Counterfeit fighting strategy and experiences of multinational enterprise

2013/08/08,By Frank Liu, IP Manager of Emerson China,[Comprehensive Reports]

China is playing a more and more important role in the world economic chain, and the huge market and relative lower cost attract multinational enterprises to expand their investment in China. Meanwhile, learning to protect brand and strengthen the crackdown on manufacturing and selling counterfeited goods have also become a required course for these enterprises. As Jack Chang, Chairman of the Quality Brands Protection Committee (QBPC) once said, IP protection environment is becoming much better gradually, but, with the development of internet website, the IP issues are becoming more complicated than before. Consequently problems have emerged, it is urgent for us to expand the protection scope and strengthen the protection effectiveness. The author uses the following strategies to approach to the issue.

I. Determine Who Will Find the Counterfeit Products

Sales people have access to all kinds of exhibits, bidding activities, and contacts with customers, distributors and suppliers; therefore, they are most likely to discover information leading to counterfeit products.

Service engineers in the customer service department may encounter some counterfeit products when they offer home maintenance services, and the call center may detect some counterfeit products while dealing with complaints from customers or consumers.

Law enforcement government authorities, mainly the Administration for Industry and Commerce (AIC), the Administration of Quality and Technology Supervision (QTS), Customs and the Public Security Bureau (PSB), may find evidence of infringement during regular inspections or provide evidence of infringement to a company after receiving reports.

The IP Dept (Brand protection Dept) should take the initiative to investigate reports of infringement through monitoring related IP, for example, 1) monitoring trademark/ domains/trade name registration, and investigate so called "freeride" infringement; 2) regularly performing search through Google, Baidu (including ranking auctions and promotion links), B2B/B2C E-business websites for signs of misconduct, 3) conducting regular market investigations with the help of a professional consultant company.

II. The Model and Analysis of the Typical Counterfeit Products Manufacturer

Usually, the diverse and complex cases of manufacturing and selling counterfeit products include trademark infringement, unfair competition and manufacturing, selling fake and inferior commodities, and involve all links of production, marketing, import and export. Typical cases are summarized as follows:

1. Shadow company

A shadow company refers to an infringing company registered with a trademark or a corporate name similar to that of the infringed party. They manufacture and sell counterfeit products in other places. Hong Kong based companies are established through a filing-in-record mechanism.

The convenience, simplicity, the low cost of the registration process and its position adjoining the Mainland makes Hong Kong a preferred choice of location for shadow companies to register. Their features are common: 1) a legitimate company which was incorporated in Hong Kong; 2) a single shareholder/director from Mainland China; 3) No operation in Hong Kong, only a secretarial services company address; 4) no assets in Hong Kong; and 5) the corporate Chinese/English name is the same as or similar to other company’s famous trademark.

While registering a shadow company in Hong Kong, the infringer operates a domestic business entity. Their common acts include:

1) trademark licensing; the operational entity manufactures counterfeit products in the name of shadow company;

2) endorsing OEM manufacturing; the domestic entity is used as a supplier to manufacture fake goods. The infringer may register multiple shadow companies which are related to different companies’ different famous trademarks and claim to be the suppliers to several enterprises at the same time;

3) create a false impression of association; the name of the shadow company may be similar to the legitimate multinational company. Its shadow company then claims to be an owner or partner of the domestic company and pretends to be a multinational group;

4) set up a franchise business; this is usually in the sales process. Through this practice, the domestic business entity is given a false franchise, which includes the rights of wholesale and retail sale of certain products with the shadow company’s authorization printed on products manuals and packaging. Shadow companies tend to be packed into multinational corporations, which may cause confusion among the public. They may also be legally registered overseas, which also interferes with the ability of Chinese law enforcement government authorities to engage in certain types of legal actions, for they lack the jurisdiction to nullify the registration of the shadow companies or alter their names.

Two ways could be used to cope with shadow companies in accordance with the current laws and regulations in Hong Kong. 1) submit complaints to the Hong Kong Companies Registry (HKCR) through administrative procedures; 2) file litigations. The former includes two cases: (i) Demand changes to the shadow company’s naming on grounds of being same or similar. If the complaint is confirmed, the Registrar has the right to ask the shadow company to change its name within 12 months from the date of registration or change the name to its Corporate Registered Number if order is denied. This approach has the advantage of using less processing time, low cost and comparatively higher success rate. The disadvantage lies in that a constant monitoring of shadow company’s registration is needed in order to file the complaint letter in time for the Registrar to make judgment within 12 months. (ii) The Registrar can order the shadow company to alter its name with no time restriction. The Registrar can only do this if he is convinced that the registered name may be misleading in identifying the company’s business and the misleading result endangers the public’s interest. In practice this approach has a lower success rate because it is extremely difficult to meet the legal standard of proving that the shadow company is guilty of “misleading an indication of the nature of its activities as to be likely to cause harm to the public.”

There are two judicial remedies if a company wishes to force a shadow company to be renamed. The first is to prove that the shadow company is guilty of passing off, which takes unfair advantage of and/or trading on the goodwill and reputation of another. The second is to claim trademark infringement, where the infringed trademark should have been registered in Hong Kong.

2. Companies who register another’s trademark (including the company name) as its trade name

According to China’s relevant laws and regulations, any registration conflicts should abide by the principles of prior rights and fair compe t i t i o n . The t radema rk registration and enterprise name registration are respectively administered by the Chinese Trademark Office and local AIC. There is no obligation for each department to censor the priority rights conflicts in conducting registration work, which sometimes results in the conflicts between trademark and trade name.

In practice, the infringer usually borrows other’s trademark without authorization to register as its corporate name and compete with the infringed in the same or related field. The following factors help to identify whether a infringement case takes place:

1) chronological order in registering trademark and corporate name; 2) Whether the trademark or trade name may confuse consumers about the source of a product orservice; 3) which is most commonly recognized by the general public; 4) whether it was a malicious act to register corporate name. In terms of the last one, it is a common practice for the infringer to carry out various marketing promotions, which can often stand as evidence of the infringer’s malicious intent. For example:

1) Improper use of company name: use of a simplified company name and exclude administrative division; highlight or enlarge the type size of corporate name with an aim to confuse customers;

2) To register trademarks/domain name similar to right owner’s and use them in business activities;

3) Website piracy, to copy or usurp website links for a false description or advertising;

4) To plagiarize other’s product model, product appearance, or use similar packaging, decoration etc.

The above-mentioned practices could be viewed as trademark infringement or unfair competition. The infringed party may file a complaint to the AIC or file civil litigation in court to cope with infringement. Generally speaking, the effectiveness and cost-saving of AIC complaint makes the first approach more popular when dealing with those direct and obvious trademark infringement or unfair competition. Considering the complexity of such infringement case and the deficiency of related laws, regulations and its Implementing Rules, as per practical experiences, it is more likely to take action in straightforward and indisputable infringements than it is to address those claims which require exercise of discretion, so the AIC usually takes a cautious approach in handling these conflicts. In addition, AIC decisions are not final in that either party which is not satisfied with an AIC decision can appeal to the relevant People’s Court for court review and adjudication of said AIC decision. It is a common strategy for infringers in the P.R.C. to file such an Appeal to delay the enforcement of an AIC decision.

3. Companies who pretend to be authorized distributors

The infringer pretends to be an authorized distributor of a certain brand in manufacturing, advertising, selling or maintaining, and even forges authorization certificate. In such case, the infringer may also be convicted of seal forgery as well as the regular charges. On the other hand, the infringed should standardize its management over distributors, for instance: 1) use standardized authorization letter or dealership plaque and 2) regularly update the list of authorized distributors for reference in their official website.

4. Companies who fabricat a company and selling counterfeit products on the website

With network development, online sales of fake products is increasing. Typically, the infringer fabricates a company whose name is the same as or similar to other’s and sells counterfeit products on the website in the name of quality goods. This kind of company leaves no valid address on its website. It conducts business by telephone and net, and use logistics corporation for goods delivery. The key to combat the production and sale of fake goods is to find out its business entity. A preliminary investigation can be made by probing into the register’s information, ICP, telephone, fax, email and etc. A contract seal and invoice can be obtained by buying counterfeit products to further the investigation.

III. Countermeasures

Based on the analysis, the author offers the following advices:

1. Enhance the Visibility of the IP Department

As mentioned above, the frontline market, maintaining/repairing department staff have access to counterfeit products, so it is most important to strengthen relative trainings. This equips employees with some basic knowledge about counterfeit products and makes them more capable of reporting infringement issues to the relevant department.

2. Use intellectual property to support business

To be specific, Intellectual Property work involves: 1) timely and comprehensive trademark registration. This is necessary to ensure that the registered trademark of specified products and services covers the actual scope of business and to take appropriate defensive protection registration concerning corporate business and relevant fields; 2) proper domain name registration. The number of registered domain names should be reasonably controlled considering the diversity of domain name and its related derivatives. It is also advisable to combine the solution of malicious domain name registration with the crack-down on counterfeit products, or apply for arbitration; 3) timely application for the protection of exterior designs, which may increase the cost of counterfeiting.

3. Strengthen monitor supervision

To strengthen supervision over trademark registration, timely initiate trademark opposition or dispute procedure and conduct investigation into the applicant’s background. Companies should also monitor registration announcements in Hong Kong regularly and, if necessary, supervise AIC registration information in key areas of Mainland.

4. Regular market sweep

The most effective way to crack down on counterfeiting is to root out its manufacturing source. Fake goods are manufactured clandestinely and labeled in different locations, which makes it very difficult to check and detain counterfeit products which related government authorities have seized. Thus, it is necessary to do regular market sweeps, exert psychological pressure in the infringer and curb the spread of counterfeiting. It deserves to be specially noted that if one company carries out counterfeit fighting work effectively, aggressively and powerfully, the infringers can but turn to other brands for survival. In this sense, regular market sweeps are like rowing upstream. The goal is not necessarily to advance, but to simply avoid falling back.

5. Assist AIC and QTS in tracing and combating fake goods

AIC and QTS are the main administrative bodies responsible for counterfeit-fighting. AIC is in charge of checking and investigating illegal market behaviors, such as marketing adulterated products or counterfeit products, while QTS is responsible for the quality control in manufacturing and distributing processes. Each performs its own functions and cooperates closely. As for the company, it is advisable to timely report to and cooperate with the administrative bodies in order to crack down on counterfeiting activities.

6. File customs recordation appropriately

With the development of economy, the manufacture and sale of counterfeit products have become internationalized. On the one hand, domestic counterfeiters intend to sell products oversea; on the other hand, some oversea companies hire domestic companies to produce brand-specified counterfeit products and export them to designated countries. Thus companies should file intellectual property rights on record with customs and keep in close touch with them to ensure a quick clearance for genuine goods while detaining counterfeit products.

7. Assist government authorities in transferring infringement cases to PAB or report the case directly to PSB to severely punish counterfeiters and increase their infringement costs

In recent years, the manufacture and sale of fakes have tended to become diversified, complicated, and even internationalized in China. However, with the continuing improvement of the performance in executive, legislative and judicial bodies, such as AIC, QTS, Customs, PSB and the court, there is a bright prospect in protecting the interests of right owners. Counterfeit fighting is viewed as a systematic project. It also runs through all links of manufacture, sale, import & export and involves multiple intellectual property rights, including trademark, unfair competition, copyright and patent, etc. It may engage many executive and judicial departments in civil, administrative, and criminal cases. On the part of enterprises, being proficient in using the rules of the game to protect their rights also contributes to creating a favorable environment for intellectual property protection.


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