China: Customs ups its game as counterfeiting continues to grow

Legal framework

The state actively promotes legislation, facilitation of trademark branding and trademark registration, improvement of product quality and strengthening of IP protection, management and relative IP services.

In 2021, the government intensively revised and issued various IP policies and regulations, including:

• Measures for the Construction and Management of National Geographical Indication Products Protection Demonstration Zones (trial implementation);
• Interpretation of the Supreme People’s Court on the Application of Punitive Damages in the Trial of Civil Cases of IP Infringement (the Interpretation);
• Provisions on Evidence in IP-related Civil Litigation, issued by the Supreme People’s Court;
• Interpretation of the Supreme People’s Court on Issues on the Jurisdiction over and the Scope of the Application of Law in Trademark Cases;
• 2021 IP Protection Guidance, issued by the China National Intellectual Property Administration;
• Opinions on Strengthening Cooperation and Protection on IP Protection, issued by the China National Intellectual Property Administration and the Public Security Bureau;
• Guidance on Strengthening the Protection of Geographical Indications, issued by the China National Intellectual Property Administration and the State Marketing Inspection and Management Bureau;
• Opinions on Several Issues Concerning the Specific Application of the Law in Handling Criminal Cases Regarding IP Infringement, issued by the Supreme People’s Court and the Supreme People’s Procuratorate;
• Guidelines for Building a Powerful Country IP with IP rights (2021–2035), issued by the Central Committee of Communist Party of China and State Council;
• Guidance of Trademark Examination Criteria, issued by the China National Intellectual Property Administration; and
• Judging Criteria for Trademark Infringements, issued by China National Intellectual Property Administration.

Border measures

With the booming development of e-business in China, many legitimate brand owners are expanding their businesses in the Chinese market. At the same time, numerous counterfeit goods are transacted in or exported from China. Below are a few tips regarding Chinese customs that IP holders should be aware of:

• China inspects both imported and exported goods at its ports. Since exported goods can be stopped by customs officials, these inspections constitute a significant tool for battling counterfeits coming out of China.
• There are two ways in which customs officials will detain goods for potential IP infringement:
  • Through ex officio action – customs officials act on their own to detain a shipment; or
  • through an application for detainment – an IP holder requests that a specific shipment be detained.
• To improve the chance that customs officials will be able to oversee and catch infringing shipments, IP holders should record their IP rights with Customs. Such recordal is usually a quick, easy and cost-saving but efficient process against infringers.
• Trademark, patent and copyright may be recorded and enforced through Customs; however, the majority of goods detained for suspected IP infringement are held based on trademark rights. Whether patent and copyright customs recordals are valuable will vary case by case and will depend on the likelihood that customs officials would be able to spot and confirm infringement.
• There will be opportunities for IP holders to communicate with and train customs officials on better catching infringing products, this may be particularly helpful for patent-related cases. Taking opportunities to train and develop stronger relationships with customs officials will help IP holders optimise this protection tool.
• Some bad faith trademark squatters may try to stop goods that are manufactured in China but shipped back to the home country of the brand holder. This may be done in an effort to harass and push negotiations.

The rapid development of cross border e-commerce and other emerging forms of trade increases the pressure and challenges that Customs’ protection of IP rights faces. In 2021, customs officials continued to strengthen the protection of IP rights and carried out in-depth actions related to the protection of IP rights. According to the database of the General Administration of Customs, from January to October 2021, Customs has detained 510,000 batches of suspected infringing goods, involving 51.06 million items, through various actions, including ‘Dragon Action 2020’, ‘Blue Network Action’ for IP protection of shipping channels and ‘Net Action’ for IP protection of export transhipment goods.

In recent years, Guangzhou Customs has continuously enriched and expanded cooperation between the Guangdong government, Hong Kong Customs and Macao Customs. This includes through joint enforcement, data sharing, information exchange and visitation exchanges. Guangzhou Customs has strengthened enforcement protection through expansion analysis and has focused on the crackdown of cross-border infringing goods. In the past two years, it has carried out six joint-enforcement actions and has seized more than 700,000 suspected infringing goods exported to or from Hong Kong and Macao.

Criminal prosecution

Key points

The year 2021 is the first year of the 14th Five-Year Plan and the 100th anniversary of the founding of the Chinese Communist Party (CPC). It is also a year of continuous effort and in-depth advancement in the crackdown on counterfeiting.

Among various actions, criminal prosecution is one powerful measure that is used to crack down on trademark infringement. If an act of manufacturing or selling fake products constitutes a crime, the Public Security Bureau will investigate, and the authority will initiate public prosecution.

According to the annual report on IP crimes in the first half of 2021 issued by the Procuratorial Organ, the Procuratorial Organ is prosecuting approximately 6,017 persons for crimes against IP rights. This number has increased by 12.6% year-on-year. The prosecution rate is 91.8%, which is 6.2 percentage points higher than the overall criminal rate and is the highest rate in the past five years. This indicates that the Procuratorial Organ’s efforts to crack down on crimes against IP rights are constantly strengthening. The cases reflected the following characteristics:

• The crimes are very concentrated, and most cases concern the crimes of copying others’ registered marks and selling counterfeits that infringe others’ registered trademarks. Of the 2,676 people being investigated in all cases, 2,138 people are prosecuted for the aforesaid crimes, accounting for 80% of the total number of prosecution cases.
• The places where the cases were appearing were concentrated (ie, mainly in the economically developed areas of southeast China). In the report, 1,463 people were prosecuted in Guangdong, 987 in Shanghai, 416 in Zhejiang, 371 in Henan and 341 in Jiangsu. Those figures equate to 59.5% of the total prosecution cases in China.
• The infringements combine both online and offline methods, and the sales channels are increasingly diversified. In 2017, trademark infringement crimes were carried out both online and offline, with online e-commerce platforms and offline mobile booths as the mainstays. With the gradual development of the internet, since 2019, online sales platforms have spread from e-commerce platforms to circles of friends, small programs, social medias and live streaming, while offline channels have spread to physical shopping malls, canteens, supermarkets, etc.
• Infringers have strengthened their connection with foreign countries. To avoid investigation, criminals even directly set up factories for counterfeit goods outside China or transport counterfeit goods to overseas markets for sale to lower the legal risks.

Preliminary measures

The investigation of trademark crimes should be conducted by the public security bureau. The main points of an investigation are as follows:

• examination of the case report and verification of the trademark holders’ basic information (including the goods approved for use under the trademark and the ownership and transfer or licensing of the mark);
• investigation into the time, place, company or individual involved with the counterfeit goods, including the timely collection of the counterfeit goods, signs and other evidence, as well as verification of the authenticity of the goods or signs, generally issued by the rights holder of the identification report;
• detention of sealing of relevant items, including products or sales documents and other information, while maintaining control of the relevant personnel on the scene; and
• appraisal of the value of the products involved in the case to determine the extent of the crime committed.

The investigation will be concluded and transferred to prosecution when verifying the factual and legal basis. When examining a case, the procuratorate will interrogate the suspected criminal and listen to the opinions of both the victim and suspected criminal. The procuratorate will then decide whether to initiate prosecution.

Remedies

If one of the following circumstances occurs, a lighter punishment may be given:

• admission of guilt and acceptance of punishment;
• obtention of understanding from the rights holder; and
• display of repentance.

To further strengthen criminal protection of IP rights, the Supreme People’s Court and the Supreme People’s Procuratorate issued the Interpretation of Several Issues concerning the Specific Application of Laws in Handling Criminal Cases of Infringement of IP Rights (III), which came into effect in 2020. In addition, the Standing Committee of the National People’s Congress issued the 11th Amendment to the Criminal Law, which came into effect on 1 March 2021. The new regulations will have a novel impact on IP crimes.

Civil enforcement

Key points

The Interpretation was passed at the 1,831st meeting of the Judicial Committee of the Supreme People’s Court on 7 February 2021. It came into effect on 3 March 2021.

Among the provisions of the Interpretation are the creation of specific provisions on the scope of application of punitive damages in civil cases of IP rights and the determination of intentional and serious cases, along with the base calculation and multiple determination, etc. The aim of the Interpretation is to guide courts to accurately apply punitive damages and punish serious infringement of IP rights by clarifying the judgment standards.

Preliminary measures

In general, when trademark holders initiate lawsuits with the court and apply to the IP punitive damages system, the plaintiff compiles evidence for the tort. If the court ascertains the defendant’s tort, and the defendant fails to carry out the action in the court’s judgment, the plaintiff can apply to the court for compulsory execution.

• Under specific circumstances, the court may, at the request of the other party:
• order the preservation of the property of the other party;
• order the other party to perform a certain act; or
• prohibit the other party from performing a certain act in a case where the execution of the judgment may be difficult or other damage may be caused to the party because of the act of one party or other reasons.

By adopting preservative measures, the court may request the applicant to provide security. After accepting an application, if the case is urgent, the court must issue an order within 48 hours. An order for the adoption of preservative measures will be executed immediately.

Remedies

To ensure the correct implementation of the IP punitive damages system and to avoid abuse in practice, the applicable elements of punitive damages must be clarified. The Interpretation clearly stipulates the scope, request content and time, subjective elements, objective elements, base calculation, multiple determination, etc.

Another way to ensure correct implementation is to strengthen guidance through typical precedents. Although the courts will usually make judgments on a case-by-case basis, to ensure the examination criteria is consistent, the Supreme People’s Court will regularly publish typical precedents and guide all courts to correctly adapt to the interpretation.

In the future, the Supreme People’s Court will continue to summarise and share trial experience, promote the improvement of the punitive damages system and effectively deter serious IP infringements.

Anti-counterfeiting online

Unauthorised internet commerce

According to Article 25 of the E-Commerce Law, e-commerce operators must provide relevant e-commerce data and information if requested to do so by the competent authorities. The competent departments must take necessary measures to protect the security of the data and information provided by ethe operators. They must ensure that personal information, privacy and business secrets are kept strictly confidential and are not divulged, sold or illegally provided to third parties.

Online investigation strategies

A combination of intelligent automatic monitoring tools and regular manual online searches can detect counterfeits. Once infringement activity has been found, online evidence should be fixed using time stamps or notarisation.

The investigator can pose as a customer and contact the infringer to uncover the specifics of the targeted infringement under the guise of purchasing products and negotiating business. Certain details must be ascertained, such as whether the target is a seller or manufacturer, whether there is only an online store or a physical shop, and the price, type and sales volume of the infringing products of the target. Only once the aforementioned details have been ascertained can the appropriate rights protection strategy be formulated.

ISP liability

Article 36 of the Tort Liability Law states that internet users and internet service providers (ISPs) will bear tort liability if they use the internet to infringe the civil rights and interests of others. If an internet user uses an internet service to commit an infringement, the infringed party has the right to notify the ISP to take necessary measures, such as deleting, blocking or disconnecting the link. The ISP will be jointly and severally liable with the infringing internet user for the damage if it fails to take the necessary measures in a timely manner after receiving the notification.

In 2020, platform enterprises earnestly fulfilled their obligations, building IP protection platforms and continuously refining the IP protection functions within those platforms. The number of IP protection system holders on major e-commerce platforms continues to increase.

Preventive measure/strategies

Use of local counsel and investigators

Generally speaking, it is beneficial to seek assistance from local counsel and investigators because they are familiar with the characteristics of the local market and infringing activities, as well as local policies and businesses. This knowledge will be useful in discovering signs of infringement and providing tailored strategies to stop infringements and recover losses in an efficient way.

With the boom of internet and artificial intelligence in mainland China, most local counsel and investigation teams will also provide an online platform for clients to conduct infringement monitoring, as well as investigative services through one-stop and regular services. After sending the instructions, the local counsel and investigators can proceed with regular monitoring services and provide relative legal monitoring reports, including the signs of infringement discovered on the website, shopping platforms, social media, physical stores, etc.

Control of contractual relationships with third parties

As a preventive measure, especially for international trade businesses, it is strongly recommend to clearly indicate the rights and obligations with the manufacturers, agencies and licensee in the cooperation agreement.

It would be useful to pay attention to the following aspects:

• strengthening of the brand shield (eg, defensive applications for Chinese names, more relative goods and services, and various IP rights) before cooperation with third parties to reinforce the legal basis and prevent the business partners from rush-registering or infringing rights;
• explicit prohibition for the business partners from registering the brands as their trade name to lower the likelihood of confusion among customers;
• strict indication of the authorised business cooperation scope, authorised products, authorisation duration, usage manners, advertising and packages design, usage in promotional activities, etc;
• explicit prohibition from using or assisting others to use the brands, copyrighted works or other IP rights without the prior consent of the real holders; and
• cooperation with the business partners to monitor potential infringement or competitors in the market and to take actions together in advance.

Effective use of technology, authentication and monitoring

Most the professional legal firms have committed to the development and operation of online infringement monitoring, covering online e-business platforms (Alibaba, Taobao, JD.com, etc), social media (WeChat, Weibo, Douyin, Redbook, etc) along with physical stores of targeted competitors.

In addition, online e-commerce platforms (eg, Alibaba) provide efficient support and impeccable­ regulations for authentication and monitoring, including legal prosecution. This will be helpful for brand holders in defending their IP rights and cracking down counterfeiting.

Cooperation with national anti-­counterfeiting agencies

There are several anti-counterfeiting and IP protection agencies in China, such as the Beijing Anti infringement and Anti-counterfeiting Alliance and the Alibaba Anti-counterfeiting Alliance. These agencies fight against counterfeiting by promoting cooperation between e-commerce platforms and enterprises, holding regular exchange meetings and reporting the latest progress in judicial protection in the industry. Companies can protect their IP by cooperating with these institutions.