China: An Overview Harley I. Lewin Greenberg Traurig LLP. An International Law Firm

1. November 14, 2006KNOCK IT OFF!American Apparel & Footwear AssociationBrands And The Counterfeiting QuandaryFashion Institute of Technology, New York China: An Overview Harley I. Lewin Greenberg Traurig LLP. An International Law Firm

2. Perspective: More Profitable than NarcoticsLess Risk(Partners don’t kill you; little jail; low fines)Example: Cartier fake watch imported into USA for USD$1.82Sells on Canal Street for $25-50Sells on Internet for $150One Ring: $8,000,000 per month $50,000,000 in profits since 1997

3. How Does China Fit In? • 15-20% of China’s GNP • Government’s own estimate: $16-20 billion USD • Two years ago China “boasted” they intercepted and destroyed 33 million bogus disks and videos • Every consumable item; Prunes in Thailand • Minor penalties; Average 750rmb

4. Is It Working? – Despite Government resolve, challenges appear to have increased • Survey in 2004 of major companies – 72% same or worse • 66% - fakes at least 5% more of market; 34% say at least 10% • Export problems have increased • Percent of seizures in U.S. And EU has increased • Criminal enforcement – almost impossible; 14,000+ AIC cases; less than 1% go criminal.

5. Is It Working? – Despite Government resolve, challenges appear to have increased • Corruption/local protectionism remains high • Statistics show jump in prosecutions but negligible results. • What does this mean: First Steps: Self-Help

6. China: What to Do Before You Get There • Register in English, all variations • Register in Chinese, all variations • In Strange and Wonderous Ways • Use Local Chinese Watch Service • Oppose Everything That is Close • Watch Hong Kong Corporate Registry for Shadow Companies • Feedback System to Gather Information • Early Retention of Outside Counsel • Systematic Strategic Approach; Reactive Doesn’t Work

7. Make Very Sure Your Documents Are Good Ones, Tailored for China • Purchase Order • Terms and Conditions of Sale • IPR statements everywhere • Customer communication • Hot Lines; designated recipient • Overall manufacturing agreement • Control submanufacturing or subcontracting • KNOW THE FACTORIES, SUBFACTORIES, EVERYONE INVOLVED • Example: Use Arbitration, Apply United Nations Rules • Do Not Provide for US litigation; waste of time • Provide for Injunctions locally • Get back molds, etc. when factory relationship is over • Control of Labels

8. When You Get There • Fact Gathering: Overt and Covert • Sighting Companies: Good and Bad • Your Own People/Distributors • Counsel • News • Covert Investigations: Difficult, Dangerous but Necessary • Analyze • Be prepared to move quickly

9. Relevant Organizations: Administration for Industry and Commerce (AIC) Quality and Technical Supervision Bureau (TSB) Police: Civilian Police: Ministry of Public Security (PSB) Armed Police People’s Court Basic Level Intermediate Level IP Section of Intermediate Level High People’s Court Supreme People’s Court There is also People’s Procuratorate Bureau which is charged with criminal conduct, ineffective Steps To Effective Enforcement:

10. Effective enforcement cont’d: • Economic and Cultural Factors • Legal system: limited manpower, much law in short time post- WWII; thus Chinese law is of lower quality in comparison with developed countries; must understand this • Even with frustration, an “ostrich approach” won’t work; an expensive mistake since China is the world’s largest consumer market

11. Effective enforcement cont’d: • Economic and Cultural Factors cont’d. • Dealing with Chinese Officials: Understand the concept of “li” meaning according to Confucius’ teaching: courtesy. The law is secondary to li. Connections matter. Respect matters. • Corruption and local protectionism. • Cultural attitude towards counterfeiting. • Not much of a moral wrong historically • Hong Kong Corporate Registry promotes issues and reflects the cultural problems • Limited purchasing power; brands are enjoyed=problems

12. Effective enforcement cont’d: • Selection of qualified agents, investigators, attorneys is critical to clear and competent advice on wider strategies and solution of problems with confidence and consistence • Use a “Guide” • Do Not Apply Western logic or expectations to time, cost, the system or what to expect • Do Not Demand: Breast Beating Just hurts your ribs • Negotiate, Make Friends, Face Time • Know What Works, What is Possible, not necessarily what the law says • Group Activities: A Mixed Bag

13. Remedies • Chose an approach: stop present infringement; sufficient deterrence; operate within predetermined budget • Be careful: while it may not be urgent today, it will become urgent tomorrow • To determine which alternatives to use: must have solid understanding of the legal system; the powers and their conflicts, the Chinese culture and mentality and the way business is conducted in the PRC • Example: “Li”

14. Remedies cont’d • Cease and desist letter: most economical, personal delivery (coerce compliance), often ignored • Negotiations: especially with service businesses: stores, schools, agencies; threaten action, follow through if necessary. • Administrative actions: AIC or QTSB; most commonly used, speedy, inexpensive; sometimes obeyed; can seize, order dissolution, confiscate dyes, machinery etc. Unfortunately, most time punishment is not harsh enough. Subject to local pressures. Potential civil damages if wrongly seize.

15. Remedies cont’d • Court Action: civil lawsuit to seek injunction and damages; potentially stronger than administrative action; drawback is limited injunction, low legal learning, expense and time. No discovery. Procedures lacking. Few Rules of evidence. Private meetings. • Criminal Action: Peoples Procutorate Bureau is supposed to file but you can yourself if refused by PPB. Very low number of cases are prosecuted; work load is an issue, need to catch red handed with police, no real undercover work • Use of Media: Television and newspapers. Radio doesn’t count. Be careful as truth is not always what is printed. Media must be used with great care as view is different in PRC. • Customs: Import and Export. Worth doing. Changes underway. Registration Required. • U.S. Government Assistance

16. Conclusion:Biggest problem is to wait. China represents the largest consumer market in the World and the largest exporter in the World. The earlier you deal with a problem, the less expensive and more manageable it is. You will not eradicate counterfeit goods but you can manage the problem.Thank You.Harley Lewin