INTRODUCTION & BACKGROUND
Over the course of a few decades, we have witnessed the proliferation of a truly global economy. The impetus for this shift is likely the rise of E-Commerce, although other factors, such as vastly improved shipping logistics and instantaneous online financial transactions have also contributed to the boom.
By and large, global trade has been good for U.S. companies. American manufacturing, for example, has grown by almost 80% over the last 25 years.i Meanwhile, economic globalization experts report that imported goods (and the pricing competition they engender) increase the purchasing power of American families by roughly $18,000 annually.ii
Lamentably, the benefits of a global economy also bring significant risks. Counterfeiting is among the greatest of these risks. Indeed, counterfeiting poses seemingly insurmountable threats to businesses and consumers alike. For example, by 2022, experts predict that counterfeiting will extract over $4 trillion from the global economy and cause a loss of over 5 million lawful jobs.iii Even more frightening, poorly manufactured fakes within the automotive, airline, pharmaceutical, and military industries are thought to cause over 3,000 deaths per year.iv
The Trouble with China
Counterfeits are being produced in the People’s Republic of China (referred to herein as the “PRC” or “China”) at an alarming rate. Indeed, government officials and industry watchers continually single out China as the dominant source of counterfeit products in the world.v Between 2008 and 2010, for example, 70% of the counterfeit products seized globally originated in China.vi
There are a multitude of reasons for this. First, China not only has the largest consumer base in the world, but it also houses several of the largest online marketplaces.vii Additionally, the PRC has also become the nerve center for the manufacture of almost every category of branded goods imaginable.viiiConsequently, the country’s bad actors have become incredibly proficient at knocking off popular brands.
In one famous example, employees of an entirely phony Apple® store had no clue that they were not working for the real company.ix In another well-publicized case, the renowned electronics brand, NEC, discovered that a Chinese counterfeiter was knocking off the whole of its operations. The counterfeiters even went so far as to create an “entire parallel NEC enterprise with business cards, R&D commissions, detailed production plans and even warranties all bearing the NEC mark.”x Further investigations revealed a counterfeiting ring consisting of over 50 fake NEC factories spread across China and Taiwan.
Notwithstanding these shocking examples, American companies continue to manufacture products in the PRC. Iconic brands such as Apple, Banana Republic, Dell Computers, Canon, Harley Davidson, Heinz, and Stanley Tools are among the hundreds of U.S. companies reported to have manufacturing facilities in China.xi Some sources report that more than 70% of American shoes are made there.xii
Online Marketplaces Contribute to the Problem
Perhaps no single force has boosted China’s counterfeiting problem in recent years more than the propagation of major online marketplaces that allow third-party retailers (“TPRs). Many people are shocked to learn that sites like Amazon, eBay, Walmart.com, and Alibaba do not sell all the products offered on their sites themselves. To the contrary, many products are being sold by TPRs who – but for click-through “agreements” that create TPR seller accounts – are wholly unrelated to the online marketplaces.
On Amazon, for example, roughly 50% of products are sold through TPRs.xiii Not coincidentally, Amazon has become notorious for peddling counterfeits through those retailers.xiv The retail giant has also been accused of actively encouraging Chinese knock-offs. As one industry watcher put it:
“Amazon’s counterfeit problem grew exponentially when the marketplace began to aggressively target Chinese sellers in 2015. To help cut out the import/export middlemen and allow Chinese manufacturers and merchants to sell directly to buyers in the USA, Canada, and Europe, Amazon streamlined the shipping process by doing things like registering with the Federal Maritime Commission to provide ocean freight, which allowed for Chinese merchants to ship entire containers directly to Amazon’s fulfillment warehouses.”xv
These actions made the Chinese counterfeiting problem in America exponentially worse.xvi Once knock-off Chinese products hit the shelves of those fulfillment centers, it became a lot harder for U.S. based brands and other authorized retailers to compete within the Amazon universe. Meanwhile, sales on Amazon from Chinese sellers more than doubled in a short period of time.
This prompted one author to describe Amazon as a “website [that] has morphed into the world’s largest flea market.”xvii Another article lamented that “Amazon and eBay have become cesspools of counterfeits … that are mostly coming from China.”xviii
Importantly, Chinese counterfeits of U.S. brands are also being sold in Chinese online marketplaces. As the Office of the U.S. Trade Representative noted in a recent report on Notorious Markets that in 2017, a greater number of small to mid-sized businesses contacted the office about counterfeits appearing on Taobao than any other E-Commerce site.xix
Taoboa is owned by the Alibaba Group. It is China’s largest mobile commerce app and third-most popular website in the PRC.xx Its parent company, Alibaba, is itself reported to have “an enormous counterfeit problem.” In fact, the problem is so big that one self-described industry watchdog found and initiated removal of 18 million counterfeit products from Alibaba-owned websites.xxi
The Feds Get Serious About Chinese Counterfeiting
Over the past several years, the Federal Government has been forced to step up its enforcement measures in an effort to thwart the importation of Chinese counterfeits. Its efforts appear to be paying off. In each of the last two years, for example, U.S. Customs and Border Protection (CBP), along with U.S. Immigrations and Customs Enforcement (ICE), have posted an 8% increase in seizures of counterfeit products at our ports of entry.xxii
This success may be due to the increased attention various agencies have committed to the problem in the last decade. Several well-researched reports have outlined the ever-growing problem with Chinese counterfeiting and are undoubtedly shaping agency responsiveness. Among them:
National Intellectual Property Rights Coordination Center, Intellectual Property Rights Violations: A Report on Threats to United States Interests at Home and Abroad, 2011xxiii, recognizing that “offenders in China pose the greatest threat to the U.S. interests in terms of the variety of products infringed, the types of threats posed (economic, health & safety, and national security), and the volume of infringing goods produced there. The report also verified that “the majority of infringing products seized by CBP and ICE originated in China.”
United States Government Accountability Office (“GAO”), Report to the Chairman, Committee on Finance, U.S. Senate, Intellectual Property, Agencies Can Improve Efforts to Address Risks Posed by Changing Counterfeits Market, 2018xxiv, noting that between 2012 and 2016, counterfeit goods manufactured in China accounted for over half of all government seizures. Importantly, this report also detailed a surveillance operation where nearly half of all covert purchases of products made from TPRs in online marketplaces were found to be counterfeit.
The battle rages on. By way of illustration, in the eight-week period preceding this publication, ICE reported the following takedowns:
Laredo, Texas, May 2018: ICE agents, acting with Homeland Security Investigations (HSI) seized nearly 80,000 counterfeit items valued at over $16 million. The products had been shipped from China to an international cargo terminal in Texas.xxv
Los Angeles, California, May 2018: Following another joint operation by HSI and ICE, a man was indicted on 30 charges relating to the sale of counterfeit integrated circuits, some of which were intended for military operations. According to ICE, the man “acquired old, used, and/or discarded integrated circuits from Chinese suppliers that had been repainted and remarked with counterfeit logos.xxvi
Portland, Oregon, April 2018: A man in Portland, Oregon was convicted of selling counterfeit Nike shoes in online marketplaces such as Instagram, eBay, and Shopify. He was caught following investigations by HSI. Agents discovered he had imported nearly $200,000 worth of sneakers from China and sold them right in the backyard of Nike’s U.S. headquarters.xxvii
It is against this backdrop that E-Enforce™ presents Combatting Chinese Counterfeiters, Strategies & tactics for taking down the globe’s most prolific counterfeiting operations. Part I will discuss preventative measures that must be taken to help companies avoid the Chinese counterfeiting plague. Part II will explore enforcement and takedown strategies should those companies find their products are being faked there.
Throughout the paper, the principal focus will be on strategies to be employed within China. In our experience, most U.S. companies have strong intellectual property plans for protecting their assets domestically. What many lack, however, is the ability to protect those assets within the world’s counterfeiting epicenter.
A concomitant focus of this paper is the main weapon brands can deploy against counterfeiters (as opposed to other illicit TPRs such as unauthorized sellers). Simply put, counterfeiting is illegal – in the U.S. and in China. The threat of prosecution and jail time is a significant tool brands must use in the war against counterfeiting. Prosecutions are not easily secured, however. Thus, this paper is intended to assist brands in taking all of the steps necessary gain this important leverage.
PART I: AN OUNCE OF PREVENTION
As we often tell our clients, every great enforcement operation begins with a great prevention strategy. In the counterfeiting realm, however, prevention strategies must be taken in both the U.S. and in China. Even if a brand does everything it should to protect its intellectual property domestically, almost none of that effort matters when trying to stop counterfeiting within the PRC.
This may sound counterintuitive, but brands should almost hope and assume they will face counterfeiting in China. This is because Chinese counterfeiters tend to knock-off the most popular and successful U.S. brands. Popular brands are faked in the PRC even if the underlying company never itself manufactured or sold a single product in that country.
These days, counterfeiters simply watch sales trends in online marketplaces, then set about to manufacture profitable fakes. Even if those fakes are only sold within Chinese borders, the true manufacturer is being robbed of sales to the largest group of consumers on the globe. Consequently, brands that manufacture all products within the U.S. should heed the strategies for intellectual property protection that are outlined below.
U.S. companies that manufacture products in China, on the other hand, have additional hurdles to jump. Business is conducted very differently in the PRC. For example, agreements that are common necessities in the U.S. typically have no force in that country. Thus, U.S. companies who manufacture and/or sell there should also employ the business strategies discussed in this Part.
Protecting Intellectual Property in China
STEP 1: Obtain Chinese Trademarks 1
Many companies assume that if they have a trademark in the United States, it is enforceable globally. In China, however, your U.S. trademark has very little value in and of itself.xxviii Therefore, a primary step in the IP protection process is obtaining Chinese trademarks.
We cannot emphasize strongly enough that this a process should not be delayed. First of all, it currently takes about a year from the time a foreign brand applies for a Chinese trademark and the date it is officially registered.xxix Therefore, if you plan to manufacture or sell products in China, you need to plan well in advance.
More importantly, however, Chinese trademark law operates very differently than it does in the U.S. In China, the first person to obtain a mark is the one who gets carte blanche authority to exploit it.xxx In America, by contrast, the first person to use the mark in commerce (regardless of whether it is registered with the United States Patent & Trademark Office) retains some legal protection over the mark as against later users.
Ultimately, this means that even if your product is trademarked in the U.S., it can be trademarked in China by someone who is wholly unrelated to your brand. In that case, Chinese authorities would then be forced to honor the mark owned by a stranger to your company.xxxi In fact, according to one expert, “if you want to sell goods in China without having a trademark registration, then there is almost absolute chance someone else will register your trademark in China and come after you for trademark infringement.”xxxii
It is also crucial to also register the Chinese language version of your trademarks. Again, without this additional step, someone else can register them and have full legal rights to enforce them against your company.xxxiii This process is frequently used to extort an exorbitant royalty fee or purchase price from the true owner of the underlying mark.
STEP 2: Register Trademarks with Chinese Customs
Registration (aka recordal) of Chinese trademarks with Chinese Customs is a critical step for U.S. companies who manufacture products in China for export to other regions.xxxiv The process involves providing Customs officials with your valid Chinese trademark, along with certain company information and detailed product and packaging information. In fact, trademark owners who register are allowed to prepare enforcement manuals aimed at assisting Customs agents in detecting counterfeits.
Upon detection, Customs officials can then seize the knock-offs that counterfeiters are attempting to export out of the country. And, if the trademark owner so desires, Customs can also refer the counterfeiters for prosecution (so long as the value of the goods meets the minimum legal threshold).xxxv
In recent years, Chinese Customs has earned a reputation for taking “proactive seizure actions to protect IP rights.”xxxvi They are only proactive, however, if registration is completed. Even though the process is not legally required, it is extremely important as “no separate registration with Customs means no enforcement by Customs.”xxxvii Statistics bear this out. A recent study by the Chinese government revealed that 98% of product seizures made by Customs officials were executed for brands that had registered their trademarks with the agency.xxxviii
The good news is that registration is easy and long-lasting. The entire process can be completed online, and each registration is good for a period of 10 years.xxxix
Forging Successful Business Relationships in China
As discussed above, it is not uncommon for U.S. companies to manufacture products in China. The reasons for this are plentiful, but basic economics appear to be a major factor. For example, while the minimum wage in some regions of the U.S. now exceeds $11 per hour, the average wage for a Chinese factory worker is just $1.74 per hour.xl Additionally, Chinese employees tend to be less litigious than their American counterparts.
Notwithstanding the benefits of doing business in China, there are legions of notorious fraudsters who realize big profits from counterfeiting the products of their American business partners. Thus, when it comes to forging business relationships in China, it is important be cognizant of some of the traps for the unwary.
For example, while it is critical to undertake due diligence regarding any potential business partners,xli the way you conduct due diligence in America could be illegal in China. The country takes its privacy laws very seriously and some investigation tactics are highly illegal.xlii Consequently, American companies should almost never initiate their own investigations. Rather, they should engage experienced investigators with knowledge of regional particularities.
In another common scheme, potential Chinese business partners will ask to sign your company’s standard non-disclosure agreement (NDA) prior to beginning negotiations. At first blush, this can give the impression that the party is on the up and up. Unfortunately, nothing could be further from the truth.xliii
In fact, that NDA is very likely unenforceable in China.xliv Among other reasons, standard American NDAs include provisions dictating that breaches will be litigated in American courts. Those courts, however, have no jurisdiction over Chinese nationals. Chinese counterfeiters tend to be very sophisticated and most are likely aware of this fact. Thus, anyone who asks for your company’s NDA should be taken out of the running immediately.
In China, the typical (and enforceable) agreement for protecting IP is known as an NNN Agreement. NNN stands for non-disclosure, non-use, and non-circumvention. These agreements achieve three desirable goals: (1) the non-use provision helps prevent the Chinese company from exploiting your intellectual property; (2) the non-disclosure provision prohibits it from disclosing your trade secrets to the public; (3) the non-circumvention provision prohibits the company from competing with you by selling the products it manufactures for you.xlv
For the greatest level of contractual enforceability through the Chinese court system, any contract with a Chinese business partner should be expressly governed by Chinese law and interpreted using a Chinese language. Additionally, it should include a jurisdiction provision acknowledging the sole power of Chinese courts to enforce it.xlvi While all this may sound cumbersome, it is the best way to protect your intellectual property from counterfeiting and other scams.
PART II: ENFORCEMENT AND TAKEDOWN
In China, there are four main options when it comes to shutting down counterfeiters: (1) Administrative actions; (2) Civil actions; (3) Commercial actions; and (4) Criminal proceedings. While the first two are real options, they are not discussed in depth herein. This is because the costs are very high and the deterrent value is very low.
In fact, even if you’ve taken every prevention step imaginable, administrative and civil actions are highly unattractive alternatives. For one thing, both strategies undoubtedly require your company to retain and employ Chinese IP lawyers for years on end. This is never a cheap or easy undertaking. Secondly, even if you do obtain a judgement, there is very little chance you’ll ever collect on it. It is the classic case of throwing good money after bad.
Perhaps most importantly, civil and administrative judgments do nothing to prevent the defendant from closing up shop only to manufacture your products in another location using a newly-formed Chinese entity. What then? Do you start the litigation process all over again? That never-ending game of whack-a-mole is a good way to bankrupt your company in record time.
Instead, a solid enforcement strategy should hit counterfeiters where it hurts. This can occur by taking away their revenue stream (commercial enforcement options) or taking away their freedom (criminal proceedings). The risks and benefits of each tactic are discussed below.
Commercial enforcement is principally aimed at counterfeiters selling products in online marketplaces. At its core, it involves submitting a “take-down request” to the marketplace owner, asking it to remove infringing products from its website.xlvii Whether you’re dealing with Amazon, Alibaba, eBay, Taobao, or any of the others, each website has its own protocol for submitting and processing take-down requests.
Even though this may seem like a quick and efficient way to deter counterfeiters, the method has its drawbacks. For one thing, when dealing with Chinese marketplaces, “it is vital to have a person on your side who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website that is posting your products.”xlviii Again, this comes at great cost to the legitimate brand.
Moreover, while this can be an effective strategy for stopping counterfeits from reaching consumers – it only works in the short term. Just as with administrative and civil proceedings, commercial enforcement does nothing to stop counterfeiters from reappearing in new online venues (or from using the same venue under a new seller name). Thus, “once this whole takedown process begins, it’s pretty much ongoing.”xlix
That said, commercial enforcement can be a cost-effective strategy for combatting Chinese counterfeiters. Unfortunately, it doesn’t do much toward eradicating Chinese counterfeiters.
From a logic standpoint, it is easy to see why criminal proceedings can be an effective tool for putting a stop to counterfeiting. If counterfeiters are in jail, they can’t make or sell counterfeit products. They can’t open up shop under a new name and they can’t migrate from online marketplace to online marketplace.
Consequently, criminal prosecution should be at the core of any company’s Chinese counterfeiting enforcement plan. That said, it is not easy to get Chinese officials interested in prosecuting your case.l First of all, remember that a prosecution isn’t even possible if you haven’t taken the preventative steps to protect your trademarks that are described above. Without those, prosecutors won’t give you the time of day.
Additionally, understand that your best chance for prompting prosecution comes from putting together a credible case that is based on credible evidence.li Your chances further improve if you have solid relationships with Chinese Customs and other prosecutorial agencies.lii That’s where E-Enforce™ comes in. Over time, we’ve put our blood, sweat and tears into developing critical relationships and learning how to “package” case evidence in a manner that increases the likelihood of prosecution. Below are some of the steps we take to foster criminal proceedings relating to Chinese counterfeiters.
Continual Monitoring & Seller Intelligence
Marketplace intelligence is at the core of every enforcement operation. Our investigators set up automated processes to scour online marketplaces for evidence of counterfeiting. At E-Enforce™, we use proprietary software and counterfeiting algorithms to root out counterfeiters. In fact, we can even pinpoint those that are operating out of China. Among other things, these specialized programs locate name brands that are spelled differently from the original, logos that don’t quite match the original, sale prices far below our clients’ Minimum Advertised Prices, bogus reviews and other proprietary indicators.
Additionally, investigators look for defined SKUs/ASINs, as well as previously known seller names. This information provides investigative teams with a real-time snapshot of how each product is being sold online. Unfortunately, these initial reports often reveal multiple Chinese counterfeiters.
Importantly, monitoring is not a one-time operation. Chinese counterfeiters are highly sophisticated and they use intricate methods to hide their identity. By continually monitoring the internet for indicia of counterfeiting, investigators are alerted on a 24-7 basis every time a red flag is waived.
Once Chinese counterfeiters are confirmed, it is time for a heart-to-heart talk with our clients. We know immediate response to our findings is necessary but some major decisions have to be made at this early stage.
For example, the typical “first shot across the bow” in combatting unauthorized sellers would be an electronic cease and desist notice (“EC&D Notice”) sent directly to the seller via the online marketplaces. Unlike unauthorized sellers, however, counterfeiters know they are at risk for criminal prosecution. Consequently, these EC&D Notices can tip off the offender to your investigation, and can send them deeper and deeper undercover.
The same can be said for sending a take-down notice. While it may remove products from those marketplaces in the short term, it may also alert the counterfeiters that they need to hide. Therefore, this is the time when the client needs to decide if criminal prosecution is the ultimate goal. If so, these early measures will be skipped.
Regardless of that decision, another immediate action our investigation teams undertake is a tactical purchase of suspected counterfeit products. It is important that this step be consummated by trained investigators for at least two reasons.
First, purchases made by a brand’s in-house personnel are simply too easy to trace. Counterfeiters are extremely careful about the addresses to which they’ll send bogus products. If they suspect the underlying brand is on to them, they will increase measures to hide their identities. Investigators, however, use covert names, addresses, and payment methods that are virtually impossible to trace.
Perhaps more importantly, our teams are highly trained to execute the product purchase so that the chain of custody is preserved. In other words, we follow precise steps to ensure that the fake product is admissible as evidence in the criminal proceeding we’re chasing.
Upon receiving the counterfeit goods, we meet with our clients to conduct side-by-side examinations of the counterfeits against original products. Results will be documented and preserved for evidentiary purposes. Additionally, identification of a confirmed counterfeit kicks off other important processes.
For example, at this stage, confirmed counterfeits will be submitted to U.S. Customs agents so they can keep an eye out for additional illicit products entering the country. Assuming our client’s products are registered with Chinese Customs, those agents will also be notified to keep an eye out for additional fakes leaving the PRC.
Individual Identification and Presentation Evidence
More often than not, the seller who was peddling counterfeits online is not the ultimate source of the fake products. They may, however, know who is. Not surprisingly, they will play all sorts of games to avoid enforcement efforts. Nonetheless, even if they stopped sales out of suspicion of being investigated, they will often re-emerge within days using a new seller name.
Fortunately, these tactics are highly ineffective. After all, monitoring software doesn’t have an “off” switch. Our investigators are alerted the moment sellers reappear and they meticulously document the continuing sales for prosecutors. At this point, additional product purchases may also be made in an effort to bolster the case that will be made to Chinese officials.
Next, we use Open Source Intelligence (“OSINT”), combined with proprietary database intelligence to identify the actual people who are selling the phony products online. Within a relatively short period of time, our teams can find a seller’s name, physical address, telephone number, and relevant background information – even if they’re located in China.
Once individual targets are identified, it is time to contact the Chinese IP lawyers who we’ve cultivated relationships with over time. Together, we strategize the presentation of evidence to Chinese law enforcement agencies, the coordination of investigations and, if warranted, additional product seizures. One benefit of pursuing criminal procedures is that the engagement of Chinese lawyers is often much shorter than in a civil action. Moreover, if the case is referred for prosecution, there is no charge to our client for that proceeding.
Even with all this effort, prosecutions are never guaranteed. That is why it is of critical importance to engage an experienced investigation team that has the relationships, the reputation, and the respect of authorities that is required to pursue criminal takedown in the People’s Republic of China.
THE E-ENFORCE™ ADVANTAGE
E-Enforce is a division of an internationally recognized investigation firm, Cyber Investigation Services. We have been providing litigation support and investigations for high profile cases and top law firms since 2010.
In 2012, we began combatting unauthorized sellers at the request of our client, Zo Skin Health. When we began that process, the company was overwhelmed with unauthorized retailers in online marketplaces. Today, they have virtually zero. They have also enjoyed exponential growth in that time. In February 2017, we made our proprietary E-Enforcement system available commercially.
Today, E-Enforce™ employs a dedicated team of engineers, software developers, data analysts, product purchasing specialists, licensed cyber investigators, and seasoned former law enforcement officers. We dedicate our time and attention to helping our clients deal with this rapidly evolving problem of counterfeiters, unauthorized sellers, and grey market sellers. In addition to our in-house team, we regularly partner with legal professionals around the world who are specialized in the many aspects of fighting cyber-crime. E-Enforce™ is committed to assisting clients with counterfeiters and traffic diverters determined to erode our clients’ hard-earned margins and brand reputation.
We currently work with over 50 brands, including global companies, mid-sized operations, and small-but-growing manufacturers to thwart unauthorized sellers and counterfeiters alike. Our clients represent the following industries:
• Direct sales
• Paper products
• Home repair
• Women’s accessories
• Food supplements
• Pet products
• Sunglasses & accessories
• Consumer electronics
• Vacuum cleaners
• Purses and bags
• Radar detectors
• Skin care
• Health products
• Hair products
If you have questions about Chinese counterfeiting or would like additional information, contact the E-Enforce™ team at firstname.lastname@example.org, or call us at (800) 892-0450. You can also follow us at e-enforceCIS@twitter.com, via the ECommerce Enforcement Group on LinkedIn, or visit E-Enforcement.com/services.
li See “Effective Anti-Counterfeiting Enforcement in China: Stage by Stage,” 2014 by Bob Youill.
1 While there are other types of intellectual property than can be subject to counterfeiting (patents and copyrights, for example), 97% of product seizures made by Chinese Customs officials infringe on trademark rights. Thus, this paper focuses solely on trademark protection. Source: https://www.limegreenipnews.com/2015/07/7-things-you-should-know-about-ip-protection-by-chinese-customs/