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For multinational companies operating in China, fighting piracy is like playing the arcade game Whack-a-Mole. Knock down one counterfeiter, and three more pop up — despite the millions spent each year on investigators, lawyers, and raids. Right now, the Quality Brands Protection Committee, a Hong Kong-based anti-counterfeiting lobbying group, is wielding the biggest mallet in China. The group represents more than 129 multinational companies — including Pfizer Inc., Eastman Kodak Co., and General Motors Corp. — and it’s quick to brag about its “success” in the fight against piracy. In January the QBPC scored its biggest victory, convincing the Chinese government to shut down Beijing’s infamous Silk Alley — a crowded outdoor market located just one block from the American embassy — that had been a shopper’s Shangri-la for knockoff goods for decades. But in China, the government whacks the pirates with one hand and props them up with the other: Soon after the Silk Alley shut down, many vendors opened up shop next door in an air-conditioned, six-story shopping mall sanctioned by the government. At the new Silk Street shopping center this August, Western tourists swarmed through the mall’s glass doors, grabbing souvenir baseball hats and guide maps. Piles of knockoff North Face jackets, Ralph Lauren polos, and Nike shoes, with logos and tags prominently displayed for inspection, welcomed shoppers on the ground floor. Downstairs, vendors sold luggage and handbags. “I have newest styles — Prada, Hermes, Louis Vuitton,” bragged a vendor. “If I don’t have, I can get,” she added, pulling out catalogues of different knockoff bags. Upstairs, counters displayed electronics, Callaway golf clubs, DVDs of classics and new releases, even fake cultural revolution kitsch. After the market reopened, the QBPC had to begin its attack anew, and has had some small successes in fighting counterfeiters here. But to call the Silk Alley operation a win in the fight against counterfeiting seems like a ridiculous bit of hyperbole. However, in China, where counterfeiting rages out of control, the meaning of success has been redefined. The QBPC, its member companies, and even the smallest family businesses cherish every tiny victory — no matter how pyrrhic. China is the world’s counterfeit superstore, producing a dazzling array of knockoff products from semiconductor chips to soy sauce. Chinese factories pumping out counterfeit goods sponge off of real manufacturers, creating shadow industries in different regions across the country. Changchun, a northeastern city, is home to Volkswagen AG, BMW (Bayerische Motoren Werke AG), and Toyota Motor Corp. factories — and an active fake auto parts business. Ultimately, counterfeits creep into supply chains and spread around the world. Some hoped the situation would improve when China joined the World Trade Organization in 2001, but the U.S. Trade Representative reports that piracy rates have not significantly declined. According to the USTR, 67 percent of all United States customs IP seizures were Chinese counterfeits valued at $134 million. In this kind of climate it’s not surprising that multinationals would support QBPC, even if its approach hasn’t made huge inroads. “It seems to me that [the QPBC] is the most influential and active organization seriously working on IP protection, at least [in] the eyes of many multinational corporations,” says Tyco International’s associate general counsel for China, Weiwen Wang. Many of the world’s most famous brands pay thousands to join the group, which preaches collective action and alternative approaches to fighting piracy, like using environmental, employment and tax laws to attack counterfeit syndicates. In its Silk Alley attack, the QPBC worked through real estate laws. With government support, the group strong-armed the Silk Alley’s landlord into instituting a “two strike” program. If vendor tenants were found selling counterfeits, they were suspended for 30 days; if they were caught again, they lost their lease. By the time the government shut the market down, the landlord had suspended more than 50 shops. The QBPC also plays up its ties to the Chinese government. The group’s chairman, Chinese-born lawyer Jack Chang, an assistant general counsel at Johnson & Johnson, has been advocating for significant change at the highest levels of China’s government, pushing for increased communication between companies and policy-makers. “The Chinese government used to be very defensive,” says Chang. “But gradually because we are approaching them with cooperation it changed to cooperation.” Cooperation requires patience. Until December 2004, the criminal threshold for counterfeiting activity was $12,000 for an individual and $60,000 for a business. Then, after lobbying by QBPC and others, the standard was lowered to $6,000 for an individual and $18,000 for a business; hardly a zero-tolerance policy. And the penalties tend to be small. Most raids still result only in seizures and small fines, an affordable business cost to large-scale counterfeiters. “People think they are just going to get a parking ticket so they just keep doing it,” says Joseph Simone, a Hong Kong-based Baker & McKenzie IP partner, who represented some of the luxury goods companies in the Silk Market campaign and helped found QBPC when he was an in-house lawyer at Gillette. Some hauls are too big to ignore. In April, two Americans were arrested by Chinese police for selling over 180,000 counterfeit DVDs to buyers in 25 countries. Five months later, Chinese police arrested 11 Chinese citizens and an American for manufacturing millions of dollars of counterfeit pharmaceuticals including the popular anti-impotence drugs Viagra, Cialis and Levitra, and distributing them in 11 countries. Both groups of defendants face criminal charges and penalties. These arrests were the first result of a joint Sino-U.S. operation. QBPC calls these kinds of actions serious progress — partly to appease its paying members. The QBPC grew out of an informal gripe session among three companies. In early 1998, Chang, received a call from Linda Wong, a lawyer with Unilever. “She asked, ‘Do you have a counterfeiting problem,’” he remembers, “I said, ‘Of course, who doesn’t?’” Wong invited Chang to join lawyers from the Unilever Group and Mars Inc., who were meeting with government officials to talk about IP protection. The conversation, says Chang, was confrontational and not all that productive. But the executives liked getting together and commiserating. Later that year, six companies joined the pity party — The Coca-Cola Co., Gillette Group UK Limited, S.C. Johnson & Son Inc., British American Tobacco China Ltd., The Procter & Gamble Co., and NIKE Inc. — and the group started regularly meeting as the Chinese Anti-Counterfeiting Association. As more companies signed on, some members started worrying that their meetings were illegal in Communist China. Chang approached the ministry of Foreign Trade and Economic Cooperation, who suggested the group become a committee of the China Association of Enterprises with Foreign Investment, an industry organization affiliated with the Chinese Ministry of Commerce. But first, warned the officials, they’d need a less controversial name, one that didn’t single out China for counterfeiting crime. In March 2000, the Chinese Anti-Counterfeiting Association became QBPC. In 2003 Chang was made QBPC chairman, replacing John Yam, an executive from Procter & Gamble. Chang was certainly well qualified for the position. Since he founded J&J’s Shanghai legal office in 1998, Chang has run one of the most successful anti-counterfeiting campaigns in China. His staff at J&J recently hunted down a counterfeiting syndicate, filing 75 criminal cases resulting in over 40 convictions. (J&J refused to discuss the details of the ongoing investigation.) As QBPC chair, Chang has brought counterfeiting into the spotlight, operating as a neutral voice for companies that prefer to operate quietly rather than taint the reputation of their products. By working together, QBPC leverages its members’ economic force in the region. According to Chang, QBPC companies have invested over $50 billion in China through their operations in the region and created thousands of jobs. The QBPC has tried to cultivate connections with Chinese officials — a huge task, as many different departments on the local, regional, and national level deal with IP protection. One of the QBPC’s biggest achievements was setting up regular briefings with government officials. The meetings grew out of a formal discussion between Chang and Vice Premier Wu Yi in 2003. Three years ago, it was impossible to meet with the police, but now QBPC regularly speaks at law enforcement training seminars and the police return the favor, says Baker & McKenzie’s Simone. The group also hosts seminars about IP law for prosecutors and judges. QBPC has emphasized carrots rather than sticks with the Chinese authorities. Instead of a public blacklist of the worst government offices, QBPC started annually honoring the best customs, police and government officials in 2001 with an awards dinner. “We want to build and expand a pool of decent dedicated Chinese officials,” Chang says. The group also uses legal position papers, academic research and press coverage to advocate for policy changes. QBPC recently produced a public service announcement — to be broadcast across Asia — featuring Arnold Schwarzenegger and Jackie Chan destroying a Hong Kong piracy operation. (Chang’s proposed slogan: “Stop buying. You’ll be the terminator of counterfeiting and piracy,” didn’t make the cut.) The carrots haven’t been enticing enough to get government administrators to start taking initiative. Almost all counterfeit investigations start with company involvement. “We act on complaints,” says Kin-Hung Lui, head of intellectual property investigations for the Hong Kong customs office. Corporations have to register trademarks, investigate counterfeiters, and supply evidence. A recent seizure of $20 million worth of fake Burberry clothes, bags and accessories in Hong Kong started with a complaint lodged by the company. Companies frustrated with playing investigator think QBPC is too quick to appease an inactive government that’s not doing its job enforcing IP laws, says Tim Trainer, president of the Global IP Strategy Center, a consulting firm that creates anti-counterfeiting strategies for corporate clients. But Simone thinks a softer approach is necessary. Since QBPC is associated with a Chinese agency, the government could theoretically shut the group down at any time. “We can’t declare a trade war and expect [the government] to be friendly the next day,” he says. Until the penalties for counterfeiting become stricter, QBPC and some trademark lawyers encourage companies to pursue more creative strategies. “If you fight the traditional routes, it’s like dollars down the drain,” says Baker & McKenzie’s Loke Khoon-Tan, a trademark partner in Hong Kong and author of “Pirates of the Middle Kingdom: The Art of Trademark War.” Chang came up with a particularly inventive tactic while out in the field. On raids for J&J, he noticed that the counterfeiters were running giant manufacturing machines out of their homes. He checked the power cable and saw that the line going in was 380 volts, significantly higher than his home’s 220 volts, and necessary to fuel their equipment. QBPC is now pushing the central power bureaus to ban voltage of 380 in residential homes and, as in the case of the Silk Market, hold residential landlords responsible when counterfeiters use their buildings. So far, the landlord tactic has been the most promising strategy. “The courts in Beijing have been informally telling government officials that this landlord liability is the real deal, so you can impose these administrative sanctions,” says Baker & McKenzie’s Simone. While the QBPC’s effect on the Chinese government is murky, its impact on corporate thinking has been profound. Multinational companies typically treat counterfeiting issues like a dirty family secret, afraid to talk about the problem outside office walls. In the past, companies kept a low profile, reluctant to work alongside the competition. This was not the wisest strategy — counterfeiters are typically brand-agnostic, selling, for example, Prada, Louis Vuitton and Burberry handbags in one shop. In the wake of the Silk Market project, luxury goods companies cooperate more, says Simone. Not only is working together more effective, it’s cheaper: “You need to bring resources together because as a single company you can’t afford to do this all on your own,” says Trainer. QBPC’s work has spawned spin-offs as more companies embrace collective action. Over the past year or so, companies formed similar trade groups in India and Vietnam. QBPC recently helped domestic companies, led by the Chinese Cereal and Food Stuff Corp. start an anti-counterfeiting group. Without foreign investment, they can’t officially join QBPC, but the companies participate in many of the group’s programs, says Chang. At the Silk Street mall QBPC is trying the landlord tactic again, hoping this second shot will achieve more permanent results. At first, the Silk Market’s new landlord, Beijing Ziushui Haosen Clothing Market Co. Ltd., was less than eager to work with QBPC. Over the past few months mall security guards have beat up investigators and journalists inspecting the market, says Simone. In preparation for litigation, the luxury goods companies filed five civil complaints against the landlord and individual vendors. In September the Beijing Administration for Industry and Commerce — the local administrative agency overseeing trademark enforcement — raided seven retail kiosks there, bringing in more than 80 officials and 20 police officers to defend against threats of violence. They also threatened the landlord and vendors with more severe fines and promised to transfer third-time offenders to the police. AIC’s pressure seems to have had an impact. On October 14, the market’s manager and main shareholder, Zhang Yongping, said the landlord had terminated the leases of five shops, wrote warning letters to over 100 vendors, issued over $50,000 in fines, and fired 12 employees (including the real estate company’s general counsel) for accepting bribes from shops selling counterfeits. That week, says Simone, visits to the market showed almost no counterfeits of QBPC brands. When asked about counterfeits, vendors were “visibly afraid,” says Simone, and only agreed to show photos of their goods, which they’d bring in from outside the market after getting paid. “In sum, success,” says Simone via email, “at least in part and at least for a little while.” The Silk Alley’s landlord still hasn’t agreed to implement the two-strike rule, so the QBPC soldiers on, monitoring the market and reporting infringers. “We’re hoping to get a crescendo of industry and government pressure,” says Simone, “the right person in the government would then wave the wand and order the market shut down for good.” Chang isn’t counting on a quick solution. He anticipates a drawn-out, difficult fight. China switched from a planned economy to a more market-oriented economy just two decades ago, he says, so the legislative environment is still emerging. He estimates that piracy and counterfeiting wars will extend for another 20 years. The real question, says Chang, is not how to completely eradicate counterfeiting today, but how best to put China on track for future development. “The point is whether we can work together and move resources in the right direction.”

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