Kering v Alibaba sounds the alarm on China's online counterfeits

This story originally appeared in Managing Intellectual Property


Since Chinese e-commerce giant Alibaba's much-heralded initial public offering last year, the company has seen its share of legal conflicts, including a securities fraud class action suit in the Southern District of New York and a scathing white paper from China's State Administration of Industry and Commerce (SAIC) concerning allegations of counterfeits and other improprieties.

The disputes keep coming, with Kering, the Paris-based luxury brands group that includes Gucci and Yves Saint Laurent, suing Alibaba over counterfeit goods sold in its marketplaces. The suit, filed last month in the Southern District of New York, alleges that Alibaba Group "knowingly encourages, assists, and profits from the sale of counterfeits on their online platforms".

Any case involving one of the world's biggest online marketplace will draw headlines, but rights holders are especially keen on following this case. Alibaba is a famously secretive company, even after listing on the NYSE. What's more, while China does not provide for civil discovery, the Kering case is taking place in likely the most discovery-friendly country in the world, and observers are keen to see what is revealed in the course of litigation.

"This is going to be massive,"predicts one private practice lawyer. "I am curious how far the discovery will go."

Not surprising

Last August, Kering and Alibaba agreed to work together to combat fake products on the e-commerce site. The agreement came after Kering withdrew an earlier lawsuit against Alibaba over similar issues.

The truce was short-lived with this second lawsuit coming less than a year after the first. A legal practitioner says this was to be expected. He explains: "I don't think Alibaba has shown good faith in dealing with counterfeits. Every measure the company has taken to combat fakes has been problematic, and none of them are good."

What has Alibaba done?

Counterfeit products have been a persistent headache for Alibaba. The company states that it has adopted " a zero-tolerance policy toward counterfeit goods" and has taken steps to fight against fakes.

It's an ongoing process and measures have been continually taken to improve the situation, David Ho, legal counsel at Alibaba Group, told Managing IP. Alibaba's IP legal department maintains a group of 30 people based in Hong Kong, Hangzhou, Guangzhou, Beijing and the United States.

The company introduced its TaoProtect system in 2011 to curb the sale of fake goods on Taobao, its popular B2C marketplace. The system's latest revision, which took effect on April 1, introduces some new rules regarding the complaint filing procedure, good faith takedown mechanism and counter-notices.

However, the latest revision remains controversial. Specifically, it adds a new step in the complaint filing procedure, requiring brand owners to submit an additional written explanation for any advertisements they deem objectionable.

"In the past, much of the burden of removing infringing or counterfeit goods from the Alibaba platform was shifted to brand owners," says George Chan of Simmons & Simmons in Beijing. "There was no mechanism for dealing with repeat infringers in place prior to 2009, and the later-implemented AliProtect take down system would only process 200 listings per complaint filed against a vendor."

Chan adds: "It is unquestionable, from Alibaba's business model, that it profits from online sales, however the focus of the enquiry will be on whether Alibaba has adopted sufficient measures to stop existing infringements of intellectual property rights and to prevent further infringements."

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Big stakes

Asked for his predictions about the Kering litigation, Chan says: "It is difficult to say without a review of the case. However some of the reports that I have come across, including a meeting memo or white paper from the Chinese government, paint a very unflattering picture of Alibaba's handling of counterfeit goods on its platforms. If these reports are proven to be true, this would not bode well for Alibaba for this litigation."

"If Alibaba loses this case, I suspect that this would open the door to many foreign brand owners weighing the benefits of pursuing a civil action against Alibaba in the US," he adds.

A particularly problematic feature is Alibaba.com's keyword and search algorithm functions, which Kering alleges is "intentionally designed to cause consumers to be offered counterfeit products when they search for brand names". According to the complaint, the search engine will suggest terms such as "cucci" and "guchi" when the user enters the search term "Gucci", leading customers to fake products and enabling Alibaba to profit from keyword sales every time a customer clicks on a sponsored store webpage.

As of the time of writing, these features appear to still be operational. If a user types in "Gucci," the site suggests "guchi" as a related search. Similarly, if the user types in "Louis V", the auto-complete feature will suggest "luis vition bags" as a possible search.

Enforcement shortcomings

The minimum value threshold required for criminal enforcement in China has frustrated brand owners. China's Criminal Code requires prosecutors to prove "serious circumstances" by showing that the volume of the illicit activity exceeds RMB 50,000 ($6,925). In practice, brand owners often struggle to provide such evidence. Consequently, IP owners seeking criminal enforcement have to resort to administrative methods through the local Administration for Industry and Commerce (AIC) and Bureau of Quality and Technical Supervision (QTS), both of which lack sufficient resources to detain knock-offs and impose fines effectively.

Online enforcement is similarly problematic. A market observer explains that the AIC that takes over online anti-counterfeiting cases does not have very many substantive powers to stop the infringement.

Another problem is that while the AIC decentralises the power to local AICs when tackling online issues, online cases are usually cross-regional. An AIC will often take on cross-regional enforcement cases only when it is a big, headline-grabbing matter. As a result, the local AICs often claim that that an online case should be handled by officials in another geographical region — leaving rights holders in a situation where no AIC claims responsibility for moving the case forward.

More work to do

In addition to problems in the enforcement mechanisms, more reform with direct involvement from the government is needed.

Joe Simone of Simone IP Services says that he hopes that the Chinese government will maintain its current focus on the online anti-counterfeit issue.

"The government will need to follow through with a range of reforms — on legislation, administrative measures, dire enforcement, and encouraging IP owners and trade platforms to cooperate more effectively," he says. "At the same time, behind the scenes they will need to push Alibaba to go the extra mile to achieve meaningful results, keeping in mind that Alibaba knows its business better than anyone else. This means trying out more experimental measures that haven't been considered before — some of which may well eat into their incomes."

Simone also suggests lowering the minimum threshold for criminal enforcement, as well as organising a well-trained cyber police designed specifically these types of issues.
Setting up pilot programmes in Guangzhou and other hotspots for online trading would also be logical steps. He notes that national authorities have indicated plans to commence pilot programmes to test out new enforcement tools, but foreign companies are not being invited to participate so far.

China's online retail market has expanded quickly in recent years. In 2014, there was RMB 13 trillion ($ 2.1 trillion) in sales. The top three B2C players are Alibaba's Tmall (57.36%), JD.com (21.22%) and Suning.com (3.50%), according to BysoftChina.

By contrast, eBay had $17.94 billion in sales revenue in 2014, while Amazon's revenue in 2014 is estimated to be $90.9 billion.

Though it is unclear at this time how far the government will go on regulating online business, Kering's second lawsuit against Alibaba has drawn the attention of the Chinese government and pushing online retailers' marketplaces to direct more attention to the issue.


By Stephy Tang, Managing Intellectual Property