Reprinted with permission from the IP Litigator, March/April 2004
Published by Aspen Law & Business

What does a company do when it finds its products "Made in China" when the factory is in Ohio? Counterfeiting remains a huge problem internationally, with China accounting for almost $16 billion in lost legitimate sales annually. Since its 2001 accession to the World Trade Organization, China has made some legal changes to its IP system, giving trademark owners more options to crack down on counterfeiting in one of the world's largest markets.

Shortly before joining the WTO, China enacted new legislation designed to align its laws with TRIPs, the Agreement on Trade-Related Aspects of Intellectual Property Rights. The Agreement, which covers most forms of intellectual property, particularly helps trademark owners because it requires that a country provide for at least a seven-year initial term of registration of a mark and the continual renewal of the registration (assuming the mark is in use). The owner of a mark also has the exclusive right to prevent others from using the mark on certain goods and services if a likelihood of confusion exists.

Significantly, TRIPs also contains provisions directed to the enforcement of those rights. In addition to establishing procedural and evidentiary rules, the Agreement provides for both injunctions and monetary damages in cases of infringement. Further, TRIPs allows for machinery used to create infringing goods to be confiscated and the counterfeit goods destroyed instead of allowing a counterfeiter to simply remove the infringing marks and release the altered products back into the market.

While these provisions may sound basic to American and European trademark owners, they represent significant changes to the trademark registration and system in China. It was not until 1983 that China began to allow individuals and institutions, not just "enterprises," to register trademarks. Ten years later, service marks became registrable. With China's highly fragmented and large bureaucracy, enforcement of trademark rights was an expensive and time-consuming task, cutting across multiple governmental agencies and costing thousands of dollars. Even when raids and seizures of counterfeit goods succeeded, the fines and sanctions imposed at the agency's discretion were hardly a deterrent (one year, it averaged only about $700 per case, with the trademark owner receiving about $40 in compensatory damages). The counterfeit goods, stripped of their infringing marks, were then resold at public auction, often to be rebranded and sold by the same or another counterfeiter.

The recent laws implemented in light of TRIPs seek to ameliorate some of the problems with China's trademark system. Even with a strict "first-to-file" registration process, procedural changes in the application and examination process were adopted to help prevent illegal trademark registration and use.

The new laws and their interpretation by the Supreme People's Court created even more change for trademark enforcement. First, the trademark owner may now obtain an injunction or a temporary restraining order to prevent the distribution of counterfeit goods and the destruction of evidence before hearings, provided the trademark owner can show irreparable harm. Second, while the new law encourages mediation of infringement disputes, it allows trademark owners to file complaints with the courts if the potential infringer refuses to attend meditation or if the mediation fails. Procedurally, a complaint can be filed regardless of whether the Administrative Authority for Industry and Commerce (AIC) chooses to cooperate with the investigation. However, any civil action taken by the agency on the same infringing acts prevents the court from increasing the penalties to be imposed on the infringer.

Third, instead of allowing officials to arbitrarily set fines, courts may assess damages based on the actual profits made from the infringement or the losses suffered by the trademark owner from the infringement, including the owner's reasonable expenses in policing the infringement. Because infringers rarely keep accurate financial records of their activities, the trademark owner's profits per item can be used in the calculation. If the profits or losses cannot be determined, the court may enter damages up to approximately $60,000. However, innocent infringers (those that unknowingly merely resold counterfeit goods) are immune from damages. Confiscation of the counterfeit goods and the machinery used to make them remains in the court's discretion.

Trademark owners have a limited time to act under these expanded enforcement provisions. The statute of limitations is two years from the time the owner knew or should have known of the infringement. If the action is brought after two years, courts may still act to halt the infringing acts, but damages are calculated only on the previous two years of infringement.

Under the new laws, the number of IP related cases and enforcement actions has increased, as has the amount of the fines imposed and number of products confiscated. Despite this encouraging news, companies must be proactive in protecting their trademarks in China. Only registered trademarks enjoy the increased protections, unless the owner can prove that the mark is well known. Because of the first-to-file system, trademark applications need to be promptly filed, and preferably before use of the mark in China given that use is considered only for conflicting applications filed on the same day. Even though the AIC has broad discovery powers under the trademark laws, companies may wish to uncover crucial evidence through private investigators to present in mediation or court, especially in preparation for a temporary restraining order. Counterfeiters have also become increasing skilled at their craft, sometimes making very high quality counterfeits detectible only to the experienced corporate eye.

With little more than two years under the new trademark scheme, the laws are still evolving. Most companies have yet to witness a dramatic reduction in Chinese counterfeiting, despite several high-profile raids and increased fines. Nevertheless, the new laws in China are a step in the right direction.

This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.