Made in China, invented in Europe
A study to the most effective strategies for European trademark holders to prevent and abolish trademark infringement and counterfeit activities by China
Student : Nathalie Francis Felix Student number : 5871441 Date : 24 June 2014 Content : Master thesis, concept version Word count : 15.834 words Education : MA European policy, European Studies, University of Amsterdam Supervisor : drs. E. Dirksen Second reader : mr. dr. A.C. van Wageningen
1 N.F. Felix Made in China, invented in Europe
Abstract
This study examines how European trademark holders can prevent and abolish trademark infringement and counterfeit activities by China in the most effective way. On the one side, the fight against Chinese counterfeiting has been going on for many years and has resulted in several strategies. On the other side, research shows that Chinese trademark infringement is a still growing problem nowadays. If so, how effective are currently executed strategies of anti- counterfeiting? Should trademark holders not change their anti-counterfeiting strategies? Comments of academicians from different disciplines will be studied and subsequently compared with the experiences of European trademark holders and protectors, assessed through personal interviews. It appears that early and international registration of trademarks, good relationships with all involved parties and warnings for penalties are most prominently effective measures in the combat against Chinese counterfeiting.
Key words: intellectual property rights, trademark violation, trademark infringement, counterfeiting, China, Europe.
2 N.F. Felix Made in China, invented in Europe Table of Contents
Abstract ...... 2 Table of Contents ...... 3 List of abbreviations ...... 5 Introduction ...... 6 1. How can the situation of IPR protection and IPR violation in China be described? ...... 9 1.1 Basic concepts of IPR ...... 9 1.1.1 Definition of term ...... 9 1.1.2 From Vienna Congress to ACTA-agreement ...... 10 1.1.3 Forms of IPR ...... 11 1.1.4 Trademarks ...... 12 1.2 Basic concepts of trademark infringement and counterfeiting ...... 13 1.2.1 Definition of term ...... 13 1.2.2 Market structure ...... 13 1.2.3 Demand side ...... 14 1.2.4 Supply side ...... 14 1.2.5 Institutional side ...... 15 1.2.6 Quantities, products and provenance ...... 16 1.3 The IPR environment in China ...... 18 1.3.1 Historical context ...... 18 1.3.2 Economic context ...... 19 1.3.3 Legal system versus enforcement ...... 19 1.3.4 Impacts of WTO-membership: the situation after 2001 ...... 20 1.3.5 Causes of weak enforcement ...... 21 1.3.6 Efforts of the Chinese central government ...... 22 1.4 Economic consequences of trademark infringement and counterfeiting ...... 23 1.4.1 Effects on European trademark holders ...... 23 1.4.2 Effects on European consumers ...... 24 1.4.3 Effects on European governments ...... 24 1.4.4 Effects on the European general economy ...... 25 1.5 The combat against IPR violation ...... 26 1.5.1 Europe must not push for better IPR enforcement in China ...... 27 1.5.2 Europe must push for better IPR enforcement in China ...... 28 2. How to combat counterfeit activities and trademark infringement: the possibilities ...... 30 2.0 Action or no action? ...... 30 2.1 Actions aimed at consumers ...... 31
3 N.F. Felix Made in China, invented in Europe 2.1.1 Preventive actions ...... 31 2.1.2 Repressive actions ...... 32 2.2 Actions aimed at manufacturers ...... 32 2.2.1 Preventive actions ...... 32 2.2.2 Repressive actions ...... 33 2.3 Actions aimed at distribution channels ...... 34 2.3.1 Preventive actions ...... 34 2.3.2 Repressive actions ...... 35 2.4 Actions aimed at retailers ...... 35 2.4.1 Preventive actions ...... 35 2.4.2 Repressive actions ...... 36 2.5 Actions aimed at Chinese local authorities ...... 36 2.5.1. Preventive actions ...... 36 2.5.2 Repressive actions ...... 37 2.6 General actions ...... 37 2.6.1 Preventive actions ...... 37 2.6.2 Repressive actions ...... 39 3. Managerial and industry efforts to combat counterfeit activities and trademark infringement: in practice ...... 41 3.0 Action or no action ...... 41 3.1 Actions aimed at consumers ...... 42 3.1.1 Preventive actions ...... 42 3.1.2 Repressive actions ...... 43 3.2 Actions aimed at manufacturers ...... 44 3.2.1 Preventive actions ...... 44 3.2.2 Repressive actions ...... 45 3.3 Actions aimed at distribution channels ...... 46 3.3.1 Preventive actions ...... 46 3.3.2 Repressive actions ...... 46 3.4 Actions aimed at retailers ...... 47 3.4.1 Preventive actions ...... 47 3.4.2 Repressive actions ...... 47 3.5 Actions aimed at Chinese local authorities ...... 48 3.6 General actions ...... 49 Conclusion ...... 50 Bibliography ...... 53 Annex ...... 57 4 N.F. Felix Made in China, invented in Europe
List of abbreviations
ACTA Anti-Counterfeiting Trade Agreement APEC Asia-Pacific Economic Cooperation ABAC APEC Business Advisory Council BBIE Benelux Bureau voor de Intellectuele Eigendom CCPIT China Council for the Promotion of International Trade CIA Central Intelligence Agency EC European Commission EIU Economic Intelligence Unit EU European Union FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product IACC International Anti-Counterfeiting Coalition IEF Index of Economic Freedom IP Intellectual Property IPR Intellectual Property Rights NGO Non-Governmental Organization NIPS National Intellectual Property Strategy OECD Organization for Economic Co-operation and Development OHIM Office of Harmonization for the Internal Market RFID Radio Frequency Identification SIPO State Intellectual Property Organization TRIPS Trade-Related Aspects of Intellectual Property Rights UN United Nations US(A) United States (of America) USTR United States Trade Representative WCO World Customs Organization WIPO World Intellectual Property Organization WTO World Trade Organization
5 N.F. Felix Made in China, invented in Europe Introduction
A Central topic and research question The World Customs Organization (WCO) has called it “a 21st century crime” (World Customs Organization, 2006). And the US Federal Bureau of Investigation has titled it as “the crime of the 21st century” (Global Business Leaders Alliance Against Counterfeiting, 2003). It goes without saying that product counterfeiting is a major problem nowadays. Within international law, counterfeiting is regarded as trademark infringement, a form of intellectual property rights (IPR) violation. Products of world famous brands and smaller brands are pirated, copied, secretly manufactured and (re)sold as if they are genuine products. Contemporary developments like globalization, progression of Internet usage, growth of web sales, and technological advances, make that trademark infringement is an ever-rising problem. The phenomenon is a large issue of concern to business firms, policymakers and consumers, especially in the developed western countries like Europe, that have well-known trademarks and brands. This study will confine itself to the perspective of European trademark holders. Concerns are particularly expressed in the direction of China: the country is the largest producer of counterfeit products worldwide, and it is estimated that the problem is still growing in size and scope. Damaged trademark holders screech for solutions. This study will try to find an answer to the question: how can European trademark holders best prevent and abolish trademark infringement and counterfeit activities by China?
B Socio-economic relevance The socio-economic relevance for answering the above posed question is high, because counterfeit products bring damage to business’ brands in all sorts of ways. Among other things, revenues go down, the image is damaged and customers run away. Trademark holders of larger as well as smaller brands try to fight against trademark infringement by China. But bearing in mind the growing numbers of counterfeit activities in China, the question is: how effective are their strategies of anti-counterfeiting? If research shows that Chinese counterfeit production and Chinese-European trade in counterfeit products are still growing, should the European companies not change their strategy? It is time to review and rephrase the strategies of the European business sector to fight against the ‘fake goods’ that are made in China, but invented in Europe. 6 N.F. Felix Made in China, invented in Europe
C Academic relevance This study will confine itself to the approach of the European business sector. Governments and NGOs are excluded. When it comes to comparable studies, this is no exceptional approach. Many studies discuss the desired business strategies to fight effectively against counterfeiting. But in most cases, the possible strategies only entail the recommended strategies according to the writer. Few studies contain an overview of all possible anti- counterfeiting actions that the European business sector could take. Moreover, much has been written about the available measures that European trademark holders can undertake. Little has been written about what strategies European firms actually or should implement. This study distinguishes itself from other studies by its combined point of view. It examines what is possible for the business sector to combat Chinese counterfeiting, what is really done and what should be done. The combined analysis will give us an impression of the gap between the possibilities and the reality regarding anti-counterfeit strategies.
D Structure In order to be able to see the discussion in its total and contemporary context, chapter one draws up an objective map of the current situation. How can the situation of IPR protection and IPR violation, in the world in general and in China in particular, be described? Definitions of terms, basics of concepts, overviews of historical developments, and facts and statistics will be given. To place the discussion in a theoretical framework, chapter two will provide an overview of the ideas offered by the academic world. From what range of possibilities can European trademark holders choose to prevent and abolish counterfeiting by China? Academicians from various disciplines and different continents will give their suggestions. Chapters three offers a practical framework, in which the views of the European trademark holders themselves will be examined. What strategies and actions are actually used by managers from brand houses to fight against counterfeit activities by China, and which of these do they experience as being effective? The combined analysis of best strategies according to academicians on the one side and trademark holders on the other side, should lead to concluding thoughts on a better working strategy for the future. This study aims be the first of several steps in forming a more
7 N.F. Felix Made in China, invented in Europe effective block of European trademark holders against the growing number of Chinese counterfeiters.
8 N.F. Felix Made in China, invented in Europe 1. How can the situation of IPR protection and IPR violation in China be described?
Part I gives an elaborated and in-depth introduction to the core of this study. Definitions of terms, basics of concepts, overviews of historical developments, and facts and statistics will be given. Hence, part I serves as a ‘prelude’; as the preparatory part to the main question. Part I is divided into five sections. Section one describes the basic concepts of intellectual property rights (IPR), while section two outlines the basic concepts of trademark infringement and counterfeiting. Section three focuses on the protection and violation of trademarks in a Chinese context. Next, section four analyses the economic and financial consequences for Europe of IP infringement by Chinese companies. To finish this chapter, section five shortly explains the core of the study: the reason why this study will focus on ways to fight against Chinese infringement of European trademark rights.
1.1 Basic concepts of IPR
1.1.1 Definition of term The term Intellectual Property Rights (IPR) refers to the legal concept that describes the rights of a person or company that owns intellectual property. The World Trade Organization (WTO) defines it as “the rights given to persons over the creations of their minds” (WTO 2013). The World Intellectual Property Organization (WIPO), a United Nations agency dedicated to the use of intellectual property, outlines it as “the legal rights which result from intellectual activity in the industrial, scientific, literary and artistic fields” (WIPO 2004, 3). When, where and for what reason did the concept of intellectual property rights emerge? The earliest usage of the term ‘intellectual property’ was, so far known, in 1845 in the United States at a judgment of the Massachusetts Circuit Court. During the legal case on patents, Davoll et al. versus Brown, Judge Charles L. Woodbury wrote: "only in this way can we protect intellectual property, the labors of the mind, productions and interests as much a man's own … as the wheat he cultivates, or the flocks he rears" (Woodury & Minot, CCD Mass. 7 F. Cas. 197, 1845, from Lemley 2004, 4). The first mention of the term in Europe was by the French author A. Nion, who used the term “propriéte intellectuelle” in his book Droits civils des auteurs, artistes et inventeurs in 1846 (Lemley 2004, 4).
9 N.F. Felix Made in China, invented in Europe However, the idea of ‘intellectual property rights’, as it is used in its present meaning, can be traced back earlier and goes back to the late eighteenth century. Between 1790 and 1850, some now-developed countries introduced their first IPR laws. First forms of IPR laws were the establishments of patent law. In the early nineteenth century, copyright laws and trademark laws followed (Chang 2001, 290-91).
1.1.2 From Vienna Congress to ACTA-agreement Although the above-mentioned IPR laws were the first signs of establishments of IPR regimes, they were extremely inadequate and incomplete by the standards of our time (Chang 2001, 290). First of all, the IPR laws were only nationally valid. Foreign intellectual property was not granted any IPR protection. The lack of international IPR protection provoked patenting of imported inventions, a phenomenon that occurred on a large scale at the time. Some other shortages of the first IPR laws included the high costs of patent application and the lack of disclosure requirements (Chang 2001, 290-91). If the firstly invented IPR systems seem so underdeveloped by the standards of our time, how did we come to the extensively developed IPR systems of nowadays? Since a rising number of countries introduced IPR laws and since the national character of the IPR regimes showed increasing inefficiency, the call for an international system of IPR protection became louder. The first effort to generate an international IPR system was made in 1873 at the Vienna Congress. Due to dissension between the participating states, the Congress did not produce any thorough international agreements around IPR protection. A second attempt was made in 1878 at the Paris Congress. The outcome of this congress was much more favorable towards patents than the first one and led to a draft convention around IPR protection. The draft convention resulted in the Paris Convention, signed in Paris in 1883 by eleven countries, and covering patents and trademarks (Chang 2001, 290-91). In 1886, the signature of the Berne Convention followed, which covered copyright (Chang 2001, 292). The administrative secretariats of the two conventions merged in 1893 and formed from then on the new organization United International Bureaus for the Protection of Intellectual Property, located in Berne and relocated to Geneva in 1960. In 1967, the organization underwent an important treaty amendment, when it changed its name into the World Intellectual Property Organization (WIPO) and became an agency of the United
10 N.F. Felix Made in China, invented in Europe Nations (UN) (Braderman 1968, 673). The Paris Convention and the Berne Convention together formed the basis for the contemporary international IPR system (Chang 2001, 292). IP law transferred from WIPO to the WTO with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1994. The international shift of IP law from WIPO to WTO was predominantly pushed by countries with maximalist IP agendas (Kaminski 2011, 3). The TRIPS agreement establishes “minimum levels of protection that each government has to give to the intellectual property of fellow WTO members” (WTO 2013). It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994 (WTO 2013). Most recently, an attempt has been made to develop a plurilateral IP agreement outside of the World Intellectual Property Organization and the World Trade Organization: the Anti-Counterfeiting Trade Agreement (ACTA) (Kaminski 2011, 2). ACTA arose as a concept in 2005 for the first time, initiated by Japan. In the following years, many countries joined the informal discussion and several official negotiations have taken place since 2008 (Kaminski 2011, 4). The process is impeded by the commotion around the content of ACTA; opponents criticize the Act for its lack of transparency during the negotiation process and for its negative side effects on fundamental civil and digital rights, including freedom of expression and communication privacy (Europa Nu 2013). On 4 July 2012, the European parliament rejected the ACTA (Europa Nu 2013). As by May 2014, ACTA is signed (but not all ratified) by 31 countries and the European Union (Swiss Federal Institute of Intellectual Property 2014). Japan was the first country that ratified the act on 4 October 2012 (Ministry of Foreign Affairs of Japan 2012).
1.1.3 Forms of IPR Generally speaking, intellectual property can be divided into two main branches: copyright and industrial property. More specifically, intellectual property rights can relate to the following areas:
- “literary, artistic and scientific works, - performances of performing artists, phonograms and broadcasts, - inventions in all fields of human endeavor, - scientific discoveries, - industrial designs, - trademarks, service marks and commercial names and designations, 11 N.F. Felix Made in China, invented in Europe - protection against unfair competition, and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.”1
The first two areas fall into the category of copyright, of which the second area is often referred to as ‘related rights to copyright’. The other areas except scientific discoveries fall into the category of industrial property. According to the definitions used by WIPO, industrial property encloses inventions and industrial designs. According to these definitions, inventions are “new solutions to technical problems”, while industrial designs are “aesthetic creations determining the appearance of industrial products ...[and] trademarks, service marks, commercial names and designations, including indications of source and appellations of origin, and protection against unfair competition” (WIPO 2004, 3). Scientific discoveries, the remaining area in the WIPO convention, does not fall into one of the two main categories. As defined in the Geneva Treaty on the International Recording of Scientific Discoveries these are “the recognition of phenomena, properties or laws of the material universe not hitherto recognized and capable of verification”.2 Although there is a great overlap between the several areas of intellectual property, this paper focuses on one particular form of intellectual property: trademarks.
1.1.4 Trademarks A trademark is a sign that can distinguish a product of a company from products of other companies. Some examples of trademarks are words, logo’s, designs and colors (BBIE 2013). A trademark can be acquired by registration in the registers of a trademark bureau. Benelux- trademarks can be requested at the Benelux Bureau voor de Intellectuele Eigendom (BBIE). European trademarks must be registered at the Office of Harmonization for the Internal Market (OHIM). International registrations are carried out under the auspices of the World Intellectual Property Organization (WIPO) (Dirkzwager IE&IT 2013). In principle, trademarks are valid for ten years, but can be extended after each term. The possibility of extension makes trademarks valid for an unlimited period of time. Once a trademark registration has been obtained, the trademark holder can bring proceedings against unauthorized usage of his trademark (Dirkzwager IE&IT 2013). Unauthorized usage of a
1 Article 2(viii)) Convention Establishing the World Intellectual Property Organization (WIPO), concluded in Stockholm on July 14, 1967 in Stockholm on July 14, 1967 2 (Article 1(1)(i) Geneva Treaty on the International Recording of Scientific Discoveries (1978) 2 (Article 1(1)(i) Geneva Treaty on the International Recording of Scientific Discoveries (1978) 12 N.F. Felix Made in China, invented in Europe trademark is an absolutely illegal activity and is certainly alien to internationally accepted Intellectual Property Rights. The next section will elaborate on the basic concepts of this illegal activity.
1.2 Basic concepts of trademark infringement and counterfeiting
1.2.1 Definition of term Trademark infringement or trademark violation refers to the use of a trademark that is identical or confusingly similar to the trademark of another company (Legal Dictionary 2013). Counterfeiting is the term used “to describe a range of illicit activities linked to intellectual property rights infringement” (OECD 2007, 8). According to the definition in the TRIPS agreement of the World Trade Organization, counterfeit goods are “any goods, including packaging, bearing without authorization a trademark which is identical to the trademark validly registered in respect of such goods, or which cannot be distinguished in its essential aspects from such a trademark, and which thereby infringes the rights of the owner of the trademark in question under the law of the country of importation” (WTO TRIPS agreement 1994, Article 51 note 14a). The terms trademark infringement, trademark violation and counterfeiting will be used in this study.
1.2.2 Market structure The market of trademark-violated products is complex and multifaceted. What does the market structure look like? The Organization for Economic Co-operation and Development (OECD) distinguishes two principal markets for trademark-infringing products (OECD 2007). On the one hand, there is what the OECD calls the ‘primary market’: consumers unintentionally buy counterfeit products, thinking that the products are genuine. On the other hand, counterfeiters appear on the ‘secondary market’: consumers consciously and willingly buy counterfeit products (OECD 2007, 10). Berman (2008) makes another grouping of trademark-infringing products into four categories. The first category consists of the ‘knock- off’ products: consumers unwittingly buy a pirated product. In the second category, consumers unknowingly buy a copied product, thinking the product they purchase is genuine. In the third category, a subcontracted supplier produces the counterfeit product with the same machinery as the genuine product, while the original manufacturer is unaware of it. Fourthly, counterfeit products are the genuine products that should be destroyed or sold as seconds, but 13 N.F. Felix Made in China, invented in Europe that are illegally labelled as first-quality products. The subcontracted supplier sells the substandard genuine products as first-quality products, while the original manufacturer is unaware of it (Berman 2008, 191-92). Another type of classification is made by Hung (2003). According to Hung, three forms of counterfeit products can be distinguished: ‘fakes’, ‘pirated products’ and ‘imitation products’. The fakes are replicates of brand products. This category forms 10 % of the counterfeit product market. The pirated products are replicates of brand products as well, but are produced by using stolen technologies and designs from the original product manufacturer. 30 % of the counterfeit products are pirated. Consumers of fakes and pirated product believe however that they purchase a genuine brand product. The last category – good for 60 % of the counterfeit market – are imitation products. The products are copies of genuine brand products, but consumers are aware of the non-authenticity (Hung 2003, 59-60).
1.2.3 Demand side Consumers who knowingly purchase counterfeit products – i.e. the consumers who buy the products on the ‘secondary market’, as the OECD defines it (OECD 2007, 10) – have a variety of reasons to do so. What are the driving factors on the demand side for purchasing counterfeit products? First of all, some product-price features play a role. Two main characteristics are the low price of the counterfeit good compared to the genuine good and the – considered – acceptable level of quality (OECD 2007, 11). Secondly, some consumer characteristics are of influence. The involved consumers apparently attach great value to the possession of brand-named articles (Chaudhry et al. 2009, 59). On the contrary, these consumers attach low value to health risks and safety risks, nor to respect for IPR protection (OECD 2007, 11 and Chaudhry 2006, 466). Some of the involved consumers carry anti-big business sentiments, which drive them to deliberately damage the IPR holder (Chaudhry 2006, 466).
1.2.4 Supply side On the supply side, a variety of factors drive suppliers to produce counterfeit products. The main driving factor is the high profit margins on counterfeit products (Hung 2003, 60 and OECD 2007, 11). Other factors are the declining costs of manufacture technologies and the fast transmission of production technologies. These advantages provide counterfeiters with
14 N.F. Felix Made in China, invented in Europe the opportunity to produce their fake products in an easy, rapid and low-cost way (Chaudhry et al. 2008, 58 and Hung 2003, 60-61). Also the lax attitude of IP holders contributes to the attractiveness of counterfeit production. Foreign companies act uncarefully when it comes to their production in low-wage countries, which indirectly helps counterfeiters in their business (Hung 2003, 61). Lastly, the large potential market size and the easiness of misleading the consumers make counterfeit production an attractive business (OECD 2007, 11).
1.2.5 Institutional side The institutional and juridical situation in low-wage countries creates an attractive environment for counterfeiters to start or continue their business. Contributing factors are the low risk of discovery, weak or no enforcement of IPR laws, weak or no penalties, weak border controls, inadequate regulatory infrastructure, a high level of corruption, and a lack of coordination between the responsible agencies (OECD 2007, 11 and Bruce 2009, 704-705).
Figure 1 schematically summarizes the driving factors behind IPR infringement from the demand side, supply side and institutional side.
Figure 1: Driving factors behind IPR infringement
Demand side Supply side Institutional side • Low price • High profit margins • Low risk of discovery • Acceptable considered • Declining costs of • Weak /no enforcement level of quality production technologies of IPR laws • Brand importance • Fast transmission of • Weak border controls production technologies • Low value to health • Lax attitude of foreign IPR • Inadequate regulatory risks holders infrastructure • Low value to safety • Large potential market size • High level of corruption risks • Low respect for IPR • Easiness of misleading • Lack of coordination consumers between agencies • Anti-big business sentiments Sources: Bruce 2009, Chaudhry 2006, Chaudhry et al. 2009, Hung 2003, OECD 2007.
15 N.F. Felix Made in China, invented in Europe 1.2.6 Quantities, products and provenance In order to estimate the severity of the counterfeit problem, it is important to quantify the problem. What is the scale size of the worldwide IP infringement? Calculations of the size of the counterfeit market show incredibly high statistics.3 The International Anti-Counterfeiting Coalition (IACC) estimated in 2012 that counterfeiting is “a US$600 billion a year problem” and that “approximately 5 % - 7 % of world trade is in counterfeit goods” (IACC 2012). According to the Coalition, the problem has grown over 10,000 % in the last two decades (IACC 2012). In the same year, the European Commission (EC) revealed that detentions totals reached a domestic retail value of €1.272.354.795, a number of 114.772.812 counterfeit articles and 91.245 cases in the year 2011 (EC 2012, 3). Trademark infringement is the most frequent form of IPR infringement in the EU, in terms of quantities as well as in terms of value of seized goods (see figure 2) (EC 2012,18).
Figure 2: Involved IP rights in the European Union, by articles and value
. Source: EC 2012, 18.
3 To measure the size and effects of counterfeiting is extremely difficult (Chaudhry, P. and Zimmerman, A. 2009, 10). Difficulties arise from the illegal nature of the business, the lack of an internationally established methodology, and the discussion on to what extent certain losses are a consequence of counterfeiting (Chaudhry et al 2009, 59). However, the likely excessive size and numerous negative effects of the trademark infringement cannot be ignored. Therefore, this study will make use of the existing estimates made by various organizations and governments in order to present an idea of the scope and extent of the problem, and to understand the relevance of the thesis topic.
16 N.F. Felix Made in China, invented in Europe If counterfeiting occurs at such large scale, in which goods does this form of illegal trade take place? The sorts of products that are counterfeited are wide-ranging. Almost all kinds of products are, to a greater or lesser extent, being copied or pirated and (re)sold on the black market (OECD 2007, 11). Some important product sectors that are subject to IPR infringement include pharmaceuticals, cigarettes, clothing, shoes, bags, accessories, foodstuffs, alcoholic beverages, the automotive sector, consumer electronics, CDs and DVDs (OECD 2007, 12). The U.S. Customs Service and the European Custom Service have made lists of counterfeit goods that were seized most. The U.S. list of 2006 is topped by footwear (41 %) and wearing apparel (16 %), followed by handbags/wallets/backpacks (9 %) and computers/hardware (9 %) (Chaudhry et al. 2009, 60). The EU list of 2012 is more or less led by the same articles: shoes (28 %), clothing (20 %) and bags/wallets/purses (7.5 %) form the top three (EC 2012, 13). Where do all these illegal products that violate IP rights come from? According to the OECD, IPR infringement occurs in practically all countries around the world. Customs have detected counterfeited goods from 150 different source economies (OECD 2007, 13). Despite the global character of IPR violation, Asia appears to be the principal source continent. Within Asia, China is the principal source country for counterfeit products. The EC concludes in its report that China is the primary source for the IPR infringed goods; 72.95 % of the articles and 70.93 % of the value come from China (see figure 3) (EC 2012, 15). The statistics show how IPR infringement in general and trademark infringement in particular by Chinese companies form a major concern to IPR holders in the European Union.
Figure 3: Countries of provenance of counterfeit goods in the European Union, by articles and by value.
Source: EC 2012, 15.
17 N.F. Felix Made in China, invented in Europe 1.3 The IPR environment in China Understanding the intellectual property rights environment in China requires a look at China in a broader context. One has to consider China’s economic and historical background, before comprehending its IPR situation.4
1.3.1 Historical context Looking at China’s history, one can state that the nation’s cultural and political traditions do not stimulate the concept of protection for intellectual property (Zimmerman 2013, 141). The origins of the adversative attitude towards ownership of IP go back to the old Chinese tradition of Confucianism. In the Confucian belief, inventions are not a product of individual achievement, but rely on past knowledge that belongs to the whole society. Therefore, an invention cannot be owned by an individual, but belongs to all citizens (Zimmerman and Chaudhry 2009, 309). Another pillar in the Confucian belief is the control of information. The state regulates the publication of works. The regulation is not intended to protect the ownership of intellectual property, but is intended to avoid any (re)publication of “nonconforming” thoughts (Zimmerman and Chaudhry 2009, 309). The state is to the Chinese people like a father is to its children, and it is the task of the Chinese monarch to keep “heterodox” ideas from the people (Alford 1995, 12-19). Communism, the dominating ideology in China from 1949 onwards, does not lend itself to IPR protection either (Zimmerman 2013, 141). The communist ideas about protection of IPR fit in with the Confucian view on it. Also in communism, the control of information and the communal ownership of inventions are high on the agenda (Alford 2005, 57-58 and Mertha 2005, 79-80). The little protection of copyright, patents and trademarks that were introduced during the decennia before the communists took over (1920s and 1930s), were removed during the communist period (Zimmerman 2013, 144). During the Cultural Revolution (1960s), the protection of intellectual property ownership was at its minimum level. From the 1970s on, trademark and patent laws were slowly re-introduced, and it was not until the 1990s that the first copyright law was re-installed (Zimmerman and Chaudhry 2009, 314). According to Mertha (2005), the USA has played a large role in pushing China to legislate protection of intellectual property rights. From 1979 until today, numerous negotiations on IPR protection between China and the USA have taken place, in bilateral as
4 See for this necessary condition inter alia: Alford 1995, Mertha 2005, Zimmerman and Chaudhry 2009, Zimmerman 2013 18 N.F. Felix Made in China, invented in Europe well as multilateral context (Zimmerman 2013, 315). In 2001, China accessed the World Trade Organization. China’s accession obliged the Republic to fulfil the requirements that the WTO imposes on its members, including those regarding IPR protection (Hung 2003, 58). As by 2014, China is a member of WIPO, the Paris Convention and the Berne Convention (Zimmerman 2013, 147).
1.3.2 Economic context To comprehend the contemporary IPR environment in China, a basic knowledge of the nation’s economic background is of importance. Zimmerman and Chaudhry (2009) give a short overview of the Chinese economy from 1500 up to now. From 1500 until 1950, the Chinese economy was stagnant and GDP enjoined very little growth. Chinese GDP went from USD 62 billion in 1500 to USD 240 billion in 1950, a small progress compared to Western European GDP that developed from USD 44 billion in 1500 to about USD 1.4 trillion in 1950. The Chinese GDP per capita even decreased during the same period from USD 600 in 1300 to USD 439 in 1950 (Zimmerman 2009, 142). This trend changed drastically from 1978 onwards, when Deng Xiaoping became leader of the Communist Party. Since 1978, Chinese GDP has grown considerably and enjoined growth rates of around 10 %. In 2013, China is the world’s second largest economy after the USA. That year, China’s GDP (official exchange rate) reached the number of USD 9.33 trillion. This was a growth of 7.7 %, the same percentage as in the year 2012, but a reduced GDP growth compared to 2011 (9.3 %) and 2010 (10.4 %) (CIA World Fact book 2014). The People’s Republic of China owes a great part of its economic growth to exports, especially to the Western world. In 2012, exports totaled just under USD 2.1 trillion. China's trade surplus (in balance-of-payments terms) increased from USD 243.5 billion in 2011 to USD 321.6 billion in 2012 (Economic Intelligence Unit 2013)5. A major side effect is that along with these high growth rates, the production and exports of counterfeit products have grown drastically as well (Zimmerman 2013, 142).
1.3.3 Legal system versus enforcement China is nowadays the world’s largest source of IP infringed goods; from 2008-2010, 67 % of all counterfeit goods directly come from China (UN 2013, 123). Of all the IP infringed
5 Figures on China’s trade surplus in 2013 (in balance-of-payments terms) not yet available. 19 N.F. Felix Made in China, invented in Europe products in the United States of America and in the European Union, the largest part is produced in China. (EC 2012, 15 and UN 2013, 124). The great amounts and enormous values of IPR infringement by Chinese companies trigger the question: how well protected is intellectual property in China? Before answering this question, it is important to make a distinction between the legal situation (in theory) and the situation of enforcement (in practice). It is generally considered that laws on IPR protection are adequate, but that enforcement remains weak (see for example Hung 2003, 67-68, Suttmeier and Yao 2011, 5, Zimmerman and Chaudhry 2009, 309, Zimmerman 2013, 144-46). In his speech at a conference on counterfeiting in China, Professor Daniel C.K. Chow (Ohio State University) confirmed this general assumption by stating: “While China’s intellectual property laws are now considered by most observers to be in compliance with the standards set by TRIPS, enforcement of these laws remains inadequate and fails to create sufficient deterrence of counterfeiting” (Chow 2005).
1.3.4 Impacts of WTO-membership: the situation after 2001 China became a member of the World Trade Organization in 2001. What impact did the access of China to the WTO have on the IPR situation in China? It was widely expected that IPR protection in China would improve after China’s accession to the World Trade Organization in 2001. However, it must be stated that WTO-membership did not or very little improve the situation in this area (Hung 2003, 68). Hung (2003) states that China has sufficient laws on IPR protection, but that these laws were already in place before China’s WTO-accession. Additionally, he defines that the enforcement system of IPR is “riddled with loopholes” and that enforcement is “selective, sporadic and disorganized” (Hung 2003, 68- 69). The weak to no improvement of IPR protection after 2001 is confirmed by analyses of the Index of Economic Freedom (IEF). The Index of Economic Freedom, a guide published by The Wall Street Journal and The Heritage Foundation, annually measures the economic freedom around the world. Since 1995, the Index presents the economic freedom of 185 countries based on ten benchmarks. One of the benchmarks covers “property rights” (IEF 2014). Figure 4 shows the index of property rights protection in China, compared to those of the Netherlands and the world average. As portrayed by figure 4, protection of property rights in China is ranked at 20.0 points. This is quite some lower than the world average of 45.0 points and extremely lower than the protection rate in the Netherlands, which is ranked at 90.0 points. More importantly, the figure shows that protection of property in China has not 20 N.F. Felix Made in China, invented in Europe improved since WTO-membership in 2001, but on the contrary has worsened over the last years compared to pre-2001 years. In the comments on the graph data of China, it is stated: “Intellectual property rights are not protected effectively, and infringement of copyrights, patents, and trademarks is common” (IEF 2014).
Figure 4: Property rights by year of the world average, China and the Netherlands from 1995-2014.
Source: IEF 2014.
1.3.5 Causes of weak enforcement If the legal framework for proper IPR protection satisfies the WTO standards, what are the reasons for the weak enforcement in China? Chow (2005) indicates two main reasons for weak enforcement. The first reason is local protectionism: local authorities benefit directly and indirectly from counterfeiting. While the central level authorities try to combat IPR violation, counterfeiting is defended or even supported by local level authorities. The second reason is inadequate punishment: fines and criminal prosecutions are extremely low to IPR infringers, while financial compensations to IPR holders are very small (Chow 2005). In its 2012 USTR Report to Congress on China’s WTO Compliance, the U.S. Trade Representative mentions the following causes for the ineffective IPR enforcement in China: “lack of coordination among Chinese government ministries and agencies, lack of training, resource constraints, lack of transparency in the enforcement process and its outcomes, and local protectionism and corruption” (USTR 2012, 104). Mertha (2005) highlights in his book one particular cause for China’s poor IPR enforcement: “fragmented authoritarianism” (Mertha
21 N.F. Felix Made in China, invented in Europe 2005, 26-27). Fragmentation exists in function (separations between bureaucracies) and in government levels (separations between the national and local governments) (Mertha 2005, 27). The fragmented authoritarianism can undermine the implementation process of IPR laws (Mertha 2005, 27). Hung (2003) mentions similar factors that contribute to poor enforcement of the Chinese IPR laws. He also sees the weak punishments and decentralized enforcement authority as barriers to a strong implementation of IPR laws (Hung 2003, 61). The lists of barriers show that weak IPR enforcement in China is probably caused by many thinkable reasons. However, it is clear that potential problems are at local level governments rather than at the central level government.
1.3.6 Efforts of the Chinese central government One of the causes mentioned above is formed by differences in interests between the central government and the local governments in China. While the local level authorities experience economic gain from counterfeiting in their region, the central level authorities see it as a threat to the Chinese overall economy. In what ways has the Chinese central government attempted to combat IPR infringement in its republic up till now? To begin with, the national government has launched numerous campaigns to raise awareness of anti-counterfeiting among the Chinese people (Zimmerman and Chaudhry 2009, 317). The Asia-Pacific Economic Cooperation Business Advisory Council (ABAC) of the US thinks that “(t)he government plays an integral role in raising awareness on intellectual property rights” (APEC Business Advisory Council 2007, 5). An example of a prominent anti-IPR infringement campaign is operation Blue Sky. This campaign, launched in 2006, was organized by the Chinese Ministry of Commerce in cooperation with a number of companies and organizations, inter alia the China Council for the Promotion of International Trade (CCPIT). The aim of Operation Blue Sky was to restrain IPR infringements at trade fairs. The campaign consisted, among other things, of: conducting law agency officials to the trade fairs to offer enforcement services on the ground, setting up complaint centers, and transferring complaints at trade fairs to administrative agencies within 24 hours (APEC Business Advisory Council 2007, 10-11). Secondly, the Chinese government has opened a national IP complaint phone number in 2006 (Zimmerman and Chaudhry 2009, 317). Thirdly, the national authorities have organized an annual ‘Week of April’ since 2004, with the aim of making the Chinese people aware of the importance of IPR enforcement. This is executed
22 N.F. Felix Made in China, invented in Europe every year by ways of advertisements in the media, seminars and contests (U.S. Chamber of Commerce 2007, 11). But most prominently, the Chinese central government announced the National Intellectual Property Strategy (NIPS) in 2008 under leadership of the Chinese State Intellectual Property Organization (SIPO) (Suttmeier and Yao 2011, 3). The Chinese NIPS is a wide-ranging list of ambitions and measures to improve the Chinese IPR environment. The purpose, according to SIPO, is “improving China's capacity to create, utilize, protect and administer intellectual property, making China an innovative country and attaining the goal of building a moderately prosperous society in all respects” (SIPO 2008). With respect to trademarks, the NIPS specifies four concrete measures. Measures number two, three and four mainly deal with encouraging registration and enhancing administration of Chinese trademarks. Measure number one is more focused on protection of trademarks and combating counterfeiting, and says: “Strengthen our capacity to enforce the law and take strict measures for curbing counterfeiting and other infringements to maintain fair competition and good order in the market” (SIPO 2008).
1.4 Economic consequences of trademark infringement and counterfeiting
The large-scaled trademark infringement by Chinese companies has far-reaching impacts in several ways and on various parties. Not only the economy in the country of the infringers is damaged, also the economy in the country of the trademark holders is harmed. This study focuses on the economic consequences for the European trademark holders, whose intellectual property rights are violated by Chinese companies. The economic effects can be subdivided into four main categories: effects on European trademark holders, on European consumers, on European governments, and on the European general economy.
1.4.1 Effects on European trademark holders Chinese counterfeiters harm the European trademark holder in two ways: directly financially and indirectly financially. Firstly, trademark holders experience losses in sales, since there is a grouping of consumers who purchase a counterfeiting product while they believe they pay for a genuine good (Berman 2008, 192). Secondly, trademark holders miss out on royalties in case of trademark infringement (OECD 2007, 18). Royalties are the payments that one party
23 N.F. Felix Made in China, invented in Europe makes to the trademark holder for permission to exercise his intellectual property (Legal Dictionary 2013). Counterfeit activities divest royalty incomes from the trademark holder. Thirdly, trademark holders sometimes include costs on counteracting IPR violation. The counteract expenses are no investments in order to create better products and can therefore be considered as purely financial losses (OECD 2007, 18). These are all direct financial losses for the trademark holder, but also indirect financial losses appear. First and most evidently, the reputation of the brand is damaged when a consumer unknowingly purchases a fake brand product. As result of the inferior quality, the consumer is deceived and might be unwilling to buy the product in the future. Secondly, the deceived consumer could relay his poor experience to potential purchasers of the product, who might be disinclined to buy the product anymore either. The injured brand image causes a loss of traditional and potential clients, and creates a decline in sales volume (OECD 2007, 18). Thirdly, the counterfeiters are inequitable competitors, since they illicitly take advantage of expenses made by the trademark holders over numerous years, e.g. expenses on promotion, research & development, design costs and advertisement costs (Berman 2008, 192).
1.4.2 Effects on European consumers European consumers who unknowingly buy counterfeit products, often pay prices that are comparable with genuine product prices. The prices are in large imbalance in relation to the commonly substandard quality of the fake good. Above and beyond, the consumer faces the danger of health and safety risks as result of the substandard and unchecked products (Bruce 2009, 705 and Chaudhry 2006, 464). Notable counterfeit products that cause health risks include products in the food and drink sector, pharmaceuticals and tobacco products. Outstanding sectors that may pose safety risks comprise the automotive sector and the electrical components sector (OECD 2007, 19-20).
1.4.3 Effects on European governments Governments experience direct financial losses from counterfeiting through tax revenue losses and costs spent on anti-counterfeiting activities. Forms of lower tax collection comprise lower takings of corporate income taxes, value added taxes, excise taxes and import tariffs (OECD 2007, 20). Forms of costs spent on anti-counterfeiting activities contain costs on customs and law enforcement, treatment of the seized products, judicial procedures, anti-
24 N.F. Felix Made in China, invented in Europe counterfeiting campaigns and awareness raising among the people (OECD 2007, 21). Indirectly, governments suffer from counterfeiting since they bear the costs associated with augmented trade deficits (Berman 2008, 192). Furthermore, they often bear a proportion of the costs related with health and safety damage caused by counterfeiting (OECD 2007, 21).
1.4.4 Effects on the European general economy The strongest argument in favor of an adequate IPR system is the assumed link with innovation: a strong protection of intellectual property rights is considered to encourage innovation.6 Although there are plenty of arguments that contradict this statement, the mainstream belief in the contemporary Western world is that a well-developed IPR system is a fundamental element of a healthy and innovative market economy (Chang 2001, 294). This assumption taken for granted, the IPR violation by Chinese companies reduces the incentive for innovative activities, which negatively affects research and development activities and, in the long run, slows down economic growth (OECD 2007, 17). Secondly, counterfeiting disrupts trade and disturbs trade relations. European governments might experience increased trade deficits due to a lack of trade registrations (Berman 2008, 193). Thirdly, counterfeiting leads to job transferals from trademark holders to infringers and likewise creates losses in employment in the country of the trademark holder (OECD 2007, 17 and Berman 2007, 192). Fourthly, the presence of trade in counterfeit products might make a country less attractive for foreign direct investments (FDIs). According to an economic analysis carried out by the OECD (2007), the circumstances with regard to IPR protection is a factor that contributes to the considerations of potential foreign investors, when choosing their investment country. A country with high imports of trademark-infringed goods invokes negative economic associations and damages the reputation of a European country as a confidential place to invest in. This is detrimental for the country’s general economy (OECD 2007, 17-18). Additionally, two indirect negative affects to the European overall economy occur when trademark rights are violated. Firstly, counterfeiters and pirates are mostly linked to criminal networks and other criminal activities. It is plausible to assume that a large amount of money earned in the counterfeit market, is later on used to sustain further criminality. Secondly, counterfeit activities can have negative effects on the environment. On the hand,
6 More about the discussion on the link between IPR protection, innovation and economic development, see inter alia Chang (2001) and Davis (2004). 25 N.F. Felix Made in China, invented in Europe inferior counterfeit products can have environmentally harmful consequences. On the other hand, destruction of seized counterfeit goods forms a negative surplus (OECD 2007, 17). Figure 5 schematically shows the direct and indirect economic and financial consequences of Chinese trademark infringement and counterfeiting for European trademark holders, consumers, governments and the overall economy.
Figure 5: Consequences for Europe of trademark infringement and counterfeit activities by China..
European European European European trademark holders consumers governments general economy Directly • Loss of sales • Too high a • Loss of tax • Reduced volumes price revenues innovation payments on inferior products • Loss of royalty • Costs of anti- • Disrupted incomes counterfeiting trade actions • Costs of anti- • Loss of counterfeiting employment actions • Loss of FDI
Indirectly • Damaged • Health risks • Costs associated • Costs of brand with higher increased reputation trade deficits criminality • Inequitable • Safety risks • Costs associated • Costs of competition with health and decreased safety damage environment Sources: Berman 2008, Bruce 2009, Chaudhry 2006, Chang 2001, OECD 2007.
1.5 The combat against IPR violation
The previous section has shown that large-scaled counterfeiting by Chinese companies brings economic and financial consequences for Europe. Trademark infringement negatively affects European trademark holders, consumers, governments and the general economy at the same time. From a European point of view, the battle for stronger IPR protection would therefore be a logical endeavor. Indeed, many economists, legal experts, politicians, NGOs and IP holders in Europe state that the Western world must push for better IPR enforcement in China. However,
26 N.F. Felix Made in China, invented in Europe another line of thought is present in Europe as well: the idea that firm IPR protection will have negative effects on both Europe and China, and must therefore not be pushed by the Western world. In order to see the discussion in its full context, section 1.5.1 briefly deliberates the second-mentioned line of thought. Subsequently, section 1.5.2 explains why this study will approach the Chinese counterfeiting problem from the first-mentioned line of thought.
1.5.1 Europe must not push for better IPR enforcement in China Donald Richards, professor in economics at the Indiana State University, states in his publication that arguments in favor of intellectual property rights are indefensible (Richards 2002). He shows how most of these arguments are based on ‘classical’ philosophic writings that defend exclusive property rights, like Locke, Hegel and Bentham (Richards 2002, 523- 539). But according to Richards, classical defenses for property rights do not apply in the same way to intellectual property rights. Richards concludes that “traditional justificatory theories do not hold up well when applied to intellectual property” (Richards 2002, 523). In his view, establishments in favor of strong IPR protection – like recently the TRIPS agreement of the WTO – are mainly the result of lobby efforts made by influential and patent-holding multinational companies (Richards 2002, 540). Ha-Joon Chang, connected to the faculty of Economics and Politics at the University of Cambridge, shows in his paper how several economists undermine the alleged link between IPR and innovation. Chang cites a study by Levin at al. (1987), in which it is proved that “…patents are considered less important than ‘natural advantages’…in preserving an innovator’s advantage” (Chang 2001, 295). In another study cited by Chang, Mansfield (1986) proved that only 14 % – a rather low proportion – of inventions done by the examined R&D executives and in the examined period, would not have been developed if patent protection was not obtainable (Chang 2001, 295). Thirdly, Chang refers to studies by Schiff (1971) and Evenson (1990). Both writers make use of the historical experiences of Switzerland and the Netherlands during their patentless periods at the end of the nineteenth century. They determine that “there is no evidence that the absence of a patent system held these two countries back in terms of technological development” (Chang 2001, 295). Chang’s conclusion on the idea of a stronger IPR regime is that “the international benefits of such a regime are (…) close to zero, if any” (Chang 2001, 303).
27 N.F. Felix Made in China, invented in Europe Even if taken for granted the alleged link between IPR protection and innovation, some economists criticize the push of the Western world for firm IPR protection in China. An example is given by Suttmeier and Yao, both connected the University of Oregon. They state that the international reaction to Chinese IPR violation is wrong for two reasons. Firstly, there is widespread violation of IPR around the world, which makes the focus on China unfair and out of proportion. Secondly, China’s IPR regime and its efforts to develop a culture of IPR protection are of rather short duration (Suttmeier and Yao 2001, 5). For these reasons, Western countries do not have the right to compare the Chinese IPR regime to their own situation (Suttmeier an Yao 2011, 1-5).
1.5.2 Europe must push for better IPR enforcement in China The other line of thought – the idea that the Western world must push for better IPR enforcement in China – is present as well and will be the approach of this study. Three reasons exist to explain why this approach is chosen. Firstly, one should be aware of the international character of IPR and IPR violation. Counterfeiting is a cross-bordering problem. Commonsensically, the problem requires a transnational solution. The fact that production of counterfeit goods occurs in China, does not make the phenomenon a solely Chinese problem. Consequences are felt in other countries as well, including Europe and the rest of the Western world (Gao 2011, 64). Therefore, Europe – and especially the European trademark holders – has all the right to participate in the combat against Chinese counterfeiting. Secondly, China’s membership of the World Trade Organization (WTO) justifies European interference in the Chinese counterfeiting problem. When China entered the WTO in 2001, the country agreed with all requirements that the WTO imposes on its members, including those regarding IPR protection (Hung 2003, 58). China’s acceptance of the international standards of IPR is not only the will of the Western world: China has imposed on itself the international IP-rules of the WTO. It is now the right of the other WTO-members to remember China to comply with these rules. Thirdly, the proven link between counterfeiting and criminal activities advocates compliance of intellectual property rights by China. Research has shown that a positive correlation exists between violation of IPR and organized crime: the more IPR are violated in a region, the larger is the scale of organized crime in that certain region (Chaudhry 2006, 464). Moreover, it has been proven that counterfeit products pose a danger to public health
28 N.F. Felix Made in China, invented in Europe and safety (Chaudhry 2006, 463-464). Regardless of someone’s political-economic perspective, these are objectionable side effects. Admittedly, the link between IPR and innovation may be depending on one’s political and/or economic vision. From this viewpoint, the desirability of IPR enforcement is debatable. Conversely, the link between IPR violation on the one hand and organized crime and health and safety risks on the other hand is a given fact. From this viewpoint, the desirability of IPR enforcement is non-debatable, and allows Europe to push China for better IPR application.
Borne in mind the above-mentioned reasons, the rest of this study will give the floor to academicians and experts who defend the Western combat against Chinese counterfeiting. The next part (part II) will provide an overview of the possible ways to combat counterfeit activities and trademark infringement by China.
29 N.F. Felix Made in China, invented in Europe 2. How to combat counterfeit activities and trademark infringement: the possibilities
Part I of this study showed that it is important to examine how European trademark holders can combat trademark infringement by Chinese companies. It also explained that for the sake of this study, the assumption is taken for granted that stronger IPR enforcement in China must be pushed. Part II discusses what possibilities exist for European trademark holders to combat trademark infringement by Chinese companies. What actions are available for brand house managers to prevent and abolish counterfeit goods? The floor will primarily be given to persons coming from the academic world.
2.0 Action or no action? Prior to considering what anti-counterfeiting measure to take, there is an even earlier decision to make for trademark holders. Victimized companies must make the well-considered choice between taking action and taking no action against counterfeiting. Managers have to strike a balance between the costs of the anti-counterfeiting measure and the benefits that will derive from it. When profits are lower than the direct and indirect expenditures of the action, the trademark holder might choose to take no action. Yet, Hung explicitly advices to not turn away from the matter and to actively fight against counterfeiting and trademark infringement (Hung 2003, 72). This study will elaborate on the possibilities within the option of taking actions. In order to actively combat counterfeiting and trademark infringement by Chinese companies, many anti-counterfeiting strategies have been invented. The strategies can be discerned in two ways. First of all, one has to distinguish the preventive measures (ex ante) from the repressive measures (ex post). Secondly, a distinction must be made in the target groups that are directed per measure. Each anti-counterfeiting measure is focused on a certain objective, e.g. the European consumer, the Chinese factory workers, the distribution channel or the Chinese local government. The next sections discuss the possible actions of anti- counterfeiting per target group. Within the discussion of each target group, a distinction will be made between preventive and repressive activities.
30 N.F. Felix Made in China, invented in Europe 2.1 Actions aimed at consumers Addressing the consumer is generally seen as an effective way in the combat against counterfeiting. When the demand for fake products reduces, the temptation to trade in fake products will reduce as well. Hence, the tendency and the desire of consumers to buy fake products must be removed. This is the ex ante way of combating counterfeiting. Additionally, consumers are addressed ex post to combat the illegal activity: they are deployed to help tracking down the fake products, once these products are already in the market. Both preventive and repressive undertakings comprise several possible measures, which will be deliberated next.
2.1.1 Preventive actions The economic theory of demand and supply tells us: demand determines supply (and not the other way around) (Krugman and Wells 2009). Hence, to tackle the counterfeit problem at source, all demand for fake products must be eliminated. After all, if there is no demand, there will be no more supply. The demand and supply-theory thus implies that the very best way to combat trademark infringement is by preventing consumers to demand for trademark infringed products. This way of thought is explicitly expressed by Duncan Freeman. Freeman is researcher, lecturer and consultant on China business and economy at the Brussels Institute of Contemporary China Studies and has written several academic books and articles on the topic (BICC, 2014). In his article in the Asia Times Online of January 2006, Freeman states that “consumer demand is the main driver of growth in counterfeit trade, and any enforcement measures of directed at China will be ineffective until the demand for fake goods is suppressed” (Freeman 2006, citation from Chaudhry 2006, 465). Several measures exist in order to restrain consumers from purchasing fake goods. A very first, anticipating step is securing that consumers are well informed about the criminal nature of counterfeiting activities. On the one hand, consumers must be conscious of the negative sides of counterfeiting. On the other hand, consumers should clearly see the positive sides of genuine products. Public campaigns could make consumers aware of the financial downsides, the social costs, the health risks and the safety risks of fake goods (Berman 2008, 195). A company could also warn for fake goods on its website (Berman 2008, 195). To make (potential) consumers conscious of the positive sides of genuine products, companies could emphasize the benefits of them compared with counterfeit products: genuine products 31 N.F. Felix Made in China, invented in Europe are safer, the product lasts longer in high quality, and the genuine producer provides warranties and after-service (Chaudhry et al. 2009, 63). Secondly, brand houses might emphasize the high-status appearance represented by owning a genuine product: possession of a real brand good is associated with a prestigious image (Chaudhry et al. 2009, 63). Thirdly, brand houses can offer lists of the legitimate retail places of the brand products, so the consumer knows where the genuine articles are sold (Chaudhry et al. 2009, 63).
2.1.2 Repressive actions The anti-counterfeiting actions that are elaborated in the previous section, are targeted at decreasing the risk that consumers purchase fake products. The measures mainly work in a preventive way. However, also repressive measures to combat trademark infringement exist: to increase the opportunity that consumers track down possible counterfeit products. The most notable example of a repressive action is the possibility for consumers to quickly report fake goods online or by phone (Berman 2008, 195).
2.2 Actions aimed at manufacturers Fighters against trademark infringement try to tackle the business as early in the system as possible. That means that the business must be tackled already at the production phase. Two sorts of counterfeit producers can be distinguished. The first sort is manufactures who copy brand products while they are not involved in the genuine production of that brand. The second sort is outsourced suppliers who produce brand products by order of the brand house, but also produce brand products outside the orders of the brand house. In both cases, there is mention of trademark infringement. And in both cases, preventive as well as repressive measures are thinkable in order to combat trademark infringement.
2.2.1 Preventive actions A first instruction to brand houses that outsource their production in China, is to carefully select their outsourced suppliers. Firms must be choosy when selecting their factories in China. A point of reference is for example the experience of earlier dealings with other firms. Bad experience of other firms with a supplier could be a sign that it is an untrustworthy partner, whilst honest relationships in the past increase the likelihood of a trustworthy partner (Berman 2008, 196). 32 N.F. Felix Made in China, invented in Europe When it comes to the desirable number of outsourced suppliers of one firm, different advices are given. Some advisors recommend to minimalize the number of outsourced suppliers, so that the chance of dealing with a counterfeiter is minimalized (Kahn 2002, p. A1). Others advise to use several outsourcers for the same good, so that not any firm has the total knowledge to reproduce that certain good (Berman 2008, 196). Many academic specialists recommend trademark holders to offer local managers and local employees trainings on intellectual property rights. Especially in a country like China, where intellectual property is a relatively poor known concept, educating the local workers is of high importance (Zimmerman 2013, 147 and Chaudhry et al. 2009, 62-62). A strategy with a more strict approach is to warn the local managers and local workers for legal action in case of counterfeiting. Threatening to lawsuit against counterfeiting could discourage the outsourcers from doing so (Chaudhry et al. 2009, 63). At last, when the relationship ends, the brand house must ensure that the outsourced supplier gives back all confidential information and all production secrets. This could prevent illegal production of ex-outsourcers in the future (Berman 2008, 196). A more far-reaching strategy is when the brand house would finalize the fabrication itself. For example Kurtenbach “urges companies to keep some of their production processes outside China” (Kurtenbach 2006). By this tactic, the outsourced supplier will not easily acquire all production information that is required for copying.
2.2.2 Repressive actions Notwithstanding all preventive anti-counterfeiting measures that are targeted at producers, counterfeiting still occurs on a large scale in China. Therefore, also repressive measures targeted at producers have been invented. To fight against trademark infringement by Chinese factories in general, trademark holders could hire investigators to track down counterfeit production. Depending on the budget and the priority level, trademark holders can either have an ad hoc team of external investigators or can have a permanent team of internal investigators (Berman 2008, 194-195). The larger the budget and the higher the priority for anti-counterfeiting, the likelier it is for a European trademark holder to have a permanent staff of internal investigators in China (Zimmerman 2013, 147). The investigators are supposed to track down possible counterfeit production by covert actions (Chaudhry et al. 2009, 63). Investigators “browse through the internet” to search for websites where counterfeit products are offered. A possible covert 33 N.F. Felix Made in China, invented in Europe action is when investigators create a fake enterprise to buy counterfeit goods. Later, the bought goods can be used in potential legal accusations (Berman 2008, 194-195). To fight against trademark infringement by outsourced suppliers, trademark holders need to check their Chinese providers more carefully. Firstly, better controlling of production could occur by attentively checking the flow of materials. When fewer materials flow out of the factory than have flown in, trademark holders should be particularly alert to possible trademark infringement (Berman 2008, 196). Secondly, trademark holders can monitor their suppliers by ‘surprise inspections’ (Berman 2008, 196) or by ‘covert actions’ (Chaudhry et al. 2009, 62-63). Once counterfeit producers are caught, the trademark holder might choose to lawsuit the manufacturer (more on legal actions against counterfeiting, see further under section 2.6).
2.3 Actions aimed at distribution channels As already stated, the best way to combat trademark infringement is by tackling the problem at source – that is, at the production phase in China. For some firms, tracking down trademark infringers at source is too complicated or too expensive to focus on. This applies in particular for the smaller firms, the firms with no or only a few own employees in China, and the firms with little Chinese contacts. The costs of sending people to China, hiring Chinese inspection firms or other measures do not outweigh the benefits. The costs of the medicine (anti-counterfeiting measures against Chinese companies) would be more expensive than the costs of the disease (the consequences of counterfeiting by Chinese companies). It is also possible that firms find it too complicated to track down trademark infringers in China. Results of the undertaken measures will be too little or will stay out too long. The large efforts are not worth the small results, so anti-counterfeit actions in China itself will fail to happen. In many cases, these firms choose to not target their anti-trademark infringement actions at the Chinese factories, but at the distribution channel. Also here, preventive as well as repressive strategies are possible.
2.3.1 Preventive actions Just like trademark holders can educate local factory managers and workers (see section 2.2.1, they can also choose to educate distributors on trademark protection and trademark infringement (OECD 2007, 29). Warnings for the presence of potential counterfeiters might
34 N.F. Felix Made in China, invented in Europe make channel members more aware of the danger (Chaudhry et al. 2009, 62-63). Two strategies exist to approach distributors. From a defensive angle, trademark holders could encourage to reject counterfeit offers by providing financial inducements. From a more offensive angle, trademark holders could threat sanctions in the event of any (support to) counterfeiting (Chaudhry et al. 2009, 62-63).
2.3.2 Repressive actions Despite of the preventive measures against distribution of counterfeit goods, what repressive measures are possible? Repressive actions have the purpose to monitor distribution channel members. So-called track and trace authentication can help monitoring a trademark holder’s distribution network (OECD 2007, 29). One of the track and trace technology systems is the RFID tag. RFID stands for Radio Frequency Identification and could replace the earlier ‘barcodes’ to track singular products, since it is more difficult to copy them. RFID tags have the appearance of normal labels, but they contain hidden computer chips and antennas. When the tags are localized at a place that is not part of the usual supply and distribution chain, the trademark holder could intervene (Berman 2008, 195 and 197). When trade of counterfeit goods in the distribution channel has been signaled, it is possible to undertake legal actions against the distributors in question (more on legal actions against counterfeiting, see further under section 2.6).
2.4 Actions aimed at retailers Retailers of trademark products are the last element in the supply chain, before the product will end up in the hands of the consumer. It is therefore essential to make sure that only genuine products are sold at the authorized sell points of a certain trademark. Preventive and repressive methods exist in order to ensure that this will be realized.
2.4.1 Preventive actions Devised measures that prevent counterfeiting and that are targeted at retailers are scarce. Among others, the OECD recommends rights holders to cooperate actively with retailers, and to encourage them to be watchful in obtaining their sell products (OECD 2007, 29). This is a rather general and non-concrete measure. More specific anti-counterfeit measures that are targeted at retailers, predominately work by repressive means (see following section). 35 N.F. Felix Made in China, invented in Europe
2.4.2 Repressive actions First of all, trademark holders have the possibility to keep checking the authenticity of their products once they are in the store. (Chaudhry et al. 2009, 62-64). Secondly, trademark holders could focus on tracking down e-commerce of counterfeit products. It is possible to use software methods to screen websites that illegitimately use a firm’s name or identity. Examples of such software products are GenuOne, MarkMonitor, Brandimensions and Cyveillance (Berman 2008, 196). The most drastic, repressive measure is to lawsuit against counterfeit sellers via the internet or via unauthorized sell points. Trademark holders could request orders to disable website domains and to freeze the bank accounts of counterfeiters (Zimmerman 2013, 147).
2.5 Actions aimed at Chinese local authorities Above mentioned measures are applicable within the frame of the Chinese law system and could be highly appropriate to combat counterfeiting and trademark infringement by China. However, it is possible to focus even more on anti-counterfeiting in China in particular: European trademark holders could target their anti-counterfeiting actions at Chinese local governments. What are potential preventive and repressive strategies that combat trademark infringement and counterfeiting, and that are directed at Chinese authorities?
2.5.1. Preventive actions To prevent counterfeiting or trademark infringement at source – meaning at the production phase in China – European firms could lobby at Chinese authorities for more stringent IPR laws on the one hand, and for stricter enforcement on the other hand (Chaudhry et al. 2009, 63). However, academicians generally recommend foreign companies to lobby for more stringent enforcement of existing laws, rather than to lobby for new ones (see inter alia Chaudhry et al. 2009, 63 and Hung 2003, 73). More specifically, foreign firms are generally recommended to lobby for better IP law enforcement at local officials in China, rather than to lobby at a more central level of the Chinese authorities (see inter alia Zimmerman 2013, 146 and Mertha 2005). Examples of how European companies could improve IP law enforcement by Chinese local officials are: create good relationships with local officials, or arrange
36 N.F. Felix Made in China, invented in Europe consultations and meetings with local administrators on IP law enforcement (Zimmerman 2013, 146).
2.5.2 Repressive actions To combat counterfeiting and trademark infringement in a repressive way, trademark holders have the option to focus their strategies on Chinese (local) authorities. It is possible for foreign firms to seek assistance from local police to combat counterfeiting and trademark infringement (Chaudhry et al. 2009, 63). Jack Chang, a senior IP counsel for Asia, suggests to use the ‘honor and shame’-method: honor the Chinese officials who actively dealt with the counterfeit problem in their region, and shame the officials who supported or enabled the illegal counterfeit business in their region. According to Chang, the honor and shame-method is intended to stimulate local officials to severely implement IP law (Chang via Zimmerman 20013, 146). Also Hung, Associate Professor Emeritus at the University of Calgary, advises to use the honor and shame-method. Managers should widely exposure reluctance or disability of Chinese governments in order to combat counterfeiting. The negative publicity may have great effect, because Chinese governments traditionally fear ‘loss of face’ in international media (Hung 2003, 73).
2.6 General actions Above-mentioned strategies are all targeted at a specific group that is or might be involved with illegal counterfeit and/or trademark infringement business. Fixation on one particular group could be very effective because of its concrete goal. From another point of view, the strategies could be called ineffective because they only reach a small part of the total illegal business. Within this second line of thought, some general strategies have been invented for managers to combat trademark infringement and counterfeiting activities.
2.6.1 Preventive actions What are possible preventive strategies? First and foremost, registration of the trademark is key to prevent any copying of a company’s trademark (Zimmerman 2013, 147, Chaudhry et al. 2009, 64). As mentioned earlier, China has signed the Paris Convention and Berne Convention and has joined the World Intellectual Property Organization (WIPO). WIPO- 37 N.F. Felix Made in China, invented in Europe membership entails that China recognizes internationally registered intellectual property, including trademarks (see Part I, 1.3.1). A second proactive way of preventing counterfeiting and trademark infringement by China, is to convince the Chinese people of the Chinese interest in good IP law enforcement. Why would the Chinese gain from improved IP law enforcement? Two new phenomena have developed over the last couple of years, that could increase China’s interest in strict IP law implementation. Firstly, more and more Chinese manufacturers hold own intellectual property. Chinese trademark holders are just as threatened by IP infringers or counterfeiters as foreign trademark holders are (Zimmerman 2013, 146). Over 2011, China submitted the most applications of all countries in the world for trademarks as well as patents (WIPO 2013). This number one-ranking in trademark applicant underlines the importance for China of good trademark law enforcement. Secondly, it is more and more clear that large-scaled counterfeiting and IP infringement will discourage foreign firms to invest in or trade with that country. Hence the lack of firm IP law enforcement in China will have negative consequences in the long run for the Chinese investment climate and for China’s reputation as a trading partner (Zimmerman 2013, 146). Managers who are planning to produce or who already produce in China, could contribute to awareness raising about the importance of strict IP law enforcement. Previously, section 2.1.1 described how to raise awareness about the importance of IP protection at consumers. Foreign firms could likewise convince the Chinese people in general about their interest in severe IP law enforcement. Educational initiatives dealing with IP protection and directed at Chinese school children could be a possible strategy (Berman 2013, 195). Imaginably, because of the high costs on the one hand and the intangibility of the results on the other hand, funding of the school programs could occur in cooperation with trade associations or governmental agencies (Berman 2013, 195-196). To prevent trademark infringement on the global level, trademark holders could lobby at international organizations for more protection of Intellectual Property Rights (Chaudhry et al. 2009, 62-64). Considering the important position that China takes in the world economy, the world will definitely look critically at the reaction of China to these lobby activities. Additionally, trademark holders may well partake in multilateral organizations or join actions funded by the International Anti-Counterfeiting Coalition (IAAC) (Chaudhry et al. 2009, 63- 64).
38 N.F. Felix Made in China, invented in Europe 2.6.2 Repressive actions Prevention of illegal business is always better than reaction to it. Nevertheless, in case reactive measures are taken anyway, it is important to exert these as soon as possible. That is why managers should focus on early warning signals of counterfeiting and trademark infringement. Barry Berman, Professor of Marketing and International Business at Hofstra University, presents in one of his articles a list of early caution indications that managers should recognize as possible counterfeiting activities or trademark infringement. Examples of indications are inter alia: unexpected declines in sales, sudden rises in returns, and significant rises in guarantee claims (Berman 2008, 194). A system of early caution indications can be developed, so that managers are able to track down and, accordingly, crackdown counterfeiting activities or trademark infringements in an early stage. Moreover, managers have the possibility to create a review and feedback system. With the help of this system, measures that have been applied can be evaluated on their effectiveness. Especially with the eye on ever changing and improving tactics of counterfeiters, trademark holders must keep responding with new anti-counterfeit strategies too. If necessary, strategies can be adjusted, improved or removed (Zimmerman 2013, 147). A well-known and logical tactic of trademark holders to combat counterfeit and trademark infringement is to undertake legal action. Lawsuits are a costly instrument, but are generally conceived by academicians as being effective and essential in the combat against pirates and counterfeiters (see inter alia). Some specific advices given by the academic world when undertaking legal actions against trademark infringers are: - Go to special Intellectual Property courts, for example in Shanghai, Beijing or Guangdong. Judges of IP courts are more familiar with and educated in international IP rights, which makes successful lawsuits more promising (Berman 2008, 196-197) - Extend lawsuits against counterfeiters to other involved parties. Besides law suiting against counterfeit producers, also lawsuit against sellers, property owners and other parties that indirectly aid counterfeit merchandise (Berman 2008, 196-197). - Extend lawsuits to cases against counterfeiters who merchandise via the internet. Request the judge to inactivate or take hold of website domain names (Zimmerman 2013, 146). When counterfeiters have actually been tracked down and counterfeit products have been seized, managers can be advised to take possession of the seized goods. This measure will prevent the risk that corrupt officials take ownership of the detained articles and resell them
39 N.F. Felix Made in China, invented in Europe on the black market (Hung 2003, 69). Contrary to this advice, managers can also be recommended to not take possession of the seized goods, because they might have to pay for the counterfeit goods to be destroyed. Sometimes they might have to purchase the seized goods back at arranged sales, so the goods will not be resold on the black market. In this way, managers keep contributing to corruption and unofficial trade (Hung 2003, 69). Lastly, the proposal is made for trademark holders to cooperate in the combat for trademark protection by creating a central database (Hung 2003, 73 and Zimmerman 2013, 147). All foreign companies that are facing (the risk for) IP violation of their brand, could collect their experiences in a central database. The database will become a gathering of information about IP developments in China. Companies could learn from each other inter alia: which manufacturers have produced counterfeit products in the past and which haven’t, the latest distribution channels, the most frequently copied products, and the newest tactics of counterfeiters. More knowledge on the latest strategies of pirates will give IP holders the opportunity to adjust their latest anti-pirate activities to it. The central database might enhance the success rate of combatting piracy and trademark infringement in China (Zimmerman 2013, 147).
40 N.F. Felix Made in China, invented in Europe 3. Managerial and industry efforts to combat counterfeit activities and trademark infringement: in practice
Part II analyzed preventive and repressive anti-counterfeiting actions that are recommended by academicians from several universities and from several disciplines. Whether the recommended strategies are actually exerted, depends on the companies that hold trademark rights. Part III discusses the effectiveness of anti-counterfeiting strategies through the eyes of the trademark holders. What strategies are actually used by managers of European firms in order to combat counterfeiting activities by China? To measure the effectiveness of anti- counterfeiting actions by European companies, the classical definition of effectiveness as presented by A. Etzioni will be used in this study, which says: “The actual effectiveness of a specific organization is determined by the degree to which it realizes its goals” (Etzioni 1964, 8).
To answer the question that is at the heart of discussion in part III, two sources will be consulted. On the one side, the answers from ten in-depth interviews with trademark holders, that were conducted by the author especially for this study, will be accessed. The in-depth interviews form the primary source of information for part III. On the other side, the strategies of trademark holders that are presented in other studies, in earlier publicized interviews or in news articles, will be retrieved. These form the secondary source of information. The findings of the primary secondary source together will provide the information that is needed to answer the central question of part III: what strategies are actually used by managers of European firms to combat counterfeiting activities by China?
3.0 Action or no action The first decision that trademark holders are forced to make is whether to take action against (future) counterfeiting or not. Judging from the interviews, all interrogated companies have declared to take action against counterfeiting. The ten persons that were questioned, have indicated that they regard the ‘doing nothing-option’ as no desirable option (interviews 1-10). Judging from secondary sources, it appears that European trademark holders exist who do follow the ‘doing nothing-strategy’ (interview 5). This is confirmed in a primary source by the legal adviser of fashion brand McGregor: “There are other brands whose policy it is not to take any action, since they view counterfeiting as a compliment, confirming their popularity” 41 N.F. Felix Made in China, invented in Europe (Bedrijfsjuristen monitor 2011, 21). Bugaboo International B.V., a Dutch design company that makes pushchairs for infants and toddlers, affirms the interpretation of counterfeiting as a compliment. Although Bugaboo does fight against counterfeiting, Jan Maarten van der Ree, Bugaboo's Global Legal Counsel, admits: “…the Bugaboos are getting more and more popular, and as a result they are also copied more frequently. It's too bad about the copycats, but it's also a sour sort of confirmation that the company is doing well” (Bedrijfsjuristen monitor 2011, 69). Due to the small scale of the primary research and a lack of external large- scale researches, we cannot make any definite comments about numbers of trademark holders who do not take anti-counterfeiting measures. Further research is needed to indicate exact and total numbers and percentages of trademark holders who exert an anti-counterfeiting strategy of non-action. As explained in the introduction, the rest of this study focusses on the desirable strategies for companies who do take anti-counterfeiting measures.
3.1 Actions aimed at consumers As clarified in part II, anti-counterfeiting measures aimed at consumers would be effective from a theoretical point of view, when taking into consideration the neoclassical theory of supply and demand (see section 3.1). However, applied research shows that trademark holders do not always share this assumption in reality. Eight out of ten interviewees declare that they find measures targeted at consumers not desirable (interviews 1-10). Three out of ten responders even explicitly affirm to consider those anti-counterfeiting actions that are targeted at consumers, the least effective of all possible measures (interviews 8, 9, 10). The IP expert for Gaastra Asia Limited states that “all measures on consumer level” are considered to be “the least effective measures” (interview 9). Also from in-depth interviews conducted by Chaudhry et al., managers appear to be “not likely to target their actions at consumers” (Chaudhry et al. 2009, 62). Let us run through the list of possible strategies as is offered in section 2.1.
3.1.1 Preventive actions Firstly, according to a legal expert in the field of IPR in an interview for this study, many companies are unlikely to warn consumers about the supply of counterfeit goods on the black market. Since if a firm warns for fake items, it implicitly acknowledges that it does not have control over (possible) counterfeiters. It might be considered as a sign of weakness, so
42 N.F. Felix Made in China, invented in Europe trademark holders do not bother their potential consumers with this kind of information (interview 5). Likewise, raising consumer awareness about the negative sides of counterfeit products is not seen as being effective. Applied research shows that on a scale of 1 (very ineffective) to 7 (very effective), brand companies appraise this anti-counterfeiting action at an effectiveness rate of 2 (research by Hung 2003, 74). What about the strategy of providing consumers with lists of points on how to recognize a genuine brand product? Interviewees regard this strategy as very unlikely and ineffective in their combat against imitated products (interview 1-10). Like the IP advisor at the legal department of a Dutch fashion brand explains: “It would be stupid to tell consumers what exact details distinct a genuine article from a counterfeited article, because then you would also tell counterfeiters how to better copy the genuine articles” (interview 8). On the other hand, examples can be found of companies who do exert such strategy. The American firm Callaway is an example of a company that took this kind of measurement in its combat against fake products. Callaway designs and produces golf-related products and is the world’s largest maker of golf clubs (Callaway 2013). On the website of Callaway, the page ‘Consumer Alert – counterfeit clubs’ can be retrieved. The webpage provides six guidelines for consumers in their preparation for purchasing genuine Callaway golf clubs. The guidelines help the customers recognizing a fake Callaway product (Callaway 2013). Microsoft provides its customers with a comparable service, by running the page ‘The risks of Counterfeit’ on its website (Microsoft 2013). The final suggestion in section 2.1.1, as attained from academicians, is to offer (potential) customers a list of legitimate retail points of the brand. In contrast to the earlier measures aimed at consumers, this action is regarded as being very effective by all ten interviewed experts in the field (Interviews 1-10). An IP advisor at the legal department of a Dutch fashion brand states: “I think the only way in which consumers can know that they purchase a genuine brand product, is by the place of the sale” (interview 8).
3.1.2 Repressive actions Section 2.1.2 offers repressive measures targeted at consumers. Seven out of ten responders declare to find it undesirable to let consumers report signs of fake products. As a legal expert in IP law indicated: “you don’t want your customers to play for policemen” (interview 5). However, apart from the ten parties questioned for this study, many examples can be found of 43 N.F. Felix Made in China, invented in Europe companies that give their customers the opportunity to report fake goods. An illustration can be found at theme park De Efteling, located in the Netherlands. De Efteling often develops new brands itself. Some of these include: Tita Tovenaar (Tita the Magician), Sprookjesboom (Fairytale Tree) and Klaas Vaak (The Sandman). Logos and images of popular Efteling brands are illicitly used and the products are sold via internet. Jaco Breur, lawyer employed by De Efteling, says on this: “Google Alerts work quite well (…) but Efteling's many fans also send in masses of tips. You don't even want to know how many people send us tips. Those tips are routed to the Guest Relations Division…” (Bedrijfsjuristen monitor 2011, 41).
3.2 Actions aimed at manufacturers As recommended by academicians, tackling the counterfeit problem at source, hence at the level of manufacturers, is of great importance. All parties questioned for this study share this view. Legal advisor of the McGregor fashion group expresses on this: “The goal, naturally, is to get at the source: the manufacturer” (Bedrijfsjuristen monitor 2011, 22). Legal counsel of Gaastra Asia Unlimited declares: “…we think the most important thing is to stop from the upper stream – factories and suppliers – but we are still working on it. It is very costly.” (interview 9).
3.2.1 Preventive actions The advice to carefully select the outsourced supplier is underwritten by trademark holders as well, although this strategy is frequently seen as a general strategy: serving many goals, and not just the anti-counterfeiting goal (interviews 1-10). Another strategy that receives support from trademark holders in practice, is the strategy of educating local managers about the counterfeit business (interviews 1-10). IP counsel at a Dutch fashion house says on this: “I believe you can only educate the factory managers. Education of other parties, like factory workers, channel members and customers, is unmanageable, ineffective, or both” (interview 8). According to Chaudhry et al.’s practical study, this IPR action is estimated at an effectiveness rating of 4.07 (Chaudhry et al. 2009, 63). By way of comparison, the IPR action of educating channel members is estimated at the somewhat lower effectiveness rate of 3.93 (Chaudhry et al. 2009, 63). Judging from the interviews that were conducted for this study, no fixed pattern has been found when it comes to strategies aimed at outsourced suppliers. Some trademark
44 N.F. Felix Made in China, invented in Europe holders share their manufactories with other companies, while other trademark holders hold their own factory (interviews 1-10). Koninklijke Philips N.V., a Dutch multinational engineering and electronics conglomerate, has undertaken a remarkable anti-counterfeiting measure aimed at outsourced suppliers. In order to prevent any production of counterfeit goods by outsourced suppliers during non-production hours, Philips has chosen to run 24 hours-shifts (interview 4). The measure that prescribes to “ensure that the Chinese supplier will give back all confidential information and all production secrets when the business relationship has ended’” (section 2.2.1) is seen as unmanageable by all ten interviewees. Outsourced suppliers and manufactory managers are able to save production information for the duration of the business relationship, and use this information for own production meanwhile or after ending of the business deal. Hence, exclusiveness of the production information vis-à-vis Chinese suppliers is uncontrollable and for that reason is a utopian measurement through the eyes of trademark holders (interviews 1-10).
3.2.2 Repressive actions Do trademark holders use the suggested strategy of investigators in practice? According to legal experts at trademark bureaus, almost all large brand houses make use of in-house or hired investigators to track down counterfeiting by Chinese suppliers (interviews 2, 3, 4, 5). The main reason for exerting such action is to create a deterrent effect (interview 5). Drawback of the action is the limited reach of the effect: the action assures anti-counterfeiting only locally and temporarily (interview 1, 4). For example French fashion brand Louis Vuitton, that manages over 11,500 intellectual property rights including trademarks, designs and copyrights, initiates around 10,000 raids per year (39 per day) and more than 25,000 anti- counterfeiting procedures worldwide (interview 1). Applied research exerted by Chaudhry et al. points out that according to trademark holders, one of the most effective anti-counterfeiting actions is warning manufacturers of possible penalties (Chaudhry et al. 2009, 62-64). This is confirmed by an IP lawyer in the interviews, who declares that “being annoying for counterfeiters” is one of the best methods to deter production of counterfeit goods (interview 5).
45 N.F. Felix Made in China, invented in Europe 3.3 Actions aimed at distribution channels
3.3.1 Preventive actions When asked for the most effective anti-counterfeiting measures targeted at distributors, trademark holders mention more or less the same measures as those that are targeted at manufacturers. Again, in the study of Chaudhry et al., the measure of educating channel members is ranked relatively high at an effectiveness rate of 3.93 (Chaudhry et al. 2009, 62- 63). Warning distributors about possible penalties is ranked high as well at the same effectiveness rate of 3.93 (Chaudhry et al. 2009, 62-63). The trademark holders who were interviewed for this study present a partially different view. The measure of educating distributors is seen as less effective (interview 8), but warning distributors of possible penalties is seen as very effective (interviews 2, 4, 5, 8). The primary and secondary sources show that providing financial incentives for distributors to reject counterfeits is considered as being very ineffective. This action receives an effectiveness rate of no more than 1.00 on a scale of 1 to 5 (Chaudhry et al. 2009, 64, interviews 1-10). Judging from the interviews conducted for this study, ten out of ten interviewees explicitly express that a good relationship with the distribution partners is key in the anti- counterfeiting combat (interviews 1-10). One lawyer in intellectual property expresses that illegal distribution channels are hard to deter, but on the contrary emphasizes the need for controlling the ‘authorized’ distribution channels. According to this expert, the worst-case scenario would be when counterfeit goods enter the legal distribution network and the goods end up in legal points of sale. This would damage the image of the trademark tremendously (interview 5).
3.3.2 Repressive actions On the basis of the interviews held for this study, one repressive action stands out: working closely together with customs services. The interviewees consider close cooperation with customs services to be the most used and most effective measure in order to detect counterfeit goods in the distribution channel (interviews 1-10). An IP legal expert for Gaastra describes their relationship with European customs service:
46 N.F. Felix Made in China, invented in Europe “(W)e have set up what's known as a 'customs application'. That means that we have informed every customs office in the EU how our brands are used, just by sending them our brochures - we send out a new brochure for every new collection. But we also provide customs officials with additional information: where the products come from, where they are manufactured, and, even more relevant, where they are going to. This allows the customs officers to better judge whether the import is the genuine article or an imitation. If they suspect it's counterfeit, we'll receive an alert from the customs office via our trademark specialists that very day: 'We have a container here that we suspect contains counterfeit clothing'.” (Bedrijfsjuristen monitor 2011, 22).
No other outstanding repressive actions aimed at distributors were found in practical researches from primary our secondary sources.
3.4 Actions aimed at retailers
3.4.1 Preventive actions Sections 3.2.1 and 3.3.1 already showed that warning for possible penalties is assessed to be effective vis-à-vis producers and distributors. Also warnings vis-à-vis retailers seem to be effective, according to trademark holders. (Chaudhry et al. 2009, 63). Financial incentives for retailers to reject counterfeits, on the contrary, are estimated to be very ineffective (Chaudhry et al. 2009, 64). Learnt from the interviews, few preventive measures targeted at retailers are undertaken by trademark holders. By means of a rather general measurement, holding good relationships with retailers was mentioned most frequently (interviews 1-10).
3.4.2 Repressive actions Judging from Chaudhry et al.’s study, monitoring and investigating retailers is considered as a relatively effective measure. On a scale of 1 (very ineffective) to 5 (very effective), trademark holders give this action the rate of 3.33 (Chaudhry et al. 2009, 63). The majority of the IP experts who were interviewed for this study indicates that products are seldom checked in stores, since most points of sale are brand stores (interviews 1-10) According to one of the interviewed legal experts, checking of products in non-brand stores is needed to assure that no fake items are sold at authentic points of sale (interview 5). Earlier research
47 N.F. Felix Made in China, invented in Europe among trademark holders reveals that checking products in stores is assessed as being a very ineffective measure (Chaudhry et al. 2009, 64). Judging from the interviews, it seems that tracking down online counterfeit offers is a frequently used action. Nine out of ten interviewees declared to use this anti-counterfeiting tool. Depending on the company, small quantities as well as larger quantities of counterfeit offers can be tracked down. Tracing larger quantities requires specially developed internet tools (interviews 1, 3-10). IP legal advisor of McGregor fashion Group elaborates on this:
“But, you might ask, can't you just Google it? It doesn't work that way. Because you'll miss a great deal if you rely on Google's Dutch site to tell you, for instance, what's being offered in Germany. This search engine actually covers the whole world.” (Bedrijfsjuristen monitor 2011, 22). Last but not least, companies take legal proceedings against Chinese counterfeit sellers. Some of the many examples are formed by Chanel, Louis Vuitton and Gucci. New tactics in lawsuits against counterfeiters have risen in recent years. In 2007, French fashion house Louis Vuitton reached an arrangement in court that forced property owners to undertake legal action against merchants of counterfeit goods that were situated in their building (Bleyer 2006 via Berman). More recently, French fashion house Chanel filed two lawsuits against Chinese counterfeiters selling fake products online, just like Louis Vuitton did in 2011. Both companies demanded the judge to deactivate domain names where the counterfeit goods could be purchased (Ritter 2011). Italian fashion house Gucci applied another tactic by questioning the judge to freeze assets of Chinese counterfeiters in Chinese banks (Flitter 2011). Three IP experts in the interviews advise to file lawsuits preferably at special IP courts in China, since the judges at the courts are better informed on IP law than other Chinese judges (interview 2, 4, 5).
3.5 Actions aimed at Chinese local authorities Seven out of ten interviewees affirm that actions aimed at Chinese local authorities are frequently exerted (interviews 1-10). One IP adviser working for a Dutch fashion brand declares that cooperation with Chinese local police is of great importance in the combat against corrupt Chinese officials (Interview 8). Furthermore, trademark holders find it effective to encourage enforcement of existing IP laws at local authorities (Chaudhry et al.
48 N.F. Felix Made in China, invented in Europe 2009, 63). Lobbying at Chinese authorities for new and more stringent laws is rarely practiced and is assessed as being highly ineffective (Hung 2003, 72-74).
3.6 General actions Besides above mentioned actions aimed at a specific target group, all ten interviewees mention registration of the trademark in time as the most important measure in combating trademark infringement by Chinese manufacturers (interviews 1-10). In the case of no trademark registration or late trademark registration on Chinese or international level, the trademark holder risks that a Chinese company registers the trademark. It is exactly this form of trademark infringement, which is difficult to pursue (interview 3, 4). Three out of ten legal experts emphasize that trademark registration under the correct product category is intricate because of the differences between European and Chinese trademark law, but is of utter importance (interview 3, 4, 5). Applied research exerted by Chaudhry et al. revealed that firms estimate registration of trademarks as the most effective anti-counterfeiting action. On a 1 (very ineffective) to 5 (very effective) scale, the registration measure is rated by the questioned firms at the high average of 4.40 (Chaudhry et al. 2009, 63). In section 2.6, academicians stress the importance of educating Chinese people in general about IPR law and the criminal character of IPR violation. However, all ten interviewees admitted to not randomly spend money in China to educate the people (interview 1-10). However, one European firm can be found that applies this type of anti- counterfeiting strategy in practice. The earlier mentioned Koninklijke Philips N.V., a Dutch multinational engineering and electronics conglomerate, organizes educational initiatives at Chinese schools. After arrangements have been made between Philips and Chinese educational administrations, the company gives trainings to Chinese school children (interview 2).
49 N.F. Felix Made in China, invented in Europe Conclusion
This study has attempted to answer the research question posed in the general introduction: how can European trademark holders best prevent and abolish counterfeit activities and trademark infringement by China? Literary as well as practical research has been done in order to answer the central question.
Today, China is the biggest infringer in the world of intellectual property rights (IPR) in general and trademarks in particular. Trademark infringement is the most frequent form of IPR infringement in the European Union. Of all counterfeit goods detected in the European Union, more than 70 % of the value and of the quantity comes from China. Two main factors contribute to the bad protection of intellectual property (IP) in China. First of all, historical circumstances are unfortunate. China’s historical traditions in Confucianism and communism do not stimulate proper protection of intellectual property at all. This is mainly due to the fact that in both ideologies, control of information and communal ownership of inventions are dominant conventions. Secondly, economic conditions are unfavorable for a decent protection of intellectual property. The sudden growth of the Chinese (official) economy from 1978 onwards, unfortunately gave rise to a drastic growth of the (illegal) economy in counterfeit products as well.
The current level of protection of intellectual property rights – and trademarks in particular – in China is two-sided. On the one side, laws on protection of intellectual property are adequate and in compliance with international standards. On the other side, enforcement of these laws remains inadequate. Two factors contribute to an adequate law system for IP laws: the preparatory process for China’s accession to the World Trade Organization, and the will of the Chinese central government to comply to internationally standardized IP protection. It are especially the conflicting interests of the central and local authorities in China, that pose a threat to adequate enforcement of IP laws. A striking finding in this study is the little to no effect of China’s accession to the World Trade Organization (WTO) in 2001. It was widely expected that China, after its accession, would adopt the international standards of IPR and that trademark infringement by China would reduce noticeably. More than ten years later, we must determine that Chinese counterfeiting, on the contrary, has grown since 2001. Although this is a sad conclusion, it is 50 N.F. Felix Made in China, invented in Europe an additional affirmation that anti-counterfeiting actions by trademark holders are relevant, since pressure from international organizations (like WTO) is not sufficient.
This study has proved that several parties – in Europe as well as China – suffer enormously from the trademark infringement and counterfeit activities by China. But it is obvious that European trademark holders, who form the focus point of this study, are hit most evidently. The greatest negative effects that European trademark holders appear to experience are: loss of sale incomes, loss of royalty incomes, costs on anti-counterfeiting actions, a damaged brand reputation and inequitable competition.
In the search for a reaction to counterfeiting and trademark infringement by Chinese companies, many strategies have been invented. The very first decision a trademark holder must make, is whether to take action or not. This study has chosen to focus on the possibilities of taking action. Strategies to combat Chinese counterfeit activities are discerned in two ways in this study. Firstly, a distinction was made between preventive measures (ex ante) and repressive measures (ex post). Secondly, a classification was made in target groups that are directed per measure. The target groups that were distinguished for the sake of this study were: consumers, manufacturers, distribution channels, retailers, Chinese local authorities, and strategies in general. A variety of academic literature was consulted to come to the possible strategies to fight against Chinese counterfeiting. Nevertheless, the effectiveness of the strategies appeared to be not always clear.
The analytic and practical part of this study revealed the effectiveness of various anti- counterfeiting of European trademark holders, and answered the central question of this study: how can European trademark holders best prevent and abolish counterfeit activities and trademark infringement by China? Two general patterns can be determined. First of all, there is no clear difference in level of effectiveness between preventive and repressive measures. Secondly, it was found that the difference in target groups at which actions were aimed, do matter for the level of effectiveness. It is safe to state that actions aimed at consumers are the least helpful in the anti-counterfeiting combat. Actions aimed at all other
51 N.F. Felix Made in China, invented in Europe target groups – manufacturers, distribution channels, retailers, Chinese local authorities, and strategies in general – are valued as being (to a greater or lesser extent) useful. Among all actions considered in this study, three concrete tactics positively stood out. First and foremost, registration of trademarks must be done in time. Point of focus is not only to register the trademark at national level, but also at Chinese or international level – even when the trademark is not yet for sale abroad. Secondly, holding good relationships with all involved parties is noticed as being important. Although close contacts with manufacturers, distributors and retailers are mostly sufficiently maintained, holding close ties with Chinese local government, police and customs is often still neglected by European trademark holders. Thirdly, is has appeared to be effective to warn explicitly for penalties in case of counterfeiting or trademark infringement. Warnings can be directed to manufacturers, distributors, retailers and Chinese local authorities. Bearing in mind the traditions of the Chinese culture, naming and shaming of trademark infringers would be one of the most effective penalties.
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56 N.F. Felix Made in China, invented in Europe Annex
List of the ten in-depth interviews that were conducted for the purpose of this study. Listed by name, function and attached company of interviewee and place and date of interview.
Interviewee Place and date Remarks Function and company 1. Viviane Paraschiv Amsterdam/Paris, Phone Advisor Services Europe 13 June 2013 Louis Vuitton 2. Niek Dubelaar The Hague, Legal Innovation Officer 25 June 2013 Ministry of Economic Affairs of the Netherlands 3. Michiel Haegens The Hague, Head Trademarks & Designs 28 June 2013 V.O. Patents & Trademarks 4. Henk-Jan Rutgers Amsterdam, Intellectual Property Consultant 16 July 2013 Global Clients Novagraaf 5. Tobias Cohen Jehoram Amsterdam, Partner and Lawyer 23 July 2013 De Brauw Blackstone Westbroek Professor Intellectual Property Law Erasmus University Rotterdam 6. Koen Ellerbeck Amsterdam, Label Manager Men 23 July 2013 Gaastra International 7. Bram Witsenburg Amsterdam/Driebergen, Phone General Counsel 30 July 2013 McGregor Fashion Group 8. Charlotte Wittkampf Amsterdam, Phone Legal IP counsel 5 August 2013 G-Star Raw C.V. 9. Kinman Chan Amsterdam/Hong Kong, Skype Employee IP desk 9 August 2013 Gaastra Asia Limited 10. Peter Kjaer Amsterdam/Copenhagen, 12 Skype Deputy General Counsel September 2013 LEGO Group
57 N.F. Felix Made in China, invented in Europe