Li Guoqing, the Co-Founder, Director and Chief Executive Officer of China Dangdang Inc. (a Business to Consumer platform, B2C) stated clearly as early as in 2009 that safety and counterfeits would become two major risks for Consumer to Consumer (C2C) platforms. According to him, counterfeit transactions were the basis for the survival of C2C sites. In the past, the counterfeits transactions used to amount to about 70% of a C2C platform’s total volume of business. Although recently, some sites have began to introduce brand owners’ and authorized stores to their platforms, counterfeit products still amount to over 30% of the turnover of these sites.

As the leading e-commerce C2C platform in China, Taobao.com has long been troubled with the foresaid problems.

 

IP Issues: The Biggest Headache for Taobao.com

Since its establishment, trademark infringements, copyright infringements, counterfeits and patent infringements have always accompanied Taobao. As a result of the severe IP problems on the platform, Taobao has been listed as one of the “Notorious Markets” (for selling counterfeits) by the United States Trade Representative Office four years in a row.

On March 12^th, 2012, Taobao for the first time officially released its 2011 annual IP rights protection data. The statistics showed that in 2011, Taobao handled a total of 63.2 million pieces of infringing information, among which over 8.7 million were removed on the basis of complaints, more than 54 million were dealt with through Taobao’s IP protection approaches, such as the special actions combating IP infringements, the mysterious purchase policy (a policy in which Taobao’s employees make purchases on the platform and then examine whether the product is a counterfeit) and so on. Altogether, there were more than 700,000 merchants being punished. In the Combating Counterfeits and IP Infringing Products Special Action that Taobao carried out in the first quarter in 2011 alone, about 25 million items were removed from the site. These numbers on the one hand reflected the determination of Taobao in quieting down IP infringements and promoting the healthy development of the e-commerce market, while on the other hand exposed the serious IP problems existing on Taobao.

According to reports, by the first half of 2011, Alibaba Group had handled more than 130,000 IP related disputes. And a new trend presented in these disputes was that when the consumers and right holders were upholding their rights, they tended to make Taobao a defendant too. Meanwhile, in the eyes of the courts, the role Taobao played in these cases and the responsibilities it should bear have also gradually changed.

 

The Past Golden Times

Since its establishment, Taobao.com has been sued for many times over IP issues.

In 2006, PUMA Aktiengesellschaft Rudolf Dassler Sport sued Taobao over infringements upon the word and device of its “PUMA” trademarks. The plaintiff held that the disputed trademarks are their original creations and internationally well-known trademarks being used upon their products including sport sweaters, shoes and bags, etc.. However, some profiteers manufactured and offered for sale a large amount of counterfeited products while Taobao, as a network trading platform service provider (NTPSP), provided a platform for 43,932 infringing stores around China, which sold counterfeit PUMA products to consumers. Therefore, the plaintiff concluded that since Taobao, to some extent, provided convenience and support for the infringing activities, it should be held jointly liable.

In 2008, Taobao was brought to court again by Shanghai Storm Information Technology Co., Ltd. for a similar reason. The plaintiff claimed that there were stores selling software products such as “Yu Yan Baby” and “Yu Yan Prodigy” on Taobao. According to the plaintiff’s initial complaint, both of the above software products were “plug-in” software programs developed by unauthorized third-parties and aimed at bypassing or undermining the plaintiff’s copyright protection measures upon its online game Yu Yan Online. Moreover, the sales pages were also found applying posts created by the plaintiff for Yu Yan Online without authorization.

According to reports, Taobao had also played the part of the defendant in many other cases, such as Hunan Golden Cliff Audiovisual Inc. v. Taobao over copyright infringements upon the DVD of the hot Korean TV series Phoenix, Pro-Health (China) Commodity Co., Ltd. v. Taobao over trademark infringements, and Chengdu Rong Dong Cosmetics Co., Ltd. v. Taobao over trademark infringements, just to name a few.

However, in the above-mentioned cases, Taobao always won. The court usually held that as the platform provider, Taobao itself had not participated in the trading processes directly. Therefore, even if there were indeed IP infringements, Taobao should not be held liable. With the safe harbor principles, Taobao had never been really hurt, although it was constantly traveling through the thorn bush of its IP problems.

However, in recent years it seems that changes have taken place. In some court rulings, Taobao didn’t have the last laugh.

 

The Fading away Safe Harbor Principles

In June 2009, the Beijing Dongcheng District People’s Court delivered the first instance verdict on the China Friendship Publishing Company v. Taobao and Yang (a merchant on Taobao) case. In its ruling, the court held that the activities of the defendants, Taobao and Yang, constituted infringements upon the China Friendship Publishing Company’s copyrighted book The Secret of Grave Robbers 4, and therefore should jointly pay the plaintiff 2,000 yuan in compensation.

At that time, the case did not attract much attention. However, another case ruled by the court half a year later made people clearly aware of the change.

On January 13^th 2010, Zhi Qian Club reached out to Taobao for the first time, claiming that there were hundreds of merchants illegally selling the Club’s copyrighted video courses, namely Zhi Qian Club’s Stock Training Courses, on the platform. The courses which were originally priced more than 10,000 yuan on the company’s official website were illegally reproduced and sold to the consumers at prices as low as only 5 yuan. In response, Taobao refused to acknowledge the existence of such infringements. After Zhi Qian Club presented solid evidence, an employee of Taobao expressed over the phone that they were “willing to cooperate with the right holders and remove infringing information on Taobao.” However, the promises were not kept. On November 25^th, 2010, the Beijing Haidian District People’s Court made the first instance decision in favor of Zhi Qian Club. According to the verdict, Taobao and its merchant Wangchao had to pay the plaintiff 20,000 yuan in compensation. The case was also referred to as “the first IP case in China’s financial field.”

In April 2011, Taobao was involved in another influential trademark infringing case. Although the court ruling of the first instance suggested that Taobao should not bear any joint liabilities, Eland Fashion Shanghai Co., Ltd. (Eland) won the case in the finial instance. Shanghai No.1 Intermediate People’s Court ruled that Taobao and the infringing stores should pay Eland 10,000 yuan in compensation. In the verdict, the court held that Taobao only passively deleted infringing links upon notice of the plaintiff while it failed to take necessary measures to prevent the occurrence of the infringing acts; therefore it promoted and encouraged the infringement to a certain degree. As a result, Taobao was jointly liable for the trademark infringement and should assume the joint compensation liability.

According to the analysis of the insiders, this case demonstrated that the administering departments and the court had reached a more clarified understanding of the responsibilities of the platform service providers. In the e-commerce environment, the network trading platform service providers’ responsibilities are increasing. Under such circumstances, platforms flooded with counterfeits were forced to shoulder heavier IP pressures.

 

Brand Owners Keeping away from Taobao

Although the large number of consumers on Taobao is very attractive, there are still brand owners both at home and abroad reluctant to enter the online market.

At the end of 2009, Eau Thermale Avène (Avène), a well-known cosmetic brand of Pierre Fabre Limited, had to adopt extreme measures to cut off all its connections with Taobao because of IP issues. In its statement, Avène declared that all the products for sale on Taobao with Avène’s trademarks were not authorized. Avène also delivered a lawyer’s letter to Taobao, and required Taobao to cease the sales transactions of all its products.

The same story also happened to Pierre Cardin. At the beginning of 2010, Pierre Cardin’s Chinese commercial agent Shi Ji Yi Hao Company brought a lawsuit against Taobao.com, requiring Taobao to delete 191 infringing stores.

There are mainly two reasons why online IP infringements remain incessant after repeated prohibition. First, there are shortcomings in online supervision so the risks of infringing activities are relatively small. Second, online IP protections are difficult to conduct while the costs of infringing activities are low.

Therefore, increasing the cost of infringing activities serves as the key to the work of reducing online IP infringing disputes and cases.

Since Taobao is a C2C platform, its business model is almost the same as a marketplace, which means that it is basically impossible for the platform service provider to examine the genuineness and legality of each item. Therefore, online infringements can never be totally stopped. However, in respect to increasing the infringing activities, there are indeed a few measures worth trying, such as increasing the security deposit and the technical support fee. Some experts believe that this, to a certain degree, justified the provisions in Tmall’s New Rules.

 

Will Tmall Solve the IP Problems?

“In the chess board of Alibaba, Tmall should be created into the network version of ‘You Yi Shopping City’ (a high-end shopping mall in Beijing) which focuses on classy brands and products; while Taobao Marketplace bears more resemblances with the ‘Zoo’ (a clothing market in Beijing famous for the cheap prices),” Lv Bowang, a senior internet observer remarked. It seems clearly that Jack Ma hopes to keep the B2C platform Tmall far away from IP infringement problems.

Currently, there are many obstacles waiting to be overcome in the process of combating counterfeit products online, among which a major one is the legal problem. First, although America, Korea, Australia and some other countries have launched relative laws, there are still no special laws or regulations in China to regulate the e-commerce. Therefore, when trying a case, the courts have to rely on the Trademark Law and the Judicial Interpretation of the Trademark Law. However, the Trademark Law is targeted more on regulating the traditional economic activities than keeping the online shopping activities in order. Secondly, at trial, the adjudications of cases involving online counterfeits combating always face dilemmas. Usually, the courts think that a platform serves just as a medium of online transactions and does not participate directly in the trading. Therefore, even if a sale has infringed upon the right holders’ IP rights, it should be deemed as indirect infringement.

One example of this difficulty was point out by a lawyer of Shi Ji Yi Hao when he stated that “Only after the direct infringements have been established can the infringing activities of the e-commerce platform service provider be proved. However, in practice, if the infringing activities of the platform provider cannot be proved first, there is no way that the right holders can obtain the infringing merchants’ identity information (such as their real names and domicile in real life) through the platform provider. Thus, even if infringements are caught, the right holders will have no idea about who they should sue. The reason why we made Taobao a co-defendant was that we could not obtain the identity information of the direct infringing merchants without proving that Taobao had contributed to the infringing activities to some extent. That was the dilemma.”

As a C2C platform, Taobao Marketplace is actually a medium which connects the merchants and the consumers. Tmall, as a B2C platform, does have differences from the Taobao Marketplace; however, in essence it is still an open network e-commerce platform. According to Daniel Zhang, President of Tmall.com, the developing strategy of Tmall is to build an open B2C platform on which brand owners, authorized suppliers, retailers and logistics providers cooperate on the basis of division of labor.

Then, is Tmall capable of solving the IP problems?

You Yunting, Partner of Shaihai Debund Law Offices, thought that “Although Tmall requires security deposits and technical support fees, in a legal sense, it still belongs to the category of network service providers. On this point, there’s no difference between Taobao Marketplace and Tmall. However, since Tmall requires higher fees, and recommends ‘brand of choice,’ it should therefore assume greater ‘audit obligations.’ For example, Tmall should take active approaches to examine whether there are counterfeits on the platform rather than waiting for complaints passively. It differs from the traditional B2C platforms such as Amazon in that, generally speaking, Tmall would not bear direct infringing liabilities, but only indirect liabilities (which indicates a lower compensation), while Amazon as the direct distributor may assume direct liabilities.”

(Translated by Monica Zhang )