Why Protecting your Trademarks in China is a Top Priority for Doing Business – Part II

By Lukas Steinberg

Posted: 27th February 2012 11:45

Unfortunately albeit not surprisingly, even registered trademarks are far from being safe from infringement. As one marketing expert put it, if your product is not being counterfeited in China, you did a bad job. Enforcement may be unavoidable depending on the individual case and if the infringement interferes with the company’s business interest. There are several channels that can be employed to protect trademarks and IPR in general in China, but which enforcement method is the most suitable for the case highly depends on the risks associated with it, as well as on the infringement and the opponent. Sometimes the infringement will not inflict real losses to the holder of rights (e.g. when upscale counterfeit commodities are sold on streets and markets in underdeveloped regions with no target market for the product) and it should be deliberated about whether the extent of infringement is worth any legal action. Not least factors like local protection and corruption of authorities should not be underestimated in the whole process. However, when the infringement directly competes with the plaintiff’s business or the reputation of the trademark may suffer, the situation is different. Therefore it is always inevitable to evaluate the case with a competent legal expert.

Protecting your Trademarks – Enforcement Methods

1) Demand Letters

Preparing a demand letter with your lawyer sends a signal to the infringer that you are determined to take legal steps if they fail to immediately cease the act of violation. Depending on the circumstances, the infringer may conclude that the illegal business activities are not worth the struggle with courts and legal expenses as well as the publicity of the trial. On the other hand, a demand letter has no legal force. On the contrary, in some cases it may even complicate the collection of evidence for a civil action since the infringer has been given enough time to “miraculously” let the evidence disappear.

2) Customs

The General Administration of Customs (GAC) offers two methods of protection from the import and export of fake commodities: A trademark owner may request the GAC to retain a shipment if the products to be shipped are suspected of violating IPR. A security deposit and relevant documents proving the applicant to be the rightful owner of the trademark must be submitted to customs. If it is determined that its IPR have indeed been infringed upon, Chinese law provides for seizure and destruction of the merchandise.

Alternatively, one may preemptively register and submit relevant information regarding the IPR to be protected with Chinese customs. Under this condition, customs officials can hold back shipments of counterfeit goods during spot checks, and report to the trademark owner who can then prepare for action. Therefore it is always advisable to register the trademarks with the GAC, as it simplifies the examination procedures and is the best way to circumcise export of counterfeit goods out of China.

3) Administrative Authorities

In China, the holder of rights can apply to administrative authorities to carry out raids to confiscate counterfeits. There are several different authorities that are entitled to perform raids and seizures, depending on the kind of IPR involved. If this method is considered, legal counsel should be retained to determine which administrative authority should be contacted, and to coordinate with such authority to ensure optimum results. Raids are arranged relatively easily and can lead to quick results (i.e., immediate seizure of fake goods, destruction of equipment used to produce counterfeits, and imposition of a fine). In some cases however, the fines may be insufficient to de-motivate the infringers, in which case administrative actions will be insufficient as an effective long-term deterrent. Moreover, the plaintiff will neither achieve any kind of compensation for the damages suffered nor for the legal and enforcement fees, as the imposed fines are of administrative nature only. However, an administrative action is easy and fast to arrange in order to take immediate action, and can serve as a good and safe way to secure inculpatory evidence, which then can be used in litigation.

4) Civil Action

Another way to combat trademark infringement is to institute legal proceedings with the people’s courts. While some western companies may be reluctant to rely on the reasoning and impartiality of Chinese courts, it should be noted that China established special IPR tribunals in most of the higher people’s courts and in the developed, wealthier regions. Nonetheless, litigation demands for careful preparation, as the burden of proof lies on the plaintiff and the legal system does not provide for discovery. Therefore it is important to gather and provide the proper evidence and documentation such as notarized samples of the counterfeit products (oral testimonies are generally not sufficient). If the plaintiff wins the case, the compensation awarded is usually low compared to western standards. Compensation is solely related to the losses suffered from the infringing act, while the imposition of punitive damages as an effective deterrent is unknown in Chinese law. Moreover, it is usually difficult to prove for the plaintiff to deliver an accurate estimation of the suffered damages. In this case, the Chinese court may impose a sum that it considers reasonable, and within a statutory limit of RMB 500,000 for trademark infringement. In rare cases, the courts may evoke the infringer’s business license, but this probably does not impress a smaller company that does not have to worry about its reputation. Sometimes, the infringers just set up another business next door and continue with the infringement. For a company of respectable size or with other business activities (besides the infringing ones) though, this could cause considerable damage. In any case, despite the fact that many foreign companies may find the statutory compensation to be insufficient with regard to the scope of infringement, it should be noted that it may be deterrent enough to hamper the infringer’s activities since they often operate on a small scale. Furthermore, it is possible to identify the infringer’s assets and bank accounts and then apply the court to freeze them while simultaneously filing the law suit. This makes sure the infringer does not have the chance to transfer their assets in order to defy any order from the court, and thus increases the chance that the plaintiff receives some compensation.

5) Criminal Action

Criminal complaints should be filed with the Public Security Bureau (PSB). At least in theory, the PSB then reports all criminally relevant cases for prosecution to the people’s courts. As powerful a deterrent a criminal suit may be (the maximum penalty for the unauthorized use of registered trademarks in serious cases amounts to 7 years imprisonment), the current liability thresholds for criminal prosecution are subject to severe international critics. The criminal liability thresholds are calculated on a base of illegal turnover and income. However, due to the high thresholds and the significantly low prices of counterfeit goods, criminal relevance is seldom given. Nevertheless, successful criminal action is very rewarding and provides for the strongest deterrence, as in many cases infringers not only may be sentenced to up to three years in prison or be fined, but the holder of rights also can simultaneously file a civil lawsuit to obtain compensation.

Conclusion

Navigation through the broad scope of enforcement methods in China requires knowledge and a sense for the reasonableness of means. If you are a victim of trademark infringement (which is likely to occur sooner or later depending on the reputation of your products or services), your lawyer can assist you with identifying and carrying out appropriate legal action.

 

Lukas Steinberg was educated at University of Cologne, Germany and Shanghai University of Finance and Economics in German and Chinese Law Studies, Lukas has a good understanding of the various legal and cultural challenges that foreign entrepreneurs have to approach in China. Lukas speaks English, German and Mandarin Chinese, and due to his training in two legal environments he serves as an important intermediary between Western clients and R&P China Lawyers’ Chinese legal specialists. Lukas can be reached by email at Steinberg@Rplawyers.Com.

 


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