China tackles problem of counterfeit goods head-on

Safeguarding brands and trade marks in developing markets poses a problem where regulation may be haphazard and counterfeiters rife

A fake Rolex watch or imitation Louis Vuitton handbag are the souvenirs of choice bagged by many tourists and backpackers to bring home from their Eastern travels. But counterfeiting is more than holiday retail therapy – it is big business and has a deep economic impact.

The International Chamber of Commerce predicts the global value of counterfeit and pirated goods could this year reach $1.77 trillion (£1.16 trillion) and put 2.5 million legitimate jobs at risk. While a study from the Office for Harmonisation in the Internal Market (OHIM) shows that in the European Union alone counterfeiting causes lost revenues of more than €26 billion (£19.18 billion), nearly 10 per cent of total sales in the sector, and the loss of up to 363,000 jobs.

Jack Ma, Chairman of Alibaba
Jack Ma, Chairman of Alibaba, has been vocal in the fight against fake goods

China is the biggest hot spot. The OHIM report confirmed it as the source country of over two-thirds of counterfeit goods circulating in the EU. The prevalence of counterfeiting in developing markets poses challenges to companies looking to move into these markets and protect their IP rights.

Improvements are being made

But, says Ben Allgrove, IP partner at global law firm Baker & McKenzie, the situation is improving as rights holders in emerging markets gain an appreciation of the importance of IP protection and enforcement.

China is making increasing attempts to tackle counterfeit goods production. In 2014 its administrative authorities handled 67,500 trade mark infringement cases with a value of 100 million renminbi (£10.3 million), destroyed 1,007 infringing sites and transferred 355 criminal cases to the prosecutors. And the Trademark Office, and Trademark Review and Adjudication Board together decided 2,800 cases against bad faith trade mark filings.

A new trade mark law, which came into force in May 2014, introduced more severe punishments for repeated infringements and raised the amount of statutory damages from 500,000 renminbi (£51,501) to 3 million (£300,000).

China’s increased commitment to tackling the problem was also shown in a landmark test case in 2005 that held landlords and vendors in markets selling counterfeit products jointly liable to pay compensation for losses and enforcement costs.

Earlier this year, Chinese e-commerce giant Alibaba, which is facing legal action over allegations it has turned a blind eye to the sale of fake goods on its websites, ramped up protection for foreign brands.

The growth of the internet and e-commerce has increased the challenge for rights holders to protect and keep control of their brands

While strenuously denying it has allowed the sale of knock-off goods on its sites, it launched an English language version of its online system for reporting IP infringements.

New markets present new challenges

The growth of the internet and e-commerce has increased the challenge for rights holders to protect and keep control of their brands, making a strategic approach crucial.

Luke Minford, chief executive of global IP firm Rouse, advises companies to consider carefully whether they can afford to enter emerging markets and suggests holding off until they have the budget to do so.

Destroyed counterfeit mobile phones in China
Workers destroying counterfeit mobile phone accessories in Shenzhen in 2005 as part of a nationwide campaign to crack down on IP rights infringements

Unlike the UK, most such countries have a civil, rather than a common law, system and IP rights must be registered.

And, Mr Minford cautions, registration should include not just the brand, logo, shape, design and colour, but the name in the local language.

Failure to do this led US coffee chain Starbucks into a two-year legal battle with Chinese firm Xingbake, which infringed its rights, adopting a Chinese name and logo.

Companies have been set up to monitor new and interesting brands, registering them in anticipation that they will seek to enter a new market and then try to sell back the brand to the original rights holder. The going rate, says Mr Minford, is $500,000 (£327,300).

Following registration, a robust monitoring and enforcement regime is required. While the challenge may appear immense, there are choke points where you can act effectively, says Mr Allgrove.

On the lookout

“If you can find the source factory in China producing the knock-off phones or tablets, that is ideal, but this is rare,” he says, suggesting an alternative strategy of “looking at landlords, payment providers, transit companies, online platforms and other intermediaries to see whether they can assist in stemming the flow”.

More prosaically, Mr Allgrove suggests having in place recordals – entries in the OHIM Register – with customs authorities, enabling them to spot and seize suspicious goods in transit. “The real value in this is the intelligence you gain about what is moving and from where to where. That intelligence can then be built into more targeted action,” he says. “It is about staying ahead of the game and deploying resources where they will have the most impact.”

And enforcement mechanisms are surprisingly good and cost effective in markets such as Russia and China, notes Mr Minford. “So be proactive when problems arise. If you are going to invest in emerging markets, be prepared to use enforcement mechanisms,” he says.
“IP enforcement done incorrectly can be a game of whack-a-mole – you hit one infringer and another pops up somewhere else,” says Mr Allgrove. “The reality is that infringers will always be more agile than large multinationals and the law.”

IP laws are national in character and, as David Rose, partner and head of IP at Asia-headquartered King & Wood Mallesons, notes: “It is an unfair battle. Counterfeiters have a global footprint via the internet while rights owners have a fragmented IP landscape. We are not going to see global trade mark or design rights any time soon.”Origin and category of counterfeit goods

Europe-wide patents

However, a Unified Patent Court regime may become a reality in Europe, allowing companies to apply for a patent covering every EU member state and enforce it.

Rebecca Baines, Mr Minford’s partner colleague at Rouse, says: “It is the biggest change in over 40 years and will be a revolution in European patenting.”

It will, she says, have global significance, removing Europe’s competitive disadvantage with other major territories, such as the United States, China and Russia.

Designed to be more cost effective, companies will get coverage across Europe for what it would now cost in only the top four EU countries, Ms Baines adds.

But there is a sting in the tail. Mark Ridgway, IP partner at law firm Allen & Overy, notes: “There will be a risk for companies whose patents are subject to the court. If the decision doesn’t go their way, they will lose rights for the whole of Europe. That is a frightening prospect and many businesses will choose to exercise the opt-out for the time being.”

Doubts remain over the starting date, which is not likely to be before 2017, as well as the procedure, and concerns have been raised over whether the judges can be trained to a sufficiently high standard in time.

But, as Mr Rose points out, the UK referendum on its continued membership of the EU could throw things up in the air as Britain is one of the three mandatory ratifiers of the new process. Its creation, though keenly anticipated, is far from inevitable and a fragmented approach may remain for a while yet.