An intellectual property “war” began in the Chinese luxury market in 2005. One combatant includes international renowned brands such as LV , Prada, Chanel, Gucci, Burberry, etc. and the other combatant is Silk Street Market in Beijing . For more than a decade, Silk Street is famous for its sale of counterfeit luxury brands. In 2005, the “new” Silk Street Market opened for business and vendors therein continued its sale of counterfeit luxury brands. The landlord once promised not to allow such practices to continue; however, the behavior continued unabated. More than 70 fake luxury brands were found in 380 tenants and some of those brands have begun their marketing in China . Hence, these counterfeits have threatened the survival of those renowned brands in the Chinese market. Such reality has been the case in the mainland China for more than 10 years, so why have those renowned brands chose to file the lawsuit now? Though those renowned brands won the support from the court this time, does it mean the end of the counterfeits in Silk Market or any similar market? What is the true meaning of such triumph in the court for those renowned brands?
We may find some clues to the above questions from a research report issued by the BNP Prime Peregrine, which pointed out that “China will soon enter the age of luxury consuming because the increasing number of middle class families and each family will have assets equal to RMB 620,000 on average. The analysts predicted that the consume rate will continuously rise with the growth of Chinese middle class family”. Statistics showed that in year 2005, China has become the third largest luxury consuming country in the world, with sales of more than 20 billion US Dollars and 12.2% market share worldwide. So the true purpose of the lawsuit of those renowned brands is not for recovery of damages which is only a small portion of sales, but for protecting their own reputation for quality and therefore market share in such a potentially large market. Ten years ago, the luxury market was very small; however, this is not the case now. An IP partner in Baker & McKenzie believed that the renowned brands’ fight against trademark infringement is mainly for the market share as the damages granted by the court can not be compared with the potential profit in the market. To protect their brands by taking advantage of IP and gain more market share from the counterfeits is what those brands really care about. They hope to cultivate a good business environment with the general public through IP protection. However, those brands also realize that it is impossible to achieve their goal by bringing several lawsuits. Now they are cooperating with the Chinese government to promote the idea of IP protection and build a better IP protection legal framework.
Beginning in year 2004, members of the Qualified Brand Protection Committee in the Chinese Foreign Invested Enterprises Association decided to carry out an IP protection plan called “Four Cities Plan”. 22 renowned brands from Europe and U.S. joined the Plan. The plan targeted counterfeiting in four major cities in China : Beijing , Shanghai , Guangzhou and Shenzhen. The Plan intended to force those landlords who lease the shops to tenants selling counterfeits to insert an IP protection clause in the lease agreement, which requires the landlord to suspend the business operation of the tenant when the infringement is found for the first time and terminate the lease agreement when infringement is found for a second time. The clause also grants those brands extensive rights such as seeking help from government agencies and filing lawsuits against the tenants together with the landlords.
The Chinese government is actively cooperating with the IP protection. For example, when the Silk Street case was still pending in the court, in year 2005, the Administration of Industry and Commerce (“AIC”) of Zhaoyang District, Beijing fined the Silk Street landlord. In April 2006, the AIC of Zhaoyang District fined the Silk Street landlord again for about 12,500 US Dollars pursuant to Article 50 Section 2 of the Regulation on Implementation of Trademark Law. Meanwhile, the Ministry of Public Security (MPS) and State Administration of Industry and Commerce (SAIC) joined promulgated a new rule on transferring cases from the SAIC to the MPS, which initiates a criminal investigation against those infringers. The new rule contains a landmark article which provides that “whoever obviously knows that other’s committing the crime of infringing upon intellectual property rights, and provides him/it with loans, funds, accounts, invoices, testimonials, permits, or provides him/it with a production or operation site, transport, storage, import or export agency, or other conveniences and assistances, shall be regarded and punished as accomplices to the crime of infringing upon intellectual property rights”. This article extends the criminal liability of IP infringement to the production and sale of counterfeits.
Though great progress has been made, the IP protection level in China is still ineffective. Most renowned brands have to fight against the infringement themselves. In other words, they are doing what should be done by the government, which may indicate that they have not received enough and effective IP protection. The laws on paper have not been enforced to their maximum. Though some counterfeits markets have been closed by the Chinese government, whether similar markets will open up or not is still a question. It seems an impossible mission to ban counterfeits in such huge market like China by those brands themselves. As to the “Four Cities Plan”, those renowned brands are only protected in four major cities, what about the counterfeits in other cities? Those brands realized that it is impossible to solve the IP problem in China thoroughly through only one fight. Mr. Amarni, the founder of the renowned brand Amarni, once told the media that he was considering manufacturing some second-tier brands in China . This might be a signal that the renowned brands are hoping to win back some market share through their price advantage of second-tier brands. Aaron Wininger, an IP partner in the Squire, Sanders & Dempsey L.L.P. Shanghai office, said that “Chinese local renowned brands will also need full IP protection and this makes those international brands confident that the IP protection in China will be further improved in the future. So it is more important for them to occupy the Chinese market at present”. It is not an easy task to protect IP in China . The counterfeits help the Chinese people who are not rich enough to know those renowned international brands by providing them at low prices on one hand, on the other hand, however, these counterfeits “rob” the profit which should be owned by those international brands. Such kind of reality is sort of ironic. It might be described as “pain exists with happiness”. Should the Chinese government do something more as the Chinese brands are also internationalized and some day in the future, Chinese brands will be the IP owner and IP will become their sword to attack the market? This sword is not sharp right now in China . However, we believe it will be sharper and will create a sophisticated market in the coming future.