Apple and IKEA in China: is it just a matter of accepting the loss?

The IPKat's recent reports here and here on the Chinese "shoplifting" of Apple and IKEA store formats may not have won him many friends among the Chinese authorities (this weblog is not currently accessible to Chinese readers), but they have reflected the anxieties and concerns of intellectual property owners as to the adequacy of IP protection as well as the mores of the Chinese business community.  In this context, the sage words of Paul Jones (Jones & Co., Toronto) are always worth noting, even though the IPKat and Merpel do not always agree with them. In "Branding in the Far East: The Fake APPLE and IKEA Stores in Kunming Do Not Tell the Whole Story", a piece written for an (unspecified) magazine, he says:

"... Despite the impression left by the fake APPLE and IKEA stories, China actually has intellectual property laws that meet international standards [Merpel notes that having IP laws that meet international standards is a necessary condition of IP enforcement but not a sufficient condition: 153 World Trade Organization members have IP laws that meet international standards -- but she wouldn't fancy her chances of enforcing her rights in every single one of them]. The courts do enforce the laws and most Chinese courts in the more advanced regions have separate divisions for intellectual property cases. These divisions also handle Anti-Monopoly Law cases and franchise cases, and are considered the more sophisticated and elite divisions of the courts. The courts have made posting their decisions online a priority and tens of thousands of IP decisions are now available online, albeit in Chinese [This is of course good news, particularly for those of us old enough to remember how much worse things were a couple of decades back].

The fake APPLE and IKEA stores discovered in Kunming, the capital of Yunnan Province, were obviously in violation of the law. In the case of the fake APPLE store, although it sold real APPLE products, it used the APPLE trademarks that had been registered in China, which is a breach of the PRC Trademark Law. There have been court decisions in China on how much use a re-seller may make of the name and trademark of the manufacturer of the goods. Two of the more notable ones, involving PORSCHE (北京泰赫雅特汽车销售服务有限公司诉保时捷股份公司(Porsche AG), 北京市高级人民法院 民事判决书 （2008）高民终字第326号 (issued December 19, 2008) and available online here and HARLEY-DAVIDSON (H-D密执安公司诉北京哈雷商贸中心, 北京市第二中级人民法院, （2007）二中民初字第10758号 – November 25, 2008, available online here, were decided in 2008. In the PORSCHE case, the dealer’s unauthorized use of the “PORSCHE” and the logo in its exhibition hall, on the automobiles in the exhibition hall, and in its brochure infringed the German manufacturer’s trade mark rights.

In addition both the fake APPLE store and the fake IKEA store were in breach of the PRC Anti-Unfair Competition Law (反不正当竞争法 (“Fan Bu Zhengdang Jingzheng Fa”) adopted at the 3rd Session of the Standing Committee of the 8th National People’s Congress on September 2, 1993 and effective as of December 1, 1993. Available online here. Article 5 provides that business operators shall not make :

unauthorized use of the name, packaging or trade dress unique to well-known products or use of a name, packaging or trade dress similar to that of well-known products, thereby causing confusion with the well-known products of another party and causing purchasers to mistake the products for such well-known products.

The leading case here is the Ferrero chocolates case that was ultimately decided by the Supreme People’s Court in 2008 (蒙特莎（张家港）食品有限公司诉意大利费列罗公司（FERRERO S.p.A），中华人民共和国最高人民法院，（2006）民三提字第3号 ， March 24, 2008, available online here. Clear plastic boxes and gold foil are not uncommon elements in the packaging of chocolates but the court held that the Chinese party had copied Ferrero’s packaging. Thus despite the fact that that the Chinese party had been using such packaging for 16 years before Ferrero took action, and had won several awards in China for their products, the Chinese party lost.

Then why were there fake APPLE and IKEA STORES in Kunming?

Kunming is the capital of Yunnan Province, in the far south of China. The province borders on Vietnam, Laos and Myanmar. It is thus far inland and is not one of the richer coastal provinces where foreign retailers first open their stores. But Kunming Prefecture has about 6 ½ million people. In other words there is demand there but no supply. [If there is demand, is it for the goods or is it for the format of the stores?]

Intellectual property rights are private rights of the owner, and thus the primary responsibility for enforcement lies with the owner. In China the State Administration for Industry and Commerce (“SAIC”) will assist with enforcement in straightforward cases, and apparently even without the cooperation of Apple the SAIC did close the fake stores. In the U.S. and Canada for example, the U.S. Patent & Trademark Office and the Canadian Intellectual Property Office will provide no such assistance with enforcement [Merpel leaves it to readers to consider whether this unfavourable comparison is fairly made, given the respective circumstances of the jurisdictions concerned -- and noting how few are the complaints in the US and Canada about the egregious "lifting" of trade mark-protected retail formats]. 

It is unlikely that the fake stores were causing direct damages to either APPLE or IKEA by taking away sales. Their stores in China were several hours away by air. While their trademark rights were diluted to be sure, some famous international brand-owners choose not to enforce their rights against pirates unless they are actually losing sales. It is in the end an economic issue. [Presumably this is all right then. And if Apple and/or IKEA wished at some later stage to open a store in the area, it wouldn't have to adopt a different format, would it, to avoid the charge that it was deceiving customers into thinking their real stores were in some way connected with those of the not-really-damaging, little-bit-diluting infringers?  It's also true to say that "some famous international brand-owners choose not to enforce their rights against pirates unless they are actually losing sales" -- but isn't this because their enforcement budgets are finite, which means they have to be selective in whom to sue?].

Is branding in China only for the adventure-seekers? Not really. Going to China should be an economic question. Because there is still a lack of “market order,” due diligence and enforcement costs will be higher than in markets in the developed world. In part because China is a lower middle income country, prices and margins may need to be lower, despite the higher due diligence costs. But China is a very large market, and a number of retailers are finding that despite the thinner margins, the large volume of sales can make China a good country for their business".

The IPKat says, Paul is more knowledgeable on China IP issues than practically anyone he can think of, and he has an unusual degree of sensitivity to the unique and sometimes delicate Chinese IP eco-system. However, his words of explanation are unlikely to bring much comfort to brand owners, or at least to those who are uniquely sensitive to the need to police and enforce their greatest asset.