NEWS BRIEF
Chinese Counterfeit Goods - How to Protect Your firm
January 8, 2010
Thomas Stiebel, Hillary Wucherer and Karen Dickinson

This past March the Chinese Supreme Court issued guidelines for implementing the 2008 China National Intellectual Property Strategy, which calls for China to greatly increase its IP rights protection by 2020. While these guidelines are certainly a step in the right direction, there are several practical steps that trademark owners should take to protect against counterfeiting. The best approach is a two-pronged attack.

Steps to take in China

1. Register Trademarks with the China Trademark Office
Trademark owners that manufacture or distribute goods in China should register their trademarks and any applicable transliterations (Chinese language versions of the trademarks) with the China Trademark Office. Trademark registration is extremely important because Chinese authorities do not recognize common law trademark rights. In order to begin infringement proceedings or to receive damages in a trademark case, trademark registration must be obtained. Recent amendments to the Implementing Regulations of the Trademark Act allow local branches or subsidiaries of foreign companies to register trademarks directly without use of a Chinese agent.

2. Record Trademarks with Chinese Customs Authorities
Trademark owners should proactively record their trademarks with the General Administration of Customs (GAC) in China. The GAC will then issue a recordal certificate valid for seven years (and renewable for additional seven-year periods). When trademark owners suspect counterfeit goods are about to be exported from China, they can prepare a written application to the GAC at the export location where protection is sought. The certificate holder has access to an expedited review process for Customs protection. The GAC has the authority to confiscate and destroy counterfeit goods and to impose fines. Trademark owners should meet with GAC officials personally to help them identify legitimate products, marks and labeling, and typical ways in which counterfeiters misuse them.

3. Take Action to Enforce IP Rights
Most trademark owners file complaints at the local administrative office. A second option is a lawsuit filed with specialized IP panels in the Chinese civil court system. Determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is governed by a number of government agencies and offices. Additionally, geographical limits or conflicts may arise when one administrative agency of one local administrative office takes a case involving piracy or counterfeiting that also occurs in another region. To coordinate local IP enforcement efforts, some provinces and municipalities in China have established IPR bureaus or IPR committees to coordinate public awareness campaigns and some enforcement. A local IPR bureau is a good source for companies seeking information on local or regional enforcement mechanisms. Some trademark owners have found success in working with local IPR bureau authorities to conduct raids on facilities that produce or distribute counterfeit versions of their products.

Steps to Take in the United States
1. Register Trademarks with the U.S. Patent and Trademark Office Although U.S. courts recognize common law trademark rights, trademark owners that sell goods in the U.S. should officially register their trademarks with the Patent and Trademark Office. A federal trademark registration is prima facie evidence that the trademark owner has the exclusive right to use the mark in commerce with the associated goods. A registration allows for trademark recordation with U.S. Customs.

2. Record Trademarks with U.S. Customs Authorities
Trademark owners should record registered trademarks with U.S. Customs and Border Protection, so CBP officials can better recognize counterfeit goods at their port of entry. Enforcement of a recorded trademark will take precedence over trademarks that have not been recorded. Trademark owners also are encouraged to communicate with, and educate, CBP officials to help them distinguish between real and counterfeit goods including: trademark appearance and placement, the presence of valid manufacturing and lot codes, and overall product appearance. Trademark owners should meet with CPB officials personally to explain the legitimate distribution channels in the industry, and how counterfeiters abuse the system.

Although not required, trademark owners should alert CBP officials if they have information that counterfeit goods are about to enter the United States. The CBP has the authority to confiscate and dispose of counterfeit goods and to impose fines. Trademark owners should consider providing a counterfeit product destruction service to ensure appropriate destruction of seized counterfeit products.

Trademark owners may find it useful to work with CBP officials to allow identified counterfeit goods to continue on to the buyer. If CBP officials can then seize the goods from a retail or warehouse location, the buyer is usually very cooperative and will work with its importer to prevent future shipments of counterfeit goods.

3. Take Action to Enforce IP Rights
Trademark owners should consider taking legal action, even on small counterfeiting cases, to build a reputation of aggressive enforcement. They should obtain temporary restraining orders and orders of seizure and asset seizures where possible. They should use the discovery process in U.S. litigation to their best advantage, e.g., to find additional information regarding counterfeiters and rogue suppliers that are part of the defendant’s counterfeit goods supply chain. Additional Suggestions

1. Exercise Tighter Control Over Suppliers
Trademark owners are advised to exercise control over suppliers of raw materials and component parts, by sourcing exclusively from OEM’s, authorized distributors, or the first owners of the goods. They should control and audit the receipt of product components or ingredients to ensure they meet the product specifications.

Oftentimes, a supplier that has been hired to make legitimate goods also makes counterfeit versions of those goods after regular manufacturing hours during an unauthorized third shift. To prevent this practice, trademark owners should perform unscheduled, on-site inspections of supplier component and work-in-process inventory levels. They should analyze abnormal product failure rates to ensure that diversion of components is not a risk.

Trademark owners can introduce authentication techniques into their products and packaging to distinguish authorized products from counterfeit ones. The techniques include intentional mistakes in the text of labels and/or manuals, intentional packaging flaws, added lines of software code, and/or the use of bar codes, holograms, watermarks or Radio-frequency identification (RFID) technologies. Some trademark owners have prevented the production of third-shift counterfeit goods by manufacturing different parts of a product at several different locations, with final assembly taking place at a closely-monitored central facility or a facility in a different country.

Finally, another way to exercise tighter control over suppliers is to include provisions in supplier contracts holding the suppliers “strictly liable” should counterfeit goods be found in the marketplace. In addition, trademark owners can include a liquidated damages clause tied to finding products in a market where the trademark owner is not selling its products, e.g., finding products sold in the Chinese market when the trademark owner is only sourcing from China, not selling there. Lastly, for Chinese suppliers, trademark owners can consider adding the requirement of a public apology in the local newspaper of the city in which the supplier is headquartered, if the supplier itself is found to be selling counterfeit goods.

2. Take Care of Your Trash
Trademark owners can also make sure to use secure reclaim bins and storage areas to maintain a legitimate supply chain. They should consider requiring all product rejects, after being recorded, immediately be placed in a secure bin to avoid diversion of rejects. Trademark owners can institute policies, in-house and with suppliers, that require production waste and damaged and unusable products to be destroyed or appropriately disposed of promptly. For product overruns or slightly damaged but usable products, trademark owners may want to select one or two charities for product donation to ensure these goods are not diverted.

3. Create Secure Facilities and Transportation Networks
Diversion of parts from manufacturing facilities by disgruntled employees and theft during transport are two ways counterfeiters obtain components to make counterfeit products. Trademark owners should require employees and contractors to submit paperwork whenever items are brought in or out of facilities, with security personnel validating authorization upon entry or exit. Trademark owners also should periodically perform security vulnerability assessments on all major manufacturing, test and assembly locations. It is advisable to require the use of GPS tracking by freight forwarders and carriers, and to institute shipping policies with suppliers that require the use of seals on all containers and seal numbers on all shipping manifests.

4. Train Your Sales Networks
Trademark owners need to train their sales force to assess customers by questioning unusually large orders, the willingness of the customer to pay cash even for very expensive orders, and the purchase of products by a customer that do not fit within the customer’s line of business. In agreements with distributors, trademark owners should require compliance with the company’s online product distribution policies.

5. Watch Out for Unauthorized Sales—Online and Off
Finally, trademark owners are encouraged to purchase random samples of products from the market, and then test for product authenticity. For some products, extensive testing may not be necessary. Trademark owners should monitor broker and product trading Web sites for unauthorized offerings, including sites such as eBay and other Internet auction sites in the U.S., China and other countries of strategic interest to the trademark owner. Trademark owners should purchase random samples from online sources and test for authenticity.

Thomas Stiebel, Hillary Wucherer and Karen Dickinson are attorneys with Quarles & Brady LLP. Reprinted with permission from INTA Bulletin, Vol. 64, No. 16–September 1, 2009, Copyright © 2009 the International Trademark Association.

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