Trademark Enforcement

Best Practices for the Prevention of Brand Theft in the People’s Republic of China

SIPS Knowledge, Trademark Enforcement

Among the most dangerous and costly types of infringement encountered by brand owners in China is the phenomenon of “brand theft”. Brand theft goes far beyond the mere sale of counterfeits – it encompasses the wholesale hijacking of the brand owner’s business. Fake websites, pirate stores and outlets, pop-up stalls in high-end malls, and even fake “franchises” spread across China are common in brand theft cases. Brand thieves misrepresent themselves as authorised distributors, licensees, or in the worst cases, the brand owners themselves. Fake Apple stores in China are likely the most well-known of these cases, but brand thieves are just as likely to target smaller up-and-coming brands, brands usually unable to afford expensive and wide-ranging enforcement efforts.

Brand thieves’ schemes have grown increasingly sophisticated, too – misleading consumers, potential business partners and even authorities. This article looks at a handful of recent brand theft cases and provides advice on countering brand thieves. It also reports on some positive developments in Chinese law and intellectual property (“IP”) enforcement that may help to gain traction in the fight against brand theft.

Case Studies

Pirate Franchises

One of the more sophisticated brand theft schemes involves the creation of a fake “franchise” network for the hijacked brand. Often, the pirates in these schemes go to great lengths to add verisimilitude to their offering. We have seen them, for example, establish Hong Kong or even United Kingdom (“UK”) entities – whose names contain the targeted brand or a close approximation thereof – to front for the franchise in China (discussed further below). Common businesses targeted are in the cosmetics or food service industries. Successful “franchisors” can be difficult to bring to heel, where they can have dozens of stores across China via unrelated “franchisees”, many of whom may believe they are actually working with the foreign brand. Often, the pirates will support their schemes with forged documents (a crime under People’s Republic of China (“PRC”) law), including authorisation letters and in many cases, even forged PRC company and trademark registration certificates. Instead of being angered by this audacious conduct, forged documents may actually make authorities less likely to take action, viewing the forgery issues as too complicated to spend time unravelling. This is particularly a risk in smaller cities where the local Market Supervision Bureaus (“MSB”) may not have a very nuanced understanding of the law and local protectionism could be at hand.

An interesting pirated franchise case involved a small Beijing bakery called Bao Shifu (Master Bao in Chinese) that quickly shot to fame after receiving favourable coverage in media and online in 2013. Soon after, fake Bao Shifu bakeries began popping up in Beijing and throughout China. By the time the original Bao Shifu started to investigate and take legal action in 2017, some 2000 fake Bao Shifu “franchises” had rippled out across China – compared to only 26 genuine Bao Shifu self-operated stores in Beijing itself.[i]

Among these pirate franchises, more than 500 outlets were sub-franchised by Beijing Yishang Restaurant Management Co Ltd (“Yishang”) which had obtained pirated trademark registrations for Bao Shifu in Classes 30 and 43 in 2015, with those registrations used to buttress its bogus claims that it was the real Bao Shifu. It was not until January 2019 that the China National Intellectual Property Administration (“CNIPA”) invalidated Yishang’s trademarks and Bao Shifu was able to take concerted action against it and its network.

Pop-Ups

Pop-ups (temporary stalls in malls or elsewhere) are another pernicious problem. Due to their temporary, mobile nature, pop-ups pose significant enforcement challenges as they frequently have packed up and left by the time a brand owner can investigate, collect evidence and file complaints against them. Their limited scale and apparent randomness can also give brand owners pause when deciding whether to invest resources in enforcement.

Pop-ups are usually much more organised than they appear. They are often tied to a mastermind who has obtained or falsified some rights to the brand (or is connected to the source of the fake goods) and licenses the pop-ups to individuals and companies in different cities, supplying them with counterfeit stock they produce or source separately. Most worryingly, they are often granted mall space by apparently reputable mall operators who turn a blind eye to the piracy – sometimes even in malls where the genuine brand owner has stores.

For example, according to an article on Qingdao Xinwang, a pop-up selling knock-offs of the Comme des Garcon sub-brand “Play Comme de Garcon” was operating in a Wanda mall in Qingdao’s central business district in September 2020.[ii]  The clothing, trade dress and aesthetic of the stall were all directly copied from the real brand, but the actual brand on the products was “Play Fantasy and Miracle,” a pirated trademark registered by a company called Qinghe County Dingzhuang Trading Co Ltd (“Dingzhuang”).

Representatives from Wanda, one of China’s largest developers, claimed that the stall’s operators had provided “all necessary paperwork” to operate a brand outlet in the mall, including a trademark registration certificate and letter of authorisation from Dingzhuang, the pirated mark’s owner. That was likely cold comfort to the actual brand owner.

Pirated Trademark Registrations for Related Products

As shown in the Bao Shifu case, trademark pirates regularly exploit gaps in brand owners’ trademark coverage to register trademarks which they then use to support counterfeit franchise operations and other infringing activities. In the Bao Shifu case, the original Bao Shifu had only registered its mark in Class 30, covering cakes and bread goods, but failed to register its mark in Class 43 for “bakeries”, leaving the path clear for Yishang to obtain the identical mark in that key class. The industrious Yishang also applied for and registered the mark in Class 32, covering coffee and other beverages, taking advantage of the logical association between coffee and bakeries/baked goods.

Similarly, in a current case being handled by SIPS, the pirate has registered a famous mark in Class 3 for a brand known for its fashion designs. This pirate has falsely claimed a connection to the fashion brand, and is attempting to leverage its pirated trademark to hook potential distributors into a multi-level marketing program (which are also illegal under PRC law) backed by the ripped-off trademark.

In this regard, China’s trademark subclass system – and foreigners’ lack of familiarity with the same – also exacerbates this problem. China adheres to a strict subclass system to determine whether a trademark’s goods or services conflict with any pre-existing marks in the same class. Applications for identical marks can happily co-exist in the same class so long as they don’t specify goods/services in the same subclasses. Brand thieves also target these smaller gaps to obtain rights that are close enough to fool potential franchisees, many of whom are all too eager to suspend their disbelief for the promise of riches.

Infringing Trade Names

As noted above, a common tactic used by brand thieves to falsely pose as well-known brands is to register companies with English or Chinese names copying the foreign brand in English or Chinese. This is particularly effective in jurisdictions that take a hands-off, reactive approach to company name registrations. For example, Hong Kong – due to its proximity to China, its dual Chinese/English system, and its loose approach to reviewing and approving company names – is home to thousands of shell companies operated by Mainland China infringers, counterfeiters and trademark pirates, many of which slavishly copy foreign brands in English and Chinese in their names.

In a well-known case, a brand called “Uncle Martian” launched to self-created fanfare with a logo nearly identical to Under Armour’s “UA” logo. To further tie the new company to Under Armour, they registered a separate company in Hong Kong called “Under Amour (China) Co Ltd”, which was alleged to have authorised the PRC Uncle Martian entity.[iii]

More recently, we have also seen cases involving UK shell companies with names identical to famous foreign brands used in these schemes. These UK shells are established by Chinese nationals, which in turn issue “authorisation letters” to companies in China (usually run by the same individuals), permitting them to license the brand (via pirated Chinese trademarks) to third parties.

There are of course also cases of companies that pirate trademarks and tradenames and do business under both until the rightful brand owner can win them back. In a major decision issued in December 2020, Wyeth LLC, a Fortune 500 company and producer of powdered infant formula, was awarded RMB30.55 million (US$4.7 million) in damages in an unfair competition and trademark lawsuit involving six defendants. Two of the defendants had included the Chinese version of Wyeth in their company tradenames, and one of those registered six trademarks for “Wyeth” (or its Chinese equivalents) as far back as 2010, operating and selling products using the trademarks until 2018, when Wyeth was finally able to invalidate the marks.[iv]

Forged and Abused Authorisations from Brand Owners

Online sellers also frequently misuse “authorisation letters” issued by brand owners. This is especially the case in the Australia and New Zealand “Daigou” industry, where almost every Daigou seller on Taobao and other sites claims to source directly from or even to be authorised by the brand owner. Such claims are supported via authorisation letters or certificates purported to be from the brand owner. Forged letters are incredibly common, however. Some authorisation letters are indeed legitimate, of course (and online sellers are very quick to request such letters from brand owners), but even those genuine letters are often stretched far beyond their actual permitted scope, used to support activity clearly not contemplated by the brand owner.

This often includes sub-authorizing other sellers (and often supplying them with fakes). In one such case handled by SIPS, a short letter, only authorising limited online sales of genuine products supplied to it by client’s exclusive PRC distributor, was used by the online seller to support a brick-and-mortar store bearing the brand owner’s trademark in three-foot high neon letters. This only came to light during a raid action at the shop, where the authorities were reluctant to act due to the existence of a valid authorisation letter, regardless of whether it supported the complained of activity or not.

Best Practices to Address Brand Theft

Vetting Distributors and Business Partners

It goes without saying that careful vetting of potential distributors before signing any contracts is vital, particularly in China where the prevalence of fraud and limited enforcement legal recourse creates incredible risk. Despite this, it is all too common for Western companies to conduct little to no vetting of partners before engaging them in business. This is a real missed opportunity, as an abundance of governmental information has been moved online and can be very useful in conducting at least minimal checks. Where the scale of the potential cooperation – and the risk to the business if the partnership goes badly – is significant, more in-depth searches should be arranged and conducted by trusted service providers familiar with the Chinese business environment, language, and laws.

Careful Drafting of Contracts and Authorisation Letters to Distributors, Licensees, etc.

Since even the most careful vetting cannot catch every bad apple, it is equally important that contracts and authorisation letters be drafted anticipating that the worst will occur. That means placing strict limitations on the scope of any granted authority, providing for speedy termination of any such rights, and building in strong enforcement tools to address potential (likely) breaches. At minimum, such documents should be bilingual and have clear, brand owner-centric dispute resolution and termination provisions. If a brand owner insists on using their standard distributor or authorised reseller template for their PRC relationships, they should ensure it is reviewed by a trusted third party familiar with relevant PRC law and able to suggest effective changes that render the agreement practical and enforceable in China.

Defensive Strategies

Comprehensive and Defensive Trademark Filing and Trademark Registry Monitoring

Hijacked trademarks are a key tool of brand thieves. Given that, it is essential that brand owners proactively file for their trademarks in key classes, leaving no gaps that can be filled by enterprising pirates. That includes insulating themselves from brand thieves by filing defensive marks in related classes and in particular, all subclasses within the classes in which they are filing.

In order to cost-effectively and efficiently file defensive trademarks in China, it is crucial to obtain detailed advice from topflight trademark agents in China. Many PRC trademark agents, particularly low-cost ones, will simply file applications based on the initial set of goods and services provided to them by the client, without giving any thought as to what subclasses could or should be covered or providing advice on the risk of failing to secure all goods or services in a given class, or to file additional defensive applications in classes adjacent to the brand owner’s business.

As well, and even if the brand owner is successful in obtaining its own key trademarks with class-wide coverage, that does not mean that pirates will give up on the brand. Even major brands with rock-solid trademark portfolios, such as Under Armour in the Uncle Martian case, remain subject to brand theft. Given that, consistent monitoring of the PRC trademark registry to identify, triage and move quickly against pirate applications is required. Waiting until such marks are registered and being actively and broadly used as part of a brand theft scheme is simply too late.

Company Registries Monitoring

Periodic monitoring of the company registries in Hong Kong and Mainland China (all fully searchable online) is also recommended to identify potential pirate shell companies that could be used in PRC brand theft schemes. In Hong Kong, for example, a simple administrative complaint to the Hong Kong Companies Registry can be used to force changes to shadow company names that infringe another’s trademark – but only if filed within 11 months of the shadow company’s registration date. Otherwise, a more expensive and time-consuming civil suit must be filed to force a name change. Regular monitoring will help to timely identify such infringing company names.

Offensive Strategies

Regular monitoring of the market and IP registries, either through IP consultants working on the brand owner’s behalf, the brand owner’s local distributors (if they have one), or by brand owners themselves, is key. Any suspicious trademark applications, Taobao shops, or retail outlets should be analysed for possible connection to broader brand theft schemes.

Local protectionism and the sheer scale of China can make acting against ongoing pirate franchise operations with outlets in multiple cities a bit of a nightmare. Given that, issuing strategic lawsuits against a limited number of outlets in cities where the pirate is unlikely to have connections could be a very effective tool. Suits solely against a few franchisees and letters threatening litigation against others, particularly where their infringement is based on forged documents, registered trademarks that do not actually cover their products or services, etc., are great tools to build pressure on the brand thief and to build awareness amongst Market Supervision Bureaux (“MSBs”) in multiple jurisdictions.

Landlords of retail outlets that permit pop-up shops to operate are also good potential targets for actions or threats of action, where they can be held to be contributorily liable for infringing activities – of which they are aware or should be aware – occurring on their property.

Promising Legal Developments

There have been several promising developments, both in terms of new laws and practical enforcement measures taken by Chinese authorities, that leave room for optimism in the fight against brand theft.

For years, PRC authorities, particularly the Trademark Office and the Trademark Review and Adjudication Division of the CNIPA, have set an almost impossibly high bar for findings of “bad faith” in trademark filings, allowing registry piracy to flourish. There have been positive changes in this regard, however. For example, under Article 4 of the recently amended PRC Trademark Law, it is expressly prohibited to file for trademarks in bad faith where there is no intention to use the trademarks. In practice, CNIPA has also been relatively proactive in applying this provision against serial pirates who file for dozens or even hundreds of marks where there is no clear intent to make use of those marks. This lack of intent to use the marks can be shown, for example, where goods/services covered by the mark are outside the applicant’s permitted scope of business, and/or where the sheer number of filings is beyond making any actual use of them.

As well, Articles 19, 63 and 68 of the revised Trademark Law provide for enhanced penalties and/or damages awards against bad faith pirates and the trademark agencies that assist them in obtaining pirated trademarks. For example, punitive quintuple damages may be awarded against those found to be infringing in bad faith where the circumstances are serious – a conclusion that might be more readily drawn where a nationwide brand theft scheme involving dozens or even hundreds of bogus franchisees is at issue.

In that same vein, there are also indications that city and provincial MSBs are more proactively investigating and breaking larger-scale networks or large numbers of linked infringing shops, and assisting victimised brand owners to regain their trademarks and other rights. For example, in a case involving both the application of the new Trademark Law and proactive assistance from local MSBs, a Zhejiang Teashop called “Good Me” discovered that a pirate had applied for 78 trademarks targeting its brands. After reporting this to its local MSB, the MSB fined the pirate and issued a notice regarding the pirate’s behaviour to CNIPA, which in turn proactively rejected all 78 of the applications on the basis that they had been filed for in bad faith.[v]  Furthermore, the local MSB, working in concert with other MSBs around the country, investigated and punished over 500 knock-off Good Me teashops. Similarly, and in relation to the Bao Shifu case discussed above, the Beijing and Guiyang MSBs worked together to punish infringing stores in their respective jurisdictions, driving the number of infringing Bao Shifu outlets in Beijing stores from 300 down to only 10 in two years, and those across China down from 2000 to only 400.

In the case of trade name piracy, under China’s Anti-Unfair Competition Law, administrative authorities, such as the MSB, and courts have the authority to force company name changes if the company name infringes a prior right of another party. Although MSBs are often reluctant to order such changes, in the Wyeth case discussed above, the court ordered the companies to stop using the Chinese version of Wyeth as their trade names.[vi]

Given these developments, victims of brand theft would be wise to consider detailed investigations designed to draw a very clear picture about the scope and structure of any brand thief’s operations. Such information will be key in convincing CNIPA, as well as local, provincial and/or even national-level administrative enforcement authorities of the seriousness of the theft. Moreover, detailed investigations can save costs and accelerate the resolution of brand theft-cases by identifying the masterminds and focusing legal actions on them and any other vulnerabilities in the network. Taking early and aggressive action will help to limit the long-term expense associated with protracted court cases, loss of revenue, and damage to the brand’s reputation.

By Dan Plane and Mark Olsen.


Endnotes

[i] News article, BJ News (Web Page, 24 April 2020) <http://www.bjnews.com.cn/news/2020/04/25/721124.html>.
[ii] News article Qingdao Xinwang  (Web Page, 14 September 2020) <https://mp.weixin.qq.com/s/4Tx8LymEEg2pYJzQZjrMyQ>.
[iii] ‘Under Armour successfully ends copying by Uncle Martian’ Lexology (Web Page, 8 February 2021) <https://www.lexology.com/library/detail.aspx?g=b57a156c-82e8-4a95-9e9f-a8f25f0da5f3>.
[iv] ‘CHINA: Wyeth Wins Infringement Lawsuit’ INTA (Web Page, 27 January 2021) <https://www.inta.org/perspectives/china-wyeth-wins-on-infringement-unfair-competition/>.
[v] News article. (Web Page, 21 August 2020) <https://mp.weixin.qq.com/s/IHgpk2R9d5Mo0UjNSAOB-Q>.
[vi] News article, (Web Page, 25, January 2021) <http://ip.people.com.cn/n1/2021/0125/c136655-32010743.html>.