China’s Unseen Industry – Protecting Yourself Against Counterfeit Goods
China Law Update 09/11/09 Thomas R. Stiebel, Hillary J. Wucherer
Counterfeiting occurs when a party illegally manufactures and sells goods under another party's trademark or brand name. It is a worldwide issue that has been exacerbated by the increase in global trade. Counterfeit products are estimated to account for up to 7% of global trade and cost legitimate rights holders around the world billions of dollars annually. Counterfeit goods adversely affect trademark holders' brands and revenues, and are potentially dangerous to consumers. As more companies source and sell globally, the impact of counterfeit goods will no longer be limited to multinational companies. Big, medium and small companies need to take action to protect themselves from seeing counterfeit products and replacement parts with their brand names being sold by someone else.
Counterfeiting in China
Differences in cultural attitudes towards counterfeiting and low levels of intellectual property (IP) rights enforcement in certain countries have contributed to the problem, with China being a prime example of such a country. Since joining the World Trade Organization, China has strengthened its IP laws and regulations to comply with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Despite stronger statutory protection, however, counterfeiting levels in China remain high. In its 2009 annual review of the global state of IP rights, the United States Trade Representative warned that counterfeiting in China remains at unacceptably high levels and placed China at the very top of its Priority Watch List. In 2008 alone, U.S. Customs and Border Protection seized Chinese counterfeit and pirated goods worth more than $221.6 million, which accounted for over 80% of the total value of all goods seized. The production, distribution and sale of counterfeit goods is a huge industry in China, and becoming more sophisticated every year. On average, over 20% of all goods on the Chinese market are counterfeit.
New Chinese Supreme Court Guidelines on National IP Strategy Implementation
The Chinese Government has recognized that in order to fully participate in the global market, it must increase the level of IP rights protection offered within its borders. On March 30, 2009, the Chinese Supreme Court issued guidelines for implementing the 2008 China National Intellectual Property Strategy, which calls for China to greatly increase its IP rights protection by 2020. The guidelines state that Chinese law enforcement should increase anti-counterfeiting activities with respect to registered trademarks through an increase in the amount of monetary fines and the frequency with which those fines are imposed. The guidelines also instruct authorities to confiscate illegal profits and to destroy infringing products. While these guidelines are certainly a step in the right direction, there are several practical steps that trademark owners should also take to protect against counterfeiting.
Tips on How to Protect Against Counterfeit Goods Made in China
The problem of counterfeiting in China may seem daunting; however, there are several steps that trademark owners can take to help prevent Chinese counterfeit goods from reaching consumers. The best approach is a two-pronged attack - in China and in other countries where the counterfeit goods may be sold to consumers.
Steps to Take in China
1. Register Trademarks with the China Trademark Office
Trademark owners that manufacture or distribute goods in China should register their trademarks and any applicable transliterations (Chinese language versions of the trademarks) with the China Trademark Office. Trademark registration is extremely important in China because Chinese authorities do not recognize common law trademark rights. In order to begin infringement proceedings or to receive damages in a trademark case, trademark registration must be obtained. Recent amendments to the Implementing Regulations of the Trademark Act allow local branches or subsidiaries of foreign companies to register trademarks directly without use of a Chinese agent.
2. Record Trademarks with Chinese Customs Authorities
Trademark owners should also proactively record their trademarks with the General Administration of Customs (GAC) in China. The GAC will then issue a recordal certificate valid for seven years (and renewable for additional seven-year periods). When trademark owners suspect that counterfeit goods are about to be exported from China, they can prepare a written application to the GAC at the export location where protection is sought. The certificate holder has access to an expedited review process for Customs protection. The GAC has the authority to confiscate and destroy counterfeit goods and to impose fines. Trademark owners should meet with GAC officials personally to help them identify legitimate products, marks and labeling, and typical ways in which counterfeiters misuse them.
3. Take Action to Enforce IP Rights
Most trademark owners use administrative remedies when facing infringement in China, including the sale of counterfeit goods, and file complaints at the local administrative office. A second option is a lawsuit filed with specialized IP panels in the Chinese civil court system. With respect to administrative remedies, determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is governed by a number of government agencies and offices. Additionally, geographical limits or conflicts may arise when one administrative agency of one local administrative office takes a case involving piracy or counterfeiting that also occurs in another region. In an attempt to coordinate local IP enforcement efforts of the various local administrative offices, public security bureaus and other enforcement agencies throughout China, some provinces and municipalities in China have established IPR bureaus or IPR committees to coordinate public awareness campaigns and some enforcement. A local IPR bureau is a good source for companies seeking information on local or regional enforcement mechanisms. Some trademark owners have found success in working with local IPR bureau authorities to conduct raids on facilities that produce or distribute counterfeit versions of their products.
Steps to Take in the Country of Sale - Example: The United States
1. Register Trademarks with the U.S. Patent and Trademark Office
Although U.S. courts recognize common law trademark rights, trademark owners that sell goods in the U.S. should officially register their trademarks with the Patent and Trademark Office. A federal trademark registration is prima facie evidence that the trademark owner has the exclusive right to use the mark in commerce with the associated goods. A registration allows for trademark recordation with U.S. Customs.
2. Record Trademarks with U.S. Customs Authorities
Trademark owners should also record registered trademarks with U.S. Customs and Border Protection (CBP), so CBP officials can better recognize counterfeit goods at their port of entry. Although the CBP enforces both recorded and non-recorded trademarks, enforcement of a recorded trademark will take precedence over those trademarks that have not been recorded. Trademark owners are also encouraged to communicate with and educate CBP officials as to the various industry practices that can help them to distinguish between real and counterfeit goods including: trademark appearance and placement, the presence of valid manufacturing and lot codes, and overall product appearance. Trademark owners should also meet with CPB officials personally to explain to them what the legitimate distribution channels are in the industry, and how counterfeiters abuse the system.
Although not required, trademark owners should alert CBP officials if they have information that counterfeit goods are about to enter the United States. The CBP has the authority to confiscate and dispose of counterfeit goods and to impose fines. Trademark owners should also consider providing a counterfeit product destruction service to ensure appropriate destruction of seized counterfeit products.
Trademark owners may find it useful to work with CBP officials to allow identified counterfeit goods to continue on to the buyer. If CBP officials can then seize the goods from a retail or warehouse location, the buyer is usually very cooperative and will work with its importer to prevent future shipments of counterfeit goods.
3. Take Action to Enforce IP Rights
Trademark owners should consider taking legal action, even on small counterfeiting cases, to build a reputation of aggressive enforcement. Specifically, they should obtain temporary restraining orders and orders of seizure and asset seizures where possible., They should also use the discovery process in U.S. litigation to their best advantage - e.g., to find additional information regarding counterfeiters and rogue suppliers that are part of the defendant's counterfeit goods "supply chain."
Additional Practical Suggestions to Secure the Legitimate Supply Chain
1. Exercise Tighter Control Over Suppliers
Trademark owners are advised to start with exercising control over suppliers of raw materials and component parts, by sourcing exclusively from OEM's, authorized distributors or the first owners of the goods. In addition, they should control and audit the receipt of product components or ingredients to ensure they meet the product specifications.
Oftentimes, a supplier that has been hired to make legitimate goods also makes counterfeit versions of those goods after regular manufacturing hours during an unauthorized "third shift." To prevent this practice, trademark owners should not only rely on long-distance monitoring, but should also perform unscheduled, on-site inspections of supplier component and work-in-process inventory levels. In addition, they should analyze abnormal product failure rates to ensure that diversion of components is not a risk.
Trademark owners can also introduce authentication techniques into their products and packaging to help distinguish authorized products from counterfeit ones. The techniques may include intentional mistakes in the text of labels and/or manuals, intentional packaging flaws, added lines of software code, and/or the use of bar codes, holograms, watermarks or Radio-frequency identification (RFID) technologies. Some trademark owners have also prevented the production of "third shift" counterfeit goods by manufacturing different parts of a product at several different locations, with final assembly taking place at a closely-monitored central facility or a facility in a different country.
Finally, another way to exercise tighter control over suppliers is to include provisions in supplier contracts holding the suppliers "strictly liable" should counterfeit goods be found in the marketplace. In addition, trademark owners can include a liquidated damages clause tied to finding products in a market where the trademark owner is not selling its products - e.g., finding products sold in the Chinese market when the trademark owner is only sourcing from China, not selling there. Lastly, for Chinese suppliers, trademark owners can consider adding the requirement of a public apology in the local newspaper of the city in which the supplier is headquartered, if the supplier itself is found to be selling counterfeit goods.
2. Take Care of Your Trash
Another thing trademark owners can do to maintain a legitimate supply chain is make sure to use secure reclaim bins and storage areas. They should consider requiring that all product rejects, after being recorded, be immediately placed in a secure reclaim bin to avoid diversion of rejects. Trademark owners can also institute policies, both in-house and with suppliers, that require production waste and damaged and unusable products to be destroyed or appropriately disposed of promptly. For product overruns or slightly damaged but usable products, trademark owners may want to select one or two charities for product donation to ensure these goods are not diverted.
3. Create Secure Facilities and Transportation Networks
Diversion of parts from manufacturing facilities by disgruntled employees and theft during transport are two means by which counterfeiters obtain components with which to make counterfeit products. Thus, trademark owners should require that employees and contractors submit paperwork whenever items are brought in or out of facilities, with security personnel validating authorization upon entry or exit. Trademark owners should also periodically perform security vulnerability assessments on all major manufacturing, test and assembly locations.
With respect to transporting the products, components or ingredients, it is advisable to require the use of GPS tracking by freight forwarders and carriers, and to institute shipping policies with suppliers that require the use of seals on all containers and seal numbers on all shipping manifests.
4. Train Your Sales Networks
Not all customers are good ones. Therefore, trademark owners need to train their sales force to assess customers by questioning unusually large orders, the willingness of the customer to pay cash even for very expensive orders, and the purchase of products by a customer that do not fit within the customer's line of business. In agreements with distributors, trademark owners should require compliance with the company's online product distribution policies.
5. Watch Out for Unauthorized Sales - Online and Off
Finally, trademark owners are encouraged to purchase random samples of products from the market, and then test for product authenticity. For some products, extensive testing may not be necessary. However, counterfeiters have become so sophisticated that some companies find it difficult to tell the difference between the company's products and the counterfeits, making testing a requirement. Trademark owners should also monitor broker and product trading websites for any unauthorized offerings, including sites such as eBay and other Internet auction sites in the U.S., China and other countries of strategic interest to the trademark owner. Again, trademark owners should purchase random samples from online sources and test for authenticity.
Chinese counterfeit goods will continue to be a very expensive problem for trademark owners until China can more fully implement broad protection for IP rights. Until that time, trademark owners will need to continue to take all legal and practical steps to prevent those counterfeit goods from reaching consumers.
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If you have any questions about protecting yourself from counterfeit goods, or any other China Law issue, please contact Thomas Stiebel at [email protected] / 312-715-5244, Hillary Wucherer at [email protected] / 414-277-5723.
Reprinted with permission from INTA Bulletin, Vol. 64, No. 16-September 1, 2009, Copyright © 2009 the International Trademark Association.