Special Report | March 2012 | By Carolyn Surh

Staying Ahead of Copy Cats

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In-N-Out imitator CaliBurger opened shop in Shanghai in January.
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Step Two: Register your IP in China, and do it as soon as possible

Subsequent to its civil law system, China recognizes a first-to-file system for IP, meaning that unregistered trademarks don’t qualify for protection.

If a Chinese competitor hijacks a mark, there are a number of possible repercussions. Under Chinese law, whomever has registered a mark is entitled to not only use the mark, but to stop anyone from using it and freeze any goods associated with the mark at customs, even if a company can show that it has used the mark in the past

“China is big on registrations,” Lam says. “In China, there is the first-to-file system; you don’t have to prove use or intention to use. Whoever files it first gets it.”

Under Chinese law, whomever registered a trademark first is entitled to stop others from using it.

Lam recommends covering all bases and trying for as many registrations as possible. Copyrights, for example, do not need to be registered in order to qualify for protection, but Lam advises registering anyway.

“When it comes to enforcement, the copyright certificate will come in extremely useful,” he says.

Company website URLs are another common target. Certain companies have made a business out of filching URLs containing company names by searching patent registration databases, seeking out well-known or familiar brands, then registering website domains before the original company. Again, Lam says, the way to avoid this headache is to get in early and register your company’s domain name or variations of possible domain names before they can be commandeered.

Step Three: Actively protect your IP

While many foreign companies find the Chinese legal system intimidating and are tempted to ignore imposters that spring up in China, Lam strongly cautions against the head-in-sand approach. “If you already know people are damaging your brand in China, do not sit back and do nothing,” Lam says. “China itself is a big market and your brand value could go downhill very easily.”

Dairy Queen has experienced imitators and aggressively fights any infringement on its IP. “Enforcement of IP rights is difficult, time consuming, and expensive,” Peters says. “[At Dairy Queen], we register and monitor trademarks carefully and prosecute violators with appropriate vigor.”

Lam encourages vigilance and an active approach to protect a company’s IP. “It is actually possible to enforce IP in China. Many companies don’t know, and they think that enforcing IP in China is very difficult,” he says. For instance, there are options available in China besides filing a lawsuit when fighting copycats, including cooperation with administrative organs or customs, or in extreme cases, seeking help from the Public Security Bureau.

China has been under significant international pressure in recent years to improve its poor reputation for IP security, and the government has made measurable progress in a truncated timeline, having only adopted its first IP-related law in 1982.

China ranked 16 out of 183 countries by the World Bank for ease of contract enforcement.

One example of the government’s efforts is its court system. In 1992, the government established specialized courts dedicated to hearing IP cases, which are now generally acknowledged as speedy and effective. As of June of 2011, China ranked 16 out of 183 countries by the World Bank for ease of contract enforcement. In comparison, the U.S. ranked 7, the U.K. ranked 21, and Italy 158.

Foreign companies, including Microsoft, have successfully sued for damages within Chinese IP courts, but the amounts of damages awarded in these cases tend to be small. The largest amounts of damages awarded by Chinese IP courts to a foreign company were RMB21.2 million ($3.4 million) and RMB7.1 million ($1.1 million).

Still, Lin agrees that for consumer brands, things are looking up. “If you do register [your IP] and have it properly registered, I think the system is improving,” Lin says.

Step Four: Consider your partners carefully

For ease of entry, many companies new to China opt to partner with a Chinese company that has an established foothold in the local business environment, including knowledge about real estate, navigating government regulations, and the critical established relationships with government officials.

Lam strongly encourages performing thorough due diligence when considering a local partnership. Partnering with the wrong company can mean the risk of IP theft from internal sources, a situation he has seen repeatedly.

Open for about three months now, the CaliBurger restaurant is a large, brightly lit space, featuring gray walls and black-and-white tiled floors. Customers fill about half the space on a weekend afternoon, a mix of both ex-patriot and Chinese customers.

“I feel guilty going to a shanzhai In-N-Out,” says San Diego native Phoebe Wu, referring to a Chinese phrase meaning imitator or counterfeited goods. “But it's the only way that I can get my Cali fix here.”

The majority of American customers interviewed sheepishly acknowledged knowing about the legal dispute between the two businesses after finishing their burgers.

One customer, an In-N-Out fan from California, “wanted to do his own taste test” of CaliBurger, but decided that while he comes to Shanghai a few times a year for business, in the future he wouldn’t come back to Caliburger. “It’s not that close to my hotel,” he says. “The burger's a little greasier.”

“And I wouldn't want anyone copying what my company does,” he adds.

Some viewed CaliBurger as a viable enough stand-in for In-N-Out in a location that many accept will likely never host an In-N-Out restaurant.

“We go to In-N-Out a lot,” says another CaliBurger customer visiting from Santa Rosa, California. “Overall it’s pretty similar. But if In-N-Out was here, I’d be loyal.”

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