26 Jun 2021

New Frontiers in China IP Protection: “Thinking Outside the Packaging”

Bob Youill Article Picture July 2021
Chrsitina Wang Article pitcure July 2021

Prologue

Counterfeit manufacturers and traders operating in China have been active participants in the past two decades of economic globalization. Standalone local operators of the past have fallen far behind highly-organized syndicates, that are today responsible for driving the burgeoning global trade in counterfeit goods. The amount of sales tax that nations lose out on globally due to consumer product counterfeiting each year is estimated to be from $70bn to $89bn, with an additional loss of $8bn to $22bn from other taxes. According to recent studies, the loss of global employment caused by counterfeiting was estimated at 2.5 million jobs, with 300,000 jobs being lost each year in Europe alone. As the counterfeiting industry continues to grow steadily, a further 5 million jobs are predicted to have been displaced by 2022.

According to reports, the primary reason fake goods sneak through anti-counterfeiting measures in China is their improved appearance of quality built into the packaging. It’s gotten easier to take advantage of leaked brand and production details that some manufactures use to create fakes that closely imitate the real thing, even the highly discreet multi- layer security features built into the packaging.

Yet we continue to witness many rights owners trying to protect their trademarks in China by focusing on a seemingly endless parade of standalone entities infringing their IPR, but as fast as targets are raided or prosecuted, new one’s step in to replace them. The “Whack-A-Mole” analogy has become common currency among IP practitioners operating in the PRC in recent years, yet many long-suffering brand owners continue to allocate budgets and measure results by the usual performance indicators that emphasize seizure quantities, value of goods denied entry to markets, numbers of enforcement actions, and prosecution head-counts, as the only return on investment indicators.

Armies of hungry commercial investigators and under-experienced so-called IP protection specialists seem to work together to fuel and perpetuate an endless, vicious sighting-raid-sighting-raid cycle. We see yearly targets being established and minimum ‘action thresholds’ (usually based on quantity) set for particular products and specified target types (manufacturers, exporters, and/or wholesalers). These criteria are announced by the trademark owners to investigation providers, and shortly thereafter informants are tasked and sighting reports start rolling in from the field proposing potential targets for investigation and/or enforcement at agreed fees. Instructions are issued, actions are taken, reports are written, and debit notes are prepared, sent, and paid.

At the end of each year summaries are prepared that reflect a great volume of activity (usually at very substantial expense). However, while such data assembles nicely for statistical reports, many anti-counterfeiting programmes proceed without regard for addressing those other driving forces that are an essential component of the multi-million dollar counterfeiting industry in China , what we call the critical “choke points” within the counterfeit product supply chains, namely the entities that produce the packaging , security seals , fake bar codes and copy widely known security features built into the packaging itself. We advocate all of these “choke points “can be effectively squeezed off through intelligence-based investigations utilizing commercially available forensic and analytical tools, that if used in harmony with the more traditional investigation techniques can lead to superior target prioritization and selective enforcement strategies.

Packaging Printer Investigation Programme – Rationale:

The use of sophisticated packaging and in-built security features has skyrocketed in recent years. Many genuine goods suffering from counterfeiting are now packaged in materials incorporating a myriad of covert or overt security features to afford consumers some degree of confidence in the authenticity of a product or to provide enforcement, judicial, or customs organizations with hidden indicators for verification of a particular product or shipment. Consumables including foods, beverages, and pharmaceuticals have been subject to product tampering attacks in recent times and brand owners have developed sophisticated packaging designs to thwart or reduce chances of such incidents. Inspecting the packaging of today’s pharmaceutical, F&B, tobacco, music/movie/games media, electronics, and telecommunications, among a host of other product sectors, will reflect a global packaging industry that has grown to be reliant on highly-specialized printing features. The bad news is that counterfeiters are using the same machines and techniques for copying and printing packaging, while specialized packaging manufacturers have grown over the past few years to cater to these needs.

In the past forty years of traditional anti-counterfeit approaches, suppliers of packaging have often been neglected and available resources have focused more habitually on finished product assembly points. This has been a result of several misconceptions, including a now invalid assumption that printing targets in China are a dime a dozen (that packaging can be sourced from tens of thousands of small print shops) and widespread belief that packaging materials are low value components of finished counterfeit goods. In today’s syndicated China counterfeiting environment, however, different production and manufacturing functions are outsourced to specialized facilities, while the product assembly, packaging, distribution, warehousing, and selling entities have become easily replaceable cogs in the counterfeit supply chain mechanism. Indeed, many of these are now being situated outside China so that final assembly is conducted in the destination market itself. This phenomenon is another reason to target the packaging manufacturers who by default must produce their final product with the fake trademarks, security features etc. before shipping.

Consequently, sourcing sophisticated packaging for fake goods is a dangerous phenomenon and, with greater outsourcing and use of the internet bringing greater anonymity to the counterfeiters, it becomes increasingly difficult to identify the real ringleaders in the counterfeit trade.

However, the good news is that due to historically low levels of enforcement, printers and packaging producers are often less alert or cautious than the actual product producers or shop front distributors who have been under enforcement pressure for decades. By attending trade shows or in-depth systematic surfing the Internet we have found open displays of packaging incorporating unauthorized use of registered trademarks in an effort to promote a packaging producers’ business.

This “lack of alertness” can be a boon for the brand protection practitioner as packaging producers and printers can be more forthcoming than product producers or distributors in unwittingly providing intelligence and insight into key players in counterfeit networks, including product makers and buyers/distributors, thus making them an ideal “choke-point” in the investigation paradigm.

Where the need for truly high-quality imitation packaging exists, mom & pop name card printers cannot deliver. Specialized printing operators, with substantial investment in equipment, are willing to ignore trademark and other IP laws because of the low enforcement threshold. As such, one printing factory providing quality copies of sophisticated packaging can often become a nexus of counterfeit packaging activity, providing packaging for a variety of fake products in partnership with distribution and logistics centers.

Legal Framework

China has well developed IP specific laws that have undergone significant review and improvement over the past several years e.g., the Trademark Law, the Copyright Law and the Patent Law with their respective implementing regulations and judicial opinion, the Civil Code, the Tort Law and the Criminal Law also contain IP-specific provisions that would assist a brand owner pursue a packaging or printer target using their trademarks, patented security features etc. The 2019 E-Commerce Law also contains provisions that permit e-commerce platform operators to be held liable for IP infringements occurring on their platforms. These provisions are however not overly helpful in addressing sales of counterfeit items unless the brand owner engages in a serious evidence gathering investigation that clearly demonstrates the depth of the infringing activity.

The Product Quality Law and the Anti-unfair Competition Law can also be used as an important IP provision by brand owners as part of their anti-counterfeiting and falsified trademarks programme in China.

Also, keep in mind that China is a signatory at the international level to most major IP treaties, including the Berne Convention, the Paris Convention, the Nice Agreement and Madrid Agreement and Protocol. All of which can assist the brand owner target packaging and printers who are applying fake trademarks etc.

In certain product areas, a well-structured investigation focusing on packaging printers can be a major precursor to the development of intelligence-based operations that are highly cost-effective and tackle a major aspect of organized counterfeiting activity. The capability to target specialized packaging manufacturers and printers should be developed as an ongoing process that combines traditional investigative field work, forensic examination of packaging, intelligence analysis, supply chain identification, and electronic data forensics in concert to facilitate advanced and effective “selective targeting”.

Key Risk Consulting Asia has pioneered the development and use of Printer Targeting Programmes to support a number of global companies with their brand protection needs and, in doing so has enjoyed success in the identification and eradication of counterfeiting syndicates in a variety of jurisdictions, whilst our Universal Law Offices partner in Shanghai is able to provide specialist legal advice and enforcement support for brand owners operating in China.

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