November 11th is the so-called ‘Single’s Day in China’; this is the day consumers celebrate or commiserate being single by shopping online.
The estimated revenue of Single’s Day could reach forty-three billion USD. This is equivalent to ‘Black Friday’ in the US.
The following article was published on IPWATCHDOG on November 1, 2019 (click here to access the article).
But China is also, not surprisingly, the primary source of the world’s counterfeit goods. A quick desktop search on popular eCommerce sites in China can easily and quickly generate many self-proclaimed “authorized” and/or “exclusive” distributors or manufacturers of the world’s famous brands – many of which are not shy in using the most iconic trademarks as part of the product descriptions, or even blatantly embossing the trademark on the product itself. Some may even go so far as to blast out emails to potential customers around the globe with the claim that they are the “authorized” manufacturer for ABC (the world’s famous brand in the XYZ industry) with the email address incorporating @abc.com. All together, this gives out the needed credibility and legitimacy that these parties are indeed what they say they are. Online anticounterfeiting is now a primary focus area in the overall enforcement strategy in China. This section reviews: (A) common pitfalls committed by brand owners when combating counterfeits in China; (B) how these pitfalls lead to legal nightmares including the recurring theme of the “whack-a- mole” game; and (C) practical tips for conducting an efficient and effective anticounterfeiting program.
A. Common Pitfalls: This is usually what happens…
Let’s say your company is the top brand for luxury watches in the world; the brand name is CHESTER.
In this hypothetical scenario, today is Friday; you stroll in the office around 8:30 AM, in a good mood and anticipating a short workday. However, your good mood is quickly soured when you turn on the computer because the business team has forwarded you an upsetting email from China. The sender of the email claims it manufacturers not only CHESTER branded watches, but all sorts of related products and accessories such as backpacks and T-shirts; all available for sale at a fraction of your current cost. In fact, the email went so far as to say that it is the authorized supplier and manufacturer of your company’s products in China. This email was sent to your company’s existing and prospective customers around the world. Around 9:30 AM, your team in Brazil forwards you the same email. At 10:30 AM, your Vice President in Europe forwards you the same email and asks what is going on. You do a quick search and you find the sender’s online shop on Alibaba. On the front page, it states in BOLD, “We are Chester’s premium manufacturer and supplier in China”. Underneath the statement are multiple pictures displaying watches, jewelry, bracelets, handbags and even T-shirts with “your” brand: CHESTER (along with your company’s unique and highly stylized logo).
Facing an online counterfeit operation, your business spends $1000 on a cease and desist letter, $3000 on a raid action, $5000 on a Chinese-type UDRP action. The total is close to $10,000 to implement an anti-counterfeiting program in China. The target complies, and even sends you a signed undertaking agreeing to cease sales and stop using your trademark. However, a few months later, the target resurfaces – essentially doing the same thing, infringing your brand under a slightly different corporate name. Frustration ensues; it’s like playing a typical “whack a mole” game except it’s in the legal world and it’s a lot more expensive.
In the Western world, a signed settlement agreement (or “undertaking”) promising not to sell the infringing product is usually the end of the story. If the infringer breaks the deal, the party will be subject to legal as well as commercial repercussions. Not so in China. One can always try to sue the Chinese infringer. However, enforcement of the settlement agreement may be an issue (try convincing the Shenzhen judge why he or she should enforce a judgement from the US). If one is lucky enough to get to the stage to actually enforce an agreement, the amount of damages awarded usually is de minimis, and collection against a Chinese company is never easy.
The anti-counterfeiting program in China – is it simply a waste of money because the bad guys could, and normally would, simply resurface a couple of months later? Or, more bluntly stated, 2 / 3 have brand-owners been trying to resolve a Chinese issue in a Western way?
B. Legal Nightmares: A Western Approach to a Chinese Problem and How It Backfires
China’s ecommerce platforms are, in our experience, effective in taking down counterfeits and infringing goods. Take Alibaba as an example, the success rate is usually hovering around 90%. In its 2017 report (2017 Annual Report on IP Protection in China), Alibaba processed 95% of the takedown complaints within 24 hours of receipt. The volume of infringement complaints to Alibaba in 2017 dropped a remarkable 42% compared to 2016. It closed more than 240,000 online stores when such stores were suspected of selling counterfeits or engaging in unauthorized use of brand names. Furthermore, it had assisted relevant IP enforcement authorities in China in arresting over 1600 suspects. Alibaba assisted authorities in China in preventing the sale of counterfeit goods with an estimated value of over 680 million USD. The numbers in 2018 are just as impressive: 96% of the takedown complaints were processed within 24 hours of receipt; the volume of infringement complaints dropped 32% compared to that in 2017. In 2018, Alibaba assisted the enforcement authorities in China in arresting close to 2000 suspects and closed over 1500 facilities which were involved in the manufacturing/distribution of unauthorized goods; the estimated value of counterfeit goods that were prevented from going into the marketplace with Alibaba’s help was estimated at over one billion USD. No doubt the 2019 numbers should be just as impressive but the information will not be available until summer of 2020.
Setting aside the trustworthiness and accuracy of the data, the report clearly indicates a trend towards increased IP enforcement in China’s online marketplaces.
In light of the impressive record stated above, the issue is not typically about the platform, but more about whether or not the approach has been “chinatized” – for example, have brand owners submitted the type of information that is required and admissible under the Chinese legal system? Here are a few typical “Western” responses when counterfeits are spotted.
(1) The CEO of CHESTER immediately instructs its US lawyer to send out a firm cease and desist letter to the Chinese manufacturer in English (which is very likely to be ignored).
(2) When the letter is ignored, the team escalates by filing a takedown request with Alibaba (or Taobao) along with a plan to start a civil or criminal raid action to identify the warehouse location and seize the inventory of the infringing goods or counterfeits.
(3) The team is also hungry for a public apology to send a signal to other would-be infringers and to calm the nerves of international vendors who have received such emails from the bad actor in China.
China is – in most circumstances – a strictly first to file country. This applies to trademark prosecution as well as enforcement strategies. Sending out a letter to a bad guy could jeopardize a brand owner’s position if the latter does not yet have a locally registered trademark in China. It rarely matters that the CHESTER brand was created in Italy one hundred years ago and has been an internationally renowned premium watch brand for over a century. In fact, sending out such a letter exposes the brand owner’s vulnerability because the bad guy could very well be the owner of the registered trademark for CHESTER in China. In other words, without the protection of a China registered trademark, the brand owner may be the infringer of its own brand and as such, expose its own production line, retail activity and export shipment to a wide array of legal nightmares ranging from product seizure to factory shutdown.
The danger of (1) is further exacerbated by the recent decision of the China Supreme People’s Court in October 2019 regarding the OEM issue in the trademark infringement context. Contrary to the principle established in prior Supreme People’s Court precedents such as PRETUL (No. 38, 2014) and Dong Feng (No. 339, 2016), the Court flipped its position and declared that OEM – without the protection of a registered trademark in China – could be deemed trademark infringement. This exposes millions of small business operators, especially sellers on Amazon, eBay and Etsy, to infringement risks in China since most source products from China and simply do not bother or do not have the resources to obtain trademark registrations.
The strategies in (2) and (3) are not likely to generate much success either unless “Chinatized” 3 / 3 thinking and strategy are first employed. For example, if the infringing goods for CHESTER are for bracelets and necklaces but the brand owner’s China registration for CHESTER is for watches only – the take down, raid action or civil/criminal complaints are not likely to be successful. The reason is simple: the registration is not in the exact same subclass. In plain English, even though the brand owner does have a registered trademark in China, it is for watches only; without separate registrations, the brand owner does NOT have senior rights for CHESTER when it comes to bracelets and necklaces even though commercially, they may all fall under the luxury jewelry category.
Suppose the bad guy not only puts the CHESTER word mark on jewelry but also puts the Chester Logo (a highly distinctive, colorful, and stylish design) on non-jewelry items such as handbags, yoga pants and water bottles – basically anything outside the brand owner’s core business. Under such circumstances, a lawyer’s letter, Alibaba take down requests or an administrative raid action request are all likely to be futile. In fact, these offensive steps are likely to repeat the mistakes discussed under scenario (1), making the brand owner the infringer of its own brand. To get out of the cycle, some outside the box thinking is necessary – for example, rather than relying on the traditional trademark rights, one may consider basing the complaints on unconventional grounds such as copyright, design patent, and false advertising.
What if rather than copying the word mark or the logo, the bad guy copies the unique color combination of the packaging or the shape of the product? Bear in mind that China does not have a trade dress law per se; in this situation, China’s Unfair Competition Law is likely the answer to Chester’s nightmare.
Assuming the team has addressed all the issues above and has secured trademarks in the right subclasses along with a valid copyright in China, what’s next? In a typical approach, the brand owner simply files a takedown request. But, assuming this particular bad guy has 261 links where the CHESTER trademark is either part of the product description or is actually imprinted on the products ranging from watches, bracelets, necklaces, to yoga pants, backpacks, headsets, iPhone cases, and gym bags – what now? A typical approach is to include all these links in one or two takedown requests so they can be removed together. Once these links are removed (which is likely because the current success rate is high, around 90%), the team moves on. But the story doesn’t usually end here. The online shop is still in existence, along with the inventory and the know-how to either procure the counterfeit products again or make/manufacture them. The takedown effort is successful but the success is likely temporary. The next time the watch notice picks up the link again, the legal team is likely to have to do another round of takedowns which means another expense but with short-lived success. How does the business deliver a firm, lasting punch to the Chinese infringer? Other than discussing the high-level strategy of a criminal action, administrative enforcement, or big money infringement lawsuit, let’s start with the basics: the initial response.
C. Practical Tips: A “Chinatized” anticounterfeiting strategy
Here are a few options to consider that could deliver more long-lasting success.
(1) Help Alibaba help you.
It’s important to note that Alibaba employs a point system to decide which of its sellers are allowed to stay, and which are removed. In permanently removing a target, the goal is to remove not only the infringing links, but also the entire online store which is the seller’s livelihood. To achieve this ultimate punishment on the Alibaba platform, each takedown request must be structured so as to achieve the maximum penalty points.
Each successful takedown complaint counts – specifically, it counts six points against the bad guy’s online store on the Alibaba English site (www.alibaba.com), and eight points on the Alibaba Chinese site (www.1688.com). So, rather than filing all ten or twenty takedowns in one batch, consider spreading them out so that after the dust settles, you will have massive good points in your account. It’s like improving your credit history: each payment counts.
This is one of primary ways to start building up the so-called “good faith account” in Alibaba’s system.
This opens the door for Alibaba’s system to start recognizing you and considering you a special guest so that as time goes on, Alibaba may send you suspicious listings and expedite your complaints whenever you have grievances. Another tactical point is to spread out each complaint as far apart as possible (with six days being the minimum). This avoids the possibly that Alibaba may simply group all your complaints into one batch.
A successful takedown also alerts the seller that there is an immediate threat. So, in order to accumulate the most points, it makes sense to start with the link that will have the least likelihood to attract the seller’s attention – for example, the one with the lowest sales volume. The goal, at this stage, is to fly under the seller’s radar. One may argue that the whole purpose of the exercise is to get the seller’s attention so why would we want to avoid attention on purpose? The reason is because if the seller becomes alerted, it may remove all its infringing product links and simply resume the activities several months down the line. This also takes away our golden opportunity to build up maximum penalty points against this particular seller and its store.
Once we have obtained the necessary points, we can start requesting Alibaba to take down the entire store, rather than simply the infringing links because the links can be easily restored. Presently, the threshold point we want to accumulate to force an online store to be closed is 48 on the Alibaba English site and 60 on the Alibaba Chinese site (1688.com). The ability to request Alibaba to shut down a store is a strong position. It is incredibly disruptive to the seller’s store because, prior to the store shutdown, it’s store may be “hidden” by Alibaba so that when/if it sells yoga pants, a search using the search term “yoga”, “fitness clothes” or “work out accessories” may no longer include this particular shop. This is why at this point the seller would start reaching out to brand owners and request their withdrawals of the complaints (rather than their usual tactics which is to remain forever silent in the face of multiple strong-worded demand letters). This is usually the point at which we start sending out demand letters and lay out our requests.
Another practice point: after reaching or being very close to the necessary threshold points, Alibaba sometimes will shut down a suspected counterfeiting store on its own (i.e., without you filing the formal takedown request), preempting your online store takedown strategy. Don’t take it as a sign of success, yet. This shut down mostly likely is temporary. Alibaba is simply trying to protect its sellers before you deliver the death sentence– after all, they are paying customers to Alibaba. Alibaba will close these suspect sites at this stage and ask them to verify the relevant IP rights or make some modifications. However, in a few months, the counterfeiting online shop may come back online after the seller “allegedly” addresses these issues. This is why it is important to pick the link that’s least likely to raise the seller’s attention. The goal is not to have the store closed voluntarily; it should be closed via our formal complaint.
(2) From online to onsite
For famous brands, the number of counterfeit links on domestic China sites such as Taobao, T-mall, 1688.com is usually in the hundreds if not thousands. By a push of a button, all these links can be gone in a matter of one month by filing massive takedown requests. However, despite the high success rate and a quick fix to the problem, this means the brand is likely to face a similar situation several months later. This also means a missed golden opportunity to get the big fish and send a shock wave to the infringer’s society that it’s not okay to mess with your brand. As one may know, the Chinese authority is also hungry for the big fish to make a statement to the Western world and media that it takes counterfeit issues seriously. For example, in 2017, around 4000 people were arrested and over 6000 people were prosecuted in connection with intellectual property violations; in 2018, 5266 people were arrested for trademark infringement and over 7000 people were charged in connection with intellectual property violations; in the first six months of 2019, over 3000 people were already prosecuted for infringement cases and over 9000 people were already arrested for their involvement with counterfeit goods. Similarly, brand owners are vying for the authorities’ attention and assistance to bring an online counterfeit from obscurity to national news, especially one that is making Wall Street headlines, showing the brand team’s huge success in combating counterfeits in China. The key hinges on the ability to spot a few worthy targets and bring the enforcement efforts from online to offline.
Back to the CHESTER brand story: rather than immediately dispatching the legal team to send out demand letters or start the takedown requests, it might be a good idea to identify the key players first and decide who the worthy targets are. The typical mom-and-pop shops are not the goal, it’s not substantial enough to perk the media’s nor the authorities’ attention. The giant established shop may not be a good first target either unless the CHESTER team has already amassed substantial legal resources over the years in China including famous mark recognitions and/or successful raid action precedents. So, choose something in the middle. Once the target is identified, the next step is to gather and preserve evidence. One can start the process by ordering sample purchases, conducting onsite investigations, and engaging the seller in conversations with the goal of pinpointing the exact factory or warehouse locations. Once clear infringement is confirmed, hopefully with sufficient ammunition to establish a criminal (as opposed to civil) case, one can also reach out to local authorities as well as Alibaba for help. This is not only recommended for relationship building purposes (after all, “guan-xi” is important in China), but also for obtaining key pieces of information since discovery is not otherwise available in China.
(3) Stop the listing from being published in the first place
To avoid a Whack-A-Mole problem, sometimes it’s easier to simply prevent the problem from taking shape in the first place. In situations where the unauthorized trademark use concerns products that pose safety hazard, threatens public health or are heavily regulated financial products, it makes sense to have meetings with Alibaba directly. The goal from such meetings is simple – ask Alibaba to list such phrase as a restricted phrase on its platform so that no one is allowed to post new links when it comes to this type of particular products.
This article first appeared in PLI coursebook associated with “IP Rights Enforcements 2020 program”; the coursebook was published in January 2020.
