In the Courts: Holding the Landlord Liable - New Tools for the Counterfeit Crackdown in China

By Joseph Simone

Groundbreaking decisions issued by courts in Beijing over the past two years, which have been hailed by the Supreme Peoples’ Court as among the Top Ten IP cases of 2006, point to new strategies for tackling the problems of counterfeiting in China’s retail and wholesale markets. The cases, involving leading fashion brands, confirm the right of trademark owners to pursue civil and administrative liability against the landlords of street markets who provide premises to vendors known to be dealing in counterfeits. In this article for WIPO Magazine, Joseph Simone, a partner with Baker & McKenzie, which assisted the fashion brands, explains the decisions and outlines related developments.

Brand owners in the fashion and clothing industries have for many years been concerned that standard approaches to combating anti-counterfeiting in Chinese markets have not been sufficient in deterring further violations. Working closely with the Chinese authorities, a group of luxury brand owners in the fashion industry have adopted new strategies which aim to encourage landlords to become partners in anti-counterfeiting work, or else risk civil actions for contributory liability.

Litigation

Trademark legislation in China—and indeed all countries—does not specify the conditions under which landlords may be held liable for contributory infringement. It has therefore been up to the courts to do so.

The first round of test cases in China was filed in September 2005 by the brand owners of Chanel, Burberry, Gucci, Louis Vuitton and Prada against the landlord of the Xiushui Market - also know as the “Silk Market” - together with five individual vendors. Each of these vendors had been identified as selling the plaintiffs’ brands on at least two occasions. The plaintiffs issued warning letters to the landlord seeking assistance in stopping the infringements. The landlord had ignored the letters.

The decisions of the Beijing No. 2 Intermediate People’s Court in these cases confirmed that, after receiving notice of violations by particular vendors, the landlord must take prompt and effective measures to stop the infringements. The court also ruled that the landlord and vendors should be jointly and severally liable to pay compensation for losses, plus enforcement costs, totaling around US$2,500.

China’s Supreme Peoples’ Court included the test case against the landlord of the Silk Market (above) as among its 2006 “top ten” IP cases. (Photo Feng Chao)

The landlord appealed. But in final decisions issued in April 2006 the Beijing Higher People’s Court rejected the appeals. In April 2007, the Supreme People’s Court (SPC) recognized the case as among the “Top Ten” of all IP cases decided in China during the previous year.¹

While these civil actions were taking place, the Beijing Municipal Administration for Industry and Commerce (AIC) also began to encourage district-level administrations to impose fines against landlords. The first such decisions were issued in Xicheng District in March 2005, and decisions against several other markets have followed. The Silk Market itself was fined by the Chaoyang District AIC in April 2006. Following two appeals filed by the landlord, a final decision issued by the Beijing No. 2 Intermediate Court in December 2006 upheld the AIC’s penalty.

Building on the court decisions, the Chaoyang District AIC also sought to regulate the use of trademarks in local markets by issuing regulations in early 2006 to clarify the landlord’s responsibility to control counterfeiting. The Chaoyang rules specifically require landlords to monitor which brands vendors are using, require vendors to obtain authorization to use the brands from the trademark owner or its authorized distributor, or failing that, require vendors to maintain written records indicating the source of their goods.

Dialogue

Luxury brand owners and industry associations had since 2004 been discussing with the Beijing municipal government possible measures to combat the problems of counterfeiting in the fashion, jewellery, footwear, and apparel markets in Beijing. The dialogue resulted in the Beijing AIC introducing several new measures during 2004 and 2005.

First, notices were issued to all major fashion markets in the city, putting vendors and landlords on notice that counterfeit sales of 48 brands would be prohibited. The AIC also announced significantly higher fines for vendors who were second offenders. Pressure from these measures led the landlords in several markets, including the Silk Market, to begin actively monitoring the sale of fakes and to deal more sternly with infringers. Landlords reported having suspended or terminated the leases of hundreds of outlets found selling the 48 protected brands.

These positive developments encouraged the original five brand owners to create a coalition with 23 other major apparel brands in order to engage in more cost-effective enforcement work. The Beijing mayor’s office encouraged the coalition to liaise with the Beijing Intellectual Property Office to co-ordinate government enforcement efforts aimed at targeting problem markets.

A “two-strike” rule, under which landlords have the right to terminate a vendor’s lease after a second offence, has had success in the Hongqiao (Pearl) Market. (Photo WIPO/EM)

Landlord partnership

The main goal of the brand coalition has been to establish a co-operative working relationship with landlords as they go about policing their markets. Key to this is a proposed “two-strike” rule for lease agreements, under which landlords would have the explicit right to suspend the operations of an outlet after a first offence and to terminate the lease after a second offence.

Landlords of three Beijing markets, including the Silk Market and the Hongqiao Market, agreed in June 2006 to adopt the two-strike rule, to respond quickly to information supplied by intellectual property owners, and to monitor their markets proactively for violations. This has been relatively successful in the Hongqiao market. In the Silk Market, however, an industry survey conducted in February 2007 still revealed infringements of over 130 well-known brands by two-thirds of the outlets.

Criminal enforcement

The coalition has begun expanding the program to Shanghai, Shenzhen and Guangzhou, with some results so far. But the experience with the Silk Market demonstrates the continuing limitations of existing civil and administrative enforcement tools in deterring counterfeiting without the police resources needed for criminal enforcement.

Aside from the difficulties of bringing criminal actions against the smaller-scale and more clever vendors of fakes under the current legal requirements, criminal actions against landlords present even greater difficulties. Some experts argue that criminal action can be justified only if there is evidence that a landlord has actively conspired with infringing vendors in promoting trade in counterfeits. Proving this to the satisfaction of prosecutors and judges would require evidence that could best be gathered by local police, rather than private investigators hired by trademark owners.

Notwithstanding the challenges, there is little doubt that the national and local governments are committed to solving anti-counterfeiting problems in the longer term. In the meantime, IP owners, encouraged by the progress to date, are continuing their constructive engagement with the authorities and with landlords in order to expand on the positive momentum generated in the last few years.

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1. http://www.court.gov.cn/news/bulletin/release/200704260020.htm (announcement in Chinese only)