IP Protection: Fighting Counterfeiters in Asia

Nicholas Blank has seen a lot of things having to do with intellectual property protection in his seven years between the China and Korea offices of risk consulting company Kroll. Recently relocated to Hong Kong, the Kroll associate managing director spoke to CFO Innovation’s Cesar Bacani about trends in IP protection among Asia’s companies after the recent implementation of the Asean-China Free Trade Agreement and similar pacts involving India, Australia and other markets.

 
The Asean-China Free Trade Agreement means there will be more products from China going into Asean and vice versa. Do you think IP issues would take centre stage because of this?
The issue that will always be centre stage in the FTA is probably agriculture, because in all of these countries you have the need for stability in the countryside. It’s very, very sensitive for politicians to ask any of these countries to tell a poor farmer that he’ll have to compete with a rice grower in Guangdong province or something like that. But certainly IP should be more at centre stage than it has been in the past.
 
In general, how would you characterise the importance of intellectual property and IP protection among businesses in Asia?
By and large, IP is something that U.S. and Euro-zone companies probably think about more just because they have invested a lot into their brands, probably with the exception of Japan and Korea. Indian brands and Chinese brands, Southeast Asian brands, they’re just emerging brands. They’re not necessarily globally recognised, although that is slowly changing.
 
The interesting thing about the [Asean-China] free trade agreement is that there might be a kind of paradigm shift, where now you have Chinese brands, in particular, that are becoming more popular, and with the free trade agreement, there’s going to be more of them being sold into Asean countries. So the paradigm shift that I possibly see is that now it’s the case of Chinese companies pressuring the Chinese government to pressure foreign governments to protect their IP rights outside of China. In the past, it’s been the U.S. that’s led that argument and put the pressure on China and Asian countries on IP rights.
 
The rest of Asia would probably follow as their own brands and their own products find niches outside their borders.
I think so. It looks like there’s going to be 9,000 different types of duty-free products [under the Asean-China free trade agreement], so that’s a huge, very broad range of products. When we deal with counterfeit cases, almost anything can be counterfeited. It can be anything from a garment to a food product to something that is very sophisticated. And if you have the possibility that some of those products will be counterfeited, that means that Asian countries themselves are really going to need to focus on IP issue. So it’s no longer just the U.S. and European countries that need to be concerned with it.
 
It’s not necessarily something that’s happening today?
No, I think this will be trend that you will see over a period of time . . . But certainly I think with the new free trade agreement, increasingly China and India [and the rest of Asia] will be considering the local Asian marketplace as a big marketplace for them, whereas in the past they’re very much export-oriented towards the Euro-zone and the U.S. What’s happening is that Asia is realising that over the next 5, 10, 20 years, there might be a de-linkage [with the West]. Increasingly the local regional market will be more important.
 
Given the state of legislation, state of execution, enforcement and so on, how difficult is it for an Asian company going into another Asian market or operating even in its own local market to protect its intellectual property?
Different countries tend to approach IP very differently. Let’s take, for example, Japan protecting their IP in China. The Japanese industries tend to come together and form a kind of coalition. It’s done for a lot of reasons but I think primarily to decrease the cost of the investigation. So basically all of the Japanese auto companies, for example, will come together to form a kind of consortium, and they will set the market price for intellectual property investigations in the automobile industry.
 
Is that a helpful approach both in terms of lowering costs and in terms of information exchange?
Well, it’s good and it’s bad. It’s good in the respect that you can hire one investigation company, and they’ll do a raid. And let’s say they raid a factory, and in the factory there will be two warehouses, one with automobile manufacturer’s fake parts, and in another warehouse another company’s fake parts. Let’s just say it was Honda, and Honda alone had engaged an investigation company, now the investigation company wouldn’t care at all about anyone else’s fake products. They would only report what they saw about in the factory with regards to Honda. But if there’s a consortium, and basically they raid the factory and they see Yamaha, Suzuki, Honda, any of the brands, they will report all of them back to us. So it’s effective like that.
 
But the difficulty that companies have is that it’s not something you can do on an ad hoc basis. In China, you can’t simply do one raid action and say, OK, I’ve done my intellectual property [program] for the year. It’s really something that needs to be done on a consistent basis. So I think the difficulty a lot of Asian companies are going to have is they don’t really have the kind of history of protecting their brands and they might not realise how much effort it takes. So I would think that’s particularly true of Chinese or Indian companies that might need to protect their brands outside of their countries or Asean countries that are protecting their brands in India and China.
 
With the free trade agreement, you’re basically creating a single market place where there’s going to be an increased amount of trade between countries that have track records of weak enforcement of intellectual property rights. In the past, a big Chinese company that experienced an IP problem might have a good relationship with the police or use a Chinese law firm to solve the problem. It would be done in a very Chinese way. Now, they’re dealing with people who aren’t Chinese. They’re dealing with Vietnamese and Indonesians and Thai, and they can’t use the Chinese method because it’s not going to work in those other countries.
  

WHAT COMPANIES SHOULD DO

What can companies do? Is there anything they can do to forestall the need for a raid, for example registering their trademarks and monitoring what’s happening in the market?
I think an ounce of prevention in terms of IP does a lot in terms of helping you protect your brand. It’s probably more effective to take preventive measures than to do a lot of raid actions. Prevention could be a lot of things. I’ve known a lot of Western companies, they come to China, they didn’t realise they had to register their trademark in China.
 
They didn’t realise that? Why not? I would have thought that’s the first thing they would do.
You’re absolutely right. It’s crucial and in China that’s sort of the first person who registers the mark owns the mark. It doesn’t matter if someone else owns the mark outside of China, it’s the first to register rule. People need to understand the local laws. They need to make sure that their trademark is registered.
 
If they’re an engineering company or chemical company or any kind of company that needs R&D staff, they need to conduct good background checks on R&D staff. They need to know where the staff worked in the past. They certainly want to make sure that, if they hire an engineer, that engineer hasn’t stolen IP from someone else and he’s going to be using that IP for their new company. They need to make sure that R&D staff don’t have husbands or wives that are working in other companies in the same industry. All of that kind of due diligence in the long run, it’s going to help protect your IP.
 
But the basic thing is, as soon or even before you go into China, you should register both your trademarks and your patents.
Yes, even if you’re not going into China [because of the first-to-register rule]. I’ve heard of incidents where a company had absolutely no intention of doing anything in China. They didn’t want to have a factory in China, they weren’t concerned at all about selling into China and still there would either be fake products circulating around in China or someone would file for their trademark in China.
 
So after registering, what next should you be doing in order to be sure that your trademarks are being respected?
You should do a number of things. First you should develop relationships with the enforcement agencies where you’re doing business. So if you just built a new factory in Guangzhou, then you should try to go out and meet with the AIC – that’s the Administration of Industry and Commerce – and PSB, the Public Security Bureau, and also people at different levels of government. When you need them to help, they’ll know who you are. You definitely don’t want to just show up with a problem. Get to know them before you have a problem and then they’ll be more helpful. And like I said, you need to do due diligence on your employees and vendors.
 
If you’re a company and you have a facility like a factory or R&D facility in China, one of the things that [companies like Kroll] can do is an intellectual property audit of the facility. So we go in and we look at all the procedures and the protocols that are in place in the facility, and we do a test to see if people are actually following the procedures. We’ll consider other things like how easy it is for someone to just walk out the front door with a laptop. You’d be surprised in some cases how easy it is to do that.
 
Is it a good idea for even a small company to have separate office that looks at IP protection issues?
I don’t know if you need a separate physical office. I do think it’s important that whether it is an outside consultant that’s hired or someone that’s in-house, they have a direct reporting line to someone very senior, likely outside of China, India or wherever. The experts need someone who does not feel pressured by local influences. They should have a direct reporting line to someone very senior, so that when they come across an issue, they will have the full and total support of headquarters. It could be a direct reporting line to legal counsel in the U.S. or Europe. It could be to the board of directors. It doesn’t necessarily have to be one person, but it should be someone who’s quite senior. 

If you think about it, people have a lot at stake. I’ll give you an example. Let’s say the general manager has made a very senior hire, someone who is a new scientist, and these two guys go back a long way. They’re good friends. And the general manager has put himself out a little bit by recommending his boss back in the U.S. that he should hire this new scientist. And it turns out that this new scientist maybe is colluding with an outside company, maybe he’s stealing IP.
 
Now the last thing—even if the GM had no idea about that—even if the GM is totally innocent, he has a lot at stake in terms of hiring this guy and in China no one wants to lose face. So if the guy that’s supposed to protect the IP reported to this GM that, you can imagine how this conversation would go.
 
Typically, within the local market, who would be the point man for IP protection? Would it be the legal department?
For a company with a lot of patents, it would probably be their in-house counsel. A company that is a luxury brand or whose strength is based on their trademark would also have an in-house counsel, but they also might have their own IP head who’s more on the ground, monitoring investigations with investigation companies, organising raid actions, stuff like that. But if it’s a company that has a lot of patents, in order to understand the patents, you need a lawyer. So the in-house counsel would be in charge.
 
Do chambers of commerce have a role to play in IP protection?

They can only do a certain amount. They’re very much like a lobby group and if a company approaches them, they have a duty to go back to the local government where they’re based and lodge complaints or express a point of view. But they should do so in a way that isn’t specific to that company. They should do it in a way that generalises the mood of the industry in general. So they can say the automobile industry is upset because IP is not being protected. They couldn’t say, we’re handling the case for the Ford Corporation and spill all the specific details of the case. And to really [ensure] effective enforcement, you need to get into the nitty gritty of the case details with the police, and the local enforcement authorities.

 
From the point of a company, though, if you have a lot of weapons in your armoury, you’re a member of the chamber of commerce, you’re a member of an association, you have your own investigation, if you have all of these tools, you can choose and develop as you go along.
I agree with you on that point. There’s no harm in having a lot of good connections and people that will help you.
 
CASE STUDIES
Are there case studies you can tell us about how companies in real life solved their IP problems?
We investigated a case where there was some counterfeit medical device that originated in China. We were able to trace the sale first to the factory where it was manufactured, then through the various trading companies in China where it was sold and then to the export destinations, whether it went through Dubai or Latin America and then into the final export markets, which would have been the developed countries.
 
In order to do this investigation, we needed a huge amount of coordination. We needed to coordinate with the local law enforcement in Asia. We also had to coordinate with federal marshals in the U.S. to do seizures there. It was incredibly complicated because different jurisdictions have different rules.
 

One of the most difficult things you can do in an international IP case like this is try to coordinate two actions at the same time. If I raid the factory that’s producing this medical device on Monday in China, the warehouse in the U.S. is going to be completely empty Monday night. Everything would have been moved out of the warehouse. To get one law enforcement organisation in China and another in the U.S. or wherever to do something on the same day, or even around the same time, is almost like magic.

 
In certain situations you can utilise Interpol, but to be honest, if you watch too many movies, you have an incorrect idea about Interpol. There’s no Interpol police officer. Interpol is just an international agreement where one police office can communicate with another police office. It requires a huge amount of paperwork. It’s much easier for us to simply use our relationship with the police here in China and also go through all of the appropriate measures in the U.S. to initiate a police action. 
 

What did this medical devices company do wrong? Were they not very vigilant about their IP products?

No, I think this company is very vigilant. But the product was relatively easy to manufacture badly, and so pretty much you didn’t need that much capital for the factory. The company did all of the right things. There was just too much incentive, there was too much for the counterfeiters to gain. The counterfeiter saw that with a little bit of investment, they could make a lot of profit.
 
Where the difficulty in the manufacturing process came in is quality control, making sure every single item is the same. You produce a million of them and the quality of each of these medical devices needs to be exactly the same. If you make a mistake on just one item, someone might get really sick or even die because of it. So if you want to become a legitimate player, legitimate factory, there’s a lot of investment that you have to do.
 
So there are instances where you do everything from your end but still, it’s just too tempting for others to be copying and stealing from you.
That’s right. The best thing you can do is decrease the likelihood of IP infringement, but if a counterfeiter really, really wants to make a fake or something, they’ll figure out a way to do it.
  
So what you as a company should do is to  sit down and really think whether your products are really just too tempting for counterfeiters, and then focus on market intelligence to detect whether there are counterfeits?
You still need to try to take as many preventive measures as possible, but you have to live in the real world. You have to realise that no matter how much you try to protect your trademark or your know-how, there will be infringements and you’ll have to react to it.
 
You need to have a process in place that would react rapidly if somebody detects that there’s a fake product circulating.
Yes, and I think that gets back to the idea that whoever is in charge of IP protection, they need to have that direct reporting line to someone senior in the home headquarters. You know how corporations are. If you want to get something done quickly, you need the CEO and very senior people to be on your side.
 

Is it also important to communicate with consumers in advertising and marketing, telling them about the counterfeit products?

Yeah, that’s something that we have thought about a little bit, but probably not as much as a public relations company would. A luxury brand flagship store in China was set up, but one block away, there was a very small store with only five or six pieces of infringing products. Normally if that store was down some back alley, they probably wouldn’t even care about it and would spend their budget looking for a warehouse with 10,000 counterfeit pieces. But because this little store was so close to their flagship store, basically what it was saying to every single customer walking into their new flagship store is, we don’t have control of IP, and by the way, if you think our prices are too expensive, there’s a counterfeit one block away. They put a huge amount of time and investment into totally crushing this one little store and making sure that this guy could never spring up again.
 
So yes, how to communicate with the customers is very important and I think the whole idea of the customer becoming more involved with IP protection is going to be a hot issue over the next couple of years. You see it a little bit already in terms of the public reaction to some of the products that are coming out of China. There was a huge international backlash against Chinese toys with lead in them and, within China, milk contaminated with melamine.
 
Eventually you’re going to get to a point where the consumer is going to have some technology on them, probably on their mobile phone, where they can go into a store and they can use their mobile phone almost like a card reader to scan a bar code or RFID [radio frequency identification] tag and send it immediately to the company to check if it’s a genuine product.
 
From the company’s point of view, this will also tell them whether the product is where it’s supposed to be, because another big issue is grey market product. Products that are supposed to be sold in Hong Kong somehow end up in a store in Shanghai. But most importantly, they will immediately have the power to differentiate genuine from fake in the hands of the consumer.
 
And the incentive for the consumer to get involved is the safety of the product.
Yes, safety. But you’re always going to have people who want to go shopping for pirated DVDs, knock-off handbags and that sort of thing, so they’ll purposely go to those small stores.  
 
Is there a case to be made for IP holders to be flexible because of the bad publicity pursuing a small business can generate? I remember in the Philippines, there was this restaurant named after the owner, who happened to have the same name as that of a big electronics consumer brand. There was a big hullabaloo, I remember, when the big company sued to have her change the name of her small business.
I know what you mean. I have to say no. These people are very proud of their company, and they also want to remain competitive and that little store, if you let that one go, maybe that little Mom and Pop store, they have bigger plans to build more stores and to start misleading the consumer into believing that they’re somehow affiliated with the major international player. So I would say, no. Go after as many people as you can. I think it’s perfectly legitimate that if you feel someone is infringing, then you should go after them. 

 

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