Anti-counterfeiting: The Law Now, in 2010 and Beyond

Currently, the vast majority of counterfeiting cases (around 80-90%) are dealt with by administrative enforcement bodies, primarily the Administrations for Industry and Commerce. However, the enforcement powers of these bodies are generally limited to confiscating counterfeits and imposing monetary fines, which are minimal as they are based on the value of the inexpensive counterfeit goods seized.

In 2010, administrative enforcement is likely to carry stronger penalties, such as fines that are high enough to take away the financial incentives of counterfeiting and which demonstrate the severity of the crime.

The preliminary position for criminal enforcement are Articles 213 and 214 of the Criminal Code, which provide fines and sentences of up to three years' imprisonment for “serious circumstances”, and sentences of at least three years and up to seven years for “exceptionally serious circumstances”. In 2004, an interpretation was issued, which reduced the criminal threshold for cases to be considered serious or exceptionally serious. In April 2007, the Supreme Court and Supreme People's Procuratorate issued further new rules that lower the criminal prosecution threshold in copyright infringement cases and increase the level of penalties that judges can impose.

Despite these reforms, the fact that a threshold exists allows counterfeiters to circumvent the rules. Many counterfeiters avoid liability by maintaining supplies at just under the minimum thresholds. The simplest way to address this is to remove the thresholds, and this may be a likely direction that criminal law reforms would take.

There have been increases in the number of civil actions brought against counterfeiters more recently due to the ineffectiveness of criminal and administrative enforcement. At present, the following civil remedies can be obtained from the courts: injunctions, compensation for infringing profits or actual damages, and statutory damages of up to Rmb500,000 (US$65,574).

By 2010, most of the concerns about civil enforcement should be addressed. Every year, judges are gaining more experience regarding IP cases, and their technical training will surely improve as a result of this. The proposed reforms of IP rights laws are likely to provide more clarity and standardization to enable judges to better apply the law.

Liability Issues

On April 18 2006, the Beijing Higher Court held the owner of the Silk Road Market in Beijing and five stall owners liable for infringing the trademarks of Louis Vuitton, Prada, Gucci, Chanel and Burberry. They were ordered to stop selling counterfeit products and were made to pay a total of Rmb100,000 (US$13,120) in compensation. The significance of the Silk Market decision was that it confirmed that landlords are jointly and severally liable with their tenants for counterfeit goods sold on their premises.

By obtaining the cooperation of landlords, counterfeiters' places of business can be taken away from them. However, landlords are still resisting their obligation to refer infringers to enforcement authorities. It is likely that in future the threat of criminal liability along with more litigation will force them to comply. Landlord liability initiatives have already begun in other big Chinese cities, building on the success in Beijing, and they are likely to be continued into 2010 and beyond.

Other groups along with landlords have been targeted for criminal prosecution, from transporters, internet service providers and financiers to factory workers and shop assistants, for their roles in the production and sale of counterfeit goods.

A recent example of this is a case involving the refilling of genuine Hennessy, Chivas, Martell and Remy Martin bottles with inferior liquor by a syndicate in Zhongshan. On May 15 2006, the mastermind was sentenced to seven years' imprisonment and a fine of Rmb400,000, the landlord to a year of imprisonment and a fine of Rmb40,000, and the workers and transporters to between 18 and 42 months imprisonment and fines of between Rmb30,000 and Rmb80,000.

In 2010, more of these cases are likely to be brought by brand owners against these different groups, since it has been so difficult to go after the counterfeiters themselves.

Consumer liability for possession of counterfeits has been proposed as another means of stopping counterfeiting, by deterring those who purchase the goods. However, it is unlikely that this will be actively pursued in China in the near future or in 2010 because many consumers would argue that they did not know the goods they purchased were counterfeits. This may well be the case when the counterfeits are over-quota goods produced in the same factories that produced the original goods. It is more likely that future initiatives will focus on the counterfeiters and the parties that assist them instead.

Political Pressure

By joining the World Trade Organization in 2001, China agreed to comply with WTO agreements, including TRIPS, which sets down minimum standards of IP regulation for all member countries.

In recent years there has been a great deal of political pressure on China, with numerous complaints that it has not done enough to protect IP rights. The United States Trade Representative (USTR) placed China on its Priority Watch List in its 2005 Special 301 Report, and it remains on the latest watch-list issued on April 30 2007. The decision to place China on the watch-list was a significant step, in that China will now be subject to investigations by the US on the adequacy, effectiveness and progress of its IP rights protection. The USTR has recognized China's efforts to address IP rights problems but states that infringements remain unacceptably high.

On April 10 2007, the US launched a formal complaint with the WTO and submitted two cases against China. One case alleged the poor enforcement of copyright and trademark protection, while the other expressed concerns over illegal barriers hampering sales of US films, music and books. The EU, Mexico, Japan and Canada have requested to join the dispute as third parties.

Under WTO dispute settlement procedures, the US and China would normally consult within 60 days, failing which a WTO dispute panel can be convened to handle it. While consultations between the US and China have taken place, whether the US government will now request the establishment of a WTO panel to rule on its complaint remains to be seen. If it does, it is likely the effects of the case will resonate into 2010 and beyond.

The PRC government has been more proactive in developing initiatives to crack down on counterfeiting. In 2010, China will still be under pressure to continue improving its IP rights protection, but it will better understand the need for this as Chinese companies continue to develop and expand.

Recent Initiatives

In 2005, China agreed at the Joint Commission on Commerce and Trade to complete a legalization programme to ensure that only licensed software would be used in government offices, and to extend this programme to all enterprises in 2006. In April 2006, the PRC government issued a notice requiring the pre-loading of legal operating system software on all computers manufactured in or imported into China.

Founder Technology Group Corporation, one of China's largest PC makers, signed a significant agreement with Microsoft Corporation on April 13 2006 for the purchase of US$250 million worth of authentic Microsoft software to be installed on all of its PCs in the Chinese market. A similar agreement had been signed a few days earlier by Tsinghua Tongfang. In May 2007, a deal worth as much as US$1.3 billion was signed by Lenovo Group with Microsoft Corporation to buy Windows, Office and other software suites for its personal computers. The agreement emulated a similar 2006 agreement worth US$1.2 billion over one year to pre-install Microsoft's Windows operating system software on Lenovo's computers.

This is a clear indication that Chinese companies are committed to combating counterfeiting. Gradually, actions such as those by Founder Technology, Tongfang and Lenovo will help decrease the number of counterfeit software purchased. By 2010, more big Chinese companies are expected to follow this initiative in different markets as they expand and create their own IP rights.

On July 15 2006, the PRC began a 100-day campaign to crack down on the piracy of audio-video and software products, led by 10 state departments. Any person or organisation found involved in manufacturing, transporting, selling or renting property for counterfeits and pirated goods was subject to strict penalties and closed down. According to official statistics, 19.46 million illegal publications were seized each month on average from July through to September 2006. A further example of a recent initiative is the crackdown on pornographic and illegal publications. In the first four months of 2007 alone, Chinese law enforcement agencies confiscated 49 million illegal books, periodicals and audio-visual products. More of such enforcement campaigns are expected in the years leading up to 2010 and beyond.

Education and training has also been identified as critically important. The education of Chinese citizens regarding IP rights, including the dangers of buying counterfeit goods, is an important objective for the future. Counterfeiting poses very real dangers to consumers, particularly where it involves fake medicines, food products and vehicle parts, for example. There must also be an emphasis on encouraging the public to view counterfeiting as a crime, and to assist efforts in combating it by not purchasing counterfeit goods. To raise awareness about IP rights protection at trade shows, a national IP rights education campaign called Operation Blue Sky was planned by seven state departments.

Future plans in 2010 should include more education campaigns in the hope of encouraging the public to purchase authentic goods rather than counterfeits. While this may result in some success, the majority of Chinese people in the PRC are still relatively poor. This means that Chinese counterfeits will continue to have a market, both in 2010 and beyond.

Training programmes for local police, customs officials and other enforcement agents have been an important objective. This is to enable them to more easily identify infringing goods and to develop their knowledge of IP rights. By 2010, there will be more courses on IP law in police colleges as well as training courses for police officers handling IP cases. This addresses one of the biggest criticisms of China's IP rights protection, which is the lack of training provided to the police.

Enforcement Concerns

Some provinces in China are dependent on manufactured goods, many of which are counterfeit. These operations are often protected by local authorities. Protectionism is a long-standing practice in China, where local authorities will protect their own industries, economies and practices from the central government. This may come in the form of delaying enforcement actions or tipping off counterfeiters about planned raids to give them time to relocate. The reason for this is because the provinces generally benefit from the manufacture and sale of counterfeit goods, which provides jobs and makes available goods that its people would otherwise never be able to afford. This also ties into corruption, where counterfeiters may bribe officials to give them advance warning of any raids or investigations.

In China's Action Plan on IPR Protection 2006, it was stated that the abuse of power by government officials in IP rights-infringing crimes would be investigated and prosecuted. This shows that protectionism is recognized as a problem by the PRC government. As this is a very challenging issue, however, it is likely that protectionism and corruption will remain serious problems in 2010 and beyond.

On May 27 2006, the late Professor Zheng Chengsi, China's leading IP academic, addressed the Politburo on the need for China to protect its IP rights. He stressed the need for Chinese companies to create their own IP rights before IP could really be respected in the country. Zheng said: “95% of Chinese companies have no trademarks; they only manufacture and produce”. Li Qunying, Director of Intellectual Property in Chinese Customs, added: “If we tolerate counterfeiting and piracy, who would want to create and invent? Who will create well-known brands? People would just use others”.

The PRC government has paid attention to these warnings. On September 12 2006, Chinese Premier Wen Jiabao said at the China-Europe business summit that China is firmly committed to the protection of IP rights. He said that this is necessary both for China to fulfil its international obligations and for it to develop and enhance its capacity for independent innovation.

The Road Ahead

China has only had 20 years to develop its IP system, compared to the decades that other countries have taken. It has also continued to make improvements every year, with a greater number of enforcement actions, goods seized, and fines and criminal sanctions imposed. However, China still needs more time to reform its IP system before IP rights can be effectively protected. Several problems still exist today, as have been described here, and it appears likely that many of these problems will still remain in 2010. The China-US WTO dispute will be a big sticking point and how it will be resolved will have significant political and legal implications, not only between the two nations, but throughout the world.

In 2010 and the future, there will likely be in China further reforms made to IP laws to better punish counterfeiters, continued increases in fines and more litigation being brought to the courts. There will be more cases against landlords and other participants in counterfeiting. China will also be more proactive and introduce its own campaigns and initiatives to crack down on counterfeiting. However, local protectionism and corruption are unlikely to diminish, consumer liability will not be a realistic option, and education campaigns will, by themselves, be unsuccessful in persuading the public to avoid buying counterfeits.

The protection of IP rights in China has come a long way in the past few years, and it appears that this will continue with further initiatives and reforms to the law. Improvements appear to be inevitable, due both to political pressure and the fact that China itself will benefit. This will eventually lead to China possessing an IP system that complies with international standards. In all likelihood, however, all of these desired changes are unlikely to be fully and smoothly implemented by 2010.

About the Author

Loke-Khoon Tan is the Intellectual Property Practice Group Leader in the HK and China offices of Baker & McKenzie and may be contacted at [email protected] and +852 2846 1970.