3 Big Issues That China Faces in Counterfeiting Battle

Intellectual property laws instituted by Beijing’s central government in recent years — including the introduction of a dedicated IP court — offer the appearance of tackling China’s large and intransigent problem with IP infringement.

Questions remain, however, about how these laws translate to ground-level enforcement.

“Over the 10-plus years I have been dealing with these issues in China, I have seen little progression in their vigilance to protect such rights. … While the laws look good as written, in practicality, there still leaves a great deal to be desired,” said Dan McKinnon, counsel for New Balance. “It’s a constant dance — and not a fun one.”

A major problem, according to experts, is the over-reliance on expecting administrative bodies, in particular China’s Administration for Industry and Commerce [AIC], to go after IP infringers.

China Counterfeiting

“AIC intervention has been criticized more and more by brands because the day after a raid, the infringers are back in business. The deterrent level of these raids is very low,” said Paolo Beconcini, an IP consultant who has worked in China since 2001 who’s also the author of the upcoming book “The Rules of Engagement: Trademark Strategies and Protection Enforcement in China.”

According to Beconcini, the raids, seizures and fines having little impact on the industry as a whole is of little relevance to the administrators, who keep the fines they collect, or the brands, who focus on quantities of seized goods.

Joe Simone, director of SIPS, an intellectual-property boutique-consulting firm based in Hong Kong, said that all parties responsible for anti-counterfeit enforcement have just done enough to look good to their superiors.

“It’s a messy business,” he said. “Most brands are just trying to [impress] a board of directors, but they aren’t really making much of a difference.

“The only thing that is going to push the Chinese government is if they are embarrassed enough to really change,” he added. “What they are doing is only enough to pay lip service to the problem, but not enough to eliminate the problem.”

Simone describes the counterfeit industry as a “whale of a problem” in China. At the same time, he says the legal system is adapting in ways to better deter infringers in the future by encouraging the public security bureau (PSB) to handle more criminal cases in this area — effectively placing a higher percentage of the enforcement responsibility in the hands of police rather than administrators.

Simone points to plea-bargaining, which is being introduced into the Chinese legal system, as a method the PSB can utilize to prosecute more offenders.

“Traditionally, there has been an aversion to going after small fish,” he said, “[but] if it didn’t take up the same kind of time and resources, they could actually bring a lot more cases.”

Under Armour Uncle Martian
China-based athletic brand Uncle Martian unveils a logo strikingly similar to that of Under Armour.

First In, First Served

Even though international brands have been running into trouble with China’s first-to-file trademark apparatus since the 1990s, there is still a constant stream of cases in which brands can’t trademark their name in China because someone has beaten them to it. Simone says half a dozen such cases have landed on his desk over the past three months.

“Foreign brands still don’t know enough, they still don’t trademark their designs, they still don’t register their trademarks — sometimes even in English, so you can bet they forget to register [in] Chinese,” said Beconcini.

In the footwear industry, this problem is illustrated by the case of basketball great Michael Jordan, who tried to get a trademark registration revoked from Qiaodan Sports, a family-owned business with 6,000 shops selling shoes and sportswear in China. Qiaodan is a Mandarin transliteration of Jordan that was registered by the Chinese company more than a decade ago. Jordan first sued the company in 2012; he lost the case in the Beijing Municipal High People’s Court last year.

The Pearl River in Guangzhou, China.
The Pearl River in Guangzhou, China.

These days, it’s not just well-known brands being targeted: Chinese companies are scouring the web for emerging brands and filing trademarks, betting on the labels’ future popularity.

The process of obtaining a Chinese trademark in a single product category is straightforward and costs the equivalent of about $400, and even though startup brands might not have the immediate intention to sell in China, it still pays to get a China trademark before anyone else can.

“My recommendation is: Don’t save a few hundred bucks; get the China trademark,” Beconcini said. “If you have an international trademark, it’s fine in the U.S. and Europe, it’s fine in certain Southeast Asian countries. But China is such an important market, and the Chinese national trademark is given more legal weight here.”

The Consumers Changing the Game

The rise of China’s middle class, with its accompanying increase in spending power and desire for authentic products, is driving the business case for everyone from Alibaba on down to focus on genuine goods.

“Chinese consumers are becoming more astute to the fact that knockoffs are usually lesser quality,” said Matt Priest, president of shoe industry group the Footwear Distributors and Retailers of America. “They [now understand] that these products are usually not purchased in an official outlet and they come with a silly name like Uncle Martian [a Chinese company launched earlier this year that resembles Under Armour].”

“They are smarter than that — they want global brands,” Priest added. “They want a pair of shoes that were designed in the Under Armour lab in Baltimore, maybe manufactured in China and then sold in the Chinese marketplace. They don’t want Uncle Martian, they don’t want Nikes with an ‘s’ — they want the real deal.”

Though it’s unlikely Chinese trademark infringements will be eliminated anytime soon, there are those — Nordey included — who see the shrinking of local industry as the inevitable result of a confluence of developing factors.

“Alibaba’s profits are coming more from the brands now anyway, so there is this sense of history,” he said. “Consumers want the real product, and as soon as they can have, they will buy only the real product. I don’t see any future in the counterfeit business — maybe if you want to make quick money in the short term, but I don’t see good long-term potential.”

Alibaba; Singles Day
Alibaba Group website Tmall.com created the Singles Day sales promotion in 2009.
CREDIT: Courtesy of company

But in spite of the desire for genuine products among Chinese consumers, the business case for major e-commerce platforms to clean up their act, and the political case for the government to cement China’s international reputation as a legitimate economic powerhouse, there is also no shortage of consumers worldwide seeking and buying Chinese-made knockoffs. And this limits the effectiveness of China-based measures in the fight against IP infringement and counterfeit products.

“Most counterfeit fashion goods are exported out of China into other markets, so the change in Chinese consumer attitudes won’t change that,” said Haochen Sun, director of information technology and intellectual property law at the University of Hong Kong.

In the U.S., federal authorities seized $1.35 billion in counterfeit goods imported into the country, based on an estimated manufacturer’s suggested retail price of the goods, in fiscal year 2015. China remained the primary source of these seized counterfeit goods, accounting for an estimated MSRP value of $697 million, or 52 percent of all IPR seizures.

Earlier this year, federal authorities seized a shipment of counterfeit Salvatore Ferragamo shoes from China with an estimated value of $4.3 million. U.S. Customs and Border Protection officials said the quantity and value of the shoes are an indication of the profits involved in the “illegal trade” of luxury goods.

The Litigation Factor

Some of the highest-profile IP cases in China in recent years have involved footwear and fashion brands, including Crocs. Last year, the brand won a landmark case in which the Shanghai Intermediate People’s Court recognized the shape of Crocs’ iconic clog design as protected.

“We are pleased to see that China’s courts are expanding their thinking and are capable of protecting brand owners and consumers against imitation and counterfeit products,” said Crocs associate general counsel Sara Hoverstock. “We are hopeful that the judicial trends we have experienced recently will continue to develop in the future.”

Salvatore Ferragamo is another brand feeling positive about the impact courtroom battles are having against counterfeits. The Italian label has taken a notoriously aggressive stance in the war against fakes, and since 2013, it has blocked more than 1,000 websites operated by pirates, as well as having more than 100,000 counterfeit items seized and destroyed worldwide.

Salvatore Ferragamo Gancio Bit Loafer
Salvatore Ferragamo Gancio Bit Loafer
CREDIT: Courtesy of Salvatore Ferragamo.

In a written statement, Salvatore Ferragamo said: “The legitimate owners of brands have increasingly been winning the fierce battle fought against this phenomenon in courtrooms around the world, also as a result of local and international authorities gradually becoming aware of the severity of the problem, modernizing laws and equipping themselves with the right tools to defend the rights of those who suffer damage at the hands of pirates and forgers.”

However, in spite of these successes, criminal and civil investigations into counterfeit operation and trademark infringement can be complicated to build. For one thing, infringers are running increasingly sophistication operations, with segmented and hierarchical organizational structures: Simone says more than one counterfeit operation he has encountered reminded him of “The Sopranos.” Also, they are careful not to keep large quantities of merchandise in one place to avoid criminal prosecution.

“Companies know that court cases cost more money, so you can’t have a court case every day,” Beconcini said. “Brands are trying to find a more balanced form of intervention. You have to move from random attacks to strategic choices that are going to act more as a deterrent. You want to hit someone in a way they won’t do it again, which is why we have more litigation right now.

“You aren’t going after a couple guys who have a small shop and they have no money or resources,” he added. “When you get a big case, you can combine criminal and civil cases — get 10 people jailed, factories and warehouses shut down, then you can consider getting money as well. If [infringers] are sent to prison and made to pay big money, of course there will still be other infringers out there, but at least you send a message: You could be next.”

A modern trend for brands is to take legal action in other jurisdictions, as seen in the Alexander Wang case brought before a U.S. District Court in Manhattan against 45 defendants either offering counterfeit goods for sale or using the Wang brand name in their domains. Though Wang was awarded a $90 million default judgment in August, the real win is more of an education and PR victory than a monetary one.

Alexander Wang
Alexander Wang.
CREDIT: REX Shutterstock.

“These cases won’t necessarily hurt the infringers in China,” Beconcini said. “Because all of the money awarded to a brand can’t be collected, these domain names have no physical entity, but at least it educates the guy who buys that stuff at the other end. Maybe he won’t do it again.”

Although it’s an expensive and complicated business, litigation in China and other jurisdictions seems to be the best deterrent for brands with the resources for these kinds of cases in the fight against trademark infringement and China-manufactured counterfeits. — By Casey Hall

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