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04 November 2019
Target sellers and landlords
Target major dealers criminally and carry out periodic market sweeps
Find the roots and dig them out
Launch simultaneous criminal, administrative and civil actions
Work closely with competitors in the same industry
Cooperate with local government and enforcement agencies
Work with the media
Brand victories in the fight against physical market sellers and landlords selling counterfeit goods are all too rare. However, there are a number of practical strategies that can be employed to maximise success in the battle against counterfeits.
So-called 'notorious markets' are markets which are well known for selling counterfeit products, often to tourists and visitors looking for good deals on famous branded products. The price of these products is significantly lower than the genuine article and most people are fully aware of what they are buying. At first glance, the shopper gets a good deal, the shop owner makes money and the landlord collect high amounts of rent – it seems that nobody loses, as the buyers cannot afford the genuine products. However, counterfeit luxury bags and high-end items may lose:
Counterfeit goods are often purchased as gifts for friend and family who may be unaware that the products are fake. Such consumers may be left with a negative impression of these brands when they think that the poor quality counterfeits are the genuine article. This is another reason why brand owners should aggressively enforce their brands and invest significant money and effort in stopping counterfeits.
It is unfortunately rare to see brands claim a victory in the fight with sellers or landlords in such markets. The successful cases over in the past 20 years show that a comprehensive strategy must be deployed to maintain brand identity. While no brand owner has yet claimed victory in the war against notorious markets, a number of brands have done an excellent job in addressing this issue – in particular, compared to other brand owners, who have taken little (or ineffective) action in this regard.
Sellers and landlords in notorious markets often protect each other to avoid being caught by brand owners – as a result, any comprehensive strategy to tackle counterfeits must target both parties. The first step for brand owners is to notify landlords that there is a counterfeiting problem in their market. This allows landlords to take corrective action on their own initiative and landlords will thus be unable to argue in a subsequent lawsuit for joint liabilities that they had no knowledge of the counterfeiting activities, which is a typical defence in such lawsuits.
Once a landlord has been notified, action can be taken against individual sellers. Depending on how bad the situation is, a sweep action targeting each seller that deals with the brand can be a good start. It might also be necessary to target a few major dealers and pursue them criminally. After the first round of action, the brand owners can establish a prevention plan with the landlord. This may include but should not be limited to the following terms:
Once a prevention plan in place, the brand owner can hire an investigator or have their local salespeople monitor the market. If the same counterfeit sellers return, the brand owner can enforce its prevention plan and formulate another prevention strategy with higher penalties. If the landlord does not agree to this strategy, the brand owner can bring a lawsuit against both the sellers and the landlord for joint and severable liabilities.
Administrative penalties (eg, the confiscation of seized goods and monetary fines) are sometimes seen as the cost of doing business. Real deterrence starts when counterfeiters end up in prison for their actions. In a typical notorious market, there are always major dealers of certain brands which are excellent targets for in-depth investigations and criminal raids. If these major dealers are criminally prosecuted and jailed, the market should remain quiet for a relatively longer period than after an administrative action. As a result, it is worth the cost and effort to carry out an investigation that will lead to the arrest, prosecution and imprisonment of major dealers. When counterfeit sellers return to the market, an administrative sweep can be an efficient deterrent.
It can be hard to tell whether demand or supply is at the root of counterfeiting. However, cutting the supply chain should be part of any strategy to tackle counterfeiting. Experience shows that the number of counterfeit manufacturers is much smaller than the number of sellers. This means that cutting a supply chain will force a significant number of sellers to halt their illegal activity, as it takes time and effort to look for new suppliers. During investigation and enforcement actions against sellers, it is key to collect information that may lead to the supply chain of the seized goods. It is easier and more efficient to pursue criminal liabilities against suppliers by tracking backwards to them, as criminal threshold is based on prior sales and the goods seized at the seller's premises count as such. Therefore, evidence collected from retail raids will be helpful in criminal prosecutions against wholesalers and manufacturers. Once a manufacturer is criminally prosecuted and jailed, many retailers will have to either stop selling counterfeit products or switch to other brands until they find new suppliers.
China has multiple enforcement approaches available to tackle trademark violations with different pros and cons. Criminal enforcement is the most effective deterrent to trademark counterfeiting. However, the evidentiary threshold is much higher and investigations and raids take much longer to complete. Administrative enforcement can be arranged quickly and is highly efficient at stopping largescale counterfeiting activities. However, administrative penalties are limited to the confiscation of counterfeit goods and fines and do not deter counterfeiters for long. Civil litigation can be a good addition to criminal and administrative enforcement actions, enabling the brand owner to seek a permanent injunction order and damages. This process can take a long time, meaning that counterfeiters will have to hire a lawyer and get involved in legal proceedings. While this can be costly for brand owners, it can discourage counterfeiters from returning to illegal activities. Brand owners can obtain a permanent injunction order in civil litigation for trademark counterfeiting. Chinese courts are also imposing higher damages awards, which makes it more worthwhile for brand owners to bring civil lawsuits against counterfeiters following criminal or administrative actions. In Chinese culture, businesspeople aim to avoid being involved in a lawsuit – it is bad luck and involves losing face – and counterfeiters see themselves as businesspeople. Further, civil decisions are included in the company credit database, which is open to the public. Once a business is found liable for trademark counterfeiting in a civil lawsuit, the court decision will appear in the public credit database forever.
It is not always easy for different companies in the same industry to work together. However, there are numerous success stories of companies in the same industry working closely together to tackle counterfeiters, especially in the context of notorious markets, which are much more sophisticated and organised than individual counterfeiters. There are several benefits for companies in the same industry working together in this context.
First, companies are more powerful when they work together as a group rather than a single brand. They will receive much more attention from landlords as a group and will be given higher priority by government enforcement agencies when they file collective complaints about enforcement actions. Given that many brands manufacture or source products and materials in China, they could act as a significant lobby group.
Second, it is easier to pursue criminal liability against counterfeiters as a group, especially when companies must deal with sellers in a well-protected notorious market. According to Chinese criminal law, the threshold of criminal liability for selling counterfeit products is based on the total value of the seized goods or the total revenue from prior sales. By acting alone, a brand can seize only a limited amount of counterfeit products from one seller and it is almost impossible to seize sufficient products to meet the criminal threshold. By contrast, industry players working together could potentially clear a market of counterfeit goods. The luxury industry group has had some significant results in several notorious markets in China, in particular, the US Golf Manufacturers Anti-counterfeiting Working Group which successfully tackled the sale of counterfeit golfing products. No single brand has claimed victory by working alone.
Finally, it is more cost-effective to share the cost for investigation and enforcement among industrial group members. Enforcement in China has never been cheap and it is getting increasingly expensive. Working together and sharing costs is the only way to lower enforcement costs significantly while maintaining pressure on counterfeiters. One of the key reasons that the US Golf Working Group has been so successful is that it shares enforcement costs equally among all members. The group believes that all brands in its industry are at risk from counterfeiting. With a relatively small contribution from all industry players, the group has put together a significant budget which allows it to carry out as many raids as necessary, something which would be impossible for a single member acting alone. Further, it may be easier for investigators and lawyers if a case involves multiple brands. Consequently, it is significantly more cost-effective for brands to work together as much as possible.
Government enforcement authorities have the power to carry out raids and impose penalties on counterfeiters. The most productive approach for brand owner is to work cooperatively with local government and enforcement agencies. Local government always has a share in markets that are popular with tourists and visitors, but this does not mean that it supports counterfeiting. On the contrary, some local governments have tried to have local markets removed from the list of notorious markets, while others have made significant efforts to promote the sale of local brands and traditional products rather than counterfeit branded products. International brands should work together with local government to tackle the sale of counterfeit goods at local markets.
Further, enforcement agents are working tirelessly to tackle counterfeiting through raid actions, seizing counterfeit goods from small hidden warehouses, dealing with aggressive counterfeiters and travelling significant distances to ensure that counterfeiters are arrested. Brand owner's must provide accurate information that leads to successful raids, submit documents for legal procedures and acknowledge when a case has been successfully concluded. In this way, government support and a productive working relationship with enforcement agencies can be fostered. Given the influence that local government can have over local markets, working cooperatively with the government is the right approach to tackle the sale of counterfeits.
The media can be a powerful tool for fighting counterfeits in China when used properly. Although counterfeiting remains a serious problem, no one in local government wants to see negative media coverage that their municipality has a counterfeiting problem. The power of local government comes from higher government authorities and they have fewer incentives to protect local business. That said, the government has a genuine desire to promote innovation and protect IP rights. For this reason, media reporting of raid actions is worthwhile. Once a raid has been reported on television and in newspapers, local protectionism is less likely to play a role in subsequent legal procedures and local enforcement agencies will have a much greater incentive to impose more serious penalties on counterfeiters to show that they are doing their job efficiently. Another benefit of getting the media involved is that publicising penalties is an effective deterrent for counterfeiters and other parties interested in getting into this illegal business.
For further information on this topic please contact Jason Yao at Wanhuida Intellectual Property by telephone (+86 10 6892 1000) or email (email@example.com). The Wanhuida website can be accessed at www.wanhuida.com.
An earlier version of this article first appeared in World Trademark Review. For further information please visit www.worldtrademarkreview.com.
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