3 Oct
2019

Chinese customs protection strategy – route to efficient and cost-saving relief

Chang Tsi & Partners

For many years, China has been at the centre of the market for IP rights-infringing goods, and this situation is unlikely to change significantly in the near future. According to the Report on the EU Customs Enforcement of Intellectual Property Rights in 2018, “China is the main source country (73%) from where suspected IP rights-infringing goods arrived when they were detained, and were where those goods were subsequently not released”. According to the US Customs and Border Protection, in 2017 China (at 46%) remained at the top as the main provenance of goods seized for suspected IP rights infringement in terms of the manufacturer’s suggested retail price, with Hong Kong (at 32%) in second place. Considering that the place of origin may not be the place where the goods are manufactured, and that Hong Kong handled $285 billion of Chinese mainland external trade in 2017, the abovementioned seized goods which were actually manufactured in China might be significantly more than 46%, in light of the small volume of Hong Kong’s manufacturing industry.

Importance of working with customs authorities

Given that China is regarded as the ‘world’s factory’ and the provenance of rights infringing goods, banning exports of infringing goods from China is probably the most efficient and cost-saving way for rights holders to deal with IP infringement at an international level, especially for transnational enterprises. In fact, Chinese Customs has been putting increasing effort into intellectual property, including developing the IP Rights Registration System for Customs Protection. According to the General Administration of Customs of China, a total of 44,500 shipments containing nearly 23 million infringing items were seized by local customs authorities across China in 2018.

Outbound shipments of original equipment manufacturer (OEM) products may also be detained by local customs. The OEM concept in China is usually restricted to trademarks, and OEM products refer to products using foreign registered trademarks which are identical or similar to trademarks registered in China and recorded by others with the General Administration of Customs. Filing OEM claims before local customs to indicate that the detained goods are shipped to foreign rights holders only and are not to enter the Chinese market resulting in trademark infringement may help to release the shipments. Working with China’s customs authorities is therefore of vital importance.

Working with the General Administration of Customs

The General Administration of Customs established the registration system in 2004 and has been continuously improving the system to make it more efficient and convenient. IP rights and relevant information registered and recorded in the system can be shared with local Customs all over China.

By using the system, rights holders can record their rights for local Customs to take ex officio action, also referred to as ‘proactive protection’. Once shipments of suspected infringing goods are detected by local Customs, the suspected goods will be detained and rights holders may decide to seize or release the goods. Moreover, rights holders may record their own suppliers in China as authorised users of the IP rights, so that goods using relevant IP rights shipped by such recorded suppliers will not be detained by Customs. In this way, Customs’ border protection can provide highly efficient protection for rights holders, but will cause no inconvenience for goods shipped by authorised suppliers.

Working with the General Administration of Customs to have border protection available in all local customs offices saves considerable time and costs for rights holders. Further, working with the General Administration of Customs, including using the registration system, helps rights holders to obtain data related to the border protection of their rights. In this information technology world, such data is helpful and rights holders may review and improve their rights protection strategy.

Recording trademarks

Because trademarks are easy to detect and identify, recording trademarks through the registration system for border protection is highly effective and a large number of trademark owners take this route for efficient protection. The majority of IP rights recorded in the registration system are trademarks. So far, there are 48,007 IP rights recorded; 42,609 of which are trademarks.

For international brand owners, recording trademarks in the registration system is the most efficient way to stop counterfeit products being shipped from China to other markets. Further, it is also an easy way to uncover infringers and counterfeit manufacturers in China.

Recording design patents

Patents can also be recorded in the registration system. As of 26 June 2019 there are 2,621 patents recorded in the registration system; 1,285 of which are design patents.

Because utility models and inventions are usually complex and infringement of such patents is difficult to detect, most of the patents recorded in the system are design patents, which are much easier to detect and identify. For the same reason, the possibility for local customs to detect and detain products infringing design patents is considerably higher.

Recording copyrights

Much like trademarks, copyrights are relatively easy to detect and identify, and recording copyrights can provide border protection for rights holders. Nevertheless, in the field of border protection, which is primarily about preventing infringing industrial goods other than counterfeit art works from being shipped from China, the function of recording copyrights is to cease shipments of goods bearing certain marks or logos, which is more akin to recording trademarks. For this purpose, trademarks have always been considered more direct, more effective and of more probative value with respect to protection. So far, there are 2,777 copyrights recorded in the registration system, a much lower number compared to trademarks.

Recording copyrights can be significantly helpful in the event that the brand owner has a copyright over a certain logo which is not registered as a trademark and that logo is similar to a trademark registered by another party in China. Under this circumstance, if the trademark owner has recorded its similar trademark in the registration system, the copyright owner may have their shipments released based on its recorded copyright. Such recordation is considered a defensive or passive measure for avoiding detention or seizure of shipments.

Acquisition of helpful data

In this era of data, collecting data regarding border protection, especially data specifically related to the rights holder, is very helpful. Based on a period of border protection, the rights holder should be able to calculate useful data related to its rights (eg, ports where the bulk of infringing products are seized, the cities where most infringing products originate and the main categories of infringing product).

A rights holder can decide with which customs authority it wishes to hold more training sessions or in which cities it wishes to hold a thorough market sweep. In short, the rights holder can put together a customised and specially adapted overall strategy by analysing such border protection data.

Working with local customs

In addition to setting up border protection at the national level, rights holders may more frequently work with different local customs because protection actions are taken at local level.

Training sessions for customs officials

In order to improve the chance for customs officials to detect and detain infringing products, especially for patents, it would be helpful if they could have the opportunity to learn more about the IP rights and features of the relevant products. Thus, training sessions for customs officials are beneficial.

Training sessions for customs officials are usually held during spring and autumn, and a large number of customs authorities, especially those in key ports, hold such sessions. Rights holders may apply for their own seminars. If border protection is the responsibility of the rights holder, training sessions should be considered an integral part of their customs enforcement strategy, particularly for coastal area key ports where infringing goods are likely be exported in larger numbers.

Detaining infringing products based on unrecorded IP rights

Detaining infringing products based on unrecorded IP rights refers to the measures taken by local customs to detain the goods which are suspected of infringement at the request of the rights holder.

In accordance with Article 12 of the Regulations of the People’s Republic of China on Customs Protection of Intellectual Property Rights, if the rights holder discovers suspected infringing goods pending import or export, it may present an application to detain such goods to Customs at the port of entry or exit.

However, given that Customs is not the appropriate authority to decide whether the detained goods are infringing products, the rights holder will have to file a lawsuit for infringement after the local customs authority detains the suspected infringing goods. Because Customs takes action based on the request of the rights holder, from Customs’ perspective, such action is usually referred to as ‘passive protection’.

Ex officio action

Ex officio action refers to action taken by local customs authorities during import and export supervision. The basis for such proactive action taken by local customs authorities is recordation in the Registration System.

If a shipment is found by the inspection section of a port customs authority to contain goods suspected of infringing IP rights recorded with the General Administration of Customs and there is no recorded information regarding the authorised use of the rights by this importer or exporter, the inspection section may require the consignee or consignor to provide proof or evidence of IP rights relating to the goods in question. Should the inspection section not receive a reply from the consignee or consignor, or should it have reason to believe that the goods are suspected of infringing an IP right recorded with the General Administration of Customs, the inspection section will report the issue to the IP session to build a case. Consequently, the port customs authority will suspend the release of the goods and issue a formal notification to the involved parties (ie, the rights holder and consignee or consignor). Within the three working days allowed by the General Administration of Customs, the rights holder may prepare an application for further detention and facilitate a bond payment.

With respect to ex officio action, local customs authorities, based on customs recordation information shared by the General Administration of Customs in the registration system, will take action proactively. The customs authorities can investigate and impose penalties on infringers, which is different from ‘passive action’.

Release of detained OEM products

Outbound shipments of OEM products may also be detained by local customs authorities in China. There is a visible trend demonstrating that goods are manufactured for export by a Chinese manufacturer based on a foreign registered trademark. While the foreign trademark right is identical or similar to a registered Chinese trademark recorded with the Chinese Customs, the Chinese courts will determine the OEM to be a non-infringing act.

The courts have held that the main function of a trademark is to distinguish the source of goods and services, and a trademark functions only when the goods enter the Chinese market. Accordingly, if goods manufactured with a foreign trademark are for export only and are not to be sold in China, there will be no resulting confusion in the Chinese marketplace. Thus, OEM manufacturing would not jeopardise the interests of the registrant of a Chinese trademark. In the meantime, the buyer of the OEM products must make an effort to monitor its own supply chain as well as the Chinese market, to ensure that the shipped OEM goods never appear in China for the purposes of sale through any channel.

To file an OEM claim, the consignor or exporter must submit a full set of documents evidencing the nature of the OEM detained goods.

Collaboration with Customs on criminal cases

The quantity of infringing goods shipped outbound is large, and it is possible that a Customs detained case will develop into a criminal case.

According to Article 26 of the regulations, on discovering any suspected criminal offence in providing IP rights protection, Customs will transfer the case to the police.

Customs is not the right authority to initiate a criminal investigation. However, the basis of such criminal cases is that Customs detains the suspected infringing products and the rights holder promptly follows up with Customs (applying for further detention and paying bonds). Moreover, Customs is the first authority to collect and handle evidence relating to the subsequent criminal case. Therefore, working with Customs on criminal cases should not be overlooked by the rights holder as the victim in the case.

Support in court-related measures

With respect to ex officio action, after the rights holder confirms the infringement and pays the requisite bond, a consignee or consignor presents Customs with a written explanation and evidence as to why its goods have not infringed any IP rights. In such cases, the rights holder must apply for an injunction or property preservation order from the relevant People’s Court. If the application for the injunction or property preservation order is approved and the order is presented to Customs, Customs must assist in the execution of the order. If the application is denied, the detained goods will be released and the bond returned after the rights holder pays the related storage expenses.

With respect to passive protection, Customs is not permitted to engage in further investigation and the rights holder will have to file a lawsuit before the courts.

Considering that the rights holder has no direct access to detained products and relevant material and information, in court-related measures, support from Customs is important.

Comment

When discussing IP rights enforcement, infringement lawsuits and administrative and police raids will come up; while customs protection may not be considered as important. However, working with Chinese Customs is of great value for rights holders.

Undoubtedly, a thorough customs protection strategy and good customs protection action can significantly contribute to the efficient and cost-saving relief of infringement at an international level. The value and importance of customs protection in China should be taken seriously by rights holders globally.

Chang Tsi & Partners

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China

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David Lee

Partner

[email protected]

David Lee is a director at the Shenzhen office of Chang Tsi & Partners. He focuses on anti-infringement actions and litigation for all types of IP case, such as trademark, patent and copyright cases. In his 20 years of practice, Mr Lee has worked as in-house counsel in a large company and as a professional attorney in Chinese law firms. He has provided professional IP services to Fortune 500 companies, including Tupperware, 3M, Kohler, ITW, Levi’s and many more. Mr Lee is fluent in English and Chinese.

Ron Tsi

Consultant

[email protected]

Ron Tsi is a consultant who participates in the marketing and daily management of Chang Tsi & Partners. He is a graduate of Fordham University and received his master’s in law there. Mr Tsi is involved in difficult legal cases and monitors IP trends to make sure his clients are aware of all legal updates in China. Mr Tsi is also responsible for risk management and control, providing risk analysis to uncover the root of problems.

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