The Counterfeiting Epidemic in China

The overwhelming majority of counterfeit products are manufactured in China, which is estimated as the source for more than 70 percent of the world’s counterfeit goods. China and Hong Kong together are estimated as the source for 86 percent of the counterfeit goods in the world and $396.5 billion worth of counterfeit goods each year.²

China is a haven for counterfeiters because they can conduct their illegal operations in relative anonymity, at very low cost, in a lax enforcement climate. The manufacturing process for counterfeit goods is often decentralized, with fakes typically being produced in stages by small teams in back-street shops and houses in the Guangdong and Fujian provinces in southern China. Once manufactured, the counterfeit products are then sold to retail and secondary market distributors in wholesale markets located throughout China.

After the counterfeit goods reach the hands of distributors, fakes are routinely marketed and sold throughout the world on rogue Internet websites and auction sites that consumers frequent in search of bargains. The Internet is a safe shelter for counterfeit goods because it allows faceless transactions in which the buyer cannot physically examine the products prior to the sale. A study of 100 websites selling counterfeit goods found that these sites draw more than 53 billion visits per year—an average of nine visits for every man, woman, and child in the world.³

Any manufacturer that ignores the threat to its business from brand thieves in China does so at its own economic peril. Counterfeit goods are generally lower quality and less effective than genuine products. Consumers who unknowingly purchase counterfeit goods that fall short of their expectations are likely to never purchase those products again. Fakes undermine a brand’s integrity and can cause irreparable injury to a brand’s reputation. This can result in significant revenue losses and decreased market share.⁴

The Challenges to Effective Brand Protection in China

Even though it is one of the leading players in world trade, China lags behind most of the world when it comes to the recognition and protection of IP rights. Some sources say the issue is rooted in the Chinese culture and resistance to the concept of intellectual property. While Western culture views copying as “an inferior imitation of an original, and in fact cheating, ‘in many Asian nations the highest compliment one can be paid is to be copied.’”⁵

Brand owners simply cannot rely on the government officials in China to independently investigate and prosecute counterfeiters. In many parts of China, counterfeiting is not considered a serious crime and criminal prosecution against counterfeiters is inconsistent.⁶ Counterfeiting is extremely lucrative, and sometimes counterfeiters are large employers in the province. Consequently, local governments have a direct or indirect interest in supporting counterfeiting, and “[m]any of the most flagrant brand violators are state enterprises and run by the same governments that should be policing them.”⁷

In China, the enforcement of IP rights takes place at the local level. “Local governments in China control all the levers of power in law enforcement.”⁸ Judges, police officers, and administrative enforcement officials “are all appointed by and beholden to local government leaders,” who are reluctant to take action against counterfeiting because it may harm the local economy.⁹ While the central Chinese government has made statements about the importance of protecting IP rights, at the local level there are serious issues of local protectionism and even corruption.

IP Enforcement Options in China

Enforcement of IP rights unquestionably plays a critical role in deterring counterfeiters. Indeed, there is a direct relationship between the degree to which companies protect their IP rights and the extent of counterfeiting in a given economy. In countries where IP rights are recognized and enforced, counterfeiting is far less prevalent. The existence of civil and procedural remedies, mechanisms for determining the amount of damages generated by infringement, minimum imprisonment terms and statutory fines, and police and customs officials who aggressively enforce those laws by seizing suspected counterfeit goods are extremely effective deterrents to counterfeiting.¹⁰

Protecting IP rights in China requires a far different approach than in the United States. In order to identify and prosecute a brand thief, manufacturers must take the initiative to investigate and identify who the counterfeiters are and where they are operating. Once that information is obtained, companies must then lobby government officials to take enforcement action.

Unless a brand owner has experienced in-house investigative capabilities on the ground in China, external investigators need to be utilized. Finding the right investigator in China is not a simple task as even the anticounterfeiting industry in China itself has been plagued by fraud. According to a recent report, major multinational companies paid investigators in China who themselves manufactured or sold counterfeit goods. In other cases, investigators colluded with the very counterfeiters they were hired to root out.¹¹

If a company is willing to act proactively and invest in enforcement, there are several different legal options that can be pursued:

Request Administrative Action

The local Administration for Industry and Commerce (AIC) has authority to conduct raids, seize infringing goods, and order the destruction of fakes. AIC administrative actions are initiated by the trademark registrant, who must have first conducted its own investigation in order to develop evidence regarding the identity and location of the counterfeiter. Once that evidence is gathered, the brand owner files a written complaint with the appropriate office with the necessary trademark registrations and other documents and information it has developed. The AIC will then generally conduct the raid promptly, seize the counterfeit goods, and issue a decision within a matter of months. If the goods are found to be counterfeit, the AIC will destroy the counterfeit goods and impose a fine on the counterfeiter. While the counterfeit goods are off the street and the AIC procedure is fast and inexpensive, the fines imposed are not large and many counterfeiters resume their illegal activity.

Initiate Criminal Proceedings

Trademark owners also have the option of pursuing criminal proceedings against infringers. These proceedings are initiated by the trademark owner presenting to the Public Security Bureau (PSB) or the local prosecutor evidence of infringement that the company has independently developed through an investigation or as a result of the AIC process. At that point, the PSB or prosecutor will start its own investigation and make a determination whether or not to prosecute the case. If the case proceeds to court and the infringer is found guilty in a criminal court proceeding, the court will either order fines or sentence the infringer to prison depending on the impact on society caused by the infringement. There are value thresholds that must be met in order for an infringement to rise to the level of a crime under Chinese criminal law.¹² In addition to hiring investigators, companies typically retain attorneys to interact with the prosecutor’s office, to monitor the trial, and to present arguments to the court at the sentencing phase.

File Civil Litigation

Brand owners who wish to recover money damages may also file civil proceedings against infringers. In China, trademark cases are normally handled by specialized IP courts in the general civil court system. There is no discovery in Chinese civil proceedings, and companies cannot plan on developing evidence through the court process. As a result, the litigation itself is generally much quicker and less costly than similar proceedings in US courts. However, before commencing the civil case, the company must come up with its own evidence of infringement through an independent investigation or through the AIC or criminal process. After the trial, the court may award monetary compensation to the victim, issue an injunction, or confiscate infringing goods and the machinery used to produce these products.

Influencing Political Change

While enforcement is a critical component of a brand protection program, the problem of counterfeiting in China will not be solved unless there are political and legal changes that erode the influence of local protectionism.¹³ In order to bring about such change, it is incumbent on brand owners to take a long-term approach to trademark protection that is not only measured by the number of raids or seizures. The message needs to be “that intellectual property is important to promote innovation and creativity, which are essential to economic development.”¹⁴

Strength in Numbers: Collaboration between Brand Owners

Rather than fighting a solitary war against counterfeiters in China, some brand owners have joined together to form working groups that have developed comprehensive industry strategies to deal with counterfeiting in China. They share intelligence about investigators, counterfeiters, leads, and other information about counterfeiting. These groups jointly hire and share the cost of investigators to root out the counterfeiters. Armed with that information, they then petition government officials in China to prosecute brand thieves.

There are a number of strategic advantages to proceeding collectively, rather than individually. By collaborating, companies have been able to obtain efficiencies and economies of scale, to reduce the cost of investigation and enforcement borne by each company, and to combine financial and other resources to stop illegal infringement.

Brand thieves often target entire industries, and raids of counterfeiters in China frequently turn up many different types of counterfeit products at retail shops or in a factory or workshop. Therefore, investigations and raids that are conducted on behalf of a group of companies jointly have a far greater prospect of reaching the value thresholds that must be met for criminal prosecution.

By approaching the government and speaking as one, members of an industry have a much louder and more persuasive voice when they interact with Chinese officials and the Chinese legal system. Data shows that companies with a poor relationship with the government experience more counterfeiting infringements. In contrast, companies that have a good relationship with the Chinese government receive faster responses when they report counterfeit crimes.¹⁵

Examples of organizations that are utilizing this industry-wide approach in China include the following:

• The US Golf Manufacturers Anti-Counterfeiting Working Group includes six of the leading golf product manufacturers in the world. Since 2004, the group’s close collaboration with international authorities has led to the seizure of nearly two million pieces of counterfeited golf products. In the last five years, nearly 1,500 websites selling counterfeit clubs and accessories have also been shut down as the direct result of legal action brought by the group. The group also maintains a website, keepgolfreal.com, that educates consumers about fake golf products.
• The BEAMA Anti-Counterfeiting Working Group consists of 16 manufacturers of electrical infrastructure products and systems that are collectively taking action against counterfeiters making counterfeit electrical installation products in China and distributors in many Middle Eastern and African countries. Since 2000, over 15 million counterfeit products have been seized through the group’s efforts.
• The Semiconductor Industry Association Anti-Counterfeiting Task Force works closely with government agencies worldwide, including US Customs and other law enforcement agencies, to identify and stop parties involved in manufacturing or trafficking in counterfeit goods.
• The Bluetooth Special Interest Group, which is comprised of leading companies developing and influencing Bluetooth technology, works closely with Chinese authorities on infringement investigations and raids against infringers of Bluetooth trademarks.
• Luxury brands, including LVMH and Estée Lauder, are collaborating with each other to develop best practices for measuring and implementing IP enforcement in China as well as other Asian countries. These practices include designing and managing IP investigation budgets, which are put toward filing complaints within the 76 different patent courts in China.¹⁶

As members of these groups have found, industry members who are able to work together to fight counterfeiting are less likely to waste money and more likely to prevail than companies that engage in a series of expensive and uncoordinated efforts. Because companies have expertise in distinguishing their own products from counterfeits, “collaborating to share enforcement costs can make enforcement more effective.”¹⁷

Keys for Effective Collaboration

Anticounterfeiting working groups are made; they are not born. They require leaders who are willing to think creatively and to form strategic alliances. Often competing brand owners are reticent to work together or to share financial and other resources. There is also the potential for personality conflicts, different goals, and disagreements about what the group can and should do collectively.

As in any form of collaboration, in order to succeed, it is essential that the members of the group share a common vision and agree up front on the ground rules for how the group will operate and function. These are critical issues that must be addressed at the outset and documented in a group working plan that can be revisited when critical issues or disagreements arise.

In the context of enforcement in China, some important issues that the group needs to decide are:

• What is the group budget, and how much money will each member invest in the group endeavor?
• What are the group’s enforcement goals? Seizures? Monetary recoveries? Criminal sentences for counterfeiters?
• Will the group proceed when an investigation only turns up counterfeit products infringing on the rights of only one or a few group members, rather than all of the group members?
• What are the group’s goals? Is the group’s focus on counterfeit retailers, distributors, or manufacturers?
• How will the group make decisions? By majority vote?
• How frequently will the group meet?
• What actions, if any, will the group take to deal with online counterfeit sales on Chinese websites?
• How and when will the group interface and interact with Chinese government officials and customs?

In addition to deciding these and other issues, it is absolutely essential that the group decide upon who will be the gatekeeper and coordinator for the group. Ideally, this will be independent legal counsel who group members trust and respect, who is knowledgeable about IP enforcement in China, and who, as explained below, is experienced with the antitrust considerations that must be kept in mind any time that competitors meet or discuss jointly pursuing any form of activity. Not only will the coordinator keep the group moving forward and on the same page, but he or she also will serve as the clearinghouse for group communications and significantly reduce the administrative burden that would otherwise fall upon individual group members.

Essential Antitrust Protocols

Even trade associations that are organized for legitimate purposes can be fertile grounds for antitrust violations. Government regulators have warned that it is essential for groups of competitors working together in activities that promote consumer protection to follow appropriate antitrust protocols.

While the antitrust laws prohibit competitors from engaging in price-fixing and other forms of anticompetitive activity, there are many other forms of joint conduct that are permissible. For example, lobbying government officials and pursuing litigation are actions that are immune from antitrust liability under the Noerr-Pennington doctrine.¹⁸ Similarly, competitors are permitted to collaborate in ways that are efficiency enhancing and beneficial for consumers.

According to the federal antitrust enforcement agencies, “[i]n order to compete in modern markets, competitors sometimes need to collaborate. Competitive forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs. Such collaborations often are not only benign but procompetitive.”¹⁹

Combating counterfeiting is clearly a procompetitive activity. In a free-market economy, the amount that a firm invests in innovation depends on the perceived rewards from its investment. Typically, the investment is greater when the perceived rewards are higher. If brand owners face diminished rewards due to others’ uncompensated use of their creations and trade names, their incentive to innovate would likely be lessened. Consequently, firms may make fewer technological advances; competitiveness may suffer; and consumers may face fewer choices and higher prices. Restricting the unauthorized use of inventions and trade names helps guarantee that inventors receive a return on their efforts, promotes innovation, and gives consumers and firms access to inventions that otherwise may never have been produced.

In order to minimize the antitrust risk, an industry group organized to combat counterfeiting should have an up-to-date, written antitrust compliance policy that is publicized in materials distributed to group members. All group meetings should strictly follow a written agenda, which members can review in advance with legal counsel to identify potential issues of concern. Legal counsel should be present at all meetings and participate in all discussions and e-mails between competitors to monitor and prevent discussion of inappropriate matters. It is also vital to record and retain accurate and complete records of meetings. The records should indicate that the antitrust compliance policy was reviewed and followed.

Certain topics may be suggestive of a per se unlawful agreement, which should be off-limits to the industry group. There should be no discussion of price-fixing, output restrictions, territorial or customer allocations, and group boycotts. Members should not share competitively sensitive information, including information about each other’s past, present, or future prices; terms and conditions of sale; business or marketing plans; sales or capacity information; production; technology; sales practices; or any other competitively sensitive information such as prices from suppliers.

The group’s focus should be to protect IP rights in order to benefit competition and promote innovation, instead of on reducing competition and increasing profits for its members. The group should also document and describe in writing all of the ways it benefits its members and consumers. Finally, the group should take action only where there is a good-faith belief that counterfeiting is taking place.

Moving Together beyond Enforcement in China

If essential antitrust protocols are adopted and followed, industry members not only have the opportunity to collaborate to investigate and prosecute counterfeiters in China, but they also can jointly pursue other anticounterfeiting strategies together. For example, trademark owners can work together to pursue legal action here in the United States and elsewhere to shut down websites selling counterfeit goods. In addition, they can jointly engage in public relations campaigns to educate consumers and potentially adopt and promote industry standards that will assist consumers in recognizing counterfeit goods. By joining together to combat counterfeiting and to protect IP rights, competitors promote free and fair competition, which is consistent with the underlying purpose of the antitrust laws.

Endnotes

1. Global estimates of the dollar volume of counterfeit goods range from $200 billion to over $1.7 trillion—accounting for 5 to 10 percent of world trade. Glob. Intellectual Prop. Ctr., U.S. Chamber of Commerce, Measuring the Magnitude of Global Counterfeiting 13 (2016) [hereinafter GIPC Study].

2. Id. at 3.

3. MarkMonitor, Traffic Report: Online Piracy and Counterfeiting 7 (2011).

4. Kevin Lewis, The Fake and the Fatal: The Consequences of Counterfeits, 17 Park Place Economist 47, 52 (2009).

5. Daniel C. Fleming, Counterfeiting in China, 10 U. Pa. E. Asia L. Rev. 14, 23–24 (2014).

6. U.S. Chamber of Commerce, International IP Index 85 (4th ed. 2016), http://www.theglobalipcenter.com/wp-content/themes/gipc/map-index/assets/pdf/2016/GIPC_IP_Index_4th_Edition.pdf.

7. Fleming, supra note 5, at 27–28.

8. Daniel Chow, Anti-Counterfeiting Strategies of Multi-National Companies in China: How a Flawed Approach Is Making Counterfeiting Worse, 41 Geo. J. Int’l L. 749, 755 (2010).

9. Id.

10. GIPC Study, supra note 1, at 20.

11. Who’s Investigating Fake Chinese Goods? Fake Investigators, Chi. Trib., Dec. 15, 2015.

12. Under Chinese law, a trademark crime may be recognized if someone has produced or knowingly sold counterfeit products and the value of the products is higher than RMB 50,000 or the infringer obtains profits of more than RMB 30,000. Xing Fa (刑法) [Criminal Law] (promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 14, 1997, effective Oct. 1, 1997), art. 213, 1997 Standing Comm. Nat’l People’s Cong. Gaz. 138.

13. Chow, supra note 8, at 779.

14. Id. at 776.

15. Ya Qian, Impacts of Entry by Counterfeiters, Q. J. Econ., Nov. 2008, at 1577, 1584.

16. Loke-Khoon Tan et al., The Top 10 Enforcement Trends against Luxury Fakes in China, World Trademark Rev., Oct./Nov. 2013, at 62, 64.

17. Yi Qian, Counterfeit Competition, Kellogg Insight (June 1, 2009), https://insight.kellogg.notherwestern.edu/article/counterfeit_competition.

18. Under the Noerr-Pennington doctrine, private entities are immune from liability under the antitrust laws for attempts to influence the passage or enforcement of laws. E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 135 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657, 670 (1965). The doctrine extends to protect individual or group action intended to influence legislative, executive, administrative, or judicial decision making.

19. Fed. Trade Comm’n & Dep’t of Justice, Antitrust Guidelines for Collaborations among Competitors 1, 6 (2000).