Intellectual Property Concerns - Apparel

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01
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Part
01

IP Challenges: Apparel Businesses in China

Trade mark infringement, design patent complications, copyright enforcement issues, technology transfers, and disclosure of trade secrets are examples of key IP (intellectual property) challenges faced by apparel companies that move their development activities/production to China.

Trade Mark Infringement

  • The China Trade Mark Office (CTMO) is responsible for trade mark registration in China. The CTMO does not offer "legal remedies for unregistered trade marks (except for well-known trade marks)." Therefore, a trade mark registration in any foreign jurisdiction will not be considered valid unless the business registers it again with the CTMO.
  • Also, China follows a "first-to-file system," which means that the first applicant is granted ownership. This has encouraged "trade mark squatting" where unscrupulous persons or businesses intentionally register the trade marks of foreign companies to sell them back to the rightful owner at a profit. Though it is possible to fight trade mark infringement through legal means, it is usually a hectic and costly affair prompting many companies to instead settle the squatter.
  • It is, therefore, recommended that businesses should register their trade marks as early as possible, ideally before conducting any business with or in China. Apart from registering in the original language, it is also crucial for companies to register their trade marks in Chinese characters since the unscrupulous parties may register it for sinister motives. Hermes, a French apparel company, lost a case against a Chinese company that registered a trade mark similar to the Chinese translation of 'Hermes.'

Design Patent Complications

  • Unlike most markets, apparel designs in China must be registered under the Chinese Patent Law. It takes between eight and 12 months for design patents to be granted in China. It takes only two working days in Europe. This may be too long for fast-moving seasonal designs.
  • China also employs an 'absolute novelty' framework for patents, which means that a design "must not have been published anywhere in the world before the date of application and must be sufficiently distinguishable from other designs." Simply put, an apparel design whose patent is protected under any other jurisdiction cannot be patented in China.
  • Apparel businesses are advised to consider alternative methods of protecting their fashion creations, such as copyrights. Design patents are not recommended for fast-moving fashion items. Patents should only be registered for "longer life designs such as distinctive patterns, continuative models for fashion apparels, or classic shapes of handbags or shoes."

Copyright Enforcement

  • The Berne Convention for the Protection of Literary and Artistic Works, of which China is a member, mandates that all design creations are automatically protected by copyright immediately after they are created. However, China employs a "formal approach when enforcing IP rights and Chinese courts require formal proof of IP rights ownership."
  • Thus, the process of proving copyright ownership of an apparel design is complicated as the National Copyright Administration refers cases where the copyright infringement is not literal to the courts, which require substantial evidence.
  • Fortunately, voluntary copyright registration is allowed in China under the Copyright Protection Centre of China (CPCC). Copyright registration will provide proof of ownership in case of infringement. This can save the apparel company's money and time. Apart from their designs, apparel companies in China use copyright to protect their brochures, catalogs, and websites.

Technology Transfers

  • Apparel companies that move their development activities or production in China may have to import their manufacturing technology into China and appoint distributors or agents to install, assemble, and service them. In some cases, contracted personnel transfer the technology to competitors.
  • To prevent know-how and technology transfers, it is recommended that companies should accompany such contracts with technology transfer contracts. These contracts cover the rights of all involved parties to prevent any 'uncompetitive' or restrictive practices.

Disclosure of Trade Secrets

  • Companies in the fashion and design sector might create business partnerships with Chinese OEM accessories and garments manufacturers. Outsourcing their production activities in China means forces companies to disclose their designs to enable the manufacturers to match their quality.
  • In many cases, it is the company employees who pass the company's trade secrets to competitors. Some manufacturing partners may use this information to their benefit or sell it off to competitors.
  • To protect their trade secrets, apparel companies operating in China should prioritize non-disclosure agreements (NDAs) before revealing any trade secrets such as design concepts. NDAs should complement copyrights and trade marks and should be signed by both company employees and third-party partners.

RESEARCH STRATEGY

The research team managed to find an EU-sponsored report detailing the key IP (intellectual property) challenges faced by European apparel companies that move their development activities/production to China. The first report provides information related to the challenges faced by European fashion and design SMEs in the Chinese industry and the second details IP-related issues encountered by European textile companies in the Chinese market. The fashion industry entails the "design, manufacturing, distribution, retailing, marketing and promotion of clothing, footwear, and accessories." The textile industry comprises "textile machinery, specialty fabrics, yarns, brand apparel & accessories, and finished fabrics." A review of both reports showed that they address the IP-related challenges faced by apparel companies. Notably, both reports focused on European companies because they were commissioned by the European union. However, the information provided highlighted the challenges faced by all apparel companies entering the Chinese market. We also found global-focused and U.S.-focused resources that proved that the problems highlighted by the first two reports are encountered by all companies in the apparel business, regardless of country of origin.
Part
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of five
Part
02

IP Challenges: Open Innovation in China

Three intellectual property (IP) related challenges faced by apparel companies engaging in open innovation in China include the US tariffs intended to enhance IP protection, forced joint ventures, and insufficient regulation of manufacturers used by joint ventures.

US Tariffs Intended to Enhance IP Protection

  • According to a recent round of tariffs imposed by the Trump administration, around 82% of apparel imports from China will be hit with a 15% tariff.
  • These tariffs affect both Chinese-owned firms and US firms that manufacture goods through joint ventures in China.
  • The legal basis of the Trump administration's decision to implement these tariffs was to pressure China into cracking down on intellectual property theft.
  • However, some experts believe that this method may actually encourage China to double-down on state-sponsored innovation instead of improving IP protection.
  • Some experts suggest that negotiating IP theft through the World Trade Organization would be a better solution.

Forced Joint Ventures

  • Many American companies are still forced to enter joint ventures with Chinese partners in order to operate in China.
  • These forced joint ventures require that US companies share technology and IP with their Chinese partners, which can lead to IP theft.
  • While this issue is a larger concern for technology-based firms, the apparel industry also has technological innovations, like Lycra, for example, that should be protected by patents.
  • Lee Branstetter, a professor of economic and public policy, suggests that strengthening the US government's control over technology and IP exports could increase the documentation of the forced joint ventures and disrupt the dynamic that has facilitated the forced transfer.

Insufficient Regulation of Manufacturers Used by Apparel Joint Ventures

  • One IP-related challenge faced by joint ventures in China is the inability to trust that manufacturers producing their goods are not violating the intellectual property right of third-parties.
  • For example, Macy's, which has a joint venture in China, has complained of this issue in its SEC filings.
  • The clothing manufacturers that Macy's and other joint ventures use in China are not always educated on the requirements of US product liability laws in certain foreign jurisdictions, and can therefore put the companies at risk of legal exposure and reputational damage.
  • Some experts suggest that these problems can be avoided by building trust with manufactures, using good and detailed manufacturing agreements, visiting the manufacturers to do inspections, and by registering any IP.

Research Strategy

Despite extensive research, we were unable to find many IP related challenges that were unique to apparel companies engaging in open innovation in China. Furthermore, the challenges we did identify do not have clear pathways for how they should be addressed. In our search for three to five challenges, we employed four main research strategies.

First, we searched newspapers, apparel industry publications, and open innovation publications, like Textile World, the Journal of Open Innovation, and more. From this research, we found a variety of IP related challenges faced by the apparel industry, including counterfeiting, judicial protectionism and local bias in IP courts, and trademark squatters. Through this strategy, we came across the IP related challenge that the Trump administration's new tariffs are imposing on joint venture apparel companies in China.

Next, we researched IP related challenges commonly faced by firms engaged in open innovation in China and then checked to see if any of those problems would apply specifically to the apparel industry. Again, we found a variety of challenges faced, but only one that meaningfully applied to the apparel industry: the issue of forced joint ventures.

After that, we researched IP related challenged faced by apparel companies in China so that we could check to see if any of these issues applied specifically to companies engaged in open innovation. While we gained an understanding of the copyright protection, trademarks, and patent protections necessary for the apparel industry, we did not identify any challenges that applied specifically to companies engaging in open innovation.

Finally, we began to make a list of foreign apparel companies engaged in open innovation in China so that we could review each of them for an IP related challenges. We identified a number of firms that fit the description, including Maison Kitsuné and the Brooks Brothers, but it was Macy's that led us to our final IP related challenge: the insufficient regulation of manufacturers used by joint ventures.
Part
03
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Part
03

Case Studies: IP Rights Protection in China (Part 1)

This research details how two apparel companies (Levi Strauss & Co. and New Balance) have protected their IP rights in China. We find that Levi Strauss & Co. and New Balance monitor IP rights violations and enforce their rights in courts of law. Levi Strauss & Co. has also registered their trademarks in multiple countries.

1. Levi Strauss & Co.

  • Levi Strauss & Co. closely monitor infringements of their trademarks and has sued several companies in China. After settling in China in 2001, the company sued four companies for copyright infringement at Shanghai Pudong District People's Court. The court ordered the defendants to cease the infringement immediately. In addition, the defendants were ordered to pay 350,000 yuan in damages, including reasonable expenses, to Levi Strauss & Co.
  • In September 2019, Guangzhou IP Court made a final judgment on a trademark infringement case between Levi Strauss & Co., and Guangzhou Lifeng Textile Company.
  • The court ruled that Guangzhou Lifeng Textile Company act of using the curved design on two pockets at the back of jeans constitutes infringement.
  • Guangzhou Lifeng Textile Company was ordered to cease distributing infringing goods and indemnify 30,000 yuan in damages and reasonable costs to Levi Strauss & Co. However, the company argued that it was not their intention to infringe upon Levi Strauss & Co.'s trademark as they had no information that it was registered.
  • Subsequently, Guangzhou Lifeng Textile Company appealed the case, asking the Guangzhou IP Court to reject the claims by Levi Strauss & Co.
  • Guangzhou IP Court denied the appeal, arguing that Levi Strauss & Co. has made a global reputation from the trademark.
  • Levi Strauss & Co. commenced using its curved design on the back pockets since it distributed its first pair of jeans in 1873. The design was officially registered as a trademark in 1943.
  • Following the initial trademark registration in 1943, Levi Strauss & Co. went ahead and registered the trademark in more than 100 countries. In China, the Levis Strauss & Co. design is registered as No.2023725 "公式" trademark. It was officially approved in China on May 2005, as a trademark for goods including clothes and jeans.
  • A similar case happened in 2017. Levis Strauss & Co. monitored and found their curved design on jeans pockets sold by an online shop named Gulanger Clothing Flagship. Levis Strauss & Co. then sued Gulanger Clothing Flagship at Guangzhou Huangpu People's Court on the grounds of trademark infringement, and requested the court to order Gulanger to cease infringement, destroy all counterfeiting goods and indemnify 50,000 yuan in damages. The court gave green light to the request.


2. New Balance

  • New Balance carefully monitors infringements of their trademarks. The company has sued some organizations in China over IP rights violations.
  • New Balance was a victim of copyright infringement in 2017. The Chinese court decided that three domestic companies infringed New Balance’s signature slanted “N” logo and owe the U.S. sports apparel company $1.5 million in damages and legal costs.
  • This is one of the largest trademark infringement award ever granted to a foreign business in China.
  • China awards trademarks based on who registers them first.
  • This favorable ruling offers hope not just to New Balance, but to other foreign companies with business operations in China. As New Balance’s senior counsel for intellectual property Daniel McKinnon told the New York Times, the ruling has given the company "a renewed confidence in our aggressive IP protection strategy within China" (Source 4). It’s likely other foreign companies will feel the same way.
  • New Balance's existence in China has not been easy. In 2016, Zhou Lelun took New Balance to court arguing that New Balance is a rough translation of his trademark which was registered in 1994.
  • Subsequently, New Balance was ordered to pay half of its profits to Zhou (98 million yuan). According to the judge, New Balance's prospered because of Zhou's Chinese trademark.
  • New Balance appealed the case at Guangdong Higher People’s Court and was ordered to pay only 5 million yuan to Zhou.


How companies can protect their IP rights in China

  • Register your company's IP rights in China as soon as possible. Registering in other countries is recommended too.
  • Use enforceable contracts designed for China as the Chinese government will not enforce court decisions of foreign courts.
  • Continuously monitor for infringement. A private investigator can be hired to monitor both online and offline infringements.
  • Enforce your IP rights.


Research Strategy

This research used various company reports, stock exchange reports, online court cases, legal experts forums, business news sources, economic outlook reports and IP protection services from the Australian government. After analyzing information from our sources we found that the two most noteworthy case studies were those of Levi Strauss & Co. and New Balance. We have analyzed the case studies and further provided information on how foreign companies in China can protect their IP rights.
Part
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Part
04

Case Studies: IP Rights Protection in China (Part 2)

Ralph Lauren and Gucci take their IP rights seriously and have been involved in multiple court cases in China. These companies sue violators of their IP rights and monitor infringements. Gucci has agreed to out-of-court settlements to protect their IP rights.

Ralph Lauren

  • The management of Ralph Lauren protect their IP rights by suing violators and monitoring affiliates.
  • In September 2018, the Guangzhou District People’s Court, convicted Wu Weisheng for selling fraudulent copies of Ralph Lauren branded shirts.
  • Weisheng was sentenced to 14 months of imprisonment without probation, and a fine of 40,000 Chinese renminbi (approximately $5,835 USD).
  • According to the company's release (Ralph Lauren), "the victory is another milestone in our continued work to combat counterfeit products, trademark infringement, and other intellectual property violations that damage our brand reputation, undermine our intellectual property rights and business interests, and deceive Chinese customers".
  • Previously, Ralph Lauren announced on May 2018, that it has agreed with Shanghai Panggong Investment Management Limited, Harbin Shan Shan Chunxiaqiudong Realty Company Limited, Shanghai Baixin Commercial Trading Company Limited, and Jiangsu Jiangnan Global Harbour Commercial Centre Company Limited that they would stop violations of the company's trademarks and pay Ralph Lauren $47, 000.
  • The above companies violated Ralph Lauren's IP rights by setting up branded stores in Harbin, Heilongjiang province and Changzhou, Jiangsu province. In addition, the stores used the Ralph Lauren trademark name and acted like affiliates of Ralph Lauren.
  • The legal representatives of Ralph Lauren filed the cases at Shanghai Yangpu People's Court on January 2018.
  • Subsequently, the court ruled that the defendants should stop their operations immediately and compensate Ralph Lauren. The accused companies made public statements saying that there are not affiliates of Ralph Lauren.

Gucci

  • Gucci protects their IP rights in China by monitoring and suing violators.
  • In 2008, Gucci won a court case against the Chinese shoe firm Senda Group, for violating their IP rights.
  • Senda Group violated Gucci's IP rights by selling women's sandals featuring an interlocking "GG" as ruled by People's Court of Shanghai Pudong District.
  • Senda Group was ordered to pay 180, 000 renminbi ($25, 700 USD) as compensation to Gucci.
  • According to Chen Huizhen (presiding judge of Shanghai Intellectual Property Court), IP rights violation is not limited to physical products only. He said "when we talk about trademarks, it refers not only to the product but also the service".
  • A company misleading clients into believing that they are an authorized exclusive shop for the brand is violating national unfair competition law.
  • Following the previous victory, in 2013 Gucci disputed with Guess over trademark violations and unfair competition operations in China.
  • Gucci representatives argued that Guess and affiliates were copying its public appeal and collections which was putting Gucci at a disadvantage.
  • The Nanjing Intermediate People’s Court of China finalized the case in favor of Gucci. Guess was forbidden to sell products with a “G” logo, including its G-shine logo pattern, or products that featured the Guess name in cursive.
  • An amicable solution was reached on April 2018 by Gucci and Guess. The representatives of both Gucci and Guess announced that they have reached an agreement, "which will result in the conclusion of all pending Intellectual Property Litigation and Trademark Office matters worldwide".



Part
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of five
Part
05

IP Rights Challenges in China: Government Actions

According to Justice Tao Kaiyuan (Vice President of the Supreme People's Court of the People's Republic of China), strengthening IP rights protection is essential for China to honor global guidelines and fulfill its international commitments. It's also necessary for pursuing an innovation-driven development approach and growing a business-friendly environment. Over the last forty years, China has set up, and persisted to improve, a present-day IP rights protection system. The recent actions taken by the Chinese government to strengthen IP rights apply to all industries in China including the apparel industry. There is no separate IP rights regulations for apparel companies in China. Strategic actions undertaken are as follows:

1. Strengthening “top-level design” of IP judicial protection

  • In line with countrywide conditions, China has set up an IP rights protection system in which judicial and administrative protection play their respective roles. Continued strengthening of the “top-level design” is the bedrock on which China has built its historic achievements in IP judicial protection within a relatively short period of time.
  • In China’s Outline of the National Intellectual Property Strategy of 2008, “strengthening the judicial protection system” and “ensuring the leading role of judicial protection of IP rights” were identified as priorities in implementing the national IP strategy.
  • In July 2016, the Supreme People’s Court stipulated China’s fundamental policy on IP rights judicial protection which focused primarily on the strict enforcement of law, control measures and proportionality.
  • Consequently, in April 2017, the Supreme People's Court issued the Outline of Judicial Protection of IPR in China (2016–2020), which proposed target areas, including the creation of “an IP court system with a regional perspective”, better rules governing evidence and more reasonable compensation for damages. The document also introduces strategic measures, including improvement of the jurisdiction system, reformation of the technical fact-finding mechanism and special attention on procedural law for IP litigation in courts of law.

2. Creation of a specialized court system for the judicial protection of IP rights

  • By the end of 2014, 3 IP rights protection courts were set up in Beijing, Shanghai and Guangzhou to creatively explore a specialized IP adjudication based on Chinese formalities. These court systems received a positive response from the public and the global community.
  • Since 2017, the Supreme People’s Court has permitted the creation of IP tribunals by intermediate people’s courts in Nanjing and 18 other cities. This facilitates the pooling of high-quality resources to handle patent and other highly technical issues across China in a more professional way.
  • Recently, (January 2019), the Supreme People’s Court set up and formalized the IP Court. As a permanent agency of the Supreme People’s Court, the IP Court is controlled by the Regulations of the Supreme People’s Court. The IP Court can handle technically advanced civil and administrative IP appeal cases from across the country.

3. International exchanges and cooperation

  • The Chinese government aims to foster the development of IP rights adjudication in China and beyond for example Australia.
  • The Supreme People's Court is engaged in implementing the Memorandum of Understanding on Judicial Exchanges and Cooperation signed with the World Intellectual Property Organization (WIPO).
  • The Chinese government supports cooperation and engages in WIPO’s reform initiatives in the field of judicial protection.


Research Strategy

This research used company annual reports, market segments reports, market watch, stock exchanges reports, economic outlook reports, and WIPO reports. After detailed analysis of the protection of IP rights in the apparel industry by the Chinese government, we found that China does not have IP rights clauses only for the apparel industry. The IP rights protection mandates apply to all companies and businesses trading in China including the apparel industry.
Sources
Sources