For months, the Chinese e-commerce giant Alibaba’s subsidiaries have been attacked by a series of setbacks. The “Fraud Gate” exposed by Jack Ma, Alibaba’s president, triggered a storm of resignations among the top executives. Following that, the United States Trade Representative Office (USTR) listed Taobao as the “notorious market” of the year for selling counterfeit and pirated goods. Taobao, on the other hand, had to cope with endless IP lawsuits as reports on its suspected IP torts appeared on media of various kinds.
Time of Troubles
The e-commerce industry called 2010 the “first year of development,” while 2011 has stepped in the “Warring States Era.” Many hidden defects emerged as the Chinese e-commerce industry boosts at a stunning speed.
On February 21, Alibaba B2B Corporation announced 1107 “Chinese suppliers” (0.8% of all service suppliers) were no longer qualified to provide any service as a result of their suspected fraud. As a result, David Wei, CEO of B2B resigned and was replaced by Jonathan Lu, CEO of Taobao. B2B’s COO, Elvis Lee, also resigned.
Jack Ma stated, “After a month’s investigation, we have confirmed that in 2009 a total of 1219 service suppliers (1.1% of all service suppliers) were suspected of fraud. As noted earlier, in 2010 a total of 1107 (0.8% of all service suppliers) were suspected of fraud. The fraudulent suppliers are suspected of joining Alibaba for the sole purpose of swindling foreign customers at the expense of Alibaba’s good credit, which had been built up over 12 years’ painstaking efforts. We also discovered nearly a hundred direct selling employees signed contracts that were clearly fraudulent just to promote sales.” Therefore, Alibaba had to take responsibility for eliminating fraud and maintaining fair exchanges.
Reports indicated that Taobao had much more serious problems with defrauding, fake credits and counterfeit goods which had been exposed by the media many times. In contrast to Alibaba however, the fraud had never been purged from the Taobao site.
On February 28, Taobao was listed as one of the year’s “notorious market” of counterfeit and pirated goods by USTR. The organization deemed that the list aimed at urging the responsible authorities to intensify efforts to combat piracy and counterfeiting in these and similar markets. “While recognizing that Taobao is making significant efforts to address the availability of infringing goods through its website, it still has a long way to go in order to resolve those problems.”
Unlike other media, which is focusing on the formation of the crisis, the transmission of the business model, the backgrounds of top-level fluctuations, or even the PR tactics use in response to the crisis, we see through the crisis and pay close attention to the IP problems and the corresponding solutions of e-commerce.
Common Types of Torts
The insiders of the industry widely perceive that torts like counterfeit goods have seriously stunted the development of e-commerce. According to the White Paper – 2010 Crack down on Counterfeit Goods and Rights Protections of Taobao, the most common IP torts fall under the following categories:
1. “Using other’s trademark or title”: Applying trademarks and titles of other stores to seller’s own user’s name or store title without authorization, and trading goods of similar kinds.
2. “Pirating Literary Works and Photos”: Applying original literary works, photos (including commercial pictures) or videos of others’ in the seller’s store or to product introductions (including second editions) without authorization.
3. “Pirated Goods”: Selling pirated books, magazines, video products, computer software, e-publications, typically the process plates of books, software cracks, hard disk editions of audio and video products.
4. “Plagiarizing logos of others”: Using logos of others in the seller’s own stores or product introductions without authorization.
5. “Counterfeit articles”: Selling phony products under the trademark of genuine ones.
6. “Patent Infringement”: The unlawful act of exploiting an effective patent in commercial purpose without the authorization of the patentee. Patent infringement opinions lie in whether products per se (including technical features and functions) fall within the scope of protection of the patent.
To be objective, it may be unfair to accuse Taobao as the “notorious hub for infringing activities” and the like. The over f low of counterfeit goods is a societal problem. As the previous exhibition businesses are always getting into scrapes over IP issues, e-malls are never the place to produce counterfeits, but to discover them. As Jack Ma once said, Taobao serves only as a platform not a manufacturing plant, yet consumers will immediately blame Taobao when they discover they have purchased counterfeit articles. Seen from this perspective, Taobao is the biggest victim of counterfeits.
From “100 million Yuan Crack down on Counterfeits” to “the Entire People’s Crack down on Counterfeits,” Taobao has been making remarkable efforts on IP protections, though the recent string of negative reports have virtually ruined everything Taobao has done.
At the beginning of this year, Taobao declared that it had been sparing no efforts in combating the availability of infringing goods and protecting intellectual property rights as the largest domestic online shopping platform. In 2010, Taobao disposed of a total of 140 million infringing articles and punished 590,000 many violators, to various degrees. For now, Taobao has set up an IP rights mechanism with the whole process of infringing complaints acceptance, confirmation and feedbacks, elimination and punishment. An IP rights owner only needs to provide a link to the infringing goods, provide reasons and evidences supporting the claim of counterfeiting, and Taobao will eliminate the infringing goods after confirming the allegations and features and doing regular spot checks.
Since last year’s implementation of the “Drawing Sword” special actions targeting IP infringements and the production and selling of counterfeit and shoddy products, nine ministries and commissions jointly issued a notice and launched actions to combat IP infringements and the counterfeits production and sale through online shopping.
Taobao responded positively on these administrative measures. On February 28, Taobao held a “2011 Online Press of Rights Protection for the Entire People,” calling for more participation in every section of the counterfeits crackdown. Taobao also showed its willingness to carry out more cooperation with the nine ministries and commissions, as well as the various brands, to make the commodity management more ordered and humanized, so that consumers could shop with ease and security. According to Zhang Yong, CFO of Taobao, consensus has been made through respective communication with the nine ministries and commissions that more support will be given to the online trade for its further development and cooperative measures are about to emerge to turn the fight against IP infringements, counterfeits and shoddy goods into a routine. In 2011, Taobao will also cooperate with the State Intellectual Property Office (SIPO) to further research on the characteristics of online IP infringements and effective measures against them.
Zhang Yong further explained, Taobao will continue its active cooperation with the Ministry of Commerce to launch the following projects to support domestic trade and stimulate the domestic demand. First is to further boost the online consumption by setting up such object projects as “Unique China,” as well as helping local e-commerce businesses develop online sales of products with local characteristics. Second is assisting the quality inspection authorities, in alliance with original design manufacturers, building an online authenticating platform with clearly visible links on the webpage to encourage consumers to report on fake and shoddy goods, and create information interaction and ganged mechanism with industry and commerce departments and the Consumers’ Association. Third comes the creation of foolproof monitoring measures on books, audio-video and other special products. Fourth is to assist the Ministry of Public Security and the Ministry of Industry and Information Technology to upgrade the crackdown on online publishing scams. Information of businesses selling fake and shoddy goods will be regularly submitted to the State Administration for Industry and Commerce and the Economic Crime Investigation Department of Ministry of Public Security and will be submitted down to the responsible municipal authorities for specific investigations and dispositions.
Taobao’s approach has reportedly been approved by relative administrative sections, including the Ministry of Commerce, SIPO, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, The State Council Information Office, and General Administration of Quality Supervision, Inspection and Quarantine. Intensified cooperation between Taobao and these institutions can be expected in 2011.
Concerns from the Policy Level
According to statistics, e-commerce was regarded as the most competitive and the most prospective development among China’s top ten Internet applied services during the “12th FYP.” The significance and the serious problems of e-commerce have already aroused the national government’s attention.
Premier Wen Jiabao, when delivering the Report on the Work of the Government in the Fourth Session of the 11th National People's Congress, said that the government will continue expanding domestic demand especially the consumer demand in a variety of ways, including: developing new services such as e-commerce, online shopping and the Geographic Information System; energetically overhauling and standardizing the market, and earnestly protect consumers’ rights and interests; and intensifying efforts to crack down on violations of intellectual property rights and the manufacture and sale of counterfeit or substandard goods.
The growing popularity of e-commerce and online shopping, as well as the risks generated by fraudulent goods has aroused the attention of the representatives and committee members of Chinese two sessions (NPC & CPPCC). As a respective expert on Internet payment, He Qiang, committee member of the CPPCC and director of the Institute of Securities and Futures of the Central University of Finance and Economics, expressed his views on the online payment in a interview, that it is not only the responsibility of the enterprises, but also of the public security departments to keep watching and reducing the possible risks. The public security departments must strengthen their intervention and give more support on the issue. During last year two sessions, Mr. He introduced a Proposal on the Standardization and Development of Electronic Payment which aroused broad attention.
The CPPCC national committee, Zhigong Party central committee member, China's electronic information industry development research institute vice President this year Xu Xiaolan submitted a proposal, including four "about further guide and promote electronic commerce development, leading to social employment, promote the development of rural economy proposal" the most concern. Xu Xiaolan think, vigorously develop productive service industry is "1025" planning the key work, so have special department in the process of development for its problems, establish the development of e-commerce strategic planning.
Ministry of commerce minister Chen Deming attended this year in CPPCC press conference and answered questions, now network shopping has said trillion Yuan, more than e-commerce transactions have more than four trillion Yuan, and network shopping also almost 100% a year growth is expected in the next few years, will be so, so this is a very important fields. This area is of special importance in cultivating and at the same time strengthens supervision of C2C transactions, we require payment by a third party. But in B2B trading, because of simply trust each other, appeared some financial, are paid on case, we will resolve to study these questions, ensure do better.
(Translated by Athena Hou)