IPR Protection Considerations on Silk Street Market Case

Issue 29By Doris Li, China IP,[Comprehensive Reports]

Once again, the Silk Street Market has become the center of media speculation because of the temporary shutdown of 29 stalls by managers on February 1, 2009, for selling counterfeit goods. The case has created several disputes. Manufacturers have become distressed over counterfeiting, and the finesse used by employed investigation companies to crackdown on counterfeiting has become the topic of public discussions.

Background

 The history of this concentrated effort began with a settlement agreement signed at the Beijing No.2 Intermediate People’s Court on December 2, 2008, between the Beijing Silk Street Company and IntellecPro, a Beijing firm specializing in intellectual property rights, who represents five foreign luxury-brand manufacturers including: Louis Vuitton, Chanel, Burberry, Gucci and Prada. According to the agreement, with the trademark owners, the market’s managers are required to punish offending vendors by shutting them down for up to a week, or three days should the merchants agree to pay 5,000 Yuan to the right owners.

On February 1, 2009, managers of the Silk Street Market shut down seven suspected stalls for selling counterfeits, based on the agreement and notarized deed provided by IntellecPro. However, the vendors involved, questioned the legitimacy of the deed, and the market’s right to do so. They clashed with law enforcement officials, and took IntellecPro and the Beijing Silk Street Company to court.

Subsequently, on February 8, 15, and 22, the market closed down another 22 stalls, escalating the skirmish between hawkers and law enforcement officials. After the “Silk Street Market Case”, dozens of vendors descended on the IntellecPro office several times and clashed with security guards at the company. The case also received international attention. The New York Times reported that, “Any successful product is likely to be illegally copied in China, warns the Web site of the American Embassy here. China’s government has pledged to crack down, and it faces increasing pressure to show progress.”

Are buyers feeding the counterfeiting industry?

To go deeper into the problems arising from IPR protection, the IP Salon of People’s Daily Online invited several IPR protection pioneers to discuss the status quo of China’s counterfeiting industry, latest changes, developing trends, the role played by investigation companies, and activities in brand right protection, as well as the difficulties and obstacles encountered while cracking down on counterfeiting. 

George Wang, the market’s general manager, explained the external environment and social influences of the case: “Since China’s entry into WTO, the Chinese government strengthens in an unprecedented way the protection over intellectual property. However, fake products never vanish. They are presented in a concealed way. The Chaoyang Branch of the Beijing Administration for Industry and Commerce has a rule that vendors selling one fake Chanel handbag will be fined 50,000 Yuan. This rule has a great intimidating effect on vendors: they dare not place their fake products in the open, but sell them in a stealthy way, or play ‘hide-and-seek’ with law enforcement officials. These vendors bear no cost, low risks, and pay no stall fee. They just need to find a foreigner and sell their fakes. Therefore, we see the result of a strengthened crackdown on fake products is the change of their selling model.  Another point is that, why does this famous Silk Street Market happen to be a neighbor in the embassy area, and not in any other location? Because there are buyers here! Buyers of fake products give birth to sellers of fake products. In my personal point of view, the current situation is an offspring of foreign consumers asking for fake products and some Chinese vendors’ passively infringing of patent rights. In earlier years, they did sales promotion in public with their products placed overtly in front. But now, fake products are hidden, and buyers are invited to seal the transactions away from the street.”

Change of the selling model makes bogus selling more “introverted,” but does not signify its fading or vanishing. Hu Qi, head of IntellecPro, expressed his opinion stating, “About this Silk Street Market Case, we shall not take ‘the end justifies the means’ attitude. What would buyers buy if there were no fake products in the market? They would pay more to buy authentic products, or buy moderately priced homegrown goods, which would stimulate the development of this industry. For example, foreign cigarettes used to be very popular in China, but they are now mostly replaced by homegrown brands. It will be more helpful for fake dealers if we provide them some correct guidance. After all, they have to weigh the risk of fake selling. In 2006, a stall owner was sentenced to prison because of the high number of fake products he was dealing with.”

Mark Cohen, former Senior Intellectual Property Attaché of the U.S. Embassy in China is now a practicing attorney with the international law firm of Jones Day. He is also in opposition to the belief that,” buyers are to blame for the flourishing counterfeiting industry. This is actually an excuse of culture or habit. Many vendors have got used to it. They get used to selling fake products. Unless there are efficient law enforcement systems or effective training, they will keep getting used to it.” 

Interests—the moving hand behind infringement

Jack Chang, Chairman of the QBPC, gave a thumb down to George Wang’s viewpoint that “vendors earned 100 Yuan yesterday for selling fake products, but earned nothing today for not selling, therefore their interests are impaired at the beginning of IP protection”. He analyzed the root cause for fake selling:

“Interest is the root cause for the survival of counterfeit products. Economic incentive leads to the combination of supply and marketing. But once we are aware of how harmful to society counterfeiting or fake selling is, we will be able to change consumers’ minds. Buyer is the mother of seller. From the standpoint of the market’s managers, and high rents for stalls induce vendors into selling counterfeit products to make ends meet. Therefore all these counterfeit deals are rooted in economic benefits.”  

Jack Chang also expressed the opinion that “the wide margin in fake sales and the weak sense of IP protection both facilitated the booming counterfeiting industry in China.” He raised the question: “How to enhance people’s awareness of IP protection? Should the market be responsible for educating or guiding the consumers?”

Hu Qi seems to agree with Jack: “Every vendor at the Silk Street Market must pay dozens of thousands of Yuan in rental fees. If we say vendors maintain a stall by selling fake goods, can we say it is the market that goads them on?”

Hu also pointed out that “Information shows that some sinister gangs have shifted their eyes to the counterfeiting industry. In China, punishment against pornography, gambling, drug abuse and trafficking is very severe. But counterfeiting is another story. The harshest punishment is two years in prison, which, in minds of counterfeiters, is worthwhile compared to the profits yielded by counterfeit dealing.

Counterfeiting is a murky industry; taxes are never paid and the; numbers are not above board. China is a great nation for manufacturing. However now, the export of counterfeit goods impairs China’s goodwill. Our government encourages innovation. Making or selling counterfeit goods is a way of preserving the old conventions. It’s our duty to use weapons in the legal arsenal to crackdown on counterfeit products.

Law is the final end for social justice. Abidance of law is the basic requirement for every citizen. Vendors who receive certain economic benefits from selling counterfeit products while enjoying our sympathy are in no means socially useful, since their doing is a big attack to those legitimate enterprises. Law abidance is the lowest limit for vendors, but they fail to do it. Then do they deserve our sympathy or protection? How can we build a harmonious society by this? We also hope that some local governments can put aside some worries, such as the unemployment problem or the curtailed local economic benefits brought by counterfeiting crackdown.” 

New problems arising from market transition

Selling fakes in the Silk Street Market has already been a standing dish for us. The Beijing Olympic Games in 2008 brought this street greater fame for receiving so many international celebrities. But, the great games did not change the VI of this street: it is still the “home of fake luxury goods”.

“The problems at the Silk Street Market originated mainly in foreign countries”, said Mr. Wang, “and it must look for support from buyers to solve its problems and find a solution suitable for the Chinese market. Buyers should keep up with the transitions of sellers. More buyers come to the market for tea, china, or our homegrown goods, fewer vendors selling fake brand bags or watches. Goods with IPRs and fine traditions of Chinese culture are welcomed in the market. Now, silk, pearls and craftworks take 60% of the market share. That is to say, those products bear no infringement risks. Rome was not built in a day, and neither is IPR protection. And we think IPR protection shall avert two inclinations: pessimism and over-optimism. The Silk Street Market Senior was a den of counterfeit products, but much has changed at the Silk Street Market Junior.”

Jack Chang has personally experienced this change. Mr. Chang was quoted to say: “As far as I know, the Silk Street Market was flooded with fake products. During the Beijing Olympic Games, I saw counterfeit stalls were not as overwhelming as before. Most of them became ‘underground operators’. I saw a vendor selling a fake Ferrari shirt. I asked him where the shirt was produced, and he said Guangzhou. Then I asked why it was tagged ‘Made in the US’, and his response was;’ Am I looking for a shirt or for trouble?’”

Recent years has witnessed efforts by the Chinese government in the crackdown on counterfeiting at the Silk Street Market; however this resulted from national and international pressure. Due to lax supervision, operators of authentic brands still cannot wipe off the effects of a negative mental attitude. Bai Gang, chief partner of the Wan Hui Da Intellectual Property Agency, said that “Law is not stipulated for punishment, but for prevention. For example, in the software industry, people say Microsoft products are expensive. Under a stringent IPR protection atmosphere, people are forced to buy copyrighted software. If they can’t afford it, they will buy products from small businesses or from domestic enterprises. In this way, authentic software costing 300 Yuan or 500 Yuan finds its market, and then this software industry starts developing. But now the situation is that anyone can use pirated software without paying a penny. So how can our own brand develop? Squeezed by foreign enterprises and bearing high production cost, how can we have our private label? I have spotted many infringing or fake manufacturing enterprises. I saw their good equipment and high technology. Some were even managed by Taiwanese or Japanese. When I asked them why not create their own brand instead of imitating others, I was told that, ‘We have to consider risks and costs. If we create a new brand, we must do much advertising work, we must push for market shares. It takes time. Even if our products are successfully put to the market, they are exposed in a counterfeiting atmosphere. If we get counterfeits, we are done for. Who bears this risk for us?’ ”

Mr. Wang: “I totally agree with squeezing the counterfeit dealers. Another important thing is to create our own brand. The Silk Street Market is doing this now. It has introduced 19 of China’s time-honored brands, including tea, china, and other products.” 

Mr. Wang also expressed his concerns: “Due to misinformation by the media, many foreign consumers believe that the Silk Street Market deals only in fake luxury items. Lacoste has also sued the market for trademark violations. Tourist guidebooks from Europe describe the Silk Street Market as ‘one of China’s most popular spots to buy cheap, good-quality imitations’. This kind of writing makes it difficult for Lacoste to maintain its intellectual property rights at the Silk Street Market. A few days ago, I made a request of a journalist from the New York Times to explain that the Silk Street Market is no longer the home of cheap, good-quality imitations. Visitors are welcomed to purchase high quality tea, china, or silk. They can also enjoy creating and making craftworks.” 

(Translated by Hu Xiaoying)

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