Damage limitation: fireproofing a luxury brand in China

Luxury brands such as Tiffany & Co are known throughout the world. Tiffany’s blue packaging is synonymous with displaying and protecting its silver jewellery. The distinctive aspects of the brand are what sets it apart—and they’re also what put it at risk.

Any recognisable company is a target for counterfeiters. Luxury brands have loyal customer bases. These customers will associate aspects of the brands with the quality of the products, and if they are satisfied, they will remain faithful to the brand. Counterfeiters see this as perfect fodder for profiting from copying, because the customers are already there. But counterfeiting is a burden to many brands—it dilutes, it reduces and it hurts.

“The Tiffany brand is appealing to counterfeiters because it's so recognisable,” says Ewa Abrams, associate general counsel at Tiffany. “Tiffany’s blue packaging is so iconic and identifiable with the brand—I think it is one of the most attractive aspects of the brand to counterfeiters.”

She adds: “Although I believe that it’s basically impossible to completely eradicate counterfeits, the problem is one that cannot be ignored. Most businesses tend to look at their legal and security/investigations departments as cost centres, not profit centres.

"Brands need to budget accordingly. In creating an effective anti-counterfeiting programme, brands need to balance the brand value gained from protecting their companies’ brand assets against the sometimes high costs of battling counterfeits— ultimately, it's a necessary evil.”

Consumers are attracted to counterfeit goods on the strength of the brand being copied, yet Abrams says that the quality of the products being counterfeited, and the price difference between the counterfeited products and the authentic ones, often mean that consumers aren’t aware they are buying fake goods.

"ALTHOUGH I BELIEVE THAT IT'S BASICALLY IMPOSSIBLE TO COMPLETELY ERADICATE COUNTERFEITS, THE PROBLEM IS ONE THAT CANNOT BE IGNORED. MOST BUSINESSES TEND TO LOOK AT THEIR LEGAL AND SECURITY/INVESTIGATIONS DEPARTMENTS AS COST CENTRES, NOT PROFIT CENTRES."

Abrams says that Tiffany’s sterling silver jewellery collection (including necklaces, bracelets and key chains) are among its most-counterfeited products. “I believe that those items are particularly alluring to both consumers and counterfeiters because they have reasonable price points that are attractive even at authentic retail,” she says. “It’s conceivable that consumers may believe that the counterfeit goods that they are purchasing are actually discounted authentic products. What many consumers may not know is that Tiffany does not discount its merchandise, so deals that appear too-good-to-be-true probably are.”

Qunying Li is an IP professional who has written about the importance of enforcing IP rights at borders and now works as director of the IP division in the policy and laws and regulations department in China’s General Administration of Customs (GAC). He says that in most circumstances, consumers are aware that the goods they are buying are counterfeit.

He says: “However, consumers are addicted to purchasing and using counterfeit goods due to vanity and economic limitations. According to the economic principle that demand determines supply, the trade in counterfeit goods will never be stopped as long as consumers are willing to purchase and use counterfeit goods. This has been well proven by the drug trade.”

“But counterfeiters can be quite good at copying products, and in some instances, we see pretty good counterfeits,” says Abrams. “They’re certainly not indistinguishable, but they’re good. Counterfeit Tiffany products coming out of China can be quite deceiving to consumers. Consumers who order counterfeit Tiffany goods online may believe that they are buying quality products, but what they actually receive are poor quality products made from substandard materials.”

Fighting back

Counterfeiting is a global problem, meaning that China shouldn’t necessarily be singled out for the IP infringement occurring within its borders. Christopher Woods, a partner at Kilpatrick Townsend & Stockton LLP and the head of the China brands group in New York, says that China offers a suitable trademark law to deal with the problem and adequate legal remedies to enforce rights.

He says: “The trademark law in China as it now is—it’s been amended two or three times—is as good as the trademark law pretty much anywhere in the world. There are perfectly adequate remedies. We’ve done a number of people’s court actions against infringers and the government itself, through its AIC [Administration of Industry and Commerce], does a lot of anti-counterfeiting work on behalf of brand owners.”

“The difficulty is the size of China and dealing with the enormous quantities of counterfeit or infringing goods that it produces,” says Woods. “The volume really creates the problem. The difficulty is the amount of money that it costs to have an enforcement programme that covers the whole of China. It’s really beyond even the largest corporations.”

Tackling the problem requires a strategy and a significant budget. China’s size is attractive to companies looking to establish brands there, but it’s a double-edged sword. The geographical spread creates logistical issues and the presence

“If you have a good enough budget and you are focused on exactly who or what it is you’re trying to stop, you can make some pretty decent progress,” says Woods. “Where people make the mistake is trying to shut down small, inconsequential operations, rather than really investigating the key players in the key problem areas of China.”

An anti-counterfeiting strategy is integral to effectively dealing with the problem. A single, thinly spread solution will not yield any results. “Anti-counterfeiting is extremely challenging on a global scale and tackling the problem effectively requires a very strong strategy,” says Abrams.

“This necessarily involves both people on the ground in the areas that exhibit the most egregious counterfeiting activity and partnering with trusted counsel and independent investigators. Ultimately, it is necessary to get a good picture of what the counterfeiting marketplaces look like in strategically chosen areas.”

Ticking the boxes

Filing trademark rights is an obvious but necessary action to aid anti-counterfeiting efforts in China. Aimin Huo, deputy director of the legal division at CCPIT Patent and Trademark Law Office, says that brand owners need to offensively file and obtain trademark rights in China so that they can build adequate trademark portfolios.

“China follows the first-to-file principle and, as a general principle, only registered trademarks are protected,” says Huo. “Protection for well-known trademarks that are not registered can be an exception, but it can be very difficult to [signify] an unregistered trademark as well known [to] the Chinese authorities.”

Brand owners also need to be aware of experienced trademark infringers that obtain trademarks in bad faith. “If they have obtained the trademark rights, the legitimate trademark owners have not only lost the legal basis to protect their trademarks in China but have become the trademark infringer instead,” says Huo.

Abrams says that not registering and not using a mark can be detrimental to big brands. “Most big brands are looking at China as an extremely important emerging market—especially for luxury goods. Large, well known brands that have not entered the market already have reason to be very nervous, because third parties may already be using and infringing their marks,” she says.

She also says that it is “very difficult to oppose once a third party has commenced use and been afforded registration...You must wait three years post-registration to challenge that particular mark on the basis of non-use,” she explains.

Word marks are popular in China and brand owners make sure that they register Englishlanguage word marks as a priority. But Chinese-language words mark may be of even greater importance to protecting a brand in China. “You have to have a Chinese-language trademark or the market has to make one up for it,” says Woods. “That’s often less than flattering to the product or the company, and the brand owner loses control of that because it’s effectively in the public domain.”

In China, Tiffany’s trademark portfolio is mainly made up of word marks, including the English versions of the primary Tiffany names. The company also has marks in Chinese characters. “We have both English-language trademark registrations in China as well as registrations for the equivalent transliterations into Chinese characters,” says Abrams.

She explains: “There is no direct, natural translation of the primary Tiffany mark into Chinese. The Chinese character marks are ultimately the most phonetically similar marks to the English version. If a brand has a name that has no direct, natural translation into Chinese, it generally chooses a common transliteration to adopt consistently. The difficulty with transliterations is that there are often variations or similar versions of such phonetic equivalents.

"In our case, we encounter ‘Difani’. This is phonetically similar to Tiffany in Chinese characters, and we have opposed many applications comprised of similar phonetic elements.”

Tour de force

China offers different remedies for enforcing trademarks. Brand owners can enforce their trademark rights using administrative enforcement, civil action or criminal investigation procedures.

"ALTHOUGH THE BRAND OWNERS ARE REQUIRED TO SUBMIT PRIMA FACIE PROOF AND EVIDENCE, THERE ARE NO COMPLICATED PROCESSES SUCH AS EVIDENCE EXCHANGE AND HEARING. THE WHOLE PROCESS MIGHT BE COMPLETED IN ONE TO THREE MONTHS FROM A BRAND OWNER FILING A COMPLAINT TO THE AIC RENDERING A DECISION."

Civil actions can yield injunctive relief and damages for brand owners, while criminal actions tend to impose fines and imprisonment on infringers. “According to the statistics of the Supreme People’s Court a few years ago, among those trademark litigations involving a foreign-invested company, about 70 percent of court decisions favour the foreign company, and the ratio may be even higher in recent years.” says Mia Qu, a partner and litigator at King & Wood. “As we all see the development in the litigation mechanism in China, we understand that a lot more will be improved.” Huo agrees that the legislation and practice concerning litigation against counterfeiters has improved, and he says that civil and criminal actions can help brand owners to enforce their trademarks. Huo says: “In light of the present pattern of trademark infringement in China, both criminal and civil actions are effective at preventing trademark infringement.”

Although litigation is an important element of any type of enforcement strategy, Abrams thinks that it has its drawbacks.

“Litigation in China has not yet proven to be a particularly effective deterrent—the penalties in China are still fairly low,” she says.

Brand owners may wish to consider other steps before enforcing their trademarks with litigation in China. “We look to co-operate and work with customs and local AIC branches in various provinces and cities in order to promote the recognition of our brand and assist in enforcement efforts such as raids and seizures,”says Abrams.

Qu says that administrative procedures are usually triggered by brand owners filing a complaint or making a report to the AIC, although the government agency also has the power to take initiative action.

She says that the administrative enforcement is fast, efficient and simple. “Although the brand owners are required to submit prima facie proof and evidence,” she add, “there are no complicated processes such as evidence exchange and hearing. The whole process might be completed in one to three months from a brand owner filing a complaint to the AIC rendering a decision. Administrative enforcement is very suitable for stopping an obvious infringing act.”

But there are downsides. “Administrative remedies are limited to stopping the infringing act, and confiscating and destroying the infringing articles and tools used specially for making infringing goods, and imposing a fine, but they do not include any compensation to the brand owner,” she says. “It is not unusual that infringement may recur.”

Despite the possibility of recurrence, a brand owner may see physical seizures of counterfeit products as a sign that its enforcement efforts are producing results. Li says that brand owners have high expectations of customs agencies because they can deter counterfeiters with high rates of seizures. “For instance, Chinese customs has seized more than 20,000 shipments of infringing goods and detained more than 100 million infringing commodities in importation and exportation,” he says.

It’s difficult to ascertain how effective or how much of an impact customs agencies—not just in China but everywhere in the world—have on brand protection efforts, says Abrams, but undoubtedly training, co-operating and working with customs is a cost-effective tool in any anticounterfeiting strategy.

Abrams explains: “We systematically train customs agencies in China, usually through the assistance of local counsel and a Tiffany representative. We usually see increased seizures following that type of training activity.”

Customs agencies need brand owners to share information with them if they are going to significantly aid brand protection efforts. “Customs has the power of enforcement and the brand owners have the information,” says Li. “The brand owners should actively provide customs with the necessary information for enforcement.”

He explains: “The information that brand owners can provide to customs usually includes the registration of trademarks, the identification of the infringing goods, the companies authorised to use the trademarks, and the importation and the exportation of the infringing goods known by the brand owners.

“When the customs finds that the recorded trademarks are used by the imported or exported goods, customs will suspend the procedure of customs clearance and notify the trademark owners,” he says. “However, the interests of the importers and the exporters will be harmed if these suspended goods turn out to be legitimate.”

The benefits of customs seizures mean that it pays to respond to requests for this type of information. “It goes both ways,” says Abrams. “Customs is willing to help well-known brands in China, provided that brands are willing to take the time to assist customs with the identification of counterfeit goods. Tiffany prides itself on being very responsive to customs and taking action and following up on seizures where it is afforded that opportunity.”

Establishing a business in China is manageable, but preserving a brand in the country is difficult. China is open to foreign companies and it is striving to help them protect their IP. The problem is the presence of a successful brand in an environment such as China, because the country is home to so many people and so much land that it is difficult to police, meaning that counterfeiters have plenty of places to hide.

A big budget coupled with a bold enforcement strategy is the most effective way of preserving a big brand in China.