Special Report: Intellectual Property Rights

Using PRC Customs to Protect IPR

New customs rules give IP owners more options, but owners must prepare to make quick and potentially risky decisions

by Neal Stender, Laetitia Tjoa, Yuanming Wang, and Yan Zeng

Recent changes to PRC law affect Customs's treatment of imported or exported goods that infringe intellectual property (IP) rights. These changes deserve careful attention from all IP owners. Some of the changes are welcome: More IP owners will find it attractive and affordable to seek Customs seizure of import and export shipments. Also, recording IP rights before requesting a seizure with Customs is now optional, rather than necessary. The new rules and implementing measures also help to clarify the division of responsibilities and procedures between the national-level General Administration of Customs and local Customs bureaus. (Most procedures will continue to be handled at the local level.) Other changes, however, are less favorable to IP owners, who will face difficult decisions and some higher risks.

Tough decisions

Under the revised PRC Rules on Customs Protection of Intellectual Property Rights, which took effect March 1, and their implementing measures, which took effect July 1, IP owners must make five key decisions. First, IP owners must decide whether to record IP rights with Customs. Second, if they have recorded a right, IP owners must decide whether to give Customs a general security deposit in advance or make a deposit each time they request detention of suspected infringing goods. Third, IP owners must decide—on short notice—whether to risk substantial liability by requesting Customs to detain suspected infringing goods. Fourth, if Customs does not find infringement, IP owners must decide whether to sue the infringer and ask PRC courts to order Customs to continue to detain suspected goods as evidence. Finally, if Customs has found goods to be infringing, IP owners must decide whether to purchase them from Customs or to allow Customs to make other disposal arrangements.

To record, or not to record?

Recording an IP right with Customs is no longer a precondition for Customs detention of infringing goods, but recording allows IP owners to obtain the most protection under the new rules, as shown by the following comparison.

For either a recorded or an unrecorded IP right

The IP owner may ask Customs to monitor a particular shipment of suspected infringing goods.
To detain goods, the IP owner must request detention, submit infringement evidence, and arrange a security deposit. The shipment will be released unless these are done within three days after the IP owner receives the Customs notice that identifies a shipment of suspected infringing goods.
The IP owner may apply to inspect the detained goods itself.
The applying IP owner must bear liability for any damages to other parties resulting from a detention that is later found to be unjustified.
When Customs disposes of the infringing goods, IP owners may purchase the goods, rather than risk possible disposal of the goods into the China market (see "Disposal concerns").

For an unrecorded IP right

Customs normally requires a separate security deposit to detain each shipment.
Customs will not detain goods beyond 20 days unless the IP owner obtains a preliminary order for such an extension from a PRC court (assuming that the investigation was initiated by the IP owner rather than Customs).

For a recorded IP right

Even without a request by the IP owner, Customs has a duty to monitor imports and exports for infringement of the recorded IP right and to notify the IP owner when Customs has identified a shipment as a potential target for detention.
IP owners can apply to make a general security deposit to Customs. This makes it easier for the IP owner to meet the deposit requirement when requesting detention of a particular shipment.
If Customs detains suspect goods as part of a Customs-initiated investigation, Customs will continue the IP investigation on its own. If, after 30 days, Customs cannot determine that the goods are infringing, it will extend the detention by 20 days during which the IP owner may obtain a preliminary PRC court order for further extension.

The application fee for recording each separate IP right is now ¥800 ($97), down from ¥1,000 ($121) under the previous rules. The new rules also lengthen the term of a recordation from 7 to 10 years, but this term will not extend beyond the expiration of a PRC IP right registration. (Certain IP rights, such as trademarks and patents, are only valid in China if the owner obtains, maintains, and renews a registration with the relevant PRC authority.) The recordation must be amended if the ownership, or other aspects of the IP right, changes.

IP owners' increased risks

Under the new rules, IP owners bear expanded liability for detention decisions. These decisions must now be made within three days—often too short a period to consider all aspects involved

Under the new rules, IP owners bear expanded liability for detention decisions. These decisions must now be made within three days—often too short a period to consider all aspects involved.

According to the rules, the IP owner-applicant is liable for compensating any damages caused by detention if "actual infringement of protected IP rights is not eventually confirmed" by Customs or by the PRC courts. Because this wording omits any deadline, and implies that "no finding" might have the same result as a finding of "no infringement," it raises the troubling possibility that liability might arise when Customs and the courts do not confirm either infringement or noninfringement. In practice, the IP owner will likely only be liable when goods are affirmatively found to be noninfringing.

Also troubling is the way the rules address the possibility of damages resulting from nondetention. With the apparent goal of insulating Customs from liability for nondetention, the new rules state that the applicant shall be responsible for damages arising from "failure of Customs to discover the infringing goods due to the IP owner's failure to provide accurate information, and/or from Customs' failure to take timely and appropriate measures against the infringement."

These detailed provisions are less favorable to IP owners than the vaguer, previous rules, under which Customs could and did—after sufficient lobbying and provision of evidence by IP owners—make detention decisions.

Role of courts

Linking PRC courts to Customs protection procedures bridges the previously frustrating gap between the two departments. But the nature of the new link is a setback for IP owners, who have historically had more difficulty obtaining appropriate proceedings, findings, orders, awards, and penalties from PRC courts than obtaining administrative action from Customs, although there have been recent improvements in the court system (see Intellectual Property Litigation in China). IP owners will find it especially difficult to obtain a preliminary court order within the short 20-day period, as discussed above.

Security deposit and costs

The security deposit covers potential storage, disposal, and damage costs. The deposit amount for a particular detention shall not exceed more than the goods' value. The rules, however, contain conflicting provisions on whether the amount could be substantially lower in some cases. Under the rules, Customs may also accept an advance general security deposit, normally of ¥200,000 ($24,155). This general deposit could be attractive to any IP owner that may need to deal with multiple infringing shipments, especially if those shipments might pass through different PRC ports or regions. Customs may accept this general deposit at the national level and then apply it to detentions by various local Customs bureaus.

IP owners have the legal right to seek recovery of storage and disposal costs from those found responsible for an infringing import or export shipment. But pursuing this legal right will entail additional costs, and it is often difficult to ascertain in advance whether a responsible party can be found and forced to pay.

In addition to paying these costs, it is possible, under other regulations, to force a responsible party to pay compensation for an IP owner's other damages, and to pay fines or suffer imprisonment. But pursuing these remedies remains uncertain and expensive—generally costing the IP owner more than the responsible party's compensation and fines.

Disposal concerns

New disposal provisions raise additional concerns. If the IP owner declines to purchase detained goods that are found to be infringing, Customs may sell them by auction to cover costs after removing the infringing characteristics, though Customs expects IP owners to bear costs when auction proceeds are insufficient. When infringing characteristics cannot be removed, Customs may either destroy the goods or donate them to charitable organizations. Such a donation would mean that beneficiaries of the organization would be using infringing goods—which raises the question of whether infringing goods will make their way back into the general market.

A boost for anti-infringement programs

Merely by recording an IP right, an IP owner has a chance to obtain, through Customs's monitoring, a clearer picture of the number and size of suspect shipments.

For years, the only way for IP owners to make substantial progress against infringers in China was to implement programs to collect evidence and request government action. But the success of such programs was far from assured, and expenses were high and difficult to budget—largely because of the need to lobby government officials for favorable interpretation of, and action on, vague regulations.

The new rules, however, make expenses more predictable and progress more likely when IP owners consider undertaking an anti-infringement program focused on Customs monitoring and seizures. Initially, merely by recording an IP right, an IP owner has a chance to obtain, through Customs's monitoring, a clearer picture of the number and size of suspect shipments. Later, an IP owner can request detention with a high level of confidence that Customs will detain and investigate the identified shipments. If the evidence of infringement is beyond doubt, the IP owner can also have a certain level of confidence that Customs itself will find infringement, making it unnecessary for the IP owner to bear the higher and less predictable costs of PRC court proceedings.

Two steps forward and two steps back?

The new rules increase the clarity and transparency of Customs procedures, but also give Customs too much discretion and protection, thereby imposing several difficult decisions and potential burdens on IP owners. Many observers hope that as Customs implements the rules and measures over time, IP owners' risks will decrease. Meanwhile, IP owners that record their IP rights and make a general security deposit as part of an anti-infringement program stand to benefit most from the new rules.

IP owners would do well to consider recording at least their most valuable IP rights with PRC Customs.

IP owners would do well to consider recording at least their most valuable IP rights with PRC Customs. Even without further action, recording will increase the owner's information about shipments of suspected infringing goods into and out of China. This can serve as an early warning system to prevent the IP owner from being blindsided by counterfeiters targeting export markets. If further action is needed, the IP owner could take full advantage of the new rules by making a general deposit, notifying Customs of suspect shipments, and compiling as much infringement evidence as possible in advance of Customs' detention. As with many PRC regulations, the new Customs rules will give the most help to those who help themselves.

How to Record IP Rights with PRC Customs

Step 1. Collect the necessary forms

Recordation application form (in Chinese)
Power of attorney form (bilingual Chinese and English) designating the person, if other than the applicant's legal representative, authorized to liaise with Customs on the applicant's behalf

One of each form is needed for each intellectual property (IP) right. These forms are posted on the PRC General Administration of Customs website (www.customs.gov.cn/ipr/ipr2001c/ReadNews.asp?NewsID=343&BigClassID=25&SmallClassID=53&SpecialID=27).

Step 2. Assemble the attachments

Copy of certification of IP right
Copy of certification of identity of IP owner
Copy of agreements and/or statements proving grant of IP use rights to PRC licensees (if any)
Photo of goods and packaging using IP right (if applicable)
Evidence of known import or export of infringing goods (if any)
Copy of bank proof of recordation fee remittance
Other documents that Customs may request

Step 3. Send documents

Mail forms and attachments to:
General Administration of Customs
Policy and Law Division, Office of Intellectual Property Rights Protection
6 Jianguomennei Dajie
Beijing 100730

Step 4. Wait for approval

Customs must approve or reject the recordation within 30 days after receiving the full application package.

Step 5. Check recordation

IP owners can check and amend the recordation online (www.customs.gov.cn).

—Neal Stender, Laetitia Tjoa, Yuanming Wang, and Yan Zeng

Neal Stender and Laetitia Tjoa are partners at Coudert Brothers LLP in Hong Kong and Beijing, respectively.

Yuanming Wang and Yan Zeng are associates at Coudert Brothers in Beijing and Los Angeles, respectively.

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	Special Report: Intellectual Property Rights Using PRC Customs to Protect IPR New customs rules give IP owners more options, but owners must prepare to make quick and potentially risky decisions by Neal Stender, Laetitia Tjoa, Yuanming Wang, and Yan Zeng Recent changes to PRC law affect Customs's treatment of imported or exported goods that infringe intellectual property (IP) rights. These changes deserve careful attention from all IP owners. Some of the changes are welcome: More IP owners will find it attractive and affordable to seek Customs seizure of import and export shipments. Also, recording IP rights before requesting a seizure with Customs is now optional, rather than necessary. The new rules and implementing measures also help to clarify the division of responsibilities and procedures between the national-level General Administration of Customs and local Customs bureaus. (Most procedures will continue to be handled at the local level.) Other changes, however, are less favorable to IP owners, who will face difficult decisions and some higher risks. Tough decisions Under the revised PRC Rules on Customs Protection of Intellectual Property Rights, which took effect March 1, and their implementing measures, which took effect July 1, IP owners must make five key decisions. First, IP owners must decide whether to record IP rights with Customs. Second, if they have recorded a right, IP owners must decide whether to give Customs a general security deposit in advance or make a deposit each time they request detention of suspected infringing goods. Third, IP owners must decide—on short notice—whether to risk substantial liability by requesting Customs to detain suspected infringing goods. Fourth, if Customs does not find infringement, IP owners must decide whether to sue the infringer and ask PRC courts to order Customs to continue to detain suspected goods as evidence. Finally, if Customs has found goods to be infringing, IP owners must decide whether to purchase them from Customs or to allow Customs to make other disposal arrangements. To record, or not to record? Recording an IP right with Customs is no longer a precondition for Customs detention of infringing goods, but recording allows IP owners to obtain the most protection under the new rules, as shown by the following comparison. For either a recorded or an unrecorded IP right The IP owner may ask Customs to monitor a particular shipment of suspected infringing goods. To detain goods, the IP owner must request detention, submit infringement evidence, and arrange a security deposit. The shipment will be released unless these are done within three days after the IP owner receives the Customs notice that identifies a shipment of suspected infringing goods. The IP owner may apply to inspect the detained goods itself. The applying IP owner must bear liability for any damages to other parties resulting from a detention that is later found to be unjustified. When Customs disposes of the infringing goods, IP owners may purchase the goods, rather than risk possible disposal of the goods into the China market (see "Disposal concerns"). For an unrecorded IP right Customs normally requires a separate security deposit to detain each shipment. Customs will not detain goods beyond 20 days unless the IP owner obtains a preliminary order for such an extension from a PRC court (assuming that the investigation was initiated by the IP owner rather than Customs). For a recorded IP right Even without a request by the IP owner, Customs has a duty to monitor imports and exports for infringement of the recorded IP right and to notify the IP owner when Customs has identified a shipment as a potential target for detention. IP owners can apply to make a general security deposit to Customs. This makes it easier for the IP owner to meet the deposit requirement when requesting detention of a particular shipment. If Customs detains suspect goods as part of a Customs-initiated investigation, Customs will continue the IP investigation on its own. If, after 30 days, Customs cannot determine that the goods are infringing, it will extend the detention by 20 days during which the IP owner may obtain a preliminary PRC court order for further extension. The application fee for recording each separate IP right is now ¥800 ($97), down from ¥1,000 ($121) under the previous rules. The new rules also lengthen the term of a recordation from 7 to 10 years, but this term will not extend beyond the expiration of a PRC IP right registration. (Certain IP rights, such as trademarks and patents, are only valid in China if the owner obtains, maintains, and renews a registration with the relevant PRC authority.) The recordation must be amended if the ownership, or other aspects of the IP right, changes. IP owners' increased risks Under the new rules, IP owners bear expanded liability for detention decisions. These decisions must now be made within three days—often too short a period to consider all aspects involved Under the new rules, IP owners bear expanded liability for detention decisions. These decisions must now be made within three days—often too short a period to consider all aspects involved. According to the rules, the IP owner-applicant is liable for compensating any damages caused by detention if "actual infringement of protected IP rights is not eventually confirmed" by Customs or by the PRC courts. Because this wording omits any deadline, and implies that "no finding" might have the same result as a finding of "no infringement," it raises the troubling possibility that liability might arise when Customs and the courts do not confirm either infringement or noninfringement. In practice, the IP owner will likely only be liable when goods are affirmatively found to be noninfringing. Also troubling is the way the rules address the possibility of damages resulting from nondetention. With the apparent goal of insulating Customs from liability for nondetention, the new rules state that the applicant shall be responsible for damages arising from "failure of Customs to discover the infringing goods due to the IP owner's failure to provide accurate information, and/or from Customs' failure to take timely and appropriate measures against the infringement." These detailed provisions are less favorable to IP owners than the vaguer, previous rules, under which Customs could and did—after sufficient lobbying and provision of evidence by IP owners—make detention decisions. Role of courts Linking PRC courts to Customs protection procedures bridges the previously frustrating gap between the two departments. But the nature of the new link is a setback for IP owners, who have historically had more difficulty obtaining appropriate proceedings, findings, orders, awards, and penalties from PRC courts than obtaining administrative action from Customs, although there have been recent improvements in the court system (see Intellectual Property Litigation in China). IP owners will find it especially difficult to obtain a preliminary court order within the short 20-day period, as discussed above. Security deposit and costs The security deposit covers potential storage, disposal, and damage costs. The deposit amount for a particular detention shall not exceed more than the goods' value. The rules, however, contain conflicting provisions on whether the amount could be substantially lower in some cases. Under the rules, Customs may also accept an advance general security deposit, normally of ¥200,000 ($24,155). This general deposit could be attractive to any IP owner that may need to deal with multiple infringing shipments, especially if those shipments might pass through different PRC ports or regions. Customs may accept this general deposit at the national level and then apply it to detentions by various local Customs bureaus. IP owners have the legal right to seek recovery of storage and disposal costs from those found responsible for an infringing import or export shipment. But pursuing this legal right will entail additional costs, and it is often difficult to ascertain in advance whether a responsible party can be found and forced to pay. In addition to paying these costs, it is possible, under other regulations, to force a responsible party to pay compensation for an IP owner's other damages, and to pay fines or suffer imprisonment. But pursuing these remedies remains uncertain and expensive—generally costing the IP owner more than the responsible party's compensation and fines. Disposal concerns New disposal provisions raise additional concerns. If the IP owner declines to purchase detained goods that are found to be infringing, Customs may sell them by auction to cover costs after removing the infringing characteristics, though Customs expects IP owners to bear costs when auction proceeds are insufficient. When infringing characteristics cannot be removed, Customs may either destroy the goods or donate them to charitable organizations. Such a donation would mean that beneficiaries of the organization would be using infringing goods—which raises the question of whether infringing goods will make their way back into the general market. A boost for anti-infringement programs Merely by recording an IP right, an IP owner has a chance to obtain, through Customs's monitoring, a clearer picture of the number and size of suspect shipments. For years, the only way for IP owners to make substantial progress against infringers in China was to implement programs to collect evidence and request government action. But the success of such programs was far from assured, and expenses were high and difficult to budget—largely because of the need to lobby government officials for favorable interpretation of, and action on, vague regulations. The new rules, however, make expenses more predictable and progress more likely when IP owners consider undertaking an anti-infringement program focused on Customs monitoring and seizures. Initially, merely by recording an IP right, an IP owner has a chance to obtain, through Customs's monitoring, a clearer picture of the number and size of suspect shipments. Later, an IP owner can request detention with a high level of confidence that Customs will detain and investigate the identified shipments. If the evidence of infringement is beyond doubt, the IP owner can also have a certain level of confidence that Customs itself will find infringement, making it unnecessary for the IP owner to bear the higher and less predictable costs of PRC court proceedings. Two steps forward and two steps back? The new rules increase the clarity and transparency of Customs procedures, but also give Customs too much discretion and protection, thereby imposing several difficult decisions and potential burdens on IP owners. Many observers hope that as Customs implements the rules and measures over time, IP owners' risks will decrease. Meanwhile, IP owners that record their IP rights and make a general security deposit as part of an anti-infringement program stand to benefit most from the new rules. IP owners would do well to consider recording at least their most valuable IP rights with PRC Customs. IP owners would do well to consider recording at least their most valuable IP rights with PRC Customs. Even without further action, recording will increase the owner's information about shipments of suspected infringing goods into and out of China. This can serve as an early warning system to prevent the IP owner from being blindsided by counterfeiters targeting export markets. If further action is needed, the IP owner could take full advantage of the new rules by making a general deposit, notifying Customs of suspect shipments, and compiling as much infringement evidence as possible in advance of Customs' detention. As with many PRC regulations, the new Customs rules will give the most help to those who help themselves. How to Record IP Rights with PRC Customs Step 1. Collect the necessary forms Recordation application form (in Chinese) Power of attorney form (bilingual Chinese and English) designating the person, if other than the applicant's legal representative, authorized to liaise with Customs on the applicant's behalf One of each form is needed for each intellectual property (IP) right. These forms are posted on the PRC General Administration of Customs website (www.customs.gov.cn/ipr/ipr2001c/ReadNews.asp?NewsID=343&BigClassID=25&SmallClassID=53&SpecialID=27). Step 2. Assemble the attachments Copy of certification of IP right Copy of certification of identity of IP owner Copy of agreements and/or statements proving grant of IP use rights to PRC licensees (if any) Photo of goods and packaging using IP right (if applicable) Evidence of known import or export of infringing goods (if any) Copy of bank proof of recordation fee remittance Other documents that Customs may request Step 3. Send documents Mail forms and attachments to: General Administration of Customs Policy and Law Division, Office of Intellectual Property Rights Protection 6 Jianguomennei Dajie Beijing 100730 Step 4. Wait for approval Customs must approve or reject the recordation within 30 days after receiving the full application package. Step 5. Check recordation IP owners can check and amend the recordation online (www.customs.gov.cn). —Neal Stender, Laetitia Tjoa, Yuanming Wang, and Yan Zeng Neal Stender and Laetitia Tjoa are partners at Coudert Brothers LLP in Hong Kong and Beijing, respectively. Yuanming Wang and Yan Zeng are associates at Coudert Brothers in Beijing and Los Angeles, respectively. Top of Page Table of Contents
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