China: What In House Managers Should Know When Planning Trademark Enforcement Strategies In China

Last Updated: 6 February 2014
Article by Paolo Beconcini

Brand protection and product liability are two fields of legal practice that most in house counsel and private practitioners would not automatically link together. Brand protection is perceived either as an IP or a corporate security issue, while product liability is often linked to after-sales/warranty or litigation services. The result is that normally in house brand protection teams work in a totally unrelated fashion from the lawyers or after sales managers in charge of product liability within the company.

Although there may be exceptions, the reality is that IP litigation and tort litigation are culturally perceived as different fields of law and have developed specific professional profiles. Such a professional separation of careers is generally acceptable for patent matters and even trademark prosecution work. However, it may not be justifiable anymore when it comes to trademark enforcement and in particular to trademark anti-counterfeiting enforcement. Trademark counterfeits are not only an often aesthetically uglier copy of the genuine branded product diluting brand value, but also a pass off of the original without meeting the quality standards of the latter. The step of going from a substandard counterfeit to a defective and dangerous one is short and the possible human and legal consequences most serious. Preventing dangerous and defective counterfeits to enter the market should be a primary objective of any brand protection strategy.

In fact, ignorance of the product liability dimension of brand protection may result in ineffective trademark enforcement strategies against counterfeits and in higher risk exposure to product liability claims especially for safety-sensitive industrial consumer products such as cars, home appliances, toys and cosmetics just to mention some of them. In practice this results into often misplaced trademark enforcement and field strategies which in turn contribute to create a perception among foreign brands that trademark enforcement in China is futile and that China does not want to enforce IP rights. This perception is in partly based on emotional rather than factual grounds. Blaming only the Chinese legal system for trademark enforcement failures will just prevent the company from identifying and correcting the shortcomings of its brand protection planning deriving from its own internal structures.

The lack of coordination between brand protection and product liability within the company may in fact cause the former to overlook important strategic objectives suggested by the latter, which should instead be considered and elaborated when conceiving and implementing efficient brand protection strategies. An allegation of product defect founded or not, always causes damage to the brand reputation. The loss of brand reputation which may be related to product liability claims may be damaging not only the company finances (i.e. multi-million dollars in product liability verdicts in US), but also undermining the brand reputation for quality and safety with far reaching negative consequences from a commercial and financial point of view. Such defect claims may actually be related to a fake, non-genuine part of an industrial consumer product which came from China. In this context, it seems therefore logic that a brand protection team should create synergies with those in charge of product liability inside the company to understand and coordinate overlapping issues in an efficient manner and to adapt brand protection strategies in order to prevent and reduce as much as possible the related product liability risks.

Practical exemplification of product liability risks related to counterfeits

A fake spark plug with a German or American car brand on it, which was installed at a down-the-road workshop for few bucks, may set the car on fire. Worse than that, it may set it on fire when the car is parked at night in the garage, thus spreading the fire to the building and injuring or killing the people sleeping in that house. The same scenario or variations of the same are thinkable for many other consumer products such as toys, home appliances, household products etc. In this case the manufacturer and seller may face product liability claims for damage compensations, while at the same time the product may be alleged to be defective on press reports or in internet blogs. The press coverage may eventually attract inquiries and even investigations by administrative authorities in charge of product safety. Even if the manufacturer is later able to clear its name by winning the related civil lawsuits or by convincing the administrative authorities to close their investigation, this may still cost him a lot of money and time. Meanwhile, product defect allegations will continue to circulate unchecked among the public through media, attracting further claims from consumers of the same product class or type around the world especially thanks to the internet. It cannot in fact be denied that both brand protection and product liability are phenomena with global reaches. Counterfeit products and part from China are sold and used anywhere later on, and product liability lawsuits may be filed before jurisdictions which are very difficult and extremely consumer friendly (many States in the US, China, Taiwan, Japan etc.) and it is not always true that being able to prove that the part was not original may win a civil lawsuit. Ultimately, a manufacturer must consider the risk that it may not always be possible to prove that indeed a part that caused a product failure and defective performance was actually a counterfeit! All these scenarios present indeed a serious risk for the protection of the brand reputation.

How does all this affect brand protection strategic planning?

If an IP or brand protection manager must decide whether to raid a small underground factory in China in which few hundreds fake spare parts with the company brand were sighted, he may decide not to go for trademark enforcement and a seizure if the quantity and value of the sighted counterfeits are too low compared to the internally set costs/benefit parameters and in light of the allocated budget.

However, if he is told of the product liability risks mentioned above, or if there is an information lifeline with the after-sale or product liability staff in the relevant markets explaining to him that that there have been already a number of fire cases in a certain country due to spare parts which were suspected to be fakes coming from China, and that good will or warranty payments in already high amounts had already been made and that a or more product liability claims may be expected, the brand protection manager may decide to alter his "action" parameters and allow its China brand protection team to raid that small quantity of counterfeits in the small hypothetic factory mentioned above. He may even decide to organize a special action on that specific product in certain regions or worldwide. This would at least prevent or strongly reduce the risks of further unjustified warranty or good will payments and even product liability litigation.

Coordination schemes as a solution

Based on the above companies should consider the possibility of creating a coordination structure to maximize the benefits of cross departmental work and prevent damages to the brand and its reputation which may derive by the combination of counterfeiting and product liability risks in relation to safety-sensitive consumer products. The globalization of the above sketched legal risks reflects automatically in the need for the legal profession to develop new types of brand protection managers with the ability and knowledge to face these emerging new challenges and help companies to prepare their structures and processes to face and win them.

The issue is not of whether this figure should stay in one of the involved departments or even being an outsourced position. The point is that of the company creating or acquiring a professional or a team of professionals experienced in handling both topics, i.e. brand protection/IP and product liability and having this person/team with such a special know-how to coordinate and facilitate the work and the strategy planning of both brand protection and after-sale/product liability teams.

For the cultural reasons related to the subdivision of legal specialties briefly introduced at the beginning of this article, there are nowadays still very few attorneys which can claim both IP and product liability specialization, and even less those who had practically implemented coordination strategies of the kind discussed in this article. To the author it seems important for the legal market to recognize such needs and supply companies with the needed human resources to properly face the above challenges.

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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Paolo Beconcini
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