Perplexities in IPR Protection

Issue 29 By Doris Li, ChinaIP,[Comprehensive Reports]

In the early 1990s, China and the United States conducted a series of negotiations on IPR protection resulting from the rampant number of pirated DVDs, CDs, compact disks and computer software in China. The conciliation discussions lasted three years. The U.S. pressured China on such issues as legislation that would attack counterfeit goods, law enforcement and the legal transparency, and warned that it would invoke Special 301 provisions against China.

During the negotiations, the United States had put forth a definitive request, that China permit such institutions as the International Federation of the Phonographic Industry (IFPI), and Motion Picture Association of America (MPAA), to conduct independent investigations in China. The results could be used as evidence in civil or criminal litigation. China firmly rejected the request, but subsequently issued a document, calling for great support of domestic investigation intermediary service organizations and institutions. Against this backdrop, a large number of agencies and investigation service institutions emerged in the late 1990s, said Li Changxu, chairman of the China United Intellectual Property Protection Center (CUIPPC), recalling the context of the initial development of the investigation service institutions in China.

After more than a decade of growth, rapid economic development, and the entrance of a large number of international brands into China, the target of the investigation industry was transformed from a concentrated effort on goods from street vendors during the initial phase to the present encirclement, pursuit, obstruction, and interception of illegal high-grade and high-tech products. However, accompanied by the quick development, intellectual property agencies and the investigation industry also encountered more troubles and bewilderment.

Perplexity -- proper status

The current anti-counterfeiting actions are very complicated. In an effort to destroy knock off plants and ferret out phony products, vendors, wholesalers, suppliers, manufacturers and printing houses, a vast amount of work is necessary. Mr. Li commented that: “Investigation companies assume a very heavy burden in anti-counterfeiting actions. Now we are facing a very embarrassing problem. Some of the fakes we handle involve organized crime. As a private company, we encounter considerable difficulties in conducting investigations and securing evidence. There is neither a leading body nor a disciplinary organization in the investigation industry. Furthermore, investigation companies have not been fully recognized by society, and there is a lack of regulations governing them. They are also browbeaten by various parties. Hence, this industry is in a very awkward position. This is different from the United States and European Union where the title of “private detective” has legal status and is governed by laws. Nevertheless, the reality in China is that the unrecognized investigation companies have played a very significant role in combating fake products.”

To protect IPR, the government needs to mobilize the strength of law enforcement organs such as the administration for industry and commerce, the quality and technical supervision bureau, the copyright office, the intellectual property office, the agriculture bureau and the tobacco administration. However, due to limited manpower and resources, they often feel inadequate, especially in certain transnational, trans-provincial and trans-municipal investigations. In Mr. Li’s opinion, “It is unlikely that a state’s administrative departments use state’s resources to conduct investigations for the sake of a private right unless public interests are injured. Factually, the investigation industry has played a very important role in the handling of cases by providing law enforcement agencies with sufficient evidence and the public security organs with reliable information. At present, law enforcement agencies in developed regions have recognized the existence of investigation companies, treating them a supplement or assistant.”

Regarding the legal status of investigation companies, practitioners in the industry feel strongly about stressing its importance. Mr. Bai Gang, senior partner of the Wan Hui Da Intellectual Property Agency stated that, “There should be expressed and systematic provisions in law with respect to such issues as the status and rights of lawyers, agencies, or investigation companies in the anti-counterfeit link. Can they go to the scene? What can they do? What can’t they do? As major participants in this industry, we hope that relevant legal systems can be established as soon as possible, and also hope that there can be an organ investigating and disciplining us.”

Perplexity -- professional capability
Due to the lack of expressed legal provisions on the status of the investigation industry, investigation companies often feel puzzled about what investigative methods can be used. Many anti-counterfeiting actions are targeted at trans-provincial, trans-regional or even transnational crimes committed by gangs. Formal and professional investigation companies, in the process of collecting evidence, dare not use certain sensitive technologies prohibited by the country, which to a certain extent, restrict their ability to combat organized infringement.

Additionally, a lack of talent limits the investigative capacity in this industry. There are also no corresponding aptitudes, certifications bodies, training institutes or educational facilities. There is only a batch of “professionals” who have received “on the job training”, through trial and error. Mr. Li once felt helpless with the limitation of the investigative capacity. “We can only take the most stupid method in following the vehicles suspected of transporting fake products. Once we arranged for two cars to follow a suspected vehicle. We followed it from Zhejiang to Shenyang, covering over 2,000 kilometers. Six or seven staff members stayed up for three days and nights. However, the target turned a corner at a fork in the road 50 kilometers away from Shenyang, which escaped the notice of our cars. Thus, we lost it. If we were allowed to put a positioning device on the target, such circumstances would not occur.”

Perplexity -- right holders view only the ends, not the means

With the rapid development of China’s economy, a growing number of internationally famous brands have entered the Chinese market. Due to their strong awareness of IPR protection, international enterprises have devoted a large amount of manpower and material resources to their IPR protection. However, in assessing the effect of IPR protection, these companies tend to focus on the results, not the process.

Mr. Li said, “The payment by a rights holder to an investigation company for the cost of investigation basically depends on the outcome, such as the number of counterfeit items in a successful case. Yet, when an investigation company begins a case, success or failure cannot be predetermined. Moreover, case investigations often entail a lengthy process, especially in criminal investigation cases. Some involve the gathering of evidence; some involve the placement of an informant in a counterfeiting company. However, most right holders generally address the issue of payment in a simplified manner, i.e., only when the number of cases discovered meet their requirement do they make payment. This is like cooking crispy sweet & sour pork slices, but only received payment for a marinated cold cucumber. I cannot cook a tasty dish even if I am an excellent chef. The target of anti-counterfeiting is conduct rather than amount. It makes no substantial difference whether the amount is 800 or 3,000. However, the key is that, from the perspective of the clients, payment based on the result is the simplest way. Thus, most right holders require that no payment be made if the cases to reach a required amount, which greatly confused investigation companies. As a result, investigation companies encountered great obstacles in manpower input during the initial period of investigation.

As I see it, the most reasonable method of payment to investigation companies should be based on the manpower, time and process devoted during the investigation process. Investigation companies can only be responsible for a process rather than a result. For example, I investigated the competitor of an enterprise. After a 7 day investigation, I found that the competitor neither made fake products nor committed infringement. However, I used the necessary manpower and resources during the investigation. Am I not entitled to payment for my efforts? The current reality is that the right holders do not think much of this process. Now however, the industry is reversing the manner in which investigations are handled; i.e., an investigation company first utilizes manpower and resources to find the origin of fake products, and subsequently submit its findings to the right holder in order to receive money to continue the investigation. If the right holder thinks that the information is of no value, the investigation company will get nothing for its work.”

Though the investigation industry maintains that the most reasonable method of payment is in terms of manpower, time and process devoted to a case, the lack of trust by right holders of the investigation industry and the normative level of the industry itself are the biggest obstacles to such a payment method.

Perplexity -- honesty crisis

The right holders’ cautious choice of payment method arises to a large extent from the honesty crisis in the investigation industry. Due to the lack of a relevant administrative department, disciplinary organization and an access certification body, the investigation industry has been a world comprised of both good and bad.

Mr. Li attributes the current honesty crisis to “false cases” by some investigation companies. He said, “The definition of ‘false case’ varies from company to company. We believe that the following three situations constitute false cases. (1) The investigation company and informant separately or in unison, create an anti-counterfeit scene, report to a law enforcement agency for investigation and punishment, and then announce the results to the right holder. (2) Altering documents from law enforcement agencies to defraud clients, such as changing100 pieces to 1,000 pieces. (3) Placing orders maliciously. An investigation company enters into a contract with a counterfeit plant and pays it earnest money to obtain the goods, which, under civil procedure law and criminal procedure law, can be divided into two situations. First, obtaining goods by providing opportunity. The investigation company knows that a counterfeit plant is manufacturing fake goods, but does not know where the warehouse is and where the package materials are placed, therefore, the investigation company pretends to transact with the counterfeit plant by placing an order, and then directs it to transfer the fake goods to a specific location so as to crackdown on the fake goods. Second, obtain goods by inducement. An investigation company induces a person who had never made fake goods before to make and sell fakes  by offering those molding boards and high amount of earnest money so as to crackdown on the counterfeits, which is illegal.”

Many investigation companies invent “false cases” to receive higher fees from the right holders. Thus, they create false scenes and alter the number of the counterfeits, which is also the consequence of the right holders’ payment in terms of the amount of the anti-counterfeiting cases. As a result, a vicious cycle forms.

Presently, “false cases” are primarily in the field of consumables because of the lower added values. The price for an individual print cartridge and selenium drum is very cheap. Mr. Li said, “Currently, printers and printing equipment are basically not profitable. The profit mainly comes from printer consumables. Such a profit making model has determined that this industry is different from other industries. Therefore, comparatively, there are more ‘false cases’ in this industry. Makers of consumables generally do not reveal their names; they just ask the informant to create a false scene, or the informant and the investigation company work jointly to make a false scene and then report to a law enforcement agency. The client may believe a document after reading it, though it is actually false. As an example, an informant may receive 5,000 Yuan or 10,000 Yuan by informing on a factory or den that produces counterfeits. Generally, the cost in creating a false scene is very low, probably not more than 2,000 Yuan. In the case of counterfeiting consumable products, an informant may buy 100 ink cartridges for 100 Yuan or 200 Yuan and rent a house for 200 Yuan. The false scenario plays out there. Some informants even build the scene by using props, similar to that of a movie set, so as to claim payment from the right holders.”

Perplexity – IPR protection awareness

In recent years, with China’s attention to IPR protection, the media, and the enhancement of IPR protection within companies, the entire market situation has changed for the better. However, due to weak IPR protection awareness by consumers, and the lure of huge profits, there is still a good market for fake products.

Hu Qi, Chairman of the Board with IntellecPro, said, “A few days ago I read an article entitled Pursuing the Dream of A Powerful Nation with the Mentality of A Weak Nation. It says that though China’s economy has been improved greatly with its reform and openness, its people still retains the mentality of a weak nation. We are always in doubt about the right holders’ motives for protecting their brands. What on earth are they going to do? Why did our agencies represent the rights and interests of a foreign country? Such mentality exists among many people. However, we need to ask ourselves: How can we respect the intellectual property rights of others with such mentality? How can intellectual property enforcement be enhanced with such mentality? Many people maintain that intellectual property rights are not important. Since the right holders sold high, we have the right to counterfeit their products, which will not harm the genuine products. Such notions are very popular in China.”

With regards to IPR protection in China, Mr. Li said, “For our country and our nation, I feel the biggest problem is ‘soil erosion’. The concept of the common people in China on IPR protection has been eroded, and moreover, the erosion is very serious. It will take us a long time, even one or two generations to make up for this course. Thus, I think China has a long way to go in IPR protection.”

                                    (Translated by Zhang Meichang)


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