With continuous progress in the fields of science, technology, and economic globalization, intellectual property has become an increasingly important universal resource, while IP strategy has also become a national policy.
 From a general perspective, intellectual property has been employed as an important stratagem in enhancing capacity for innovation and improving core competitiveness in many developed countries.
   After China’s accession to the WTO, the growth rate of foreign trade remained constant, above 20%, for the last six years. For developing countries like China, the more open the economies, the more intense the competition, and the more obvious the role intellectual property plays in promoting economic growth. In 2008, the Chinese government issued the Outline of the National Intellectual Property Strategy, which raised the bar to that of a development strategy. Likewise, it is of great significance for the enhancement of China’s core competitiveness if enterprises also raise intellectual property protection to an enterprise development strategy.
 
I. IPR infringement and its harm

Due to its great economic and social value, intellectual property has become an important business tool when competing for market shares. It can be said that the value embodied in IP has far exceeded itself. As an example, in 1995, the United States Coca Cola trademark was valued at USD 36.9 billion and the “Nestlé” coffee trademark of Switzerland at USD 11.6 billion; in 1997, China’s “Hongtashan” trademark was appraised at 35.3 billion Yuan. In modern society, intellectual property has not only become an important brand resource and intangible asset for companies, but also a symbol of wealth.

Due to the great commercial value of intellectual property, it has lured companies and individuals to counterfeit and misrepresent famous trademarks. These goods range from the daily necessities of consumers to luxury items and production materials. Additionally, domestic counterfeiting extends to the exportation of goods overseas. It appears almost everywhere and in various forms. According to the data provided by the WTO, trading volume of inferior goods bearing fraudulent trademarks accounts for 5% to 7% of  total sales worldwide reaching USD 150 billion to USD 180 billion annually. As a public nuisance this problem runs a close second to the illicit dealing of drugs and has been called the “black economy.” According to the Research on the Harm of Making and Selling of Counterfeit Goods to the National Economy made by the Development Research Centre of the State Council (DRC) in 2003, the value of fake and shoddy goods in China totaled between 160 billion Yuan and 200 billion Yuan. This has resulted in the country’s loss of tax revenues estimated between 27.5 billion Yuan and 34.5 billion Yuan.

II. Legislative efforts in criminal sanctions for IPR protection

 In a market economy, there should be less government intervention. However, the mainland’s market economy is experiencing a gradual transition from a planned economy to a free market economy, which has been followed by a continuous increase of illegalities. A consummate market-oriented economy needs to be strengthened by a strong legal system. When civil and administrative sanctions are inadequate, criminal prosecution becomes the “last line of defence”.

 As for newly emerged criminal conduct, if civil and administrative sanctions are inadequate in making criminals and the public realize the seriousness of the crimes or effectively deter criminal conducts, there is a need to perfect legal remedy so as to establish an integrated IPR protection system. Civil, administrative and criminal remedy measures are a kind of protection system with progressive relationship. Criminal remedy is not a mere supplement to civil and administrative remedies. It has its own independent status, ensures the advantage of its backing laws with its severe punishment and plays an irreplaceable role in fighting IPR crimes. Criminal protection is a need for comprehensive protection of IPR.

 Criminal law protection of IPR including trademark rights started in China in 1979. Article 127 of this Law provides that “where the industrial and commercial enterprises counterfeited other enterprises’ registered trademarks in violation of the trademark administration regulations, the persons who are directly responsible shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or be fined”. The subjects of counterfeiting acts were only limited to persons directly responsible in the industrial and commercial circle. Apart from the foregoing persons, no others shall, though counterfeiting the registered trademarks of others, be prosecuted for criminal liability. This provision paralleled the actual condition of China’s commodity economy that was underdeveloped, and the crime of counterfeiting trademarks was not as severe at that time. Article 40 of the Trademark Law adopted in August 1982 amended corresponding provisions. The Supplementary Provisions Concerning the Punishment of Crimes of Counterfeiting Registered Trademarks promulgated in February 1993 made amendment to the 1979 criminal law with respect to those who counterfeited registered trademarks, the objects whose registered trademarks were counterfeited as well as the statutory punishment. The revisions are mainly embodied in the following. First, the criminality of those subjects who counterfeit registered trademarks has been expanded undertakings of individuals, enterprises and public institutions; second, establishing two sentencing grades, increasing statutory punishment and attaching importance to the use of fines. In cases involving considerable amounts of illegal gains or other serious circumstances, the offender shall be sentenced to a fixed-term imprisonment of not more than three years or criminal detention, receive fines, or both. Where the amount of his unlawful income is enormous, he shall be sentenced to a fixed-term imprisonment from three years to seven years and concurrently be fined. In the meantime, new crimes were added, such as the “crime of selling goods bearing counterfeit registered trademarks representations” and the “crime of illegally making or selling registered trademark representations.”

Chapter III of the 1997 Criminal Law has stipulations on the following crimes: “crime of counterfeiting registered trademarks”, “crime of selling goods with counterfeit registered trademarks” and “crime of illegally making or selling registered trademark representations.”

Since its entry into the WTO, China has been obligated to provide effective criminal remedies to satisfy TRIPS requirements. On April 18, 2001, the Supreme People’s Procuratorate and the Ministry of Public Security promulgated the Provisions on the Standards for Prosecuting Cases of Economic Crime (the Prosecution Standards), specifying the standards in determining the “serious circumstances” of the crime of counterfeiting registered trademarks as provided in Article 213 of the Criminal Law. They are as follows: (1) Individual counterfeiting of another’s registered trademark where the illegal turnover exceeds 100,000 Yuan; (2) A unit counterfeiting of another’s registered trademark where the illegal turnover exceeds 500,000 Yuan; (3) Counterfeiting a well-known trademark or a trademark of medication for human use; (4) Not reaching these thresholds, but counterfeiting the registered trademarks of another after having been punished twice by the administrative penalty twice before; (5) having negative impact.

The Prosecution Standards set forth a practical numerical threshold for public security organs and the people’s procuratorates nationwide in which to prosecute crimes of counterfeiting registered trademarks and played a positive role in cracking down on IPR crimes. However, the Prosecution Standards are just standards used by the public security organs and the people’s procuratorates in criminal detection and prosecution rather than the standards used by the courts in making decisions. Many local courts do not refer to this standard for decisions. However, the numerical threshold is too high, for the effective crack down on crimes of trademark counterfeiting. Many foreign governments, institutions and organizations have requested China’s supreme judicial organs to lower the thresholds of criminal protection for IPR. The Quality Brands Protection Committee (QBPC) under the China Association of Enterprises with Foreign Investment (CAEFI), as one of the associations of foreign companies, has actively begun to lobby the Supreme People’s Court and the Supreme People’s Procuratorate to draft judicial interpretations on criminal liabilities covering IPR infringement crimes. The QBPC submitted a paper on criminal liabilities covering IPR crimes to the Supreme People’s Court and the Supreme People’s Procuratorate. After two years of research, the Supreme People’s Court and the Supreme People’s Procuratorate issued the Interpretation on Several Issues of Specific Application of Laws in Handling Criminal Cases of IPR Infringement – the Judicial Interpretation I of IPR Crimes in December 2004 to considerably lower the threshold for criminal prosecution of IPR crimes. It was welcomed by both foreign governments and IPR holders domestically and abroad.

III. Strategy on IPR criminal protection

Three options are available to IPR holders for intellectual property infringement: administrative enforcement, civil litigation and criminal enforcement. In administrative enforcement, organs such as the industrial and commercial administrations, the technology supervision bureaus and customs enjoy administrative enforcement power.

Administrative enforcement is the traditional enforcement model. By comparison, it has many advantages: low cost, quick action and little requirements on the part of IPR holders. The administrative organs have the power to seize suspected infringing products, and can confiscate and destroy infringing products, while simultaneously establishing a database on recidivists. However, administrative enforcement is not without deficiencies: administrative fines are generally low, instead of imposing fines, law enforcement organs may simply give infringers oral warnings, and sometimes, infringing products, instead of being destroyed, are auctioned after the infringing trademarks are removed. Generally, administrative enforcement is basic. However, in criminal prosecution cases, probation does not apply to a recidivist who, after having been subjected to administrative penalty, commits additional IPR crimes. This is in accordance with Article 3 of the Judicial Interpretation II of the Supreme People’s Court and the Supreme People’s Procuratorate where an IPR infringement constitutes a crime after having been subjected to a criminal or administrative penalty, probation shall not apply.

Enterprises have a limited budget for IPR protection, and this is especially true in the current economy. Companies should allocate budgets for IPR administrative enforcement, criminal enforcement and civil litigation, giving greater weight to criminal enforcement, the most powerful deterrent. It has been suggested that criminal enforcement should receive 1/3 to 1/2 of the total budget for IPR protection. Also recommended is a defence budget for infringement lawsuits.

With respect to IPR administrative enforcement, a “zero” tolerance policy should be advocated towards IPR infringement. However, that does not suggest that enterprises have an unlimited budget for administrative enforcement organs to investigate each infringing unit or individual. Generally, the management of a business will analyze the costs involved on the crack down on counterfeit goods, including the value of the detained infringing products; administrative penalty, criminal or civil sanctions received by the infringer; economic benefits (including the increase of the sales of genuine products), and the societal benefit to the enterprise. The return should be considerably higher than the investment. In terms of practicality, the value of detained infringing products, according to the actual selling price of the infringing products, should be more than twice the costs incurred. Usually, the price of genuine articles in different industries is triple or quintuple of the infringing goods.
 
According to the Criminal Procedure Law, in criminal cases involving IPR infringement, an IPR holder should be fully aware of their statutory rights. They may initiate private prosecutions before a court. Plea bargains are unrealistic in China; however, if the infringer is willing to pay increased compensation, the rights holder may agree that the court imposes a lighter sanction on the infringer.

With regards to the selection of an intellectual property agent, the IPR holder, if necessary, should entrust a reputable intellectual property investigation company to conduct an in-depth investigation, or retain the services of an experienced Chinese lawyer.

To protect intellectual property rights, IPR holders should band together to combat adversaries, share information and costs, and should not give up anti-counterfeiting cooperation because they are competitors within an industry.
 
About the author:
James Luo is the Partner Equivalent Director at Bird & Bird Hong Kong.
                                   

(Translated by Zhang Meichang)