The Knockoff 狂标 - Snoops & Snitches

Following the launch of The Knockoff last month, my first topic kicks off where most anti-counterfeit cases start: with evidence collection. In China, the basic premise has not changed – the IP owner has to dig out evidence by themselves, and that requires time and effort upfront to build a case. There is no discovery process where the other side is required to disclose their side of the story. The civil courts have powers to conduct searches, or to shift the burden of evidence to the defendant to provide negative evidence, but even so, only after the plaintiff has done the legwork to make their case. The administrative authorities are becoming somewhat more active in bringing cases ex-officio. The PSB (police) have extensive powers of investigation if they choose to use them but will almost never take a case unless much of the picture – key locations, people – has already been filled in by private investigation.

Therefore, IP owners and, implicitly, law enforcement agencies, rely on private investigators to develop the core evidence needed to launch a case, whether by purchasing samples, trailing vehicles, or meeting targets under a false pretext. Despite this, there is no regulatory framework for this industry. So what is the legal basis for private investigations in the IP field? And how are brand protection investigations affected by the recent crackdowns on consulting companies offering market analysis and due diligence such as Bain, Mintz Group and Capvision?

On the first question, for those needing a legal summary, this can be found on a briefing by Rouse’s strategic partner, Lusheng Law Firm. Lusheng provides a more detailed Memo to clients. The quick version is as follows:

• Some of the core methods deployed in IP investigations – use of a business pretext and purchase of infringing samples – are permitted under Supreme People’s Court Provisions (“SPC Provisions”). There have also been cases in the courts where these issues have been tested, and the IP owner’s ability to collect evidence has been respected.
• As for covert video or audio recording of meetings with targets, factory tours or the process of obtaining samples, this is commonly done alongside notarization, which is essential for evidence to be used in the civil courts in China. While the “gold standard” of notarisation is to carry out the recording in front of notaries in person, this can be difficult to arrange, even with notaries who are skilled at playing along with the investigator’s undercover pretext. Nowadays, use of blockchain-enabled notarisation apps downloaded on a smartphone is also common and accepted by the courts.
• Even if the covert recording is not notarised, Lusheng’s briefing suggests that it is acceptable if it does not violate the “legitimate rights” of the subject. In practice, it seems that courts give broad leeway to the IP owner, and seem to agree that a subject engaged in IP infringement does not enjoy “legitimate rights” to protection of that information, such as the right to privacy. Surveillance, such as watching or trailing a subject, which is also a common tactic in anti-counterfeiting, falls under the same provisions. Surveillance and covert recording might violate the rights of the subject in a private setting such as their home. There are situations, of course, where counterfeiters do business at home, so this is where caution might be needed.
• Another key form of evidence gathering is through whistleblowers and informants. Whistleblowers are people within an organisation who voluntarily decide to report wrongdoing. Informants, on the other hand, are individuals who are intentionally placed as a “mole” inside an organisation by an investigation or law firm to discover infringement, most commonly on a production line or warehouse to spot counterfeit goods in process. In reality, the line between whistleblowers and informants may blur, as there is an industry of “professional” whistleblowers, who work in counterfeiting hotspots and know who to contact when they find something, while some brand owners have had successes with encouraging reporting through hotlines and rewards. Lusheng’s briefing covers the risk of violating laws relating to employment contracts or trade secrets which must be managed when informants are used, but it concludes that courts and law enforcement have weighed in favour of this method for the purpose of discovery of IP infringement behind closed doors.
• Evidence gathering must take account of the Personal Information Protection Law (PIPL), or “China’s GDPR”. There is still uncertainty about the detailed application of this relatively new law, but for a typical undercover investigation, where the target is providing their contact details as a part of a business interaction, Lusheng sees this as falling within an exception within the law. Companies should still have a compliance policy in place to identify and filter out any personal information. We will discuss data compliance in a future post.
• The kind of actions which are not permitted is clearer: investigators cannot use equipment such as covert listening devices or spy cameras, commit trespass, use fake ID cards or impersonate officials.

As Lusheng’s opinion concludes, the law permits investigators to be civilian sleuths with a smartphone and a front company, but not a “wannabe 007” with sneaky gadgets. It also helps if the investigators are employed by, or supervised by, a law firm to ensure that their agents are operating within this legal framework. IP owners should not just be vigilant about investigation practices: IP agencies in China very rarely restrict themselves to providing evidence to law firms, but offer a package of enforcement services, organizing administrative and criminal raids, as these activities do not require law firm representation. There are a number of potential unethical practices around the conduct of enforcement that IP owners should beware of, which I will cover in a later post.

So the basic acts of evidence gathering by investigators fall within some legal boundaries. How is this relevant to the recent crackdowns on consulting companies conducting due diligence, and how does the amended Anti-Espionage Law affect things? The Lusheng briefing, issued in April 2023, predates the 1st July amendment to this law.

The news reports about this crackdown provide scant details, but here is a summary of what has been reported:

• The Mintz Group, the first company targeted in March, had several staff in Beijing detained. The FT says that the company was providing due diligence on supply chains in Xinjiang: China’s ‘men in black’ step up scrutiny of foreign corporate sleuths | Financial Times (ft.com).
• Next, in April, Bain & Co. in Shanghai was investigated by state security officials, also, according to the FT, allegedly over work it had commissioned for a Korean semiconductor company to assess market size. It had paid Capvision for access to its “expert network”, who had commissioned a state-owned official to provide information.
• Then in May, Capvision itself was raided, and, as reported by CNN. Chinese TV stations aired reports saying that Capvision had illegally accessed sensitive data through its expert network. From my understanding, such “experts” as engaged by Capvision are handsomely remunerated, and often on an individual basis – they may not have received the proper approvals from their employer, which may be a state-backed company or organization.

These reports have cited revisions to the Anti-Espionage Law which expanded the definition of state secrets beyond what is specifically protected under national classification protocols to anything which may be relevant “national security interests”. This is just the latest in a series of moves to tighten up of information flows within and out of China, including in finance, research and technology sectors. The difficulty for any company operating in China is that this broadly-worded legislation appears to make all kinds of normal commercial information gathering or due diligence potentially an act of espionage. I should add that while many, including law firms,  are reacting with alarm, a detailed memo from one major law firm, Allen & Overy, takes a more measured tone, implying that the new law is not expanding the scope for criminal liability, but only codifies what was already covered in Supreme People’s Court interpretation from 2001.

A strange update to this story was provided at the end of August, when it was reported by several outlets that the Beijing Municipal Bureau of Statistics had fined Mintz Group CNY10.7M (approximately US$1.5M) for carrying out “foreign-related statistical investigations” without authorisation. It is not clear if that concludes the case or whether there are more sanctions to come, but clearly this sounds far less serious than charges of espionage. In fact, the new law provides for administrative penalties or referral of the case to other agencies where the case has not met the standard for criminal prosecution, and that may be what has happened here.

As some have mentioned, this could all be part of a tried-and-tested method in China of “kill the rooster to scare the monkey”, which means conducting a crackdown on a few targets, under some previously untested legislation, to create some fear and uncertainty across a whole sector, making the industry players self-regulating. It is an economical way to create good behaviour. Until it is clearer whether the recent raids are a warning shot, or whether a permanent adjustment to a new form of risk is needed, IP owners instructing investigations in China should seek advice from their advisors. While the following is NOT advice, based on discussions with my friends at Lusheng, my own take is as follows:

As a general rule, I believe that there is a safe harbour for investigations supervised or conducted by a domestic law firm which have, as their sole purpose, discovery of IP infringement. That does not mean, however, that all such IP infringement investigations fall within that safe harbour. For example:

It has long been known that background investigations into individuals, particularly anyone with titles in government or the Party, are highly sensitive. Background investigations on individuals is something that should be unnecessary for most IP infringement cases. Where an IP infringement case happens to involve such individuals, any investigation that targets them as opposed to gathering evidence about an entity should be treated with extreme caution.

Anything that involves, or may appear to involve, Xinjiang supply chains should be very closely reviewed. Activities in Xinjiang which are focused on IP infringement of a specific target may lower risk - fortunately, in my experience, brand protection cases in Xinjiang are relatively uncommon.

Investigations into counterfeiting activity is likely to be at low risk: counterfeiting is something that the central government also wants to tackle. And anti-counterfeiting, at its most basic level, is about chasing products through a supply chain and catching the people involved, not collecting technical information. 

Commercial investigations, i.e., for purposes of discovering information about competitors, or for potential M&A or investment, are exactly the kind of issues that can press the counter-espionage hot button. The problem is that investigations into patent or trade secret infringement, particularly relating to processes or internal operations where the relevant evidence can only be obtained from inside the organization, may involve methodologies which may look very similar commercial investigations. Where the subject matter of the investigation is a state-owned company operating in a high-tech sector that is a strategic priority for the government, I think there is real risk of exposure to accusations of industrial, and thereby state, espionage, if an investigation is not very carefully managed.

Again, the problem here is that there is a lack of specificity about where to plant the red flags, which means over-caution until it becomes clear where the boundaries lie. My own firm has put in place review processes, but by no means do we claim to have a clear roadmap through the safe harbour, and I recommend everyone to conduct their own assessments. It would probably be a good idea, however, to start with the legal framework for IP investigations, because if you are conducting IP infringement investigations for a legitimate purpose and in legitimate ways, you may be able to avoid misunderstandings as to your intentions.

Disclaimer: The views in this blog are my own and not those of my employer.