The name Silk Market used to refer to one of Beijing's top tourist attractions and bargaining hot spots: a 20-year-old outdoor market where visitors flocked to buy cheap imitations of name-brand merchandise. But the name was co-opted in January 2005, when the city shut down the market and a new department store calling itself the Silk Market sprang up next door.

The old market's regular customers claimed it wasn't the same, but the new Silk Market did keep one tradition alive: it continued to sell fakes. Five international luxury brands - Prada, Chanel, Gucci, Burberry and Louis Vuitton ¨C banded together to file suit against Beijing Xiushui Haosen, Silk Market's owning company, claiming that imitations of their brands were being sold on the premises. In December, a Beijing court ruled in favor of the brands. The verdict: US$24,800.

The dollar value may look small, but this was more than just one case. A victory for a foreign company in a Chinese intellectual property lawsuit is rare, and yet the end of 2005 brought not one but three high-profile IP court battles that showed promising results.

Critics claim that not enough has been done, but slow change in the direction of protecting intellectual property is being made, and there are other encouraging signs. The government announced that China's courts tried 12,700 civil IPR cases in the first 11 months of 2005, up 27 percent from the same period in 2004. Overall, China is beginning to get serious about protecting IPR, and companies are finding better ways of having them enforced. Perhaps pressure from foreign institutions and business interests is having some effect after all.

Grounds for dispute

In Shanghai, Starbucks sued Xingbake, a local coffee store that uses an identical Chinese trade name to Starbucks' - as well as a conspicuously similar green and white logo with a steaming cup of coffee in place of the Starbucks emblem's wavy-haired nymph. In December, the court awarded Starbucks a verdict of US$60,000, and ordered the defendant to apologize in local papers.

While Shanghai Xingbake argued that it had registered as a company in Shanghai in 1999, before Starbucks had, the American coffee giant countered that it had registered its Chinese trademark name for use nationwide a year earlier. Then, Xingbake tried playing dumb, dubiously claiming that the whole matter was a coincidence. "I hadn't heard of Starbucks at that time," a manager was quoted as saying in 2003. "How could I imitate its brand or logo?" No such luck. In the ruling, the court found Xingbake's name and logo to be "clearly malicious" and unfairly competitive.

In Tianjin, Luxembourg-based chocolate maker Ferrero Rocher won a suit against Montresor Food (Zhangjiagang), whose Tr¨¦sor Dore candies' logos and gold-foil packaging resembled Ferrero's.

The city's high court ordered Montresor to pay Ferrero US$87,000 and halt production of the chocolates.

All of the decisions in these cases are still pending appeal, but the rulings are an encouraging sign of reform taking effect. "I think what this signals is a lot more trust in the Chinese court system for dealing with difficult issues," says Joe Simone, a partner at the law firm Baker & McKenzie who advised the five luxury brands in the Silk Market case. "The courts really aren't that bad. There are experts in the major cities in the courts, and there's a specialized IP tribunal now. They know what they're doing."

Struggle against the landlords

Of the three recent suits, the Silk Market case in particular stands out as the first time a company has successfully held a landlord of a large market in China legally responsible for the selling of fake goods by its tenants. The ability to confront both vendors and their landlords with lawsuits would be a useful new weapon for rights holders as they fight infringement - if the ruling is upheld, that is. "We need a nice, clear statement from the courts," Simone says.

"They need to decide how important it is for the civil courts to be giving brand owners new ammunition."

With or without the courts, Simone thinks that landlords will be increasingly pressured to make sure their lessees are selling real merchandise.

Already, Beijing's Administration for Industry and Commerce (AIC) - which has begun experimenting, product sector by product sector, with requiring vending booth owners to provide evidence that they are authorized to sell from brand owners.

"They've already had some success with it at another market in Beijing," Simone says. "If they can do that in places like Silk Market and in other small markets, that could really help push the problem onto the streets, which is where it belongs."

Baker & McKenzie is collaborating with the Beijing city government and the AICs to put in place a "two-strike" policy on enforcement. The policy would dictate that after an initial warning to a vendor found selling fake merchandise - as well as his landlord - authorities issue a 30-day suspension from the market on the first strike, and take away the vendor's business license on the second.

Simone is hoping that there can be two strikes "with a twist", to further harass landlords into keeping an eye on their tenants. His "twist" is a provision that shop owners would be forced to include in contracts with lessees that the security deposit for the store or booth goes back to fund IP enforcement work in the event of a conviction. Currently, whenever a lease is terminated with cause, the security deposit ¨C "which is hefty", Simone notes - goes back to the landlord. "We think that's unfair," he says.

Applying pressure

International businesses have been finding ways to pressure the government to improve IPR protection standards. The European Chamber's efforts are a good example: the Chamber's 2005 Position Paper, published in September, lists recommendations for improvements to specific IP-related laws and enforcement issues, as well as raising industry-specific concerns. The Chamber's IPR Working Group is also using meetings with high-level government officials as a forum to discuss problems and voice the concerns of its member companies.

"The idea is to establish constant contact on each side - the government's and ours," says Thomas Pattloch, Chairman of the Shanghai IPR Working Group. "Over time, that has led to more trust and a higher comfort level - we are now seen as a kind of high-level talking partner."

This closer contact is yielding some results. Recently released criminal guidelines reflected the Chamber's input. In 2005, the Chinese government invited the European Chamber and a few other chambers of commerce to provide suggestions in the drafting of a new anti-unfair competition law, which has taken longer than planned to be finalised. "It could be a sign our recommendations to rethink certain paragraphs have been taken seriously," Pattloch says.

This is not to say that foreign companies can effect change across the board. "In China, if you want to get a response, you have to focus on the issues that you want," Pattloch says. "But if you repeat yourself enough and continuously apply pressure, then eventually there will be some kind of response." In the case of the unfair competition law, the Chamber focused on improvement of design patent legislation - what the Position Paper refers to as the "slavish imitation of the shape of a product".

Accession to the WTO has also helped enormously to raise awareness of the need for IP protection, according to Pattloch.

"Awareness among high-ranking Chinese authorities is now very high," he says. But even with the window for China's WTO commitments expiring at the end of this year, there is no clear deadline for China to reach certain standards. "Because IPR is a horizontal issue - in that it isn't implemented from the top down and affects all different sectors - there aren't the same types of benchmarks for progress as there are in other areas," says Pattloch.

But awareness is not limited to just government officials. As private Chinese businesses mature, they are realising the value of IPR in ways that the big state-owned enterprises have never had to.

Today, the majority of civil litigation and trademark disputes are not between foreign companies and domestic ones - it is Chinese companies suing other Chinese companies.

There is a growing sense in China that intellectual property is not simply an issue that foreigners need to be worried about.

China wants to have powerful brands that it can project around the world, but to get there it must be able to protect them properly from imitators. The Ministry of Commerce recently announced that the government will provide a US$86.4 million fund in 2006 to help domestic companies build their brands with legal IPR protection and boost research and development for well-known Chinese companies like Haier, Lenovo and Tsingtao.

Enforcement obstacles

But while the desire is there, the means to enforce IPR are still lacking. Simone of Baker & McKenzie believes that both the government and companies have relied too much on administrative crackdowns, driven by policy rather than any legal foundation to curb piracy. While they have done that, the other two enforcement options - criminal and civil - have deteriorated from lack of use, he says.

The periodic crackdowns are hopelessly ineffective.

There are some temporary results - stores selling fakes close down and violators are fined ¨C but once a campaign ends, enforcement effectively ends as well. The stores open their doors again and continue doing business as usual. In short, as a report by the US Trade Representative office pointed out, administrative actions are "not having a deterrent effect".

Criminal enforcement has not fared much better so far. "The police don't have a law to go after the small guys," says Simone. "So they just basically say, ˇ®forget it'." In the case of warehouses of fake goods - and tracking down the original factories where they were made - little is being done. Rules for stricter punishments for repeat offenders, a common principle in the West, still do not exist in China. The EU Chamber's Position Paper proposes that cases involving repeat counterfeiters automatically become criminal matters rather than civil violations.

While the numbers have gone up dramatically ¨C year-on-year increases in arrests, prosecutions and convictions are reportedly in the 50-100 percent range - those numbers were low to begin with, so the overall effect is still small.

"The trickle-down deterrent that comes from increased criminal enforcement will take a couple of years to make a difference," Simone says.

The court system, for all its merits, is still young. And while civil litigation can work in the larger eastern cities, there is a steep drop-off in experience and IP know-how the further one gets away from them, and favorable decisions are less certain. "Other regions sometimes may rely on semi-legal industries to safeguard or help create jobs and social stability," Pattloch says. "The level of local protectionism and nepotism can play a crucial role for IP protection." In other words, political pressure to side with local industry over foreign patent holders can be a factor.

And while rulings in courts in the major cities are usually seen as fair, litigation in China is a costly process, especially for small and medium companies. The mainland currently has no service like that offered in Hong Kong, where customs conducts investigations on behalf of anyone who files a complaint. Instead, plaintiffs are responsible for collecting all of the evidence, which can be a tedious - and expensive - process for foreign companies in China. "If you bang hard enough on any individual case, you will probably get a positive result," Simone says. "But it does take time and resources, and that is where things have got to change."

Meanwhile at Silk Market, you can still find fake Louis Vuitton bags on sale for RMB100 - the case is awaiting an appeal process that could take up to two years. But everyone will be paying close attention to the outcome, and will wait to see what happens from there. One thing is certain: getting China to play straight on IPR will be a step-by-step process.

"For us, the idea is to get Beijing to do it right," Simone says. "We're trying to get the government to support us against all the major markets, but initially in Beijing, then in other cities."