China: Investment in protection, enforcement and courts signals growing anti-counterfeiting focus

Legal framework

In 2022, with the pandemic hindering the recovery of the world economy, China enhanced its focus on intellectual property rights with amendments to laws and regulations, and strengthened law enforcement and justice to combat new trends in infringement and counterfeiting. The amendments to the framework concerning the protection of intellectual property rights (IPR) in 2022 included:

• Provisions on Prohibiting the Acts of Eliminating or Restricting Competition by Abuse of IPR, revised by the State Administration for Market Regulation (SAMR);
• Cybersecurity Review Measures, revised by 13 departments;
• Provisions on Supervision and Administration of Trademark Agents, promulgated by the SAMR;
• Implementation of Interpretation of Several Issues regarding the Application of the Anti-Illegal Competition Law, announced by the Supreme Court;
• Several Provisions on Jurisdiction of Civil and Administrative IPR Cases of First Instance, promulgated and applied by the Supreme Court;
• Notice on Issuing Standards for Basic People’s Courts’ Jurisdiction over IPR Civil and Administrative Cases of First Instance, issued by the Supreme Court;
• Opinions on Strengthening the Judicial IPR Protection of Traditional Chinese Medicine, issued by the Supreme Court;
• Guiding Opinions on Protecting the IPR of the Seed Industry, Fighting against Counterfeit and Shoddy Brand, and Creating a Good Environment for the Revitalisation of the Seed Industry, jointly issued by seven authorities;
• Provisions on Intellectual Property Credit Management, issued by the China National Intellectual Property Administration (CNIPA);
• Opinions on Strengthening the Coordination of Intellectual Property Appraisal Work, jointly issued by the CNIPA, Supreme Court, Supreme Procuratorate, MPS and SAMR;
• Opinions on Strengthening Collaborative IPR Protection, issued by the Supreme Procuratorate and CNIPA.

Border measures

In 2022, the General Administration of Customs of China (GACC) carried out its “Longteng” campaign to comprehensively strengthen IPR protection, the “Blue Net” campaign to protect the IPR in delivery channels and the “Clean Net” campaign to protect the IPR of export transhipment goods, detaining 61,000 batches of suspected infringing goods, involving nearly 78 million goods items.

Companies engaged in cross-border transactions should take customs protection seriously. It is highly recommended to first record the IPR in the GACC system. Information of authorised factories or companies involved in import or export should also be recorded under the respective IPR. Customs all over China will then ex officio take preliminary action to detain or release a shipment based on the recorded IPR and its authorised companies, usually referred to as ‘white list’ companies.

If the company related to the shipment is in the white list, its import and export will not be affected. Otherwise, the goods will be temporarily detained. After the temporary detention of suspected infringing goods, local Customs will issue a notification to the right owner, requiring the right owner to respond within three working days as to whether to finally detain or release the goods. Right owners that decide to detain the goods should also pay a security bond equalling the value of the detained goods. If the right owner does not respond within the time limit, or does not pay the security bond, the goods will be released. For goods which are detained, the local customs will conduct a deep investigation to confirm the infringement or counterfeit.

If the customs investigation does not confirm the infringement, the customs detention is improper and the right owner needs to pay damages to the owner of the detained goods for the harm caused by the improper customs action. If infringement or counterfeit is confirmed, a penalty will be imposed on the infringers. Where the value of the detained counterfeit goods meets the criminal threshold, the local customs will transfer the case to the public security bureau (PSB) for criminal investigation. In March 2022, the Customs of Chengdu Shuangliu Airport seized 1,488,300 game cards, 18,000 laser card books, 16,200 commemorative coins, and 72,000 sets of plastic protective cases in export cargos. They were suspected of infringing the POKEMON trademark of Nintendo Co, Ltd by the confirmation of the right holder. Customs detained the goods and transferred the cases to the PSB for criminal investigation. This case is typical in showing that law enforcement cooperation between the PSB and Customs builds strong cross-border protection of IPR.

Criminal prosecution

Key points

Criminal prosecution needs to go through three stages, PSB investigation, procuratorate initiating public prosecution and the criminal trial.

In the PSB criminal investigation, some cases are reported by the right owners and some are discovered by the PSB. There are also some cases transferred by the local Administration for Market Regulation or Customs because the value of the counterfeits meets the criminal threshold. Throughout 2022, the Ministry of Public Security organised public security organs across the country to carry out special campaigns such as “Kunlun 2022”, and solved 27,000 criminal cases involving IPR infringement and the production and sale of counterfeit and inferior commodities. Especially to help create a favourable legal environment for IPR protection for the success of the 2022 Beijing Winter Olympics and Paralympics, in January 2022, Beijing PSB arrested 10 suspects and destroyed six dens manufacturing and selling pirated Bing Dwen Dwen and Shuey Rhon Rhon (ie, official mascots) products.

In the second stage, the procuratorate will examine the documents, interrogate the suspects, listen to the opinions of both the victim and suspects, and decide whether supplementary investigation is needed. If the procuratorate believes that the evidence is sufficient, it will prepare the sentencing opinion and officially initiate the public prosecution before the court. In 2022, the procuratorates in China approved the arrest of more than 3,900 suspects and prosecuted more than 14,000 persons for producing and selling counterfeit and inferior goods.

In the last stage, the court will try the case and issue a judgment. If the court believes that the evidence is insufficient, it may ask the procuratorate to provide more.

Preliminary measures

The criminal investigation of trademark crimes should, by law, be conducted by the PSB. The main points of a criminal investigation are as follows:

• the case report is examined and the trademark owner’s basic information is verified (including the goods approved for use under the trademark and the ownership and transfer or licensing of the mark);
• an investigation is conducted into the time, place, company or individual involved with the counterfeit goods. This includes 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;
• the relevant items are detained or sealed up, including products or sales documents and other information, while control of the relevant personnel on the scene is maintained; and
• the value of the products involved in the case is appraised to determine the extent of the crime.

Remedies

Whoever uses the same mark as the registered trademark on the same goods or services without the permission of the owner, where the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than three years with concurrent or single fine; where the circumstances are particularly serious, the penalty shall be fixed-term imprisonment of between three and ten years and a fine.

Whoever knowingly sells counterfeit goods bearing registered trademarks, where the amount of illegal gains is relatively large or there are other serious circumstances, shall be sentenced to a maximum of three years’ fixed-term imprisonment, with concurrent or single fine; where the amount of illegal gains is huge or there are other particularly serious circumstances, the penalty shall be a fixed term between three and ten years and a fine.

If a legal entity commits the above crimes, the entity shall be fined, and the directly responsible supervisors and other directly responsible personnel are punished according to the above regulations.

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

• admitting guilt and accepting punishment;
• where understanding has been obtained from the rights holder; and
• showing repentance.

Civil enforcement

Key points

A civil lawsuit is required to claim sizeable damages. Administrative actions such as the administrative raid action or customs action can dispose of the counterfeits and punish the infringer but cannot compensate the right owner. In the criminal lawsuit, a supplementary civil lawsuit can be filed but the damages will just be calculated based on the counterfeits seized in the criminal case, resulting in a relatively small damages award. To obtain sufficient damages, the right owner can file a civil lawsuit.

For online infringement, if the infringer does not comply with other enforcement actions such as a cease and desist letter, or the internet service provider (ISP) complaint fails, the right owner should also consider a civil action.

In 2022, punitive compensation for infringement was intensified. The amount of punitive compensation for IPR infringement increased by 153% compared with 2018.

Preliminary measures

Preliminary measures normally include the property preservation, evidence preservation and preliminary injunction.

The purpose of a property preservation application is to make sure that a favourable judgment can be fully enforced. To avoid alerting the defendants, pre-litigation property preservation is recommended. When filing the property preservation application, security of equal value to the preserved property should also be provided. Otherwise, the court may not accept the property preservation application. After receiving the application, the court shall make decision as to whether to approve the application within 48 hours. If it approves, it will freeze bank accounts or detain other property of the defendants.

To preserve evidence, in urgent situations when the evidence may be lost or difficult to obtain in the future, the interested party may apply to the court at the place where the evidence is located, the domicile of the respondent or the court that has jurisdiction over the case before filing a lawsuit or applying for arbitration.

For the preliminary injunction, the court’s attitude is conservative. Unless all of the following requirements are met, the court may not approve the preliminary injunction.

• the situation is urgent;
• if the injunction is not issued, irreparable damage will be caused which cannot be compensated otherwise;
• the infringement facts are clear and the evidence is sufficient.

Remedies

A favourable judgment will stop the infringing activities, eliminate negative effects and grant compensation to the right holders.

The amount of compensation for trademark infringement shall be determined according to the actual loss suffered by the right holder due to the infringement; if the actual loss is difficult to determine, it may be assessed according to the benefits obtained by the infringer from the infringement. If this cannot be determined, it shall be reasonably determined with reference to the multiple of the trademark licence fee. For malicious infringement of the trademark right, if the circumstances are serious, the amount of compensation may be determined between one and five times the amount determined according to the above methods. The amount of compensation should include the reasonable expenses paid by the right holder to stop the infringement. If it is difficult to determine the actual loss suffered by the right holder, the profit obtained by the infringer, or the licence fee, the court shall award a compensation of less than 5 million yuan according to the circumstances of the infringement.

Anti-counterfeiting online

Although counterfeiting is not as serious as it previously was on traditional e-commerce platforms such as Tmall or Jingdong, live streaming platforms have become the new promotion channel of choice for counterfeits. In 2022, China deepened its internet IPR protection actions. Four authorities jointly launched the special action coded “Jianwang 2022” to combat online IPR infringement.

Unauthorised internet commerce

Unauthorised internet commence includes two situations. One is just using the right owner’s trademark for online attraction of potential consumers and actually selling products of the infringer’s own brand or other brand. The other is promoting and selling counterfeit products.

For the first situation, a simple ISP complaint can solve the problem. For the second situation, deep investigation and comprehensive enforcement actions are necessary.

Online investigation strategies

Investigation of online counterfeiting needs to be combined with offline investigation and enforcement actions. Counterfeits can be detected using a combination of smart monitoring tools and regular manual online searches. Once infringement activity is found, online evidence should be fixed using time stamps or notarisation. The infringer can then be contacted by the right holder or its authorised agent via purchase of products, negotiation of business and/or onsite visit of business address if necessary, which can help the right holder to fully understand the specifics of the infringement. Whether the target is a seller or manufacturer should be identified, as well as whether there is only an online store or a physical shop. The price, type and sales volume of the infringing products of the target should also be noted. Once the necessary information is collected, the appropriate rights protection strategy can be formulated.

ISP liability

According to Article 1195 of the Civil Code, if a network user uses a network service to commit infringement, the right owner has the right to notify the ISP to take the necessary measures, such as deleting, blocking or disconnecting the link. If the ISP fails to take the necessary measures in time after receiving the notification, it will be jointly and severally liable with the network user for the expanded part of the damage.

According to Article 1197 of the Civil Code, where an ISP knows or should know that a network user has infringed the civil rights and interests of others by using its network services, and fails to take necessary measures, it shall bear joint and several liability with the network user.

Most major ISPs such as Alibaba, Jingdong, Tiktok, etc, have established IPR protection systems that greatly facilitate the right owners’ complaints for the removal of online infringing information. The ISPs make sure that their reaction time complies with the regulation of the laws to avoid taking the joint and several liability with the network users.

Preventive measure/strategies

Use of local counsel and investigators

Local counsel and investigators are very familiar with the characteristics of local markets and infringing activities, as well as local policies and businesses, which gives them significant advantage in discovering the infringement clues and formulating tailored strategies to stop the infringement and recover losses in an efficient way. Therefore, seeking assistance from and cooperating well with local counsel and investigators plays a significant role in finding, combating and preventing infringement, including counterfeits, in local markets.

Since counterfeiting is a serious form of infringement, mere online investigation and monitoring is insufficient. Local investigation needs to be conducted to obtain a full understanding of the scope of infringement and legal analysis of the investigation result is required, which calls for the involvement of the local counsel and investigators.

Control of contractual relationships with third parties

The right holder should define the rights and obligations with the manufacturers, agencies and licensee in contracts. On one hand, to avoid damaging its own rights, the right holder should not permit third parties to apply, or assist others to apply, for registration of its trademarks, copyrighted works or other intellectual property. Without the right holder’s prior consent, third parties should not use, or assist others to use, its trademarks, copyrighted works or other intellectual property. On the other hand, it should be made clear in the contract that third parties will not be involved in any infringement against the right holder. Otherwise, they will bear all related legal responsibility.

Effective use of technology, authentication and monitoring

There are many online tools for the automatic detection of infringement online. In addition, some large e-commerce platforms are devoted to the development and operation of monitoring infringement within the platform.

With the booming development of Internet and AI technology in mainland China, some IP companies and firms have also established their own online platforms to conduct IP infringement monitoring and time-stamp authentication. For simple monitoring, clients can use this by themselves. For complicated monitoring that may require legal analysis, local counsel will be involved to provide legal services.

Cooperation with national anti-counterfeiting agencies

China has established the National Leading Group for Combating Intellectual Property Infringement and Production and Sales of Counterfeit and Shoddy Commodities, which is supervised by the State Council. This group focuses on the IP protection and anti-counterfeiting from the government standpoint. In addition, China has a number of anti-counterfeiting or IP protection agencies, such as the Beijing Anti-infringement and Anti-counterfeiting Alliance and the Alibaba Anti-counterfeiting Alliance, which fight counterfeiting by promoting cooperation between e-commerce platforms and enterprises, holding regular exchange meetings and reporting the latest progress of judicial protection in the industry. Companies can protect their IPR through cooperation with these institutions.