China: Counterfeit Alcohol – Coming Soon To A Glass Near You?

Last Updated: 4 March 2015
Article by Paolo Beconcini and Robert Binion

Counterfeit production is a thriving industry in the People's Republic of China (PRC); imitators profit from a wide variety of products ranging from fake consumer goods, to industrial products, to wine and spirits. Indeed, with the increasing popularity of alcohol among the growing Chinese middle class and a strong global market in general, counterfeiters are turning to wine and spirits as a new profit source1. Counterfeit alcoholic beverages negatively impact legitimate industry participants in two ways. First, counterfeiters reduce the sales and market share of legitimate producers and dilute brand strength. This negative impact is currently spreading from luxury brands to mid-level brands; it poses a significant problem for industry participants importing alcoholic beverages to the thirsty Chinese market. Second, counterfeit wines carry an increased risk of adulteration and injury. This impact may further dilute and damage the legitimate brand and its reputation.

Some alcohol beverage industry producers have adopted technological solutions enabling bottle authentication (e.g., DNA detectors, special seals and graphic-based solutions) to respond to counterfeiting. However, once technological solutions are adopted, the counterfeiters' technological sophistication quickly rises to meet and circumnavigate such preventive measures. As a more effective solution, alcohol industry brands must be proactive by taking steps to stop counterfeits at their source - in China.

Counterfeit wines from China

Recent crackdowns on counterfeiting rings demonstrate the scale of risk counterfeiting poses to legitimate alcohol producers. In response to pressure from European Union (EU) authorities, Chinese police and product quality monitoring agencies, such as the Administration for Quality Supervision Inspection and Quarantine (AQSIQ), launched a series of operations that revealed the existence of large-scale wine counterfeiting rings2. In 2012, after complaints from consumers, police in Shanghai discovered and raided a wine counterfeiting operation seizing over 4,000 bottles of counterfeit wine in the raid3. In 2013, officials in Yantai uncovered another wine counterfeiting operation and seized thousands of bottles of cheap Chinese wine with fake foreign labels4. The problem is so serious that, on a recent trip to China, one blogger reported that he spotted 300-400 counterfeit wines in nearly 100 stores5. While this may presently be considered a "Chinese problem" that does not impact American beverage producers, it will not remain that way. As counterfeiting alcohol becomes more profitable, counterfeited Chinese products will inevitably make their way outside China to other countries, including America, through internet purchases or criminal enterprises, as well as via other avenues. For example, in 2011, counterfeit wines of Chinese origin were allegedly seized in England6.

The limits of preventive measures on wine counterfeits

Like authentication technologies, preventive measures alone at best merely reduce the risks related to the circulation of counterfeits. Even sophisticated consumers often have difficulty determining the authenticity of potentially counterfeited products7. Even if a retailer or consumer is sophisticated enough to understand and utilize such technologies, authentication technologies can also be faked. Consumer confidence and trust in a brand can still be damaged.

Additionally, online vendors facilitate sales of counterfeit products despite the best authentication technology. A picture of an original bottle is the basis for a purchase, but it is not until the sale is consummated and the counterfeit is shipped that the purchaser even has the opportunity to inspect the bottle and confirm authenticity.

A growing brand protection issue in terms of sales and safety

The global expansion of the alcoholic beverages market, driven by the thirst for alcoholic beverages of the emerging middle classes in many Asian countries, has two immediate effects related to counterfeiting. First, counterfeiters are expanding their target base from high-end luxury wines and spirits to lower cost brands. This expansion increases the segment of the beverage market at risk from counterfeiting. Second, counterfeit products have significant negative impact on a company's brand. In addition to consumer association of inferior quality due to counterfeit products, there is also an increased risk of personal injury claims. In fact, counterfeit alcohol leads to many injuries around the world. Recently, a report stated that fake alcohol is responsible for an increasing number of deaths and injuries8.

How to stop counterfeiters

In addressing the question of how to stop counterfeiters, the alcoholic beverages industry can learn from the experiences of the fashion and healthcare industries. To halt the rising tide of counterfeit products, the fashion and healthcare industry leaders took the fight directly to the home of the counterfeiters. Alcohol beverage industry member companies need to be proactive by taking measures directly in China, the center of counterfeiting, by promptly registering their trademarks and design rights in China as well as recording them with Chinese customs. These registrations activate customs monitoring and seizures. With those tools in hand, companies can proceed to bring counterfeiters to justice.

Trademark Portfolio

China does not protect unregistered trademarks or trade dress. Only trademarks registered with the Chinese government are enforceable in China. Thus, without trademark registration, a company is at the mercy of counterfeiters who may usurp that company's valuable trademark or trade dress in China.

Trademark protection in China is supported by both the PRC Trademark Law and the Criminal Law9. In cases of infringement on the rights of beverage companies, the counterfeiter will frequently put cheap local alcohol in authentic bottles. This type of act alone constitutes a violation of Article 57 (1, 2) of the Trademark Law. The Criminal Law also bans counterfeiting trademarks under Article 213, forging registered trademarks under Article 214, and manufacturing or selling trademarked goods without the owner's knowledge or permission under Article 215.

Although case precedent is not law in the PRC, a recent case in Beijing held that selling a labelled product without being a legitimate right holder could constitute criminal trademark infringement. In that case, the counterfeiter used original bottles and manufactured other elements to suggest authenticity10. The court held that the illegal appropriation of the bottles constituted a crime. In another recent case against counterfeiters, prominent winery Societe Civile De Chateau Lafite Rothschild (Lafite) prevailed over a Chinese brand that used a Chinese translation of Lafite's registered English trademark11. Therefore, despite binding precedent, the law may protect the marks of registered trademark holders in cases of infringement.

Customs Protection Programs

China is a large country, rendering it very difficult to police. However, Chinese customs officials have developed a fairly efficient and cost-effective response to counterfeiting. Unlike in many common law countries, customs protection in China is rather inexpensive. No civil suit is necessary for action via customs. Instead, a producer need only verify the product is not authentic and then pay for storing the seized product (up to three months) and associated legal costs. The process of identifying and destroying counterfeit products is fast and efficient. Brand owners may further enhance their legal protections by educating and training Chinese customs officials regarding their products and trademarks.

Once a registered trademark is recorded with Chinese customs officials (and after some training of the customs staff by the brand owners), Chinese customs officers will seize and destroy counterfeits they find as they pass through their ports. This reduces the risk of brand dilution and the possibility of claims due to counterfeits while deterring would-be counterfeiters. Recordation of a trademark with Chinese customs is different from the registration of a trademark with the Chinese trademark office. A customs recordation is an enforcement tool for an already registered trademark in China. Therefore, only registered trademarks have the right to be recorded with the Chinese customs for enforcement purposes. If a registered trademark in China is not recorded with Chinese customs, customs enforcement of that trademark is nearly impossible. In fact, customs officials only actively look for counterfeits when a registered trademark in China is also recorded with the Central Administration of the Chinese Customs ("CACC") for customs protection.

Recent research of the CACC open database shows that only five American wine brands are recorded at customs, compared to 16 from Germany and 12 from France. The overall figures of recorded wine brands at customs in China (57 in total) are miniscule when compared to other consumer goods sectors. Therefore, it is no surprise that there are no recorded wine seizures by Chinese customs as yet. Without customs recordation and training, Chinese customs will continue to ignore wine counterfeits leaving China. Wine manufacturers were not previously given clear information of the potential and usefulness of such an enforcement tool. It is time for American wine brands and alcohol beverage industry members in general to learn more such enforcement possibilities.

Enforcement

Trademarks are protected by the Chinese government via administrative or judicial enforcement.

Administrative enforcement can take the form of surprise raids on the counterfeiters' facilities, complete with seizure and destruction of counterfeits and manufacturing tools and administrative fines. Administrative enforcement is conducted by officers of the provincial Administration for Industry and Commerce (AIC). When large quantities of fakes or in case fakes posing a serious threat to the safety of consumers are involved, investigations and raids are conducted by the police as in the cases listed above. Police raids usually culminate in criminal trials. Criminal counterfeiting and trademark infringement convictions may lead to a jail term between 3 and 7 years (depending on the severity of the case), in addition to the destruction of the infringing goods and manufacturing tools, and the disgorgement of any illegal profit12.

All these administrative actions and criminal cases may be followed up by civil lawsuits for the recovery of damages (i.e., judicial enforcement). Many companies think judicial enforcement of trademarks in China is impossible or, at the least, very difficult. However, judicial trademark enforcement that follows administrative action is generally straightforward and simple because all the evidence necessary for the suit was already collected during the prior enforcement. Damages recovered from a civil suit may include damages from lost profits and reputational harm13.

With the entry of the new Chinese Trademark Law on May 1, 2014, both administrative penalties and statutory civil damages have been drastically increased; administrative penalties increased from 500,000 RMB (81,000 USD) to 3 million RMB (approx. 480,000 USD!), and maximum statutory damages went from 500,000 to 1 million RMB14. The strengthening of enforcement tools creates even more effective and durable deterrents against counterfeiters15.

Conclusions

While counterfeiting is on the rise and creeping into the alcohol beverage field, industry members can reduce the risks associated with counterfeit product by taking proactive steps in China, the heart of the counterfeiting movement, by policing their trademarks in China and taking part in China's customs protection programs. These steps provide industry members with access to the tools and enforcement mechanisms to stop existing counterfeiters and deter would-be counterfeiters.

Footnotes

1.On wine industry growth, see: Vey Wong, "Betting on Chinese Wines Could Bring More Cheer for Investors" H.K. Econ. J. (Feb. 18, 2011) (http://www.ejinsight.com/template/eng/news/jsp/detail.jsp?dnews_id=128&title_id=6750).

2. "Counterfeit Products Hit By Raids" (http://www.chinaipr.gov.cn/newsarticle/news/government/201104/1216178_1.html).

3. "Shanghai Police Crack Wine Counterfeiting Ring" (http://www.thedrinksbusiness.com/2012/08/shanghai-police-crack-wine-counterfeiting-ring/).

4. "Shangdong: 210 Cases of Fake Wine Seized" (http://www.chinaipr.com.cn/newsarticle/news/local/201301/17260_1.html).

5.http://www.grapewallofchina.com/2012/06/03/matured-two-years-nick-bartmans-investigation-of-fake-wine-other-ipr-issues-in-china/

6. "Tonnes of Illicit Food Seized Across Europe in INTERPOL-Europol Led Operation" (December 6, 2011)(http://www.interpol.int/en/News-and-media/News/2011/PR101).

7. "The Problem of Counterfeit Wine in China," Wandering Am. Travel Blog (May 14, 2012) (http://wanderingamericantravelblog.com/2012/05/14/the-problem-of-counterfeit-wine-in-china).

8.See: Fake liquor deaths in the UK (http://www.dailymail.co.uk/news/article-2697876/Deadly-fake-spirits-flooding-Britains-licences-Laced-bleach-nail-polish-anti-freeze.html); Deaths resulting from fake Chinese liquor in Russia (http://en.itar-tass.com/opinions/1708). See also http://www.securingindustry.com/food-and-beverage/bootleg-and-fake-alcohol-kills-eight-in-czech-republic/s104/a1399/#.U-HD12flodU for cases of death related to counterfeit Czech vodka.

9.Trademark Law of the People's Republic of China (promulgated by the Standing Comm. Nat'l People's Cong., Aug. 30, 2013, effective May 1, 2014). (Herein after "Trademark Law"); Criminal Law of the People's Republic of China (promulgated by the Standing Comm. Nat'l People's Cong., Dec 28, 2002) 2002 China Law LEXIS 2261 (China). (Herein after "Criminal Law").

10.Diana Matthias & Landy Jiang, "Insights into Criminal Convictions for Mark Counterfeiting", China L. & Prac., Sept. 2, 2011.

11. "Setting Precedents in IP Law", China L. & Prac., May 30, 2012.

12.Criminal Law, Article 214.

13.Dennis S. Corgill "Measuring the Gains of Trademark Infringement", in Fordham L. Rev. Vol. 65, No. 1909 at 1923.

14.Trademark Law, Article 64, 67.

15.See also: Paolo Beconcini "Brand protection and the New China Trademark Law", in IP Litigator, Vol. 20, No.1 January/February Issue, Wolter Kluwers.

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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