Reprinted with permission from the IP Litigator,
March/April 2004
Published by Aspen Law & Business
What does a company do when it finds its products "Made in
China" when the factory is in Ohio? Counterfeiting remains a
huge problem internationally, with China accounting for almost $16
billion in lost legitimate sales annually. Since its 2001 accession
to the World Trade Organization, China has made some legal changes
to its IP system, giving trademark owners more options to crack
down on counterfeiting in one of the world's largest
markets.
Shortly before joining the WTO, China enacted new legislation
designed to align its laws with TRIPs, the Agreement on
Trade-Related Aspects of Intellectual Property Rights. The
Agreement, which covers most forms of intellectual property,
particularly helps trademark owners because it requires that a
country provide for at least a seven-year initial term of
registration of a mark and the continual renewal of the
registration (assuming the mark is in use). The owner of a mark
also has the exclusive right to prevent others from using the mark
on certain goods and services if a likelihood of confusion
exists.
Significantly, TRIPs also contains provisions directed to the
enforcement of those rights. In addition to establishing procedural
and evidentiary rules, the Agreement provides for both injunctions
and monetary damages in cases of infringement. Further, TRIPs
allows for machinery used to create infringing goods to be
confiscated and the counterfeit goods destroyed instead of allowing
a counterfeiter to simply remove the infringing marks and release
the altered products back into the market.
While these provisions may sound basic to American and European
trademark owners, they represent significant changes to the
trademark registration and system in China. It was not until 1983
that China began to allow individuals and institutions, not just
"enterprises," to register trademarks. Ten years later,
service marks became registrable. With China's highly
fragmented and large bureaucracy, enforcement of trademark rights
was an expensive and time-consuming task, cutting across multiple
governmental agencies and costing thousands of dollars. Even when
raids and seizures of counterfeit goods succeeded, the fines and
sanctions imposed at the agency's discretion were hardly a
deterrent (one year, it averaged only about $700 per case, with the
trademark owner receiving about $40 in compensatory damages). The
counterfeit goods, stripped of their infringing marks, were then
resold at public auction, often to be rebranded and sold by the
same or another counterfeiter.
The recent laws implemented in light of TRIPs seek to ameliorate
some of the problems with China's trademark system. Even with a
strict "first-to-file" registration process, procedural
changes in the application and examination process were adopted to
help prevent illegal trademark registration and use.
The new laws and their interpretation by the Supreme People's
Court created even more change for trademark enforcement. First,
the trademark owner may now obtain an injunction or a temporary
restraining order to prevent the distribution of counterfeit goods
and the destruction of evidence before hearings, provided the
trademark owner can show irreparable harm. Second, while the new
law encourages mediation of infringement disputes, it allows
trademark owners to file complaints with the courts if the
potential infringer refuses to attend meditation or if the
mediation fails. Procedurally, a complaint can be filed regardless
of whether the Administrative Authority for Industry and Commerce
(AIC) chooses to cooperate with the investigation. However, any
civil action taken by the agency on the same infringing acts
prevents the court from increasing the penalties to be imposed on
the infringer.
Third, instead of allowing officials to arbitrarily set fines,
courts may assess damages based on the actual profits made from the
infringement or the losses suffered by the trademark owner from the
infringement, including the owner's reasonable expenses in
policing the infringement. Because infringers rarely keep accurate
financial records of their activities, the trademark owner's
profits per item can be used in the calculation. If the profits or
losses cannot be determined, the court may enter damages up to
approximately $60,000. However, innocent infringers (those that
unknowingly merely resold counterfeit goods) are immune from
damages. Confiscation of the counterfeit goods and the machinery
used to make them remains in the court's discretion.
Trademark owners have a limited time to act under these expanded
enforcement provisions. The statute of limitations is two years
from the time the owner knew or should have known of the
infringement. If the action is brought after two years, courts may
still act to halt the infringing acts, but damages are calculated
only on the previous two years of infringement.
Under the new laws, the number of IP related cases and enforcement
actions has increased, as has the amount of the fines imposed and
number of products confiscated. Despite this encouraging news,
companies must be proactive in protecting their trademarks in
China. Only registered trademarks enjoy the increased protections,
unless the owner can prove that the mark is well known. Because of
the first-to-file system, trademark applications need to be
promptly filed, and preferably before use of the mark in China
given that use is considered only for conflicting applications
filed on the same day. Even though the AIC has broad discovery
powers under the trademark laws, companies may wish to uncover
crucial evidence through private investigators to present in
mediation or court, especially in preparation for a temporary
restraining order. Counterfeiters have also become increasing
skilled at their craft, sometimes making very high quality
counterfeits detectible only to the experienced corporate
eye.
With little more than two years under the new trademark scheme, the
laws are still evolving. Most companies have yet to witness a
dramatic reduction in Chinese counterfeiting, despite several
high-profile raids and increased fines. Nevertheless, the new laws
in China are a step in the right direction.
This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.