Online Counterfeiting - Status and Strategies JOE SIMONE APRIL 28, 2016

In a Nutshell  Scale of problem difficult to measure, but enormous  Many legal and practical challenges to defending IP rights  Nevertheless, IP owners may adopt a number of best practices  How can the Italian Chamber help? 2

Common Types of IP Violations  Counterfeiting 3

Common Types of IP Violations  Trademark infringement (not “counterfeit”) 4

Common Types of IP Violations  Use of stylized marks to promote parallel goods 5

Common Types of IP Violations  Copyright – Illegal use of IP owner’s photos/images 6

Common Types of IP Violations  Design Patents 7

Where and How?  Trade platforms  Social media & search engines (increasingly popular) 8

Where and How?  Stand-alone websites 9

Where and How?  / spam 10

Scale of Problem

 2015 data  37.25% of goods purchased by China Consumer Association were fake  Xinhua estimated $45 billion in sales of fakes on Alibaba alone  China represented 88% of value of fake goods seized by US Customs 12

PRC Enforcement Data (2014)  Administrative Enforcement by “AICs”  67,500 counterfeit and other TM infringement cases handled  Decrease of 15,600 cases or 19% from 2013  Value of cases: RMB 998 million (US $161 million) 13

PRC Enforcement Data (2014)  PSB (police):  Claim to have handled 28,000 cases (IP and “product quality”)  32,000 suspects  Case value of RMB billion (US$ 2.86 billion)  Criminal courts  4,447 TM counterfeiting cases and 735 copyright cases, up 4.4%  3,966 product quality cases, up 61.55%  Difference of 20,000 cases compared to PSB statistics above 14

PRC Enforcement Data (2014)  PRC Customs  240,000 shipments seized (up 14%)  92 million units seized (up 21%)  The problem with small parcels… 15

Scale of Problem & Trends  IP owner perspectives:  Problem enormous, but hard to estimate losses  Online markets are critical to future growth  668m Internet users  88.9% of these users use smartphones to get online  Online retail sales billion RMB (~USD 1 Trillion) in 1Q2016  Enforcement using traditional tools cost-ineffective  “Hidden” infringements 16

Scale of Problem & Trends 17 Obvious Fakes Hidden Infringement

IP Owner Response  “Take-down programs” now more routine  What about parallel goods?  Some pursuing civil and criminal investigations  MOUs and other cooperation with platforms  Alibaba’s “Good Faith” Program  IACC MOU with Alibaba  French and UK coalitions  Gucci litigation in New York against Alibaba  Real lobbying: very little 18

Chinese Government’s Current Work Plan  Campaigns  Pilot enforcement programs  E-commerce Law  Alibaba White Paper  Black-list database  Social credit system 19

Legal and Practical Challenges in Enforcing IP Rights

Legal & Practical Challenges  Too many infringers – big and small  Government resources limited  Structural problems (legal and enforcement)  Insufficient government cooperation on cross-border cases  Lack of templates for successful enforcement programs for IP owners  Government’s roadmap for progress unclear 21

Legal & Practical Challenges  Criminal enforcement  Numerical thresholds (RMB ,000 or US$ 7- 21,000)  High cost of investigating  Authorities and IP owners only able to deal with small number of cases  Administrative enforcement  Investigative powers limited  Penalty powers limited  Cooperation with police  Civil enforcement  Actual recovery of infringer profits difficult  Access to evidence 22

Best Practices

IP Owners Should:  Allocate more internal resources and attention  Integrate take-down and bricks & mortar enforcement programs  Focus on priority cities – e.g., Guangzhou, Hangzhou, Yiwu, Shenzhen  Adopt more sophisticated and experimental strategies  Random purchases  Tougher demands towards trade platforms  Cooperate with other brands on joint investigation and enforcement  Lobbying 24

Best Practices  Trade Platforms should:  Make a good faith commitment to clean markets  Give the benefit of the doubt to IP owners  Be proactive  Expand use of filters  Use “big data” to identify more suspicious targets, then:  Verify identity of sellers  Verify goods  Impose bond requirements  Random purchases by the trade platform  Refer leads to police  Cooperate with brand owners in investigating specific targets 25

Suggested Enforcement Reforms

Proposed Government Action  Measure true economic impact and trends  Impose higher and clearer duty of care on platforms  Require “proactive measures,” not just “reactive”  Regulatory controls on vendors  Pilot programs in hot spot regions  Deeper reforms of overall enforcement system 27

Criminal Enforcement Reforms  Goal: Process more cases  Amend and modernize Criminal Code  Reduce or eliminate numerical thresholds to prosecution - Currently RMB 50,000 to RMB 150,000  More police manpower and training  Perhaps fewer people sent to jail  More efforts to promote settlements with IP owners  Models: Hong Kong and Taiwan 28

Civil Enforcement  Allow access by IP owners to e-evidence  Permit more generous compensation 29

Administrative Enforcement  Clarify role of administrative authorities  Clarify investigative powers  Expand role in monitoring vendors  Regulatory supervision  Manage IP work of online platforms and other intermediaries  Make B2C/B2C vendors obtain business license  Monitor and inspect vendors  Enforce tax rules 30

Bad Faith Trademark Registration  Piracy is rife for brands big and small  Inhibits market access for foreign companies  Makes policing of rights difficult or impossible  NOTE: Alibaba/AliExpress will enforce foreign TM registrations 31

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