China: IP reshapes e-commerce strategies

Last Updated: 18 January 2012
Article by Xianjie Ding and Di Yao King

New developments in e-commerce regulation bring the issue of intellectual property infringement and the liability of e-commerce operators to light. A landmark case in China removed the defence of the "Safe Harbor Principle" for the first time, and should serve as an admonition to online platforms

The rise of e-commerce in China

In 2011, the e-commerce business in China underwent major changes. After significant amounts of private equity (PE) investments and many successful initial public offerings (IPOs) on the New York Stock Exchange (NYSE) or NASDAQ, e-commerce operators have increased resources to develop their business strategies. They are no long playing a neutral role by providing a merely technical and automatic processing of the data (for example, merely providing space for a blog, etc.) but marketing aggressively as a real internet value-added service provider (for example, providing services in building up or optimising a member's own website, etc.). This change in role will lead to great legal challenges in the future in the area of trade mark infringements committed on an e-commerce operator's platform. This article will introduce two high-profile online trade mark infringement cases in both the EU and China, and offer an analysis of the implications on the development of e-commerce.

L'Oreal v. eBay: Active role, no exemption

In 1998, the Digital Millennium Copyright Act (DMCA) in the US created a safe harbor for e-commerce operators against copyright liability so long as they adhered to and qualified for certain prescribed safe harbor guidelines, and promptly blocked access to allegedly infringing material (or removed such material from their systems) if they received a notification claiming infringement from a copyright holder or the copyright holder's agent (generally known as the "Safe Harbor Principle"). On May 22 2001, the EU passed the Copyright Directive (EUCD), which addresses some of the same issues as the DMCA. Recently, a long awaited decision by the Court of Justice of the EU (CJEU) made it clear that the Safe Harbor Principle does not apply to all e-commerce scenarios and it is tightening e-commerce operators' liability of IP infringement committed on their platforms.

One of the principal areas of the L'Oreal v. eBay case concerned the liability of e-commerce operators for infringements committed on their platforms. The court found that e-commerce operators may be responsible for trade mark infringement carried out by users on their platform if they play an "active role" in facilitating the infringing activities.

Specifically, the court noted that the general exemption of secondary liability only applies to service providers that have acted neutrally by providing a merely technical and automatic processing of the data. However, where the service provider has played an active role such as giving it knowledge of, or control over, those data, or providing assistance intended to optimise or promote certain offers for sale, it would not be subject to the general exemption.

Moreso, even if the e-commerce operator plays a neutral role, it would not be exempt from liability if:

  1. it has actual knowledge of illegal activity;
  2. it is aware of facts or circumstances from which the illegal activity or information is apparent; and
  3. having obtained such knowledge or awareness, fails to act expeditiously to remove or disable access to this information.

In conclusion, the CJEU made it clear that e-commerce operators should be responsible for trade mark infringement carried out by users on their platforms if they played an "active role" in facilitating the infringing conduct or if it had actual knowledge or awareness of illegal activities.

Preceding the L'Oreal v. eBay case, the Gucci America v. Frontline Processing case is still under trial before the United States District Court Southern District of New York on whether a credit card processing company shall assume contributory trade mark infringement because it brings services to the public for a website trading counterfeiting goods, which it should have known about.

PRC practice: A tougher government and IP regime for online IP infringement

Clarity from new rules

On April 21 2011, the Ministry of Commerce, the Ministry of Industry and Information Technology, the Ministry of Public Security, the People's Bank of China, the General Administration of Customs, the State Administration for Industry and Commerce, the General Administration of Quality Supervision, Inspection and Quarantine, the General Administration of Press and Publication (National Copyright Administration), and the State Intellectual Property Office jointly released the Circular of Further Pushing Forward the Crackdown on Intellectual Property Right Infringement and Manufacturing and Sale of Passing-offs and Inferior Products in the Online Shopping Sector (关于进一步推进网络购物领域打击侵犯知识产权和制售假冒伪劣商品行动的通知) (Circular).

The Circular not only requests serious investigations from government departments but also clarifies the responsibilities of online shopping platforms for the first time. According to the Circular, the major actions e-commerce operators are required to do are:

  1. tighten the market access of business operators and commodities to be traded;
  2. establish the trademark and patent inquiry system;
  3. adopt technical means to screen information on IP rights infringement, and manufacturing and sale of knock-offs and inferior products;
  4. improve information publication, identification, trading, payment making, logistics, after-sale service, dispute resolution, advance compensation, process monitoring and other assurance mechanisms;
  5. establish a daily 24-hour online inspection system;
  6. investigate and eliminate hidden dangers in time;
  7. handle violations of regulations and laws; and
  8. report the symptoms, trends and dangers of serious problems in a timely manner.

E-land v. Taobao: Taobao can no longer rely on the Safe Harbor Principle

In China, the "Notice-removal principle" stipulated in Article 23 of the Regulations on the Protection of Rights to Information Network Communication (信息网络传播权保护条例) creates a similar safe harbor for e-commerce operators in China, which is often quoted by many e-commerce operators to escape from trade mark infringements committed on their platforms. However, the E-land v. Taobao case cuts through the principle for the first time as the court found that Taobao was apparently aware of the counterfeiting information and was reluctant to stop the illegal activities.

The E-land v. Taobao case is the Chinese version of the L'Oreal v. eBay dispute. The No. 1 Shanghai Intermediate Court followed a brand-owner friendly approach by ruling that Taobao was responsible for trade mark infringement carried on by an individual on the platform.

The most controversial issue of the case was whether Taobao was still assumed to be jointly liable for trade mark infringement activities that were conducted again after Taobao had forbid it. The court found that although Taobao had deleted the infringing information, it would still be held responsible for taking further necessary actions to stop the infringement if the individual continued to sell counterfeit goods on Apparently, Taobao was aware of the illegal activities and instead of stopping them, it turned a blind eye. Thus, Taobao constituted joint liability for trade mark infringement.

Implications for e-commerce

For almost every e-commerce operator today, its e-commerce business is no longer a neutral vehicle engaged solely in the technical processing of data. Every operator takes initiatives to build up their relations with users, exerting control over the user's data, either public or private, and providing assistance in promoting users' sales. Providing these value-added services is definitely the future of the e-commerce business model in this fiercely competitive market. Unfortunately, this business model will also lead to high legal risks if the operators do not figure out clearly how to deal with possible IP infringers on their platforms.

E-commerce operators are advised to:

  1. Be ready for responsibility: Be prepared to take on more responsibilities when it comes to the IP protection of brand owners. This is particularly pertinent where e-commerce providers are actively involved in the services it offers to its users.
  2. Conduct a self-investigation and analysis: Conducting an investigation on your own business model and analyse whether you have played an active role in promoting services that have a high risk for IP infringement.
  3. Establish a supervision system: Set strict market access for users who are your potential "active role" service acceptors.
  4. Collaborate with brand owners: Collaborate with brand owners to jointly survey for IP infringement activity and share this cost.
  5. Prepare for court hearings: E-commerce operators should prepare themselves to assume more liability, including injunctions imposed against them. They should also take steps to restrict future infringement activities and be well-prepared for future litigation.
  6. Employ public relations: Avoid being misjudged as a counterfeiting platform by engaging in appropriate public relations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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