Zhou Xuan, a young professional and working mother, discovered last year the wonderful world of Taobao.com, the largest c-c online trading website in China. What she liked best were children’s clothes and shoes meant for exports to the European and American markets. These types of merchandise, with their creative designs and high quality, are not available in China’s department stores. But one can get them at Taobao at great discounts in Western markets. Transactions are easy, safe, and enjoyable.  Zhou decided to set up a store on Taobao herself. She works for a state-owned enterprise (SOE) and has plenty of time on her hands, although she does have to do manage her venture in secret.


Her store, “Aquarian Princess and Magic Wardrobe,named after Zhou and her daughter’s sign, was opened in October 2006. Zhou went to a wholesale market to carefully pick children’s clothes and shoes. She wanted only “the real stuff” – extras from the original overseas orders of branded merchandize. A month after her online store was up and running, she completed her first sale. Now the store has been operating for seven months and Zhou is pleased with her [admittedly moderate] sales. Her vision is to have a stable supply of quality merchandise and a regular group of buyers. She even dreams of working on her store full-time when sales reach a certain scale, and perhaps opening a brick-and-mortar store one day.


Zhou doesn’t realize that she might have infringed on the trademarks or copyrights of overseas brand owners. Her story is a recurrent theme on e-commerce platforms in China. More and more Chinese, especially net-savvy young people, are joining the swelling ranks of buyers and sellers online, which explains the staggering growth of online trading in China.


Booming E-commerce and Rampant IPR Infringement

According to the atest figures released by Taobao itself, the online giant now has 35.1million registered members and sells over 60 million pieces of merchandise. In fact, Taobao’s transaction values in 2006 already exceeded RMB16.9 billion (US$2.1 billion), overtaking Lotus (RMB10billion,US$1.25billion ) and Wal-Mart (RMB9,93 billion,US$1.24billion ) in China.


According to Taobao, in the first quarter of 2007, daily transactions were close to RMB100million and total Q1 transaction exceeded RMB7billion. There were 100,000 sellers with monthly profits over RMB2,000. Sun Tongyu, president of Taobao, estimated that by 2009, Taobao would support RMB 100 billion (US$12.5 billion-worth transactions and create one million jobs in China.


Jack Ma, founder and CEO of Alibaba, is pleased that his company sells things “as big as cars, machines and houses, and as small as cosmetics and pens … Whether you are a giant like Lenovo, or a storefront of just several people, whether you are a female PhD in Beijing or an unemployed youth in Zhengzhou [a city in the middle of China], you can sell things and make money on our website,” he told the Economist.


But as e-commerce grows to be a major force in retailing, the legitimacy question has inevitably arisen and scrutiny has intensified. Online members sell numerous branded merchandises online. Some, if not most of them, have obviously not been authorized by brand owners. “Intellectual Property Rights (IPR) infringement in e-commerce is still rampant today”, Shang Jiangang, partner and attorney-at-law of Shanghai Diligence Law Firm, an IPR specialist, told China Knowledge@Wharton. “Every style of IPR infringement offline is also reflected in the online space,” added Spring Liu, attorney-at-law with Guangsheng & Partners (G&P), a law firm based in Beijing.


A few high-profile lawsuits involving IPR infringement in e-commerce seem to echo this judgment. Last year, Nike sued “King of Ball Game in a Century,” an online store on e-Bay China operated by a former professional sportsman in Shanghai. The store owner, Zhuang, spent RMB90,000 to buy 1,069 fake Nike shoes from a couple of wholesalers in Fujian province, south of China, and sold them on e-Bay. Nike asked for RMB200,000 in compensation. Under court mediation, the two parties settled and Zhuang eventually paid Nike RMB60,000 in compensation. Huangpu District Court in Shanghai further sentenced Zhuang to nine months in imprisonment (which was later suspended.)  


In 2006, a Danish company, owner of branded clothes ONLY, VERO MODA and JACKJONES, sued e-Bay China directly. The plaintiff claimed that there were as many as 73 stores on e-Bay selling unauthorized ONLY, VERO MODA and JACKJONES merchandise at great discounts off prices at authorized counters, and asked for RMB200,000 compensation. This time, Shanghai No. 1 Intermediate People’s Court didn’t support the plaintiff’s claim on the grounds that e-Bay as a platform didn’t infringe on the plaintiff’s trademarks itself, and that e-Bay was unable to control the tremendous amount of information on its site.


What Role E-commerce Platforms Should Play

Have online platforms such as Taobao and e-Bay done enough to provide IPR protection? Lu Weixing, public relations manager of Taobao’s Strategic Marketing Center, responded by saying that “Taobao fully conforms to Chinese laws and regulations.” He added that if “brand owners lodge a complaint, we deal with it promptly. We take off the concerned merchandises and even shut down the stores.” Lu said that “Taobao has already worked with brand owners such as Shiseido, Nike and Adidas to tackle these issues together. These brand owners even opened retail fronts themselves directly on Taobao. They employ defensive as well as offensive measures.”


Liu from G&P suggested that companies borrow the “Safe Goalkeeper’s Principle”, which has proven quite effective with search engines. It works as follows: An IPR claimant reports an infringer website to a search engine. If the search engine has adequate reason to believe there is indeed infringement, it is obliged to delete the website. Otherwise, the search engine announces it on its site and leaves the claimant and the accused party to resolve the issue among themselves. Liu thinks it can work with e-commerce as well.


But Shang from Shanghai Diligence law firm suggested that online platforms should and could actually do even more. For example, a declaration system can be effective, said Shang. Online platforms can track online stores over a certain amount of transaction values. Secondly, top brands should be given priorities in IP rights protection.


On April 19th 2007, the Shanghai Administration of Industry and Commerce issued a second order banning the sales of 20 top labels in small markets, including Giorgio Armani, Versace, Burberry, the North Face, Ermenegildo Zegna, Omega and Rolex. The first order, issued in October 2004, banned the sale of 40 labels in small markets,. But there is no indication that online platforms such as Taobao and e-Bay are prepared to apply such stringent methods at this stage.


Shang acknowledged the issue of high costs in policing and cracking down on online IP rights infringement. As the secretary general of IP Rights Centre of National Animation Industry Development Base, he is now working on a program to develop an accreditation system of online stores for e-commerce platforms. “Taking legal action towards IPR infringement can be very costly with little effect. Our thinking is to set up a third-party system offering accreditation service to online platforms, and to help the latter to take the initiative to recognize brands and actively screen stores in advance before infringement can actually happen.”


China’s Legislation and Enforcement

“First, you should note that IP rights infringement is not worse online than offline,” said Shang, “In fact, a lot of times, online shops are more trustworthy due to the credit system. You go to second-tier, third-tier cities in China, and sometimes you dare not buy things even in downtown department stores. What about those roadside stalls? Aren’t they all selling fakes?”


IP rights protection online in China is getting better every year,” added Liu, “To put it in our terms, there are fewer and fewer high-quality, lawsuit-worthy subjects (i.e., big infringers) these days, indicating much improved legislation and law enforcement.”


Liu explained that China’s online IP rights protection legislation is, in fact, up to international standards, and the government devotes a lot of efforts to enforcement, arguably under international pressure, although he acknowledged that efforts vary in different regions. In Shanghai, enforcement is fast and efficient. “For example, if an offense is reported in the afternoon, the Shanghai police can take action on the same evening,” said Liu. On April 20th, 2007, Shanghai had an IPR Week in Zhangjiang High-Tech Park publicizing Shanghai’s achievements in IPR protection and promoting IPR knowledge to the general public. </SPA