Written Statement for the Record
US-China Economic & Security Review Commission
Hearing on “China and the WTO: Compliance and Monitoring”
February 5, 2004
Submitted by
Timothy P. Trainer, President, International AntiCounterfeiting Coalition, Inc.
Preliminary Report on Counterfeiting Practices
in the People’s Republic of China
PEOPLE’S REPUBLIC OF CHINA (PRC)
Introduction
In 2003, there has not been any significant progress. China continues to pose the greatest threat to IACC members’ intellectual property (IP) assets as compared to other countries in the world. Based on our efforts to determine the general global counterfeiting situation, China has no equal when looking to source country and the volume produced for its domestic and export markets. Despite significant improvements made to China’s IP legal regime, which we have noted in previous filings, the enforcement system continues to be fraught with weaknesses and inefficiencies that result in massive counterfeiting and piracy.
If there is one positive note to underscore, it is the “Market Order Rectification Office” (MORO), under the Ministry of Commerce, which is an inter-departmental coordination office of the government. It has agreed to meet with industry (via the Quality Brand Protection Committee and other groups) every quarter to discuss outstanding IP issues. Industry is optimistic that this may provide a vehicle for an active exchange of views for resolving some of these difficult enforcement issues. The first meeting was held in December and a second meeting is already scheduled for March 2004.
As in the past, it is not a question of what is counterfeited in China, but what is not counterfeited in China.[1] The fundamental illegal activity of counterfeiting in China becomes much more heinous because of the counterfeits that pose significant public health and safety concerns. The list below is a snapshot of the types of products counterfeited in China, some that pose serious safety hazards for consumers.
· Batteries
· Razors
· Medicines
· Shampoo
· Cigarettes
· Auto parts (e.g., oil filters, headlamps, windshields, spark plugs)[2]
· Industrial valves
· Vision wear
· Apparel
· Air compressors
· Portable tools
· Power strips
· Extension cords
In addition to the impact on IACC member companies, China’s counterfeiting industry has a direct impact on foreign governments. The U.S. Department of Homeland Security’s Bureau of Customs and Border Protection reported the seizure of 2,056 shipments from China for containing counterfeit and pirated product, having a value of over $62 million dollars.[3] In addition, China is the top source of counterfeits found in Japan, which includes many products that are counterfeits of our members’ brands.[4] Similarly, the European Union has also found that China is a leading source of counterfeit and pirated products to its borders.[5]
Economic Impact—Based on Enforcement Actions
IACC Member companies, for the most part, have not provided loss estimates. However, the results of enforcement actions provide a glimpse into the economic harmful economic impact that China’s counterfeiting industry has on IP owners.
China’s production and export of counterfeit goods is a tale of organized illegal activity that attracts profiteers of many nationalities. A member auto company’s raid of a Chinese auto parts factory uncovered 7,000 sets of counterfeit brake pads intended for export to Egypt. The single raid represents potential losses of nearly $330,000.[6] Another auto industry member reported raids resulting in the seizure of thousands of counterfeit windshields and several thousand suspension control arms, valued at nearly $4 million dollars total. A third auto industry member estimates that 50%-60% of counterfeit parts bearing its trademarks found in the world are made in China.
An IACC member, whose certification mark is relied upon as a mark of safety, reported that of the 91 seizures made by U.S. Customs in 2003 because of counterfeiting, approximately 65 shipments were from China. These seizures included a $1.5 million dollar seizure of air compressors that had counterfeit ground fault circuit interrupters, $700,000 of counterfeit extension cords, power strips and hair trimmers that, in turn, led to a $7 million dollar seizure of counterfeit extension cords and power strips. In addition to the Customs seizures, another $1 million dollar seizure of Chinese made counterfeit portable and hand tools was made by police in southern California.
An Australian investigation of two Australian nationals led to the discovery of a massive counterfeit operation of Chinese made batteries and razors, which were counterfeits of IACC members. Three containers heading to different ports – Dubai, Oman and Los Angeles – were seized having counterfeit goods valued at $1.5 million dollars.[7] Australian authorities also seized two shipments (50,000 bottles) of counterfeit shampoo from China bearing the trademark of a famous brand.[8]
Canadian authorities seized 60,000 counterfeit
“Duracell” batteries before the holiday season and warned consumers because of
potential hazards if used in toys.[9]
In New York City, the NYPD busted an international counterfeiting ring that smuggled
pricey counterfeits from
China to New York. The NYPD busted the distribution center in
Chinatown. The center was warehousing about $2 million worth of counterfeit
designer handbags, sunglasses and clothes, as well as racks of illegal CDs and
DVDs of hit albums and movies, in a storefront and two sub-basements.[10]
China’s counterfeit tobacco production and export of major brands is
testing enforcement officials around the world. U.S. authorities broke up a
ring in Texas that is believed to have imported over 100 million counterfeit
cigarettes, mislabeling shipping documents by indicating that they were importing
toys or plastic parts.[11]
Austrian authorities charged seven people with smuggling over $19 million
dollars worth of counterfeit cigarettes, which were described on shipping
documents as kitchen utensils, scooters and suitcases.[12]
U.K. Customs arrested ten Polish nationals after 44 million counterfeit cigarettes were
discovered in eight containers that had arrived from China in the summer of 2003.[13]
In contrast to these large shipments, one IACC member reports that counterfeit cell phone covers, belts, watches and other products bearing its marks have become difficult to detect due to small quantity shipments going via the postal systems. If a person is caught, the penalties, if any, are smaller due to the smaller quantities of counterfeits involved.
In China, counterfeit vision wear products bearing member trademarks are plentiful in Guangzhou. For one IACC member, the counterfeiters are using its mark on a product that the member does not produce.
One member company reports that it is spending over
$5 million dollars to combat counterfeiting in China. Although over a quarter
million counterfeit batteries and nearly a half a million counterfeit labels
have been seized in the past year, counterfeiting of its products continues.
Despite the enforcement actions, the resulting sanctions have been inadequate,
ranging from officials stating that the amount involved failed to meet
thresholds for criminal action to refusal of administrative authorities to
investigate the individuals involved.
Finally, the Development Research Center (DRC) under China's State Council released a report in July 2003 on the damage that counterfeiting inflicted on China’s economy. According to the DRC report, the market value of counterfeited goods in China was estimated at 160 billion to 200 billion yuan (19 billion to 24 billion US dollars) in 2001.
The above examples simply point to the global resources of IP owner4s and governments to combat China’s counterfeiting industry, which has a global reach and is so extensive that the actual economic impact on a particular industry is practically impossible to estimate. The DRC’s estimates underscore the significant impact on the local Chinese market with billions lost in tax revenues. In view of some of the staggering quantities and values associated with the seizures noted above, it is easy to conclude that China’s rampant counterfeiting is causing an enormous diversion and drain of corporate resources to simply gain a better awareness of the scope of this problem—many in industry are not ready to state that these enforcement actions have led to controlling the problem.
Trademarks
Despite the amendment of the Trademark Law in 2001 and a five-fold increase in the fines, there is no minimum fine set forth in the law. Thus, despite the increase in the upper limit, the experience is that the imposed fines have decreased. Over the last two years, different departments of the Chinese Government have been considering new measures to address critical problems in existing laws and regulations relating to trademark protection. These include (a) the issuance of new judicial standards for criminal liability in counterfeiting cases; (b) new customs regulations on the protection of IP; and (c) new regulations to assist local authorities in calculating fines and other administrative penalties in trademark infringement cases.
Criminal Liability Standards and Enforcement
The lack of clear and reasonable standards for determining whether a counterfeiter may be criminally prosecuted, rather than merely subject to administrative fines and seizures, represents the single biggest barrier to deterrence in anti-counterfeiting work by both government and industry in China. Fortunately, the Supreme People's Court (SPC) and the Supreme People's Procuratorate (SPP) have both set up study groups to deal with the issue and develop new standards to replace those hastily issued in April 2001 by the SPP and Ministry of Public Security (MPS). However, it remains unclear exactly when they will issue any new standards, and whether they will ultimately be effective.
Under the TRIPs Agreement,[14] any prosecution standards should, in principle, facilitate criminal enforcement against any offender involved in counterfeiting on a “commercial scale”. At present, very few such counterfeiters are subject to criminal sanctions in China, and administrative sanctions imposed on them fail the TRIPs-mandated standard of “effective” enforcement that has a deterrent impact.
Existing criminal prosecution standards set out numerical standards for determining whether a producer or vendor of counterfeits may be prosecuted. For example, an enterprise infringer may be prosecuted if it is determined to have produced or sold more than US$60,000 in fakes. This amount is arguably too high, given the fact that most counterfeiters do not maintain documents indicating the scope of their prior production and sales. What is of greater concern to all is the lack of a clear and simple method for calculating the value of counterfeit goods. The SPC and SPP are aware of these problems and they are currently considering the options for resolving them.
Industry believes that any new standards should take into consideration the price of the victim’s genuine product, rather than rely on the infringer’s declared price or other methods. Moreover, it is recommended that, consistent with international practice, criminal prosecution automatically be pursued in all cases involving producers of counterfeits, i.e., without any numerical standards imposed.[15] Experience proves that it is extremely rare for any counterfeit manufacturer to produce fakes in small quantities, and it is equally rare for brand owners or government enforcers to detect such producers right at the commencement of their illegal activities. Thus, it is reasonable to assume that virtually all counterfeit manufacturers have already produced and sold fakes in quantities that exceed current criminal liability standards by the time they are detected or raided by relevant authorities. Indeed, the references to raids and enforcement actions noted above support this contention.
It is also recommended that the calculation of the value of fakes seized from manufacturers take into consideration semi-finished products and components. Under current policy, such items are given little importance, thereby creating a major loophole for counterfeiters, as they will routinely assemble and ship products within a short period of time and often at night, thereby making seizures and arrests very difficult.
It is also recommended that steps be taken to ensure that counterfeiting cases initially handled by the Technical Supervision Bureaux (TSBs) that cannot be criminally prosecuted under Article 140 of the Criminal Code (governing the sale of fake/inferior goods) be promptly transferred to relevant police organs for investigation and prosecution under Article 213-214 of the Criminal Code (governing trademark counterfeiting). Under current policy, the TSBs will routinely refuse to transfer to the police cases that do not involve fakes which fail to meet national product quality standards. This also creates a significant loophole in criminal enforcement.
The Ministry of Public Security (MPS) and local police organs in areas where IP protection is a problem need to set up special IP divisions. Industry is encouraged by the fact that the MPS may be planning a reorganization that would establish these specialized IP divisions. Currently, criminal enforcement against trademark counterfeiting is handled by the Economic Crimes Investment Division (ECID). This division would need to be split into two in order to realize such a reform.
Recommendations:
· adopt the price of legitimate products as a basis for calculating “illegal business amounts”;
· adopt the same numerical standards for enterprise and individual infringers;
Well-Known Trademarks
The Trademark Office issued new regulations on the protection of well-known marks, effective June 1, 2003, and pursuant to Art. 13 of the Trademarkl Law (as revised effective Dec. 1, 2001). The Trademark Review and Adjudication Board (TRAB--an appeal board over the Trademark Office) has reportedly issued two recent decisions citing Art. 13. The trademark community is hopeful that the TRAB is finally acting on applications for well-known status.
Despite the possible good news from the TRAB, no decisions of the Trademark Office have been seen and, of greater concern, local offices of the Administration for Industry and Commerce are unwilling to accept applications for well-known status in connection with the unauthorized use of well-known marks inside company names. The lack of specific procedures and regulations is being cited by local authorities in this regard. The trademark owners believe that this is to mask the fact that there are different divisions in the State Administration for Industry and Commerce that disagree on how things should be dealt with.
Administrative Penalties under the Trademark Law
A revised version of the Trademark Law’s Implementing Regulations entered into effect on September 15, 2002. These regulations provide for substantially increased administrative fines against infringers, i.e., up to three times the “illegal business amount”, or in cases where the scope of production or sales is unclear, discretionary fines up to RMB100,000 (US$12,000). The Trademark Law itself separately provided for the “confiscation and/or destruction” of infringing goods in all cases. However, there are still no clear standards for enforcement authorities to rely upon to determine the appropriate level of fines in a given case. The lack of such standards—and in particular minimum fines—leaves a large loophole for “protectionism”.
Industry recommends that minimum fines of 150 percent of the value of goods should be considered in any case involving counterfeits, with even higher fines required in cases involving repeat offenders, refusal of infringers to cooperate with government investigations into the source of fakes or labels, and infringers operating without a business license.
The current Trademark Law and Implementing Regulations likewise fail to provide standards for determining when seized counterfeit goods are to be destroyed, as opposed to merely having infringing labels removed and the goods donated to charity or auctioned off. Industry recommends that there should be no auctioning of counterfeit goods without prior approval of the trademark owner.
Trademark owners have perceived no significant change in the level of deterrence created by administrative enforcement actions undertaken pursuant to the new Trademark Law and Implementing Regulations thereto. Greater deterrence can only be realized by addressing the above issues.
Trademark Office officials of the State Administration for Industry and Commerce (SAIC) have indicated that it is planning to issue new guidelines to address these issues, but no firm timeline has been announced. Industry is concerned that any regulations issued by the Trademark Office will not be entirely effective. Most anti-counterfeiting work within the SAIC system is handled by the Economic Supervision Divisions of local Administrations for Industry and Commerce, which are not managed by the Trademark Office, but rather by the Fair Trade Bureau of the SAIC. Accordingly, it is recommended that the SAIC itself issue the required regulations due to its ability to issue instructions to both with agencies.
The SAIC issued an “opinion” in 1994 dealing with these problems, but given the recent amendments to the Trademark Law and Implementing Regulations thereto, the contents of this opinion clearly need to be updated.
Finally, printers and packaging suppliers of trademarked goods should be the subject of special rules regarding administrative enforcement. Presently, they are subject to very modest fines, based on the value of the goods seized--which is almost always low to begin with.
Transparency
Decisions issued by TSBs and most Administration for Industry and Commerce divisions in the course of enforcement are not automatically provided to brand owners, or otherwise made available to the public and for publicity purposes. Likewise, decisions of the Trademark Office and TRAB are not made available--even to Chinese lawyers. And parties involved in oppositions and cancellations for non-use do not get access to the other side’s arguments and evidence. Arguably, withholding decisions on the merits, such as these, are violations of TRIPs.
Copyrights
Criminal liability standards are a continuing problem, but a bigger problem is the lack of interest in enforcement by the police division responsible for copyright crimes--the Social Order Division. This division has been reasonably proactive in dealing with CD plants, but not with virtually any other copyright crimes. Hopefully, responsibility will be shifted out of this division to the new department being considered for trademark cases.
China’s State Council recently issued new regulations entering into effect on March 1, 2004, that replace earlier regulations from 1995 on the protection of IP rights by local customs offices. While we commend the effort to issue new regulations and the transparent process that allowed industry to provide its comments and concerns, several issues remain problematic and need further clarification. Absent further clarification and amendment, the new regulations may have the effect of deterring IP owners from using the customs measures as an enforcement tool.
Bonding Requirements
The bonding requirements in cases involving obvious counterfeits need clarification. The new regulations give customs the flexibility to fix bond amounts at somewhere between nothing and 100 percent of the value of the counterfeits. Future implementing rules or policy papers should make clear that counterfeits should only attract the lowest possible bond.[16]
Storage Costs/Disposition of Counterfeit Goods
The cost of storage and disposition of counterfeits lies with the IP owner under the new rules. This is regrettable, and it may well deter lots of IP owners from recording their rights with Chinese customs, much as bond requirements have done so in the past. Procedures in line with TRIPs Article 59 should provide for the Government to order destruction of counterfeits rather than place the burden on IP owners. Moreover, given the potential high cost of storage, procedures should be adopted that are clear as to administrative handling of cases with the possibility that destruction could occur except for samples as evidence once a definitive decision on the goods has been made.[17]
Criminal Transfer
The new regulations provide, at least in theory, the possibility of a criminal transfer. Future implementing rules and other practical measures absolutely must be introduced to ensure that such transfers actually take place. Absent the possibility of transferring customs cases for possible criminal investigation and prosecution, there is no deterrence.
Information Disclosure
Access to information must be guaranteed to IP owners. Unfortunately, the new regulations do not address this issue. Chinese officials should be encouraged to provide for the disclosure of information regarding persons involved to the IP owners. Given the information disclosure possibilities under the European Council Regulations and U.S. regulations, this would simply make China consistent with many other countries.
Recommendations:
· consider the European Council approach regard bonds or a nominal amount for a continuous single bond;
· Require destruction of a pirated and counterfeit goods;
· Provide for the imposition of penalties that require the importer/exporter to pay for storage costs or impose a time certain for either administrative decisions on the issue of infringement that permits destruction except for samples as evidence in judicial proceedings;
· Clarify the regulations regarding case transfers for criminal investigations to determine the manufacturers of counterfeit and pirated product; and
· Encourage information disclosure regarding importers, exporters, consignees, etc., in order to engage IP owners in the pursuit of violators.
IACC members urge the U.S. Government to re-examine the February 26, 1995 U.S.-China exchange of letters between Minister Wu Yi and Ambassador Kantor regarding IP enforcement. In the exchange, China committed to stop shipments intended for export that contain infringing goods. Moreover, China committed to taking steps to stop the cross border trade of infringing goods ex officio. In view of the massive volume of counterfeit and pirated product now found around the world, the IACC requests that the U.S. Government emphasize China’s nine-year old commitment to stop such shipments.
The current enforcement system of multiple agencies and ministries creates an overly complicated system that creates loopholes and provides opportunities for protectionist behavior. Currently, there is too much overlapping authority and lack of coordination among the various administrative enforcement bodies. The current list of agencies involved in enforcement includes the Trademark Division of the AICs, Economic Supervision Divisions of the AICs, TSB, Customs, Social Order Divisions of the Public Security Bureau, ECID of the Public Security Bureau and others. One common example of such problems is the difficulty in promptly transferring criminal cases from the TSBs to the ECIDs, notwithstanding the fact that the relevant standards for criminal investigation and prosecution under Art. 213-215 of the Criminal Code have clearly been met.
Recommendation:
· Encourage the central government to research methods of improved coordination and implement changes in order to eliminate overlap and complexity of the enforcement system.
Foreign Trade Law
The Chinese Government is currently amending the Foreign Trade Law. The IACC requests that, to the extent possible, the amendments to this law address enforcement issues impacting trade. Given that the import and export of goods is trade related, a provision in the law to criminalize the export and import of counterfeit and pirated goods would be a positive step. In addition, the IACC recommends that the amendments also include penalties for businesses, e.g., trading companies, etc., involved in arranging, processing, goods for import or export be within the scope of the law for purposes of penalties if counterfeit or pirated products are involved.
Conclusion
The China counterfeiting and piracy problem is so massive that it is difficult to provide a short list of steps that our members believe are necessary. Several bullet point recommendations are provided above. There is no doubt that the points and the points below, some that repeat our stated concerns, are part of the package of industry’s issues regarding elements of the enforcement system that need to be addressed.
· Imposing of more severe penalties (fines paid/prison terms served);
· Issuing of clearer standards by relevant courts and authorities and communication of such standards to enforcement authorities at all levels;
· Penalizing repeat offenders with higher level of sanctions;
· Ensuring destruction of goods, and to the extent legally possible, seizure and destruction of the materials and implements used to produce the counterfeit and pirated goods; and
· Seizing any documentation as evidence during raids.
[1] Associated Press Worldstream, (January 27, 2004). Chinese police raid fake prison, find disguised cigarette factory. Over 100 tons of tobacco found in the fake prison where 20 brand names were being used.
[2] Automotive News Europe (November 17, 2003). Authorities cite brake linings made of compressed grass, sawdust or cardboard, and oil filters that use rags for the filter element.
[3] These Fiscal Year 2003 statistics place China at the top of the list of countries as the source of infringing goods stopped at the U.S. border.
[4] Asahi Shimbun, “Training Program to Combat Counterfeits” (February 3, 2004).
[5] European Report, “Customs: Rise in Counterfeit Goods Seizures” (November 26, 2003).
[6] Forbes Magazine, “Stolen Cars” (February 16, 2004).
[7] The Sunday Telegraph, “Counterfeit Gang Foiled” (January 4, 2004).
[8] Herald Sun, “Shampoo Didn’t Wash” (December 25, 2003).
[9] The Vancouver Sun, “Bogus Batteries Pose Safety Threat” (December 12, 2003).
[10] The New York Post, “Pirates Sacked – Chinatown Fake-Goods Ring Cracked” (December 3, 2003).
[11] The Dallas Morning News, “Tobacco-Smuggling Ring Busted” (January 29, 2004).
[12] Associated Press Worldstream (July 29, 2003).
[13] Mail on Sunday (London), (August 3, 2003).
[14] The World Trade Organization’s Agreement on Trade-Related htmects of Intellectual Property Rights.
[15] The U.S. federal criminal statute against trafficking in counterfeit goods does not have any threshold value that must be met. See 18 U.S.C. § 2320.
[16] The new European Council Regulation 1383/2003, July 2003, takes effect on July 1, 2004 and states that rather than a bond, IP owners are to submit a declaration accepting liability. Article 6. The World Customs Organization’s new Model Legislation concerning Border Measures (February 2003) has in the notes accompanying Article 10 suggestions and recommendations that Customs authorities permit a continuous bond so that IP owners are not under a constant obligations to post new bonds for each shipment that is stopped. The notes also adopt the new European Council approach of a declaration rather that a bond.
[17] A legal determination as to whether the goods are counterfeit or not should be separate from a decision regarding the sanctions to be imposed upon the persons involved.