Reactions from Australian manufacturers range from entrenched cynicism to bewilderment to confidence and optimism. Curve’s Belinda Stening asked the experts for advice on IP, specifically in relation to China, and gives an overview of her findings here.
It’s no secret that the majority of Australian manufacturers are concerned about their ability to protect intellectual property (IP) rights in China, especially in relation to effective enforcement.
According to Heather Ridout, chief executive of the Australian Industry Group (AIG), IP infringement was nominated most frequently of all non-tariff barriers to trade with China in a recent survey of 700 Australian manufacturers. Almost half of those surveyed identified it as a concern.
As a result the AIG has been lobbying the federal government on the Australia–China FTA. Ridout says, “We have called for the establishment of an ongoing bilateral consultative and referral mechanism to address the concerns of Australian business people regarding IP rights infringement in or from China”.
In addition to strengthening its enforcement mechanisms, Ridout thinks China will need to educate its population about the benefits of protecting IP for its own economic development. “As innovation becomes a more important component for Chinese manufacturers, there will be increasing domestic pressure to ensure an effective system of IP protection.”
Caroline McCarthy, director of IP Australia’s international policy section, is generally optimistic about IP issues under discussion at Australia–China FTA negotiations. “A comprehensive FTA with China will provide an opportunity for Australia to work with China to improve and strengthen IP enforcement,” she says.
“This could include enhanced cooperation in the enforcement and protection of IP rights, and practical measures to deliver IP outcomes of commercial benefit to Australian stakeholders.”
However, McCarthy does acknowledge that alleviating the concerns of Australian manufacturers will be challenging. Part of the problem is that IP protection in China has a short history, beginning only with real economic reform in the 1980s.
She says the development of China’s IP agencies and its infrastructure has been impressive, especially since it now has the largest trademark office in the world. “But in any organisation that experiences dramatic growth, there are issues of quality.
"This is especially true of IP offices. Where do they get their trained and competent trademark and patent examiners? Where do you find judges knowledgeable of complex IP issues? The answer is you have to grow them, and that takes time.”
McCarthy sees other barriers to stronger enforcement of IP rights in China as well. “There are a range of systemic issues affecting the enforcement of IP rights in China,” she says.
“These include local protectionism by provincial authorities; difficulties in coordination between China’s IP and enforcement agencies; the sheer scale of China’s manufacturing capacity; the failure of some western business interests to properly register or enforce their IP rights in China; difficulty in registering patent and trademark rights; delays in patent and trademark examination processes; and transparency problems in relation to those registration processes.”
And, in relation to the FTA, she does express some reservations. “We are only at the beginning of the negotiating process, and expect the negotiations to be long, complex and challenging,” she warns.
“Coming out the other end with practical and commercially useful outcomes will be difficult.”
So, in the meantime, how should Australian manufacturers protect themselves against IP marauders?
Caroline McCarthy highlights the importance of doing one’s homework before trading with countries such as China. “Manufacturers should undertake an IP audit before commencing trade overseas to assess what needs to be protected,” she suggests.
“They should have a good understanding of the requirements for protecting IP in the relevant country or have legal advisers experienced in IP matters for that country.
"Often there are subtle differences between IP systems. Time frames for completing aspects of the application process may differ, and there may be differences in what can be protected as, say, a patent or trademark in China.”
Bob Fantozzi is international business development and intellectual property manager at Clipsal Australia, a manufacturer of electrical consumer products.
He sees IP management as much more than a legal issue, especially in countries where the law is difficult to navigate: “We realised early on that the war against counterfeiters would not be won in Chinese courts; it had to be won in the market place”.
Fantozzi says that when Clipsal first went to China, technology kept counterfeiting at bay. “In the early years we were protected from copies because our manufacturing technology was ahead of that available to most Chinese manufacturers.
"Plus, we imported our raw materials. However, this advantage soon evaporated.”
Outright piracy is now a straightforward part of manufacturing electrical products in China, according to Fantozzi, with an established ordering, production and distribution process. “Chinese manufacturers are contacted via the internet, and orders for counterfeit goods are placed from abroad,” he says.
“The counterfeiters manufacture the batch required to fill the order then ship out via an agent, then via an import/export company. This makes tracing the manufacturer very difficult.
"In Dubai we caught a dealer buying our products then also buying counterfeit versions and substituting about eighty per cent of the Clipsal item with a near-perfect copy.”
Clipsal acts on counterfeiting first by gathering evidence (that is, by making purchases) and then goes to the authorities to have the activity stopped. “Outside China, in those countries where the law is strong, we have used the law to stop the import of counterfeit Clipsal products.”
According to Fantozzi, a strong brand is the best defence against counterfeiters. “Brand-building requires a long-term effort and a considerable and difficult investment in various marketing elements – advertising, public relations, sponsorships, etc.
"We have developed a very strong brand though distinctive products (via shape, feel, function and quality); market-driven pricing; matching of our staff to our customers; and establishing the strongest distribution network.
"The outcome has been that in China those who can afford genuine Clipsal will buy it and they won’t want a copy.”
Fantozzi believes that fear of IP infringement is preventing some Australian companies from manufacturing offshore, saying “For a small manufacturer it’s very daunting and expensive to manage IP”.
He also counsels that it can be difficult to develop reliable distribution channels within China. “Small players with limited resources cannot finance the sales-and-marketing effort necessary in China.
"They need to rely on local agents/distributors, which only need them as long as they are the only effective supplier. Once the market is flooded with cheap copies distributors lose interest and may even source a good copy themselves!”
However, he says companies that distribute via strong and reputable channels are less likely to encounter problems – because the distributors have too much to lose by selling counterfeits. “They simply won’t take the chance, especially in countries like Australia.
"Even in China the large retailers can’t afford to go to court over selling counterfeits. It’s not the money; it’s the bad publicity.”
So, are there any other ways a company can minimise IP infringements? Fantozzi offers the following advice: “The number-one rule is to keep all information confidential and back in Australia.
The second rule is trust no-one. Rule number three is to split the information so no one party knows it all, and obviously keep the parties separate”.
Fantozzi says that Clipsal does have some concerns about the IP issues being discussed at the FTA negotiations, especially in relation to quality assurance and safety certification.
Rhonda Steele, marketing property manager for Effem Foods, a division of Mars, has a more positive view of the IP situation in China.
Effem’s businesses cover chocolate and sugar confectionery, convenience foods and pet foods, and include big names like Snickers, M&M’s, Masterfoods and Pedigree. Steele says that Effem has had some success with its IP management system in China.
“We have learnt a lot since we dealt with our first infringement in China back in 1989. We used a Hong Kong-based law firm which dealt directly with one of the few agencies who were, at that time, authorised to deal with foreign applicants.
"It was very hands off and largely out of our visibility and control, which led to much anxiety on our part because we were kept pretty much in the dark and everything seemed to take too long.
"Following this, we quickly worked out that we needed direct contact with an agency and to work with a person rather than a street address. It cut down quite a bit of cost, too, because using a Hong Kong-based law firm was quite expensive!
“Up until very recently, the vast majority of our enforcement actions in China were handled administratively rather than through the courts. It’s only in recent times that we’ve felt comfortable using the court system, because there’s been a steady build up in experience by the judges and some wellconsidered court judgments delivered in a number of IP cases.
"Whilst the administrative route served us well for a while – in that we could usually obtain a quick decision on an infringement case, leading to a quick seizure of goods and other items such as finished packaging – the fines were small and retained by the relevant authority, not paid to Mars.
“Last year, we decided that it was time to use the court system and actually recover some of our costs via awarded damages. Our first court case (in Shanghai) was a win for us, though we’re still trying to actually get our hands on the damages we were awarded – which is another significant enforcement issue in China.
"Our second court case (also in Shanghai) is proving more complex and challenging – especially on the evidence side, which doesn’t follow the same system as in Australia – but we remain hopeful.
“As our business has grown in China, our profile has led to increased infringement activity. We work almost exclusively now with one service provider in China, with whom we share just about everything! The work done by this firm is made totally transparent to our local business people, who are themselves a valued member of the overall team, and acknowledged as such.”
According to Steele, it’s important to protect your IP from the get-go. “Enforcement is really the back-end of a total protection strategy,” she says.
“It’s important to concentrate on the front-end initially, so you have the best arsenal of registered rights to fight the inevitable infringements in the longer term.”
When it comes to protecting trademarks, she advises registration of more than just the English-language word mark. “Register not just your word marks but distinctive devices, logostyles, shapes and colour combinations. And don’t forget your Chinese character mark.
But take local advice to make sure that you’ve picked the right character set so you don’t end up with an inappropriate meaning!
Remember that labels are protected in China through design patent registration, not the trademark regime – which is different to Australia. And use the copyright-registration system if you’re in a fast-moving area such as fashion.
This really is important and does show the authorities – when you go to enforce your rights – that you’re serious.
“Famous marks are protected, theoretically, without registration, but this area of the law in China is still open to interpretation, so invest in a registration upfront.
"It really doesn’t cost that much, especially if you use the international registration system and nominate China as one of the countries you want to cover.”
In relation to China, Steele also suggests outsourcing IP matters through a single agency. “We work almost exclusively through one service provider to give us a one-stop protection shop covering searching and clearing of new marks; portfolio reviews; registration issues; renewal of rights; oppositions and cancellations; and both administrative and judicial enforcement,” she says.
“Having access to an external resource also helps us overcome the language issue.”
Steele thinks the negativity within Australian manufacturing towards IP protection in China has arisen in large part because of misinformation. “The media is good at reporting bad news stories and if that’s all you hear, that’s what you tend to believe!
"Obviously, if you’re in the film or music industry you are faced with a large problem. We’re not without our problems (we are currently dealing with more than 300 open infringement cases), but they’re not insurmountable.
“I also think there’s a misunderstanding that you have to beat the infringers up with a big stick. We’ve had great success with warning letters that have allowed us to achieve a negotiated settlement.
"The local Administrations for Industry and Commerce (AICs) are becoming more adept at mediation and are very willing to bring the two sides together to try and reach resolution in a dispute.”
As an example of the way in which Effem manages IP problems, Steele cites an incident where the packaging of one of their pet food brands was copied: “One of our recent successes has been in the pet food area. A key element of our Pedigree dog food brand is the colour yellow.
"We became aware of a Pizzazz dog food pouch which bore a close resemblance to our Pedigree pouch. After prolonged discussions the Tianjin AIC finally agreed to take enforcement action against Pizzazz for infringing Mars’ intrinsic rights, given that the colour yellow which, combined with other similar elements, could lead to consumer confusion about the product.
"The AIC seized and destroyed 2700 finished pouches and 11,440 pieces of packaging. Our face-to-face meetings with the administrative authorities, together with our strong submissions showing substantial consumer recognition of the colour yellow as a key element of the Pedigree brand, were critical to our success."
Steele sums up by encouraging businesses of any size to protect themselves against IP infringement: “It is often said that it’s easy for us because we’re bigger and we have more money.
" I dispute that because the principles – whether you’re dealing with one infringement or three hundred – are the same. Don’t sit back and think that it won’t happen to you in China, because it will. If you are in the system, use it to your advantage”.
IP Australia provides information on its website, including a fact sheet on China (www.ipaustralia.gov.au/resources/china_introduction.shtml), to help businesses protect their IP overseas.
DFAT’s China FTA Taskforce produces negotiation updates, available from DFAT’s website (www.dfat.gov.au/geo/china/fta). Alternatively, readers can register for updates on the progress of the FTA negotiations by emailing firstname.lastname@example.org.