Increasingly litigious IP owners change enforcement landscape

Rouse
Sophia Hou
[email protected]

The landscape of IP enforcement in China is changing. Whereas in the past, the first line of attack against infringers was usually administrative action, IP owners are increasingly seeing the advantages of civil court action. There are good reasons for this change of approach.

This article explains the reasons by reference to a case study, which is based on a company that has been seeking for some years to enforce its rights through the administrative route.

Taking administrative action
A German automotive company has been seeking to enforce its IP against infringers in China since 2003. Its strategy has been to rely, primarily, on AIC (Administration for Industry and Commerce) raids, which it saw as a quick and cost effective means of enforcement.

The raids, however, proved to be of limited value. Firstly, they were of little deterrent value. The AIC would usually confiscate the infringing products, order the infinger to cease infringing, and impose a fine that was not sufficiently high to act as a deterrent.

Secondly, the company frequently took action against repeat infringers and this, ultimately, resulted in the infringers changing their tactics and ceasing to make straight counterfeit auto parts. Instead, they would slightly change their brands and packaging, making them no longer identical to the original product.

The infringements became more sophisticated. The infringers gradually sought legal advice and began to use legal weapons to protect themselves. They initiated administrative reviews and commenced law suits against the local AIC. This not only created a burden for the AIC in terms of time and manpower, but also damaged its reputation.

In order to avoid the risk of being sued for wrongdoing, procedurally or substantially, the AIC decided it would take action only in the most clear cut cases. Another reason it adopted this approach was that most of the AIC officials do not have a legal background and are not confident to take action that might be the subject of dispute.

From the perspective of the infringers, once they knew that the AIC was not likely to raid them unless they made pure counterfeits, and the IP owner was not likely to take court action, they could continue with impunity to flood the market with infringing products. This was obviously a disappointing result for the IPR holder after years of anti-counterfeiting effort.

Civil litigation route
At this point it is necessary to think of other alternatives such as civil litigation. Although civil litigation is both time-consuming and expensive compared with the administrative route, there are advantages.

The courts in China are becoming increasingly competent in the area of IP. For cases involving foreign elements, first instance hearings usually take place about six months after commencement of the action. The courts award damages on the basis of illegal profits made by the infringer as a result of the infringement, or actual loss suffered by the IP owner. Where the defendant's illegal profits or the plaintiff's actual loss cannot be calculated, statutory damages of up to Rmb500,000 (US$73,000) may be awarded by the court.

While the principle underlying the grant of compensation has been to compensate the plaintiff for the loss suffered, recent opinions of the Supreme Court on the implementation of the national IP strategy stress that damages shall play an important role. This is in relation to both sanctions against the infringer and appropriate relief for the IP owner, and that “the level of compensation shall be increased in the event of malicious infringement, repeat infringement etc”. This indicates that Chinese courts will be able to impose sufficient damages, which will make infringers financially incapable of repeating the infringing conduct.

Our advice to the German company in this case study would be to select one or two well-chosen targets, in relation to which it has solid evidence, and bring a civil court action. The benefits of doing so would include:

• the possibility of obtaining an award of damages (as high as possible);
• the possibility of obtaining a ruling from the court on the basis of trade mark infringement/unfair competition, which could then be used to encourage the AIC to attack smaller infringers;
• obtaining high-profile publicity for the case in the local area, thereby helping deter potential infringers; and
• causing as much aggravation for the defendant as possible by requiring it to take part in court proceedings (if possible, selecting a relevant venue far from the manufacturing location).