• The Wild, Wild East: Strategies to Combat Counterfeiting in China
  • January 3, 2013 | Author: Brian S. Sun
  • Law Firm: Foley & Lardner LLP - San Diego Office
  • Consider this simple word-association exercise: “counterfeit.” For many, the first word that may come to mind is “China.” Indeed, when it comes to counterfeit goods and brand piracy, China is the number one source of infringing products. While considerable strides have been made in recent years to promote intellectual property (IP) protection in China, two obstacles continue to hinder enforcement efforts: an administrative and judicial inability (or unwillingness) to enforce IP laws, and an overall lack of administrative and judicial transparency. Other problem areas also include local protectionism and corruption, lack of public awareness, and low penalties, which can result in “whack-a-mole”-style enforcement.

    Despite these problems, progress has been made to promote the enforcement of IP in China, largely due to growing political pressure from the West, and the fact that China is emerging as an innovator nation. However, in response, smart counterfeiters have adapted by developing sophisticated techniques, making them more difficult to identify and thus more difficult to shut down. As such, implementation of an aggressive anti-counterfeiting program is essential to any company that produces consumer products, whether it be in the apparel, electronics, pharmaceuticals, or entertainment industry. This article sets forth the components of an effective anti-counterfeiting program - and a number of best practices for implementing such a program - that will reduce the amount of counterfeit goods on the market and allow companies to recapture lost revenue and avoid brand dilution.

    Be Proactive, Not Reactive

    Effective IP registration and portfolio management is the first component to a successful anti-counterfeiting program. However, while obtaining a significant portfolio of trademarks and patents well in advance of commercial use is essential, it requires aggressive monitoring and proactive measures to prevent IP misuse and infringement. Specifically, aggressive monitoring will involve establishing a global watch service, tailored to each company’s specific needs, to track the sale of counterfeit goods, trademark misuse, domain name registrations, and the like. Additionally, any information that is gathered should be entered into a database system, including data relating to seizures and enforcement activities, so that the IP owner can properly adjust to market shifts and thereby formulate a coordinated strategy.

    It is common for companies to overlook, or at least underestimate, the importance of promoting an aggressive anti-counterfeiting program, resulting in a reactionary approach to instances of counterfeit activity in which companies feel compelled to file suit immediately upon discovery. To better illustrate the futility in this approach, counterfeiters can be analogized to a Lernaean hydra, such that an IP owner who initiates enforcement proceedings against one counterfeiter after the first sighting will ultimately fail to curtail the counterfeit goods from propagating because he or she did not cut off all the heads. This inability to completely eliminate a counterfeiting operation is due in large part to the fact that Chinese counterfeiters consider seizures, fines, and injunctions to be simply part of the cost of doing business, and as such they are usually able to resume counterfeiting operations with little difficulty. In this regard, rather than focusing on metrics like “seizure numbers” or the total number of lawsuits filed, an effective anti-counterfeiting program will facilitate targeted action to identify, cripple, and more preferably eliminate the counterfeiters at the source.

    Other important proactive measures include working with government liaisons from agencies such as police authorities, U.S. Customs and Border Protection, and the National Intellectual Property Rights Coordination Center (IPR Center). The latter represents a joint effort on the part of 15 government agencies to promote IP enforcement, and operates in part to share information, perform interdictions, and conduct investigations. Additionally, having “boots on the ground” in the form of trusted local service providers (i.e., private investigators, IP counsel) in China is critical for investigatory and shutdown efforts to be successful. Unfortunately, in order to identify trusted local service providers, thorough screening and mechanisms to safeguard against conflicts of interest and exploitation are required. If used properly, however, these proactive measures can provide systemic anti-counterfeiting effects and reduce the cost of enforcing IP in China.

    Investigatory Practices

    Many foreign companies tend to be unfamiliar with the rules of civil procedure and evidence in China, which differ widely from the U.S.-style civil discovery. More specifically, Chinese courts base their decisions almost entirely upon the presentation of a substantial body of written and physical evidence that the plaintiff must produce up front and submit with the complaint. This requires a considerable amount of investigatory work to be conducted in order to locate manufacturing sites, make notarized purchases of counterfeit goods, and uncover the main players responsible for running the counterfeiting operations. Other considerations that impact the overall return on IP enforcement include identifying liquid assets for which requests to the court can be made to freeze on an ex parte basis, which requires ascertaining bank account numbers and the location of the assets to be frozen.

    As discussed above, having trusted investigators on the ground is vital to successfully identifying and shutting down the key players in a counterfeiting scheme. This sort of “detective” work can be frustrating for domestic corporate clients who may demand immediate action upon first discovering an infringer. However, continuing the investigation after first discovery in order to gather additional intelligence pertaining to manufacturing sites, suppliers, sub-contractors, distribution channels, and customers is critical if a brand owner wants to eliminate the problem at the source. In this respect, comprehensive database management and the use of third-party intelligence programs to run data sets and analyses are key elements to properly coordinating anti-counterfeiting efforts and, additionally, to stay within a fixed budget by avoiding wasteful spending through “whack-a-mole”-style enforcement.

    The Four Paths to Enforcement

    While China’s legal system provides IP owners with a full range of options for relief, the results can be a mixed bag depending on the particular avenue taken, and are often poorly navigated via trial and error by inexperienced practitioners. In brief, China’s legal framework prescribes routes for IP enforcement through administrative, civil, criminal, and customs enforcement.

    1. Administrative Enforcement

      Administrative action is the most frequently pursued route for enforcing IP rights in China, as it is quicker and less expensive than litigating in the Chinese courts. These actions are carried out by various government agencies, including local intellectual property offices, which are supervised by the State Intellectual Property Office (SIPO), Administrations for Industry and Commerce (AICs), and cultural bureaus such as the General Press and Publication Administration (GPPA). Typically, IP owners must first engage in independent investigations to gather evidence against infringers before bringing a case of infringement to an agency office. Once a strong case has been presented, the agency will undertake its own investigation and notify the infringer. Thereafter, the agency may conduct inspections, hold hearings, engage in raid actions to seize counterfeit goods, and/or assess administrative penalties.

      While administrative enforcement provides the advantage of being able to select between a variety of enforcement authorities, there are significant drawbacks that can blunt the effectiveness of administrative actions. For example, IP owners often find it difficult to navigate the multitude of administrative agencies when each agency has local offices that are each given considerable local autonomy. As a result, IP owners are faced with a host of problems that include a lack of operational consistency between local agencies and jurisdictional challenges caused by political infighting among localities. Furthermore, some agencies have overlapping IP policing powers, which can make selecting the most suitable agency problematic when cost is a primary concern. Another shortcoming associated with pursuing administrative proceedings includes the fact that administrative enforcement is generally limited to injunctive relief and does not provide redress to IP owners in the form of monetary damages. Furthermore, administrative fines levied against infringers tend to be small and factory closures are usually temporary, resulting in merely a short-term cessation in the production of counterfeit products. As such, taking the administrative route can sometimes be ineffective against counterfeiters due to the non-deterring size of administrative fines and other inherent problems plaguing Chinese administrative agencies such as corruption and local protectionism. However, if an IP owner brings a strong case and injunction is the primary objective, administrative enforcement can be a cost-conscious choice that provides at the very least an effective stopgap measure to counter counterfeiting.

    2. Civil Enforcement

      In recent years, IP enforcement utilizing civil litigation in Chinese courts has been gaining ground as an effective anti-counterfeiting tool, and it is expected to increase as a deterrent force as China brings its laws more in line with those of other IP innovator nations. However, the cost of conducting investigations and hiring trustworthy local litigators, especially in view of the insufficient damages that are awarded, make civil enforcement less than ideal. Despite these drawbacks, as part of a coordinated anti-counterfeiting program, targeted actions that utilize available civil remedies such as preliminary injunctions, freezing of assets, and the ability to litigate and secure judgments, simultaneously or in succession, against a group of infringers can be an effective solution to combat counterfeiting. Moreover, there is a desire to see the Chinese judicial system become more robust and independent, which will ultimately lead to larger damages awards, more injunctive relief, and more transparency in litigation.

    3. Criminal Enforcement

      Similar to the civil litigation route, pursuing criminal proceedings against counterfeiters also has its share of ineffectual results. In particular, both the severity of sentences and the rates of criminal prosecution are too low to serve as a meaningful deterrent. Furthermore, criminal liability can be difficult to establish, as the evidentiary bar is high, and numerical thresholds also must be met before criminal charges can be leveled against an infringer. However, thoroughness and attention to detail in conducting an investigation can greatly enhance the chances of imposing criminal sanctions on a counterfeiter. More specifically, providing precise calculations for the values of seized goods, and gathering and notarizing probative evidence relating to completed transactions in the form of sales orders and receipts, ledger and account books, and tax documents, will increase the chances of obtaining criminal punishment. Moreover, as with the upward trend with civil litigation, the length of sentences and the amounts of assessed fines are creeping up as more pressure is placed on IP protection and enforcement in China. By way of example, a recent conviction obtained by the U.S. Golf Manufacturer’s Anti-Counterfeiting Working Group against a prolific Chinese counterfeiter of golf products resulted in a four-year prison sentence and a substantial fine, exemplifying positive progress toward stiffer criminal penalties in the future.

    4. Customs Enforcement

      Customs enforcement also is on the rise as counterfeit goods can be seized both at the point of departure from China as well as the point of arrival in the destination country. Disadvantages associated with pursuing the customs route include the requirement of a sizeable security bond in order to detain seized goods and potential corruption of front-line customs personnel. However, developing relationships with customs departments can be a particularly cost-effective solution, especially when customs officials are educated and understand how to identify infringing goods. In this regard, maintaining a constant channel of communication and providing manuals, guides, and educational resources to facilitate the identification of counterfeit products is an important component to a successful anti-counterfeiting program.

    Best Practices for Implementing an Anti-Counterfeiting Program

    Developing and managing an effective anti-counterfeiting program can be a difficult task because it requires a significant amount of strategic planning, thorough investigation, and precision in execution. The most common problems that stifle brand owners’ attempts to stop counterfeiters typically stem from a failure to prioritize actions against counterfeiters and an inability to properly scale legal budgets to achieve desired goals. As such, gathering intelligence and understanding the counterfeit market landscape in China, which includes monitoring sophisticated counterfeiters that attempt to circumvent enforcement efforts, is critical to achieve any measurable success.

    One rising trend that has resulted in favorable dispositions is joint actions wherein multiple brand owners join together to bring civil, criminal, and administrative actions against infringers. Notable advantages to pursuing joint actions include the collective pooling of resources, intelligence, and political and economic clout. This was perhaps best demonstrated by a group of European luxury brand owners, including LVMH, Gucci, and Chanel, who in 2004 embarked on a joint enforcement effort to reduce counterfeiting in Chinese retail and wholesale markets by targeting landlords of major markets. This ultimately led to the assembly of an even larger coalition of apparel, sports, and fashion brands that since coming together has obtained civil and criminal judgments against infringers, and also secured a series of agreements guaranteeing certain additional protections for IP rights.

    Conclusion

    In summary, IP enforcement in China is completely different from that of the United States and other Western nations. Moreover, the changing tides in response to political and economic realities are moving China toward stronger IP protection, thereby increasing the efficacy of administrative, civil, criminal, and customs enforcement and resulting in stiffer penalties and greater recoupment of lost profit. With so much in flux, the development and implementation of an effective anti-counterfeiting program requires the careful consideration of a multiplicity of factors and unique strategies in order to successfully reduce and prevent the proliferation of counterfeit goods.