As counterfeit products continue to plague digital retail, new intellectual property regulations from China could threaten some of its largest platforms, including Alibaba and JD.com.
Digital commerce in China saw a growth rate of 20 percent in 2020 alone, a revenue totaling $2.16 Trillion and generating almost half of the world's eCommerce transactions. Yet despite their admittance into the World Trade Organization in 2001, China's enforcement of copyright and intellectual property rights law has been notably lax, marked as much by significant market access barriers as it has by a failure to align themselves with international IP laws.
Is it any wonder that intellectual property skirmishes are more often than not taking place on the digital battlefield? And what will proposed regulatory changes mean for some of China's largest digital marketplaces?
Intellectual Property Rights in China
International trademark law varies from region to region, with holders having to register in each specific nation to be afforded intellectual property protection. While trademark owners can register through multiple jurisdictions with a single application administered by the World Intellectual Property Organization, domestic businesses in the US aren't afforded international IP rights simply by registering with the US Patent and Trademark Office.
But IP protection is particularly thorny in China, with intellectual property law being vaguely defined and expensive to prosecute. The threshold for bringing a copyright or IP infringement case before Chinese courts is notoriously high, with specialized IP courts taking years to pass judgment—often well past applicable statutes of limitation.
China's been a member of the World Trade Organization since 2001, making the nation entirely subject to WTO provisions protecting intellectual property rights and patent law. But the reality can paint an entirely different picture.
The US Customs and Border Protection Agency indicated that over 80 percent of the seizures of counterfeit products reported in 2020 originated in both mainland China and Hong Kong. Nor are IP infringement violations exclusive to the US. A recent review from the European Union Intellectual Property Office found that China was the main country of origin for goods infringing on intellectual property rights in the EU.
Current Chinese law indicates that intellectual property holders must prevent their trade secrets from being leaked to the general public, with every attempt to establish confidentiality measures taken prior to filing an official claim of infringement.
Yet foreign intellectual property protection doesn't necessarily apply to China's IP laws. Subsequently, brands who have filed for IP rights in their respective countries may find published trademarks and patents to be insufficient cause for infringement in China.
That's because official intellectual property protection in China is only available for entities which have filed copyrights, patents and trademarks with regulatory IP enforcement bodies of the CPC Central Committee. As a result, foreign companies often find their applications are bound up in an endless circle of delays and red tape, frequently turning to trademark and IP protection specialists who aren't always reputable.
Proposed Regulatory Changes to Intellectual Property Laws
The State Administration of Market Regulation (SAMR), which oversees both digital and physical retail markets in China, proposed amendments to the nation's eCommerce law earlier in 2021, indicating that licenses can be revoked for online platforms failing to take action against vendors infringing upon intellectual property rights.
According to the Draft Guiding Opinion on the Adjudication of Intellectual Property Disputes Involving E-commerce Platforms released before the Supreme People's Court of China in 2020, online retail sites hold the primary responsibility for implementing their own measures regarding intellectual property rights.
Article 45 of the current Chinese eCommerce law passed in 2018 specifically indicates that platforms shall assume an additional case of joint liability with offenders when they “know or should have known” of any IP infringements yet failed to take appropriate measures, including the removal, blocking and deletion of links.
The law reflects, in part, commitments made on behalf of China during the first phase of 2020's US-China Economic Trade Agreement. Several Chinese platforms, including Alibaba's Taobao.com, had previously been included on the US Trade Representative's 2020 Review of Notorious Markets for Counterfeiting and Piracy.
The Alibaba Effect: Too Big to Fail?
With only $131.3 Billion in sales in 2022, Alibaba's revenue was relatively minor compared to Amazon's $502.1 Billion. Yet Alibaba still remains the undisputable titan of eCommerce in China—an industry representing over 6 percent of the nation's GDP.
But the difference between the two isn't merely a question of sales but their very purpose. Amazon isn't merely a platform. It's much a brand as it is a retail outlet, one which has become synonymous with both the changing face of commerce as well as the role of big tech in our lives—for better and for worse.
Alibaba, on the other hand is simply a connector, enabling both wholesalers and brands to sell internationally at highly cost competitive rates. Despite the popularity of its multiple storefronts, Alibaba is hardly an innovator. Unlike Amazon, it doesn't maintain particularly diversified business segments. It may be highly successful, but it's defined solely as a marketplace for retail products.
More increasingly, a high number of counterfeit products. Alibaba's status as a discount marketplace may be a justifiable one, but that marketplace has become a safe haven for counterfeiters, with over $600 million worth of pirated goods being seized across the platform's multiple subsidiaries in 2020.
Yet despite their attempts to curb counterfeiters, a brief glance at any of Alibaba's retail platforms will reveal a wide assortment of pirated and fake merchandise from international sellers.
“The problem is that the fake products today, they make better quality, better prices than the real products, the real names,” stated Alibaba co-founder Jack Ma in 2016, some two years after the company broke records for the then largest IPO in history.
Yet not even five years later, Alibaba was the target of an official government investigation into alleged antitrust violations, resulting in a suspension of a planned public offering from affiliated fintech provider Ant Group valued at $37 Billion, a $2.8 Billion fine from the SAMR and Ma's resignation from the platform.
While a penalty of 2 million yuan ($309,521 USD) is already in place for platforms knowingly enabling counterfeiters and IP violations, the SAMR's proposed revocation of licenses is a new amendment reflecting the growing international concern from both regulatory agencies and retailers towards online piracy.
Trademark and Patent Protection in China
Recent estimates from the World Intellectual Property Organization indicate that over 46 percent of all global patent filings were conducted in China in 2021.
In China, patents are administered by the China National Intellectual Property Administration (CNIPA.) All applicants are required to show a distinct inventiveness in their product development to indicate a lack of interchangeability with other existing patents as well as its overall utility.
Similarly, the CNIPA is also responsible for administering trademarks which must pass published standards for review; not the least of which includes a "confusion threshold" for products and brands providing similar goods and services to other applicants.
At first glance, those requirements might seem to be fairly straightforward and not too different from other international standards. But in the realm of digital commerce, the proliferation of knockoff products is immeasurable—a charge levied even at the likes of Amazon, despite their protests to the contrary.
Yet patent and trademark infringement in China remains prevalent, not the least of which is due to the difficulty in obtaining substantiating evidence.
The statute of limitations in China indicates that any patent infringement lawsuit must be brought before specialized intellectual property courts within three years of filing in China. Given that many IP offenders tend to be fly-by-night operations doing business under multiple names, the lack of corroborating evidence combined with a preexisting bias against foreign entities makes establishing the burden of proof an increasingly difficult proposition.
An Uphill Battle for Intellectual Property Rights in China?
A recent review from the International Trademark Association estimates that the value of trade in counterfeit goods could reach as high as $2.8 Trillion in 2022. Pirated goods from China reportedly accounted for over 70 percent of all global counterfeit trade in 2016 alone, a value assessed at over $285 Billion.
That many Chinese platforms have engaged in fairly unscrupulous selling activity should come as no surprise to both sellers and buyers alike. China's history as a notorious hotbed for counterfeit products and intellectual property infringement has been well-documented long before the advent of eCommerce.
But it's the relatively unregulated nature of online shopping that provides a certain safe haven for counterfeiters, regardless of their country of origin. While companies like Amazon have taken active measures to prevent counterfeiting and IP violations, many brands are entirely unaware that intellectual property laws vary dramatically between regions. And what may be applicable in the US or the EU is not necessarily applicable to China.
Sellers and brands are facing increased scrutiny towards selling practices in 2023, not the least of which has resulted in investigations into alleged antitrust and product liability practices on Amazon. While that scrutiny isn't solely isolated to the US, China's status as a World Trade Organization partnering nation means that Chinese law may require a thorough and much needed revision if it hopes to staunch the flow of bad actors emanating from the nation.
eCommerce is a global phenomenon, and one that no specific nation can claim exclusive rights to. Isn't it time that intellectual property law reflects that diversity as well?
Understanding international law is just a small portion of growing your eCommerce business. Find out more at Color More Lines.