According to figures published at the beginning of 2007 and derived from a study by the Organisation for Economic Cooperation and Development ("OECD"), worldwide about USD 176 billion is turned over with counterfeits, which accounts for approximately two per cent of the world trade. On a legislative level, the PRC has made considerable efforts to better protect proprietors of industrial property rights. However, there are still great problems in enforcing industrial property rights in the PRC effectively and lastingly.
The counterfeiters follow the simple rules of a market economy and look for products which promise high profits at a low financial risk. The range of fake products starts with the usual mass-produced items, such as DVDs and software, to special machinery, aeroplane parts and medication. The market for distributing counterfeit products is not limited to the PRC but can be found throughout the world.
It is therefore imperative that companies with business in the PRC develop a tailor-made intellectual property ("IP") strategy.
A comprehensive IP strategy should be developed specifically for the company and products in question, be reviewed regularly in order to take timely account of any changes in the company's or counterfeiters' environment and should comprise a combination of the following components:
- Legal measures
- Operational / company-internal measures
- Technical measures
- Political measures
Legal Measures As Part Of The Overall Strategy
Legal measures assist in pursuing preventive and repressive objectives. Preventive legal measures include the registration of IP rights and careful contract management. Repressive legal measures relate to the enforcement of the IP rights by legal action.
Two goals are pursued by registering IP rights in the PRC. Firstly, a registration creates the necessary legal basis to proceed against counterfeiters in the PRC. The importance of registration is paramount, as the PRC legal system provides practically no possibility of taking action against infringers if one's own IP rights are not legally protected in the PRC. Thus, for example, PRC law does not automatically protect designs without being registered and, thus differs form European law. It is also noteworthy that it is not possible to take legal action against a manufacturer of so-called "slavish copies" on the basis of the PRC Act against Unfair Competition, unless further conditions are met.
The PRC provides for the possibility of copyright registration which facilitates enforcement in the event of a dispute. In addition, as a member of the Berne Convention, the PRC recognizes that copyrights arise automatically upon creation of a work. The registration of copyrights with the competent "Copyright Protection Center of China" (CPCC) is quick and cost-effective and usually takes about 30 days.
Trademarks are registered by applying to the Chinese Trademark Office. Since, the PRC has acceded to most international treaties relating to IP, the trademark application procedure at the Chinese Trademark Office, by and large, follows the usual international standards. However, the Chinese Trademark Office is severely understaffed and as a result, applications for trademark registration regularly take about two and a half to three years from the time of filing the application until a final decision is made by the Trademark Office.
The protection of patents, utility patents and design patents is governed uniformly in the PRC Patent Law. The patent application process at the Chinese Patent Office takes about five years, the application process for a utility patent takes about two years and the application process for a design patent takes approximately nine months.
The second reason why IP rights applications should be submitted in good time in the PRC is that counterfeiters are then prevented from registering these IP rights (that are originally owned by the proprietor) in the counterfeiters' name. What initially sounds preposterous is, unfortunately, reality for many companies in the PRC. Counterfeiters in the PRC do not shy away from the costs of applying for IP rights because they are worth it in the long term. Considering the work overload the Chinese Trademark Office currently has to deal with, proceedings for the cancellation of a PRC trademark are likely to take at least five years, if successful at all. During this period the counterfeiter can use the registered mark exclusively and can even prohibit the rightful proprietor from using it within the PRC. The timely application for IP rights in the PRC is therefore strongly advised even if the companies at risk decide, as part of developing their IP strategy, not to take legal action against infringements under any circumstances.
Finally, IP rights can also be registered with the PRC General Administration of Customs. The purpose of the registration is to prevent counterfeit products from being imported and exported and thus to cut off the counterfeiters' access to sales markets. The process for registering IP rights with the customs authorities is simple and inexpensive and has, in the past, resulted in a number of encouraging results.
Enforcement action against infringing acts can be filed with the civil courts. The local jurisdiction of the court is determined either by the defendant's place of residence or its seat of business, the location in which contracts relating to the dispute were fulfilled or where the infringing act took place. If the claimant fails to adequately substantiate a claim for damages, the court can estimate the damages as it deems fit. In such case, the maximum sum of RMB 500,000 (approximately € 50,000) may not be exceeded.
The PRC law provides a dual system for enforcing IP rights. Apart from civil court action, proprietors of IP rights also have the possibility of administrative proceedings in the PRC. The competent authorities in the PRC can issue cease-and-desist orders, fix fines, conduct further investigations and raid the business premises of the infringer, and can take measures to prevent further acts of infringement. Administrative authorities cannot award damages. Any such claims must be pursued by way of civil court action. In serious cases of infringement, the administrative authorities should also involve the public prosecutor's office.
Administrative steps can offer quick and effective legal protection in cases where the infringement is clear cut. However, an administrative action is not advisable in difficult cases because the administrative authorities have only very limited means of investigating complex cases.
Legal measures of an IP Strategy also include contract management. Joint venture partners, employees (particularly those in senior positions), suppliers, distribution partners and even customers may have insight into a company's business structure, access to business secrets, possibilities of using IP rights etc. and should therefore be under a contractual obligation to maintain the confidentiality of business secrets and to use IP rights only to the extent permitted and necessary.
It is particularly important to develop a management structure within a company, which allows for the comprehensive implementation of the IP strategy throughout the company. The team responsible for the development and implementation of the IP strategy must have a certain degree of decision-making freedom and must be assisted by management. Only then is it possible to ensure that events, requiring a quick reaction by the company, are reacted to with the appropriate speed.
Just as an IP strategy is made up of various components, the team responsible for enforcing the IP strategy should also be comprised of (senior) employees from various departments. Cooperation amongst team members is crucial to the success of the IP strategy, as although a lawyer from the legal department at home may have the requisite knowledge and competence to take action against the exhibition of counterfeit products, only a field worker can discover the sale of counterfeit products at a trade fair in the PRC.
It is therefore necessary to train and sensitize one's own employees. If counterfeiting is discovered the same must be reported to the company. If, for example, a subcontractor who manufactures the final product using various components, orders more components than are necessary for manufacturing the requested quantity of final products, then it can be assumed that the subcontractor is overproducing in order to make an extra profit by distributing such over-produced final products itself. It is imperative that any such conspicuous incidents be brought to the company's attention so that appropriate action can be taken.
In addition, pre-emptory measures should be implemented to enhance the difficulty of copying. This particularly includes keeping know-how and confidential information secret. The company's own employees should be provided with information about products and production only to the extent absolutely necessary for them to be able to do their work. For example, it is not necessary for all of the employees of a company to have full access to the company server, on which the entire know-how of the research and development department is stored. Employee turnover in the PRC is notoriously high. We often hear of cases in which former employees move to competitors who then suddenly produce products identical to those found in the former employer's product line. If private detectives then invite the former employees to an interview in which the private detectives pretend to be head-hunters, the employees bring their laptops with them to show what data they have downloaded from their former company's server and what (stolen) know-how they can bring into the new job.
Furthermore, an attempt must be made to deprive counterfeiters of market share. This can, for example, be done by binding customers long-term to the chosen products, by offering products together with a service package which counterfeiters cannot offer etc. Such a service package can include training on machines, software etc. or the possibility of receiving inexpensive updates. Manufacturers should not opt for price wars as a means of winning back market share from counterfeiters, for counterfeiters already have a considerable market advantage because they have not incurred any costs on research and development. The list of possibilities that can be used to contest market shares from counterfeiters is long and depends on the product concerned. Here, it is important to develop an appropriate in-house strategy.
There are a number of technical possibilities of making products and packaging counterfeit-proof. From "black-boxes" developed in-house which cannot be reproduced and without which a product does not work, to relatively inexpensive anti-counterfeit markings on the products or packaging, to high-tech products such as "DNA markers" or "radio frequency identification" etc., whereby the companies or end users can ensure that they do in fact have a genuine product in their hands. Technical measures are particularly intended to provide protection against counterfeits in the supply chain and can be used to ensure that no counterfeits by suppliers end up in production and that, further down the chain, no counterfeit end product ends up being distributed.
The political and legislative environment in the PRC is constantly changing. The PRC government is also increasingly willing to consider suggestions from abroad. In the long term, a certain amount of political involvement by foreign companies in the PRC is therefore also helpful in order to improve the enforcement of IP rights in the PRC. In the PRC, a number of pressure groups for the protection of IP rights have formed. These groups are demanding, on a political level, reforms to PRC laws and regulations on IP rights for the proper implementation of the same. A well-known pressure group is, for example, the Quality Brands Protection Committee (www.qbpc.org.cn).
The members of such pressure groups also often form joint task forces to take joint action against counterfeiters. The advantage of such joint actions is that resources can be shared and, due to greater political influence, especially from large multinational companies with very good political connections that may join such joint action, the Chinese enforcement authorities are more willing to take comprehensive action. Political measures also include effective cooperation with the local and national press, as repressive legal measures are also supposed to deter other (potential) counterfeiters. It is therefore important to inform the public about such measures.
The enforcement of industrial property rights in the PRC remains extremely problematic. Foreign investors in the PRC have to expect that their products will be copied. Even a carefully formulated and implemented IP strategy will not prevent this. However, an IP strategy will help to keep the scope and the consequences of counterfeits down to a manageable level.
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.