Going down the product liability route may be a better route for business owners faced with counterfeiting issues. Paolo Beconcini discusses the role of AQSIQ.
Upping the ante in China Sophy R
While a brand may be the only value a consumer is after when buying fashion or accessories, this may not be the same when purchasing pharmaceuticals, cosmetic products, a high-tech home appliance or spare parts for a car. For pharmaceuticals as well as for luxury industrial products safety related factors aside from the brand dilution and the erosion of the product outer design may come into consideration. This is certainly the case of counterfeits which may endanger the safety of people and property. Spare parts of vehicles, appliances etc made from low quality materials risk making their way into authorized distribution channels and posing serious safety threats. To prevent and defend from these threats, it is important for the brand owner to recognize their nature and to devise the appropriate anti-counterfeiting/brand protection strategy.
This short article will explore a less known enforcement tool, which may be particularly effective in cases in which product quality and consumer’s safety are also jeopardized by fake goods aside from constituting a violation of trademark or other IP rights. Brand owners producing goods which are strongly safety-related may in fact consider the possibility of involving product quality and safety administrations in their brand protection strategies against counterfeiters in China, if safety issues related to counterfeit goods are paramount.
Counterfeiting turns into Product Liability
If a fake spare part is introduced into a transportation mean, being it a car, a train or an airplane, this may lead to a decrease or an outright failure in the product performance which may in turn lead to personal injuries and death to its users or third parties. The same can be the case of tainted food, pharmaceutical and cosmetics. The fact that the shoddy and outright dangerous fake product bears the trademark of the manufacturer makes the latter automatically liable according to both the Trademark Law and the Product Quality Law of China.
Even if the trademark owner may often be able to reject warranty claims or defend its case before civil courts or product quality authorities, there are also risks of not being able of succeeding in it. Furthermore, while in the process of proving that the defective parts which caused death or injuries was not an original one, there is always the problem of aggressive press and skeptical public opinion.
Often, legal or administrative procedures last long time and when the lawsuit is won or the administrative procedure is closed in favor of the brand owner, the public will not care anymore and will only tend to remember the bad headlines at the beginning of the case. The reputation of a product’s name will be destroyed independently of the brand owner winning a long judicial battle. Eventually, there is always a risk of recall or other administrative measure against the manufacturers. All these threats may then result in large financial losses and in loss of market share due to severe damages to the brand reputation.
Counterfeiting and product liability
This is the point where counterfeiting turns into product liability. The best way to reduce such a risk is that of taking away from the market as many fake safety-related products as possible before they reach their users. Normally, this is done through administrative trademark enforcement. The problem of such tool is that it often hits isolated targets rather than whole infringement rings, and does not constitute a strong deterrent to infringers. For these reasons, it would be very sensitive to consider whether aside from administrative enforcement, there are other legal recourses which could trigger wider and more constant involvement of Chinese administrative organs in the protection of consumer safety, and by reflection, of the trademark and other IP rights of the brand owner.
This possibility exists in the form of a recourse that a brand owner may file with the Administration for Quality Supervision and Quarantine (AQSIQ). The advantage of such recourse is that of triggering the intervention of one of the most powerful state organs in China, which could independently shut down large IP and product quality infringing organizations, being also functionally and politically independent from the typical local factors normally affecting trademark administrative enforcement.
The role and functions of AQSIQ in the anti- counterfeiting arena
When it comes to anti-counterfeiting the Administration for Industry and Commerce (AIC) and Public Security Bureau (PSB) are the typical administrative bodies in charge of IPR enforcement. Raids are normally conducted by AICs as the administration in charge of trademark protection. In more severe cases in quantitative terms, the police (PSB) can also be involved. However, there is another player which could be beneficially involved by brand owners in severe cases in the qualitative sense, i.e. AQSIQ.
In compliance with the Law on Product Quality and the Standardization Law, AQSIQ is authorized by the State Council of People's Republic of China to use its inspection and quarantine organization to verify and remove from the market substandard and shoddy products which endanger or may endanger the life and health of people. AQSIQ is the product quality watchdog in China and the principal authority for investigation and recall of defective products and the punishment of their manufacturers, sellers and distributors.
Power to seize
In particular, AQSIQ has the power to raid and seize defective and low quality products and their manufacturing tools and the related raw materials. This raiding and seizure power is quite remarkable, especially because it includes expressly the destruction of manufacturing tools of the shoddy products. Now these enforcement powers have been extended to the seizure and destruction of counterfeit products with shoddy quality. According to the “Regulations on Main Responsibility, Internal Unit and Staffing of Administration of Quality Supervision, Inspection and Quarantine”, issued on 12 August 2008 by the State Counsel of the People's Republic of China, AQSIQ is now authorized to organize and coordinate the fight against counterfeits in China, by employing its statutory inspection and quarantine organization and powers.
Although AQSIQ is not expressly an “IPR enforcement organ”, its functions now can overlap with those of trademark enforcement, given certain conditions.
Advantages and limits of the involvement of AQSIQ in anti-counterfeiting enforcement
One major advantage offered by the involvement of AQSIQ in an anti-counterfeiting action is that normally such involvement starts at national level. While typical administrative trademark enforcement takes place at the lowest local level, a request for AQSIQ intervention against shoddy counterfeits can be filed at the central office in Beijing. This advantage is self-evident. AQSIQ in Beijing is not easily influenced by local political and economic factors as would be a territorial AIC or police office.
AQSIQ is also interested in large campaigns targeting large numbers of infringers at the same time, rather than isolated enforcement against one single infringer. This makes AQSIQ a very useful partner in severe trademark and product quality cases, where a brand owner seeks the destruction of a complete infringement ring rather than the closure of an isolated factory or warehouse.
Another advantage is represented by the powerful investigative and punishment tools available to AQSIQ. AQSIQ can order the PSB offices to cooperate and support investigative efforts. While in case of administrative trademark enforcement the destruction of tools is possible only if the tools were exclusively used for the manufacturing of the counterfeit (and this is rarely the case), AQSIQ can destroy manufacturing tools beyond this limit, for the reason that the destruction is based on product safety and not only on IPR infringement grounds.
AQSIQ can act alone
Eventually, AQSIQ can initiate actions and raids against shoddy and dangerous goods including fake products on its own. The most recent case of AQSIQ involvement in anti-counterfeiting actions is a national campaign against forged and fake children products, including toys, child seat, children wear, children shoes, education aids and other health and safety related child products initiated on 27 May 2013. In the raid of Rongda Machinery Factory in Jiangxi province in 2012, AQSIQ seized over 1000 semi-finished counterfeit power steering gear products and 181 finished products and the total cash value later rose to RMB 2,000,000 (about 250,000 Euro). Afterwards, such case was transferred to local PSB and the latter started the criminal investigation and finally arrested 4 suspects.
The major limit to the involvement of AQSIQ is the fact that there must be a clear relation between the counterfeit and product quality and safety issues. This makes the recourse to AQSIQ more suitable for those products which are safety related, and in case the danger of its diffusion threats large numbers of consumers.
Even in cases where a counterfeit product is unsafe for the user, AQSIQ will likely move only if: a) the safety issue is very serious; b) the safety issue may affect a large number of consumers; c) the counterfeit organization and scale is larger than a simple one-factory enterprise. In other words, even if AQSIQ has now been officially involved in the fight of counterfeit products in China, the protection of consumers and not the trademark is its paramount concern.
Now that counterfeiting also affects Chinese consumers, and in light of the numbers of consumers and the risk ratio due to the large Chinese population, it will surely push AQSIQ to be more and more involved in joined product quality and trademark anti-counterfeiting actions. The cases so far were mostly started upon the initiative of AQSIQ, rather than on requests from trademark owners. However, the law does not prevent trademark owners to file such claims and seek AQSIQ intervention in cases of counterfeiting/product safety.
This is a new option, little known and rarely tried by brand owners. Now that China is also a market of consume products and not just the world factory, it is important for brand owners related to industrial products to consider it in their brand protection strategy.
One last advantage of this option is that, unlike the present state of anti-counterfeiting enforcement, often controlled and steered by local Chinese investigative companies (not always transparent), AQSIQ deals directly and only with the manufacturer itself. This will give the latter full control of this enforcement tool, which is in turn the best guarantee that this tool will be solely use in the interest of the brand owner itself.
Paolo Beconcini is a partner in the Beijing office of US law firm Carroll, Burdick & McDonough LLP. Contact: email@example.com