Practical measures to combat the grey market goods under Chinese law

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Lotus Wu
Beijing Yingke Law Firm, Shanghai
wufurong@yingkelawyer.com

Introduction

As companies establish their global supply chain and distribution channels, an increasing number of global market control issues occur to brand owners. Brand owners create different pricing policies to correspond with complex regulatory requirements and different marketing costs in different jurisdictions, so the prices of some products may vary in different countries and regions. Some unauthorised merchants import goods from overseas to resell them in other countries without their brand owners’ consent, by utilising the price difference on products. This is typical ‘grey market’ behaviour.

This harms the authorised distribution channels of the brand owners. Sometimes, grey market goods harm the reputation of brand owners even more than the harm caused by the counterfeit goods. These grey market goods are not typically ‘illegal goods’ or ‘counterfeits’ and, therefore, cannot be addressed through typical legal action. Many brand owners do not know how to protect themselves from grey market behaviour that weakens their market strategy. Are there any measures to protect brand owners and prevent grey goods from being distributed via authorised channels? The answer is yes, at least in mainland China. This short article aims to provide several practical perspectives for brand owners, give an idea of how to prevent goods from becoming grey market goods, and to protect brands in the Chinese jurisdiction.

Legal measures available to brand owners

Since grey market goods are often sold very quickly, they are difficult for brand owners to detect pre-emptively. Therefore, we recommend brand owners design and manufacture packaging labels with slight differences for different countries and regions to make it easy to detect offending products and collect relevant evidence.

Stage one: preventing grey market goods from entering the Chinese market

The best way to protect brand owners is to prevent grey market goods from entering markets. In China, for protection of the Chinese registered trademarks, patents and copyright intellectual property (IP), the General Administration of Customs (GAC) provide a filing record service on IP rights for the owners. Once the filing has been completed, the GAC’s law enforcement agency can proactively confiscate grey market goods that infringe recorded IP rights. This is a quite practicable way to decrease the possibility of grey market goods entering China at the early stage on customs clearance. Brand owners may find that filing IP rights is the most straightforward practical method. Key benefits include:

• low cost – each filing of one IP right is charged RMB800 (approx US$113) by the GAC with a ten-year validity period and is effective nationwide following completion of the filing;
• simple procedure – IP owners can register an account and file recording of IPs via GAC’s online system. All filing procedures are conducted online;
• short filing time with long protection – the GAC will issue its review opinion within 30 business days after receiving the filing. Once the filing is successful, protection lasts for ten years; and
• one filing within nationwide effect – IP owners only need to file once on the GAC system, thereafter every local Chinese customs office will execute their examinations using the system.

Stage two: how to combat the trade in grey goods if they have been distributed within China

Even if IP/brand owners have filed their IP on the GAC system, some grey markets still exist in the unauthorised markets. How should brand owners protect themselves if the grey goods have already been distributed in the Chinese market?

The perspective of IP rights protection

It is not difficult to find some clues of infringed trademarks and copyrights from the online resale of grey market goods. Introductory pages of online stores usually contain product pictures with trademarks on those products, which may infringe the rights of IP/brand owners. In China, most of the main online-shopping platforms, such as Tmall, Taobao, JD and Pinduoduo, have established their own IP complaints system to help brand owners combat infringements. For example, when a brand owner detects the introduction of grey market goods on these platforms and official pictures of the offending products, they can follow the platform’s procedure and file a complaint. If successful, the grey market goods’ store owner must delete all infringed information and pictures, which may lead the store owner being unable to sell grey market goods online.

The use of compulsory requirements on labels and packages

As above described, grey market goods are not legally counterfeit goods and, therefore, do not match the definition of ‘counterfeits’ on online platforms. Where grey online stores sell grey market goods without infringement of trademark or copyrights, there are few legal options available to brand owners. The following are ways in which labelling can help combat the problem of grey market goods.

Electronic products: the mark of CCC accreditation

Based on our past experience, grey market issues relating to electronic products are the most serious in China. We found grey market electronic products generally miss some mandatory compliance accreditations. Brand owners may crackdown on grey market goods by reporting grey market goods which break mandatory compliance requirements to the relevant law enforcement authority.

For instance, we led a case whereby a computer brand faced serious grey market goods attacks in China. In this case, most of these grey goods were sold offline. When we started collecting evidence, we found the offending grey market goods were missing the ‘China Compulsory Certificate’ (CCC) mark. Certain products must be CCC certified when imported into China. Where the products are imported and sold by an entity without such mandatory certification and accreditation, the entity is issued a correction sanction and may be fined from RMB50,000 to RMB200,000 by the relevant law enforcement agency according to clause 49 of Administrative Regulations on Compulsory Product Certification, and clause 67 of Regulations of the PRC on Certification and Accreditation (PRC RoCA). Furthermore, portable personal computers are clearly listed on the First Catalogue of Products Subject to China Compulsory Certification. A resale portable personal computer in China must have CCC mark, otherwise it breaches PRC RoCA and is subject to fines. Therefore, we assisted our client in reporting the CCC issue by submitting evidence to the relevant law enforcement agencies and successfully achieved their objectives.

Cosmetics and food product labels

In China, there are specific compulsory requirements on the labelling of imported food and cosmetics. These may provide an avenue for brand owners to combat grey market goods, provided such goods do not comply. The following cases are relevant to the cosmetics and food sectors. They were conducted from the review of labelling and offered an effective crackdown strategy in the related grey market goods market.

In a case involving a cosmetics brand, an unauthorised distributor resold the imported products online without our client’s consent. This resulted in pricing problems for the client. When we started to collect evidence, we found that almost all good distributed by unauthorised distributors did not contain the necessary Chinese labels. In China, all imported cosmetics for resale must have a label in Chinese relating to the PRC Quality Law. For the first imported cosmetics, the brand owner or brand local agency shall file an application for Recorded Certificate of Imported General-used Cosmetics ('recorded certificate') or Hygiene Permit of Imported Specific-used Cosmetics ('hygiene permit'). Once an application is accepted, the recorded certificate or hygiene permit is issued by government with a certificate or permit number which must be included on the label of imported cosmetics products in accordance with Regulations on the Hygiene Supervision of Cosmetics. In this case, the grey market goods did not contain the recorded certificate or hygiene permit number, or even the Chinese label.

It, therefore, clearly violated the PRC Quality Law and Regulations on the Hygiene Supervision of Cosmetics. Consequently, all illegal products and income from the grey market store were confiscated by the law enforcement agency.

We also advised a client with a range of food products brands whose authorised exclusive distributor in China was inundated with grey market goods. Although these grey market goods did have Chinese labels, they did not contain registered local agency information of the brand in accordance with GB 7718-2011, the Food Safety National Standards for General Rules of the Labelling of Pre-packaged Food. We, therefore, used the violations of compliance and reported the case to the relevant law enforcement agency.

Conclusion

As demonstrated by the above measures, brand owners could either take action via IP protection or report grey market activity and strengthen their distribution channels. As each sector has its own unique regulatory compliance requirements, brand owners must carefully follow every requirement and examine each piece of collected evidence with professional legal analysis to develop a full and effective legal strategy.