China: Enforcement Of IP Rights In China – A Primer

The impact of fakes on global trade cannot be underestimated. Statistics from the OECD and the EU's Intellectual Property Office estimate that worldwide, trade in infringing and counterfeit goods accounts for a staggering 3.3% of global trade, up from 2.5% in 2013.¹ The vast majority of those fakes originate in the People's Republic of China (PRC), which is responsible for perhaps as many as 80% of the world's counterfeits.² Indeed, counterfeits and infringing products manufactured in China have long been a thorn in the side of companies around the world. In spite of incremental changes to the PRC's IP laws and practices to address fakes, as well as the continuing global outcry over the problem (such as the recent PRC/US "Trade War," based heavily on complaints about China's failure to address flaws in its IP enforcement system), the flow of Chinese manufactured counterfeits continues unabated.

Counterfeiting has kept pace with the times, too, with pirates having moved forcefully into the world of e-commerce. Millions of PRC sellers operate virtual businesses via online marketplaces like Alibaba, Taobao, JD, and via social media apps like WeChat. The massive shift of counterfeiting from brick-and-mortar stores to virtual marketplaces has forced rights owners to modify their IP enforcement strategies to keep pace with the counterfeiters. This is not always an easy job with the sheer number of potential counterfeiters offering their wares.

The sheer scale of the PRC counterfeiting problem requires IP rights owners to very much plan ahead, crafting pragmatic enforcement strategies to achieve realistic - and affordable - goals. Here, we provide a primer for IP rights owners as they work to create such a strategy, taking into account the very specific nature of China's market (especially the prevalence of online counterfeiting) and its IP enforcement system.

1. Know your - and your enemy's - IP

As a first step, a thorough review of any and all IP rights owned by your or your client's company should be undertaken. This review will ideally be informed by the actual situation on the ground in China, easily accomplished via a survey of key online marketplaces. Any gaps in filings, particularly gaps being actively exploited by pirates, should be filled as quickly as possible.

It is equally important to run searches on key government IP databases in China to identify any pirate applications or registrations held by trade mark squatters and/or counterfeiters. Actions to oppose, cancel or invalidate such applications/registrations may well be necessary to remove those obstacles.

1. Trade marks

Trade mark registrations are fundamental for enforcement actions related to counterfeiting or trade mark infringement, as unregistered trade marks are generally not enforceable in the PRC (save for the case of unregistered trade marks that can be shown to be "well-known" in China - a hurdle few if any brands can practically ever clear). In response to any complaint against trade mark infringements, government authorities, online platforms and landlords will demand to see PRC trade mark registration certificates before they will consider those complaints.³

The key point to keep in mind in China, where trade mark piracy is rampant, is that the PRC is a "first-to-file" jurisdiction for trade marks, with trade mark registrations generally granted to whomever filed the earliest application for a given mark with the Trademark Office ("TMO") of the China National Intellectual Property Administration ("CNIPA"). Later-filed applications for the same or similar mark covering identical or similar goods will most likely be rejected.

China's first-to-file system has created real incentives for pirates to file trade mark applications for third-party brands. A given mark may be pirated to provide cover to a counterfeiter that is actively making knockoffs of that brand. Others enterprising pirates may file for trade marks covering accessories for the real brand owner's products. Pirated applications could also simply be filed by trade mark squatters hoping for a big payday when the real rights owner realises their mark has been stolen.

Finally, particularly enterprising pirates may use their stolen trade marks to threaten or even take action against the real brand owner's operations in China. This includes both products being sold in China by the brand owner or its distributors, and products being manufactured solely for export from China - where the pirate can record the registered trade mark with China Customs, asking them to seize any products bearing the mark.

Pirated trade marks can be attacked via invalidations (where the mark has matured to registration), oppositions (where the mark has been preliminarily approved for registration but is still within the three-month opposition period)⁴ or cancellations (where the mark has been registered - but not used - for at least three years). Success in these actions is uncertain, however, and can be expensive and time consuming, often taking years and multiple rounds of appeals (including costly court appeals) to reach a conclusion. During the pendency of those actions, it will likely be impossible to halt the pirate's infringement, and the real brand owner's own PRC business operations could be severely disrupted, with sales of genuine products potentially resulting in civil, administrative or even criminal penalties.

Given all that, it is strongly suggested that brand owners file Chinese trade mark applications for their house marks in China as early - and where budget permits - as broadly as possible. Regular surveys of the PRC TMO's trade mark registry to identify new pirate filings (and the pirates behind them) as soon as possible are also recommended.

2. Patent rights

Under the PRC Patent Law, there are three "species" of patents, including design patents, utility models, and invention patents. Only patents registered in the PRC can be enforced in the PRC. Given that, and when filing applications for new designs or inventions in key jurisdictions for sales like Australia, New Zealand, the EU and the United States, strong consideration should also be given to filing corresponding applications in China (including under the Patent Cooperation Treaty, to which China is a signatory), where the original goods may well be manufactured - and where infringing ones definitely will be.

Somewhat frustratingly, design and utility model applications filed in China do not initially undergo any substantive examination and will be deemed registered so long as they meet relevant formality requirements. This means that, technically, any design at all can be registered in the PRC. As a result, it is not uncommon for pirates to file design or utility model applications for other companies' hot products. These registrations can be used by a pirate to either or both cover their infringing activity or to put their potential customers' minds at ease if they fear infringement claims. Positively, in order to enforce such rights, administrative authorities or the civil courts will usually require complainants to submit positive evaluation reports issued by the CNIPA to prove that the design and utility model patents meet the requirements under the Patent Law, in particular, novelty requirements. This usually limits the ability of pirates to use their bogus design and utility models as much more than a flimsy shield.

For protecting new inventions, it should be kept in mind that it may be several years before an invention patent passes through full substantive examination and is finally granted. While the invention patent is pending approval, it will not be able to be enforced. For innovative products with a potentially limited shelf life, such as new toys or games, this means the product may have faded from popularity several years before the invention patent is even granted. Given that, a good tactic is to file a simultaneous application for a utility model patent covering more limited claims than those in the corresponding invention patent. The utility model will be immediately enforceable and can simply be withdrawn if/when the invention patent finally issues (to avoid violating rules against double patenting).

3. Copyright

As with all Berne Convention jurisdictions, copyrights are protected automatically in China, with rights springing into force immediately upon their creation. China has a voluntary copyright recordal system (similar to the U.S.), although recordal is not required to enforce copyright, where rights can also be proven through extrinsic evidence such as declarations, drafts of the work, commissioning contracts, etc. That being said, there are real benefits to having your copyright registered locally. For example, the Copyright Protection Centre of China ("CPCC") does not require legalized/notarized materials in support of applications for recordal, as a court would, and conducts little if any substantive examination of the materials put forward in support of recordal. As well, the copyright recordal certificate once issued, is written in Chinese and serves as prima facie evidence of subsistence and ownership in support of online takedowns, cease and desist letters ("C&D letters"), administrative or criminal complaints, and civil suits.

In addition, copyright registrations can often be used to bridge gaps in registered trade mark and design patent rights. For example, proof of copyright ownership in logos and/or heavily stylized trade marks can be useful in overcoming a pirate's application for trade marks encompassing those artistic works. Similarly, copyright can be used as an enforcement tool where the pirate is reproducing those trade marks/artistic works on products.

Similar, and in relation to unregistered designs, the category of works referred to as "works of applied art" can often be used to protect the designs of products such as toys, electronics products and furniture. To qualify for protection, such works should generally possess the following characteristics:

• Originality;
• Reproducibility;
• Higher aesthetic meaning/characteristics;
• Functionality - but a functionality separable from (independent of) the aesthetic characteristics.

The functional feature(s) need to be either physically or conceptually independent from the aesthetic features, with that aesthetic design able to exist on its own as an artistic design, with its own originality.

We note that it is not unusual for PRC infringers to file their own bogus copyright recordal applications to defend themselves against enforcement actions. There is a process to apply for such recordals to be cancelled via copyright registration centres, but it is a complicated and cumbersome one, and is rarely utilized.

2. China IP enforcement - the basics

The following section outlines the most common actions to enforce IP in the PRC.

1. Cease & Desist "C&D" letters

C&D letters are the cheapest and fastest means of demanding that counterfeiters or infringers halt their infringing activity lest they be subject to more serious actions. Practically speaking, however, and particularly where the rights owner is not actually willing to follow through on the threats contained within the C&D letter, such letters do not accomplish much. Indeed, there is every likelihood that the infringer will ignore the letter entirely, or perhaps will only make a few minor concessions, pulling a few online ads. Delivering a C&D letter in person is often a more effective means of putting some muscle into the letter's threats and can often open up broader negotiations than would be possible over the phone or via email.

2. Online take-downs

The most effective means of dealing with online listings promoting counterfeit or infringing products is via takedown requests filed with the platform. If such requests are filed aggressively and regularly, online visibility of fakes can be driven down to manageable levels. As well, multiple takedowns against sellers (particularly small sellers that may not warrant broader, more expensive actions) over the course of several months can be very effective, perhaps even resulting in the seller losing the store entirely when it is eventually viewed by the platform to be a repeat offender.

The largest platforms, such as Alibaba, Taobao, and JD, have set up their own online portal that IP owners can use to record their rights (again, usually PRC registered rights, save for those platforms facing outside China) and then file electronic takedown requests against infringing listings. Upon receipt of complaints, the platforms will decide whether any given complaint has merit under its own internal policies.

Companies just starting online enforcement programs will likely score a number of easy wins at first, where up till that point, infringers had been free to make use of whatever IP they wanted with impunity. Once those initial victories are in hand, however, the infringer will most likely modify their listings to limit vulnerabilities to future takedown actions. This includes removal of copyright-infringing content (such as official photos, videos, or ad copy), or logos, and halting use of the companies' full trade marks to refer to the infringing products (perhaps using deliberate misspellings or abbreviations of the mark). As most platforms refuse to remove listings for fakes purely due to claims that "it must be fake, the price is suspiciously low", a coordinated series of trap purchases may need to be undertaken to prove conclusively that the goods on sale are themselves counterfeit or infringing.

3. Administrative raids and criminal raids

The Market Supervision Bureaux ("MSBs," formerly known as Administrations for Industry and Commerce) are responsible for market administration and have the power to investigate potential IP infringements (either on their own initiative or in response to a rights owner's complaint). In order to address such infringements, they may conduct raids against infringing operations, seize infringing products and tools used to make them, order cessation of infringing activity, and/or impose financial penalties (which are paid to the MSB, not to the impacted brand owners).

If the value of the counterfeits traded by the infringer reaches relevant thresholds, the rights owner may request the Public Security Bureau ("PSB") to take over the case and conduct a criminal investigation against the infringers. Ideally, those investigations lead to the case being referred to the Procuratorate for criminal trial and an eventual judgment. Most brand owners agree that criminal punishment in China has the great deterrent impact, even if a large number of convictions for IP crimes results in, at best, suspended sentences and fines (that again, are not paid to the infringed party, but instead to the convicting court).

In either case, it should be kept in mind that final administrative and criminal punishment decisions can form an independent basis for a civil suit seeking, amongst other things, compensation, where the punishment decision makes proof of the infringer's wrongdoing (in particular, the amount of sales of infringing product) essentially a foregone conclusion.

4. Civil lawsuits

Victimised rights holders may also bring civil lawsuits seeking redress for the infringement of their rights. That redress usually includes requests for permanent injunctions and damages awards. Damages awards are generally based on either the rights holder's actual losses, the infringer's illegal gains, a reasonable royalty rate, or if any those are hard to prove, via statutory damages provisions.

Preliminary injunctions are contemplated under PRC IP laws, but in practice, they are almost never granted. Of more interest as potential enforcement tools are requests for orders to preserve either assets or evidence of infringement. Asset preservation tools in particular can be incredibly beneficial, both as a means of ensuring any eventual damages awards are actually paid, as well as to force the infringer to the table to negotiate a resolution early in the piece. Nothing focuses an infringer's mind like having their bank account locked.

3. Crafting an effective IP enforcement strategy

As noted above, an effective IP enforcement in China needs to be pragmatic. Intellectual property budgets are never bottomless (and may be nearly non-existent for SMEs), and the number of infringements to be addressed with that limited budget may be staggering. Given that, it is vital to develop a proactive strategy designed to quickly identify and triage the existing problems, taking hard, direct (and more costly) actions against key targets, and "softer" (less costly) actions against minor targets, using the fact of the hard direct actions to "put the scare" into all targets, ensuring that your enforcement efforts have a broader, market-wide impact, and giving you the most bang possible for your buck.

Manufacturers always remain "priority targets," where halting manufacture cuts off the head of the snake, depriving its "body" - all those downstream sellers - access to those fakes. Identifying and taking strong, direct action against such infringers (including via criminal raids, if possible) is nearly always worth the investment.

As for major distributors, administrative raids via MSBs may be enough to shut down the infringing activities and deter them into compliance. That being said, for larger scale sellers, particularly ones supplying their own network of downstream sellers, stronger (and yes, more expensive) actions may well be justified.

For small-scale resellers, C&D letters (noting the other enforcement actions being taken by the brand owner, of course) and online takedowns may be enough.

When setting out to craft an IP enforcement program, the following initial steps can be considered.

1. Survey / review of data to identify priority products and targets for further investigations

A broad initial online survey can be used to prioritize targets based on a variety of factors, in particular scale and scope of infringement, notoriety of target, its total sales, its production/sales capacity, and its likely response to the right holders' demands (e.g., is it an "easy" target that will comply with a gentle nudge, or a hard-core infringer that will refuse to give up its trade in your products absent real risk to it?).

Surveys can often quickly and accurately identify likely manufacturers or major distributors of a target product, better arming the investigators for their pretext approaches, helping to shape the case for action by ensuring actionable evidence is quickly obtained against any involved targets.

2. Sample purchases / evidence preservation / onsite investigations

Generally speaking, in order for evidence to be admissible in PRC courts, it must be collected in the presence of Chinese Notaries Public. The additional complexity and cost associated with collecting notarized evidence usually makes initial non-notarised sample purchases (ideally, online) worthwhile to conduct an initial infringement analysis, confirm addresses, phone numbers, email addresses, etc., identified in the purchase, and identify other parties that may be involved (manufacturers, distributors, landlords, etc.) before investing significant resources in a given case.

Once the precise nature of the infringement and all relevant targets have been identified, notarized downloads of infringing contents, notarized online purchases and/or notarized face-to-face, onsite purchases can be conducted. During the process of collecting onsite evidence, investigators can also scan the premises for the presence of fakes, potentially setting up follow-on administrative or criminal raid actions. Importantly, and in cases where raids go pear-shaped for some reason (such as corruption in the form of a tip-off to the pirate by authorities, local protectionism, etc.), having that notarized evidence in hand before the raid will still permit a civil action to be brought against the pirate.

3. Determination of which enforcement to take against which target

Once all facts relating to the infringement have been confirmed and all targets identified, and, if relevant, notarized downloads and purchases have been completed, stocks of infringing products (if any) located, and bank accounts identified, a decision can be made how to proceed against any given target. Online takedowns, C&D letters (perhaps served in person), raid actions, and/or civil suits are all possible courses of action. Which of them should be taken is best decided pragmatically, by reference to at least (a) what is hoped to be achieved; (b) what is likely to be achieved; and (c) how much it is likely to cost to achieve it - and to manage all of the other cases you wish to or need to run over the course of the year.

If budgets are limited (and they usually are), then those targets that are manufacturing counterfeits - products which unsuspecting consumers may believe are actually your products - should always be prioritized. This is because success against these targets down can potentially have a direct impact on your bottom line by clearing the market for consumers to buy your genuine products, an easy justification for litigation spend.

Footnotes