seeing favourable judgments in these challenging cases as well.

In this article, we describe how to outmanoeuvre these sophisticated Chinese counterfeiters. We begin by providing an overview of the active enforcement occurring and prosecution issues in China. Then, we discuss the need for intellectual property audits and an aggressive prosecution strategy for trademarks, copyrights, design, utility model and invention patents, and domain names. Finally, we describe how to effectively perform anti-counterfeiting work through cease and desist letters, administrative raid actions and penalty decisions, civil litigation and criminal prosecution, and customs protection.

We have handled a number of matters where our clients have had their goods detained at China Customs because someone else registered their intellectual property in China and recorded it at customs. And, Chinese companies have also registered companies and secured trademarks in foreign jurisdictions in order to claim that their shipments containing counterfeit products are original equipment manufacturing (OEM). Stopping these sophisticated counterfeiters is possible, but careful planning and initial investments are often required.


Enforcement and Prosecution
Administrative and judicial enforcement of intellectual property has increased in recent years. In 2012, AIC officials inspected 394,500 markets and investigated and prosecuted 120,400 infringement and counterfeiting cases, with an estimated value of over RMB 2 billion ($326 million). Of these administrative enforcement actions, 59,085 cases were trademark infringement and counterfeiting cases and 14,033 of those cases included foreign rights owners. Also, in 2012, there were 12,974 first-instance criminal cases concluded and criminal judgments effective against 15,338 people - an increase of 94% from 2011.

However, the number of registered trademarks and patents makes prosecution and enforcement work more challenging. In 2012, 1.6 million trademark applications were filed in China, an annual increase of over 15%. For 11 years now, China has had the largest number of applications in the world. The number of oppositions is also large and increasing, and 73,000 trademark opposition cases were decided last year, an increase of nearly 30% from 2011. By the end of 2012, 4,486 trademarks had been recognised as well known through administrative proceedings including oppositions.

In 2012, the State Intellectual Property Office (SIPO) received a total of over two million patent applications, including 650,000 invention patent applications, 740,000 Utility Model applications and 657,000 design patent applications. Domain names are also often registered by so-called cyber squatters and may be used to sell counterfeit goods. By the end of 2012, China had 7.5 million .CN domain names, an increase of over 112 percent from 2011. In addition, the number of .中国 Chinese domain names reached 280,000. Registering key domain names for defensive purposes is significantly more cost-effective than reclaiming a domain name through the Asian Domain Name Dispute Resolution Centre or civil litigation.


Hermès and trademark markets
The Chinese government is serious about enforcing intellectual property. However, counterfeiters are often able to register or purchase or license trademarks or patents that are identical or similar to those of other known companies. The success and troubles of Hermès in China illustrate the potential for meaningful enforcement, but also the attention that needs to be spent on trademark oppositions and cancellations.

In a widely publicized decision in August 2012, Heyuan Intermediate People's Court in Guangdong Province sentenced Xiao Zhenjiang to life in prison. According to a statement on the Court website, Xiao was found with RMB 100 million yuan worth of fake Hermès products. Three of his accomplices were also sentenced to seven to ten years in prison and were handed fines of RMB 500,000 to RMB 800,000.

Although in April 2013, the sentence for Xiao was reduced to six years the case still has had a strong deterrent effect. Trademark violations under PRC Criminal Law provide for criminal sentences up to seven years, but Heyuan Court had issued a life sentence for the manufacture and sale of substandard products. Xiao and his gang were well organized, but they did not have a registered trademark. However, they could easily have bought one.

Currently, one of China's many online marketplaces to purchase trademarks, Famous Trademark Assignment Net, features the trademark H FRG EMMAS. Although there are several different English letters in this registered trademark than the real trademark, the website prominently features the mark together with a variation of the distinctive Hermès carriage along with a variation of the common Chinese name for Hermès. Unfortunately, for the French Hermès, they were not successful in registering their Chinese version mark in China.

The price for H FRG EMMAS is negotiable, but similar imitation marks have sold for hundreds of thousands of dollars. Hermès should probably file a cancellation in dispute against this mark, but even with the clear bad faith such an action will be more challenging than opposing the mark initially - which was not done. Opposing and preventing the registration of similar marks is a key component of anti-counterfeiting.

Even third-party registrations of a foreign company's house mark - and the Chinese versions - are still common. For these types of marks, requests for millions of Renminbi for registrant of a company's own trademark are not unusual. Nearly everyone in China knows that Proview Electronics managed to obtain $60 million from Apple for the iPad trademark that Apple thought it had already purchased. Although not a counterfeiter, Proview Electronics’ iPad trademark and the surrounding media coverage increased awareness of the value of selling trademarks.


IP audits and prosecution
The key to successful anti-counterfeiting work is registering intellectual property in China. Companies need to make sure that their existing intellectual property rights in China are sufficient to support their business, especially potential expansion in China. Thus, it is important to conduct extensive audit work regularly.

Audit work forms the foundation of a company's intelligence on whether their rights have been sufficiently protected and whether there are similar or identical marks against which actions need to be taken. The audit work will also help companies to determine how to strategically proceed with necessary action, both now and in the future.

Key issues for trademark prosecution include Chinese version marks and the sub-class principle. Many companies are still unaware of the threat posed by the Chinese equivalents of their trademarks and unfortunately there are often many characters with similar pronunciation and appearance. These Chinese equivalent marks are better recognized and more familiar to consumers in the Chinese market. Therefore, it is strongly recommended to figure out and register Chinese equivalent marks as soon as possible. Also, in China each international trademark class is further classified into many Chinese local subclasses and the registration of a trademark in one subclass cannot prevent others from registering under similar trademarks in other subclasses.

It is also important to consider the potential for design patents, as well as potentially utility model and invention patents. Domain name registrations are also another area that needs to be carefully considered.


Anti-Counterfeiting strategy and customs
Once intellectual property rights are secured it is highly recommended that they be recorded at customs and market surveys be undertaken to determine the extent of any potential infringement. Once market surveys are completed, investigations should be done to determine the key sources and key evidence may be notarized. Then complaints can be filed and administrative or police raids conducted. Following a raid, penalty decisions will be issued and civil or potentially criminal liability may be pursued. These successful cases against the key infringers will provide a strong deterrent in the market.

Based on our experience, usually we can prevent the significant majority of infringing acts by means of investigation, notarized purchase, administrative or police action and follow-up checks. Moreover these actions would also continue to produce a deterrent effect in the key markets.

China customs is also effective at stopping the export of counterfeit and infringing goods. Because some courts believe that OEM should be defined as unauthorized use of a trademark in China, the court may find use of an unregistered trademark in your OEM in China infringes upon the trademark right of the Chinese registrant of the trademark (copycat). Chinese companies have also registered companies and secured trademarks in foreign jurisdictions in order to claim that their shipments containing counterfeit products are OEM. Chinese counterfeiters understand and know how to navigate China's intellectual property law - and the serious risks of counterfeiting. We have used the term counterfeiters expansively to refer to any company or individual that takes an advantage based on the reputation of another company through copying or imitating its intellectual property. This expansive definition of counterfeiters represents the reality on the ground. In many cases, we have found companies in China manufacturing some products using their own mark, or a registered or unregistered variation of another company's marks and then secretly producing entirely counterfeit products as well.

Previously, much of our work dealt with helping clients register and enforce their trademarks against Chinese companies that were copying and selling our client's products using our client's trademarks. Now we are seeing more and more of these same companies applying for similar trademarks and copying our client's products while applying and protecting themselves with design, utility model and invention patents of their own. These companies then often use shell companies or related companies to register domains and use online sales via third-party websites to sell goods across China and around the world. Effectively stopping these increasingly sophisticated counterfeiters requires strategic development of intellectual property rights and active enforcement.

Spring Chang and Steven Andrews, Chang Tsi & Partners, Beijing

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