Counterfeiting in China: common practices and cures
Author: Resources
Comprehensive information on how counterfeiters operate in China.

"Counterfeiting in China has reached a crisis point." This common view is heard from many foreign executives and government officials. The problem appears to be getting worse each year: Not only is the quality of counterfeits improving, **** goods are appearing in more overseas markets.

The problems with intellectual property (IP) infringements are, however, not an issue just for the PRC government. Many foreign companies have done little to protect their IP rights in China, leaving their products vulnerable to counterfeiting. In addition, as a senior official of the PRC Ministry of Public Security pointed out at a recent conference jointly sponsored by the World Customs Organization and Interpol, it is often foreigners who supply the machines to make counterfeits and buy the counterfeits that are produced.

How counterfeiters operate

Counterfeiters worldwide use increasingly sophisticated methods to avoid detection by rights holders and law enforcement bodies. Even if detected, their operating methods are designed to minimize potential penalties.

Corporate practices
Counterfeiters frequently use front companies or front men to register companies that produce counterfeits. This makes it difficult to identify the true players behind a **** operation and make them liable for their unlawful acts. Furthermore, company production and sales records do not indicate that counterfeits are being produced and sold; rather, model numbers and code words are used. Even if a rights holder obtains these records as part of an investigation or raid action, they can be difficult to use unless the meaning of the model numbers and code words can be explained satisfactorily to a court.

Production processes
Like all good modern businesses, counterfeiters use just-in-time production and rarely keep inventories to reduce carrying costs and the risk of seizure. They produce only to order, making it difficult to seize large volumes of **** products. If counterfeiters do keep stock, they usually keep it separate from manufacturing facilities in a secret location leased in the name of a front company, making it difficult to link to the counterfeiter. Rights holders can find these locations only after in-depth investigation.

The more sophisticated counterfeiters will not make products themselves. Instead, they use separate subcontractors to make different parts of the **** goods, which are then assembled by another subcontractor.

Sales and distribution
To avoid detection by investigators, counterfeiters do not provide samples to prospective "buyers" and will refuse to deal with potential customers who do not make a substantial purchase. This can make it difficult and expensive to confirm whether counterfeiting activities are occurring. To mount any type of civil or criminal case, it is generally necessary to have a sample of the **** product.

Even if a counterfeiter accepts an order, the main players behind counterfeiting rarely take delivery of **** products themselves. Instead, products are shipped directly from sub-contractors to freight forwarders. Payment for counterfeits is usually made to entities separate from the production and sales companies. This can make it difficult to tie the counterfeiter directly to siezed products, hindering criminal prosecution.

Finally, sophisticated counterfeiters will often buy genuine products on the gray market and mix them with **** products. This can make criminal prosecution difficult because in most criminal justice systems, defendants can avoid criminal liability if they can show that they have been innocently caught up in counterfeiting activities. Those found in possession of mixed products can simply claim that they have been duped and that they checked the products, which appeared to be genuine.

Government tools to combat counterfeiting

Countries can do three things in the legal realm to combat counterfeiting: have an effective trademark registration system; criminalize all manufacturing and commercial distribution of counterfeits; and have effective civil procedures, including the availability and enforcement of injunctions and shifting of the burden of proof when necessary.

Effective trademark registration system
First, it is important to have an effective system for the registration of trademark rights. To be effective, a system must be able to examine and approve trademarks rapidly, as well as deal with oppositions or cancellation actions quickly. An efficient trademark registration system provides certainty to all parties involved. Speedy decisions also help to reduce disputes over trademark rights, particularly when more than one company is claiming to be entitled to a particular trademark.

Criminal penalties for all commercial counterfeiting
For maximum deterrence, criminal penalties for counterfeiting must be imposed on all production and commercial sale of **** products. In all detected cases, including seizures by Customs, criminal penalties should be imposed on all individuals involved in the process of producing and selling counterfeits, including factory workers and shop assistants. The criminal justice system should also be designed to take into account the fact that it can be extremely difficult to locate and obtain evidence against counterfeiters.

Civil procedures
Civil procedures and remedies should be designed to take into account the difficulties of proving counterfeiting. In particular, civil procedures should provide for the shifting of the burden of proof to a defendant when the plaintiff is able to produce reasonable evidence that counterfeiting activities have occurred, making the defendant responsible for proving that the products in question are not ****. Injunctions should also be granted against all defendants found to be involved in counterfeiting. Defendants who breach an injunction should face fines and imprisonment. Currently, China lacks a method for effectively enforcing injunctions. There are no clear procedures for finding a party breaching an injunction in contempt of court.

Tools for rights holders

The rights holders that have been most successful in combating counterfeiting are those that actively manage their anti-counterfeiting program.

Product design
Products should be designed so that they cannot be easily copied. This can involve introducing parts that are more complex and hard to copy, which can increase production costs. To prevent counterfeiting throughout the supply chain, many companies in China are embedding trademarks on all key parts of their products and packaging. Parts suppliers thus may potentially be held liable for counterfeiting.

Trademark management
Effective trademark management is essential to avoid counterfeiting and infringement in China (and worldwide). Given the slowness of China's registration system, it is essential that companies register trademarks well before use, if at all possible. To avoid infringement by Chinese translations of trademarks, companies should register Chinese versions of their trademarks and their variants.

Investigations and actions
The companies with the best anti-counterfeiting programs in China have invested heavily in investigations targeted to identify the key players behind counterfeiting activities. Not raiding immediately, even when an investigator discovers that **** products are to be shipped, is key to these investigations. Companies should take action in the context of a strategic plan that should not focus solely on "seizure numbers." Rushing out and raiding a factory because "product is about to be shipped" is not the best way to run an anti-counterfeiting program. Investigators often give the impression that if a factory is not raided immediately, all chances of taking action will be lost. This implies that the factory will never be involved in counterfeiting again. Frankly, if a factory is making counterfeits, is about to ship product but is never going to make counterfeits again, then it should not be a target. Instead, a factory found making counterfeits should be investigated to help identify suppliers, sub-contractors, customers, and how products are distributed in China and exported. Sometimes a raid can help to obtain such information, but any action must be taken with this goal in mind.

A rights holder must make internally coordinated efforts to identify major infringers and record this intelligence properly. Information should be entered into an internal database, indicating the locality of the infringing product, the identity of the suspected infringer, and the markets supplied. Details of previous actions taken and other relevant information should also be included.

When information is properly analyzed, it often becomes clear that a small number of organized syndicates is involved in the counterfeiting of certain products. For example, in one case, where raids of more than 150 factories had been conducted by a foreign company, analysis of the raid results and other information showed that three main groups were behind the production and sale of counterfeits. Several computer programs are available that analyze intelligence to show links among various factories and counterfeiters and thus identify the mastermind behind counterfeiting activities.

- Douglas Clark

Source: This is an excerpt from an article originally published in the Jan, 2006 issue of the China Business Review.

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