China is the largest e-commerce market with 1 billion online users, making the protection of intellectual property rights a massive challenge.
Leading e-commerce platforms are tackling the challenge of keeping counterfeit goods off their marketplaces by instituting a range of measures to protect intellectual property (IP), in many cases going over and beyond their legal obligations. The marketplace operators are required to deploy notice-and-takedown procedures that allow rights holders to assert their IP rights, so that platforms can take the measures necessary to stop any infringement once they have received a rights holder’s complaint.
“I think that brands, platforms, trade associations and government agencies must realize that we're on the same side in fighting counterfeits,” said Andre Zhu, General Counsel of Pinduoduo. “People may have different expectations on each other, on what can be done, and should be done. But I think by now, people have realized that we must work together if you want to win this battle against counterfeits.”
China’s leading e-commerce platforms have taking the initiative to implement a series of proactive steps to screen and identify counterfeits. Some operators, like Pinduoduo, have put in place measures that go above and beyond what is mandated by law.
Pinduoduo has the toughest compensation policy of any of the major e-commerce platforms. Its policy fines any merchant who sells counterfeit goods 10 times the value of the goods sold historically. This compensation far exceeds what is required by law and was upheld by China’s highest IP court after aggrieved merchants claimed it was too onerous. Additionally, all customers who have bought a counterfeit product (not just those who complained) get this 10x compensation.
Other proactive measures by Pinduoduo include the Brand Care Program, Circle of Trust and Secret Purchase Program.
The following is a condensed and edited transcript of the podcast:
Podcast host (00:55)
I would like to welcome Andre Zhu, General Counsel of Pinduoduo Inc, or PDD to this podcast. PDD is a Chinese ecommerce platform that offers a wide range of products from daily groceries to home appliances, under an innovative model that features social interactions and team purchases among users. The company is one of the top three ecommerce marketplaces in China, together with Alibaba, Taobao and Tmall, and JD.com
E-commerce is a global trend and its rapid growth has revolutionized the way products are sold and bought around the world. There are many people shopping online than ever before in the world, leading to a large amount of scrutiny by government authorities on e-commerce platforms. Why are regulators around the world paying so much attention on Intellectual Property rights?
Andre Zhu (AZ) (02:02)
We definitely see a trend of regulators around the world paying attention to Intellectual Property protection in the digital economy. For example, in China, the e-commerce law, which became effective in January 2019, dedicated six articles specifically addressing e-commerce platforms’ obligations to protect IP rights. In the U.S., recently a bipartisan group of lawmakers introduced a new bill called Shop Safe Act, which would make online retailers legally liable for counterfeits sold on their platforms. Now, we also see congressional hearings that delve into counterfeit issues on major online platforms. In Europe as well, lawmakers and think tanks also discuss how to upgrade the EU’s liability and safety rules for digital platforms with the new Digital Services Act.
There are mainly three reasons for the increased scrutiny on e-commerce industry. First of all, is the rapid growth of industry. E-commerce is playing an increasingly important role in consumers’ lives. In 2019, the e-commerce retail sales reached USD3.5 trillion worldwide. That's over 14% of the total retail sales. Now close to 2 billion people around the world now shop online. In almost all of the major economies including the US, EU and China, the online shopping penetration rate is around 80%. So more than 80% of the populations of these major economies actually use the internet to shop.
Secondly, the new technologies have presented some unprecedented challenges in IP protection and anti-counterfeit efforts. Now with the e-commerce platforms breaking physical boundaries and creating a virtual shopping space for users, counterfeit sellers have also developed technologies to take advantage of e-commerce platforms to sell fake products at a higher speed and in greater quantity. Most importantly, these new technologies also make it easier for counterfeit sellers to hide their identities behind screens.
When it comes to regulations in this space, the regulators are facing dilemmas: do we do everything we possibly can to track the bad guys? Or do we still need to restrict ourselves out of respect for data privacy? Do you screen every product listing before they actually appear on a platform? But if we do, we raise concerns over freedom of speech and censorship
The third reason is that people are having a hard time placing online platforms. It's difficult to find a perfectly analogous role in an offline retail scenario for online platforms. They're not exactly like shopping malls that rent retail spaces to merchants. Nowadays, the platforms have a lot more tools as they handle warehousing and deliveries. They have a lot more powerful data collection and analytical tools to monitor what's happening on their platforms. But they are not as involved in the daily operations of the stores as the merchants.
So laws and regulations developed 20 years ago, when the e-commerce platforms were no more than just some bulletin board systems where people lists what they want to sell, are outdated and do not reflect today's commercial reality anymore. If we were to reform the legal regime in this space, what is that right balance? Where's that line where we could motivate the platforms to be more proactive and do more? But how do we at the same time not suppress the vibrant growth of the industry?
So with the tremendous growth in the industry and the fast evolving technologies in the space, all relevant stakeholders around the world should pay more attention to IP infringement and counterfeiting issues in this space, and not just the regulators.
Podcast host (06:12)
China is the factory of the world and manufactures a gamut of products. There are many big players in the market, the likes of Alibaba, JD.com, Tencent and of course, Pinduoduo, all of them trying to get the billions of people around to access their platforms. How has IP protection evolved in China's e-commerce space?
Andre Zhu (AZ) (06:45)
China surpassed the US in e-commerce sales for the first time in 2013. Since then, it has quickly widened the margin. Now China is the largest e-commerce market by any matrix. It has RMB1.9 trillion e-commerce sales and 1 billion online users. It has the world-leading logistics infrastructure and online payment systems. It’s also a huge market with a lot of players, large and small, competing with each other. So keeping users from having any bad experience is a critical matter for the platforms.
From the very beginning, we understand that creating a safe and clean shopping environment for the users is a matter of life-and-death for the platform. Platforms in the West may have started paying attention to IP protection and anti-counterfeit matters because of the pressure from the brands from the rights holders. Now we place anti-counterfeit as a strategic priority because of competition because we must protect the interests of the consumers.
As the reason why Chinese platforms are engaging in IP protection or anti-counterfeit is slightly different from their counterparts, the approach taken by the e-commerce platforms in China is also different. Chinese e-commerce platforms tend to focus more on proactive efforts because we believe that if we don't do it, we will lose consumers, lose users and die.
Podcast host (11:31)
What's so unique about your approach to IP protection?
Andre Zhu (AZ)
I'm not sure any single IP protection measure or policy we adopted is unique on its own. But during the four years of our existence, we have developed a comprehensive system that works well with our unique business model.
Our users tend to be more passive when shopping on a platform, in a sense that they're not actively looking for something to buy something specific. Rather, they have some spare time to kill and trust us or their social friends to recommend something that they could be interested in. So in that scenario, creating a safe shopping environment is even more critical as they need to feel safe to actually do the shopping. To do that, we developed a closed loop system that screens and monitors both the merchants and the products, before they enter the platform and until after they exit it.
I would highlight three core principles in our anti-counterfeit system. The first one is that compared to other platforms, we don't just rely on notice-and-takedown procedures. We actually pay a lot more attention to proactive and preventive measures to block infringing product listings, before they even appear in front of our consumers.
The second one is that as a technology company, we try to make full use of our technological and data analytical capabilities to reduce human intervention because we want to make it more efficient.
The third one is, as a pure marketplace, we want to leverage the efforts of all market participants to fight counterfeits. Our role, as the regulator and operator of the marketplace, is to put in the right rules that punish bad behavior and infringers, while rewarding good merchants and good behavior.
Podcast host (13:35)
It looks like there are a great many steps that the company is taking to ensure that your consumers feel safe about the products they're buying, and also there are stringent merchant verification procedures in place. So take me through the process. Let's assume I am a new merchant who wants to be listed on your platform. What do I have to do?
Andre Zhu (AZ) (14:02)
If you are a new merchant trying to get on our platform, you’ll have to pass our merchant onboarding screening process first. So if you're a natural person applicant, you need to provide your detailed personal information and ID documents. If you are using a corporate entity to apply, you will need to provide a valid business license of the entity. But you will also need to provide your personal information on ID documents, because we need to verify the real person behind the corporate entity. Our entity verification system is also integrated with the National ID database. So if you're using a fake ID to apply, our system will flag it and reject your application.
Then you're also required to conduct a live facial recognition procedure to match with the ID documents you submitted with your application. If you're using someone else's ID documents, you won't be able to pass this procedure and your application will be rejected. We also cross check your application against our proprietary blacklist system, which is set up to against the repeat infringers. So if you have engaged in some bad acts on a platform previous, for example, as a merchant selling fake products, your name and other information will be kept by this blacklist. If your information is on a blacklist, your application will be automatically rejected.
Now, once you pass the merchant onboarding screening system, you will then be required to carefully review and sign our platform agreements, undertaking to comply with our platform rules, which includes the rules relating to IP protection and anti-counterfeits. And then you also need to make a deposit to secure your compliance of the platform rules. The amount of deposit depends on the type of product you're about to sell on the platform. So products of higher value or products with higher risk require bigger deposits. So once you have passed our onboarding screening process and paid the deposit, then congratulations you're officially a Pinduoduo merchant.
Podcast host (16:23)
Now that I'm in and on your system, am I scot-free? Do I just have to do self-policing?
Andre Zhu (AZ) (16:36)
No, not at all. At this point, you have just passed the first line of defense in our anti-counterfeit system.
If you wish to post any product listing on a platform, your product listing applications will have to pass our automated blocking rules developed under our proactive Brand Care Program. This is a program that we launched in February 2019.
We realized that brands of higher exposure and recognition among users and consumers are more likely to attract counterfeiters. So, we selected 1000 domestic and international brands with the highest exposure and recognition among Chinese consumers, based on Baidu index and now search data. Then for each brand, we developed and maintained customized rules to screen new listing applications for possible infringements.
Now, once these rules are put in place, they automatically screen every product listing applications, including whatever you want to sell. If the rules identify your product listing application as infringing, or as a counterfeit, the application is automatically rejected.
If the rules identify your product listing application as suspicious, it will send it to a dedicated team for manual review. Our team will then decide whether to approve or reject your application.
You can only post your product listing on the platform, if it passes the pre-listing blocking rules screening process. I just want to highlight that our pre-listing blocking rule screening process is a powerful preventive tool that keeps the platform clean. 97% of the suspicious listings are intercepted and blocked by this system before they could appear in front of the users.
Podcast host (18:32)
There are lots and lots of layers that I have to think through. All checks and balances are going to keep me on guard and I'm going to check them all. But what if I'm a smart merchant and somehow I've managed to find some loopholes to get my counterfeits on the platform? Or maybe I was able to sell products that are not covered by your Brand Care Program. What are you now going to do?
Andre Zhu (AZ) (19:04)
That's a good question.
So our preventive measures are like border controls that keep bad merchants and infringing products from entering the platform. But it's equally important to deploy enough forces and people to monitor and police a platform for infringement and counterfeits on existing merchants and product listings.
We have developed over 6000 screening models. You can think of each screening model as an online raid that addresses a specific type of infringement or counterfeit. We constantly conduct these online raids based on feedback from consumers, or leads from brands, or just from our own data analysis.
We also have a powerful Secret Purchase Program. We keep hundreds of trained anonymous buyers around China to help us conduct sample purchases of products on the platform. To authenticate these products we bought under the Secret Purchase Program, we have established collaborations with over 1,000 brands. Last year, we shut down close to 90,000 merchants through our proactive measures.
Now, in addition to our own efforts, we also work with others to catch counterfeits on the platform. We launched an IP Protection Portal 2018 to handle takedown notices by brands. Before we launched this portal, all takedown procedures were handled through email. So the brands will need to send us a takedown request through email, and we handle it by responding to it by email as well. This is not a very efficient way of handling complaints. Now, with the streamlined online system, our capability of handling takedown notices has increased 10 times. It is much faster and more efficient.
We also rely on users to report counterfeits. One way for users to report counterfeits is to our customer services. But we recently launched this new feature called Circle of Trust and that is the latest feature we added to the platform. With this feature, consumers are encouraged to share their comments on their shopping experience and the products they bought with their social contacts on the platform.
Before, consumers were reluctant to rely on consumer reviews, because many merchants actually hire people to write fake reviews. Now with a Circle of Trust, all comments are from people you know, that are from the users’ own social circle. Consumers can avoid making bad purchase decisions, because now they don't have to base their purchase decisions purely on information provided by merchants. Other real consumers could help you to make that purchase decision. So that effectively squeezes out the bad merchants and bad products. This is what makes our Circle of Trust feature unique.
Podcast host (22:05)
Let's say I get caught, what penalty would you impose on me?
Andre Zhu (AZ) (22:25)
We have always had the strictest penalties against counterfeits in the industry. So if you are caught for selling counterfeits on the platform, you could be subject to a range of penalties.
First of all your product listing will be removed, your merchant score will be affected, which affects your ability to participate in promotional campaigns and other activities on a platform. Then your store could be temporarily or permanently shut down. You could be added onto the blacklist which means that you can never open another store on our platform.
If we confirm that you're selling a counterfeit product through our Secret Purchase Program, or through the product authentication collaboration we have with brands, you could also be facing the 10x Compensation Policy. The 10x Compensation Policy is a unique policy. We are the first e-commerce platform to strictly enforce this policy because we think this is the right level of deterrence against counterfeiters.
So for a confirmed counterfeit, we do not just impose 10 times compensation on the value of the product we identified as counterfeit. Instead, we actually require you to pay 10 times compensation based on the value of the entire batch of products you sold on the platform. So if you sold 1,000 units, we require you to compensate all consumers that bought a product from you on our platform.
Podcast host (24:08)
When I signed the application form, I probably consented to this policy?
Andre Zhu (AZ) (24:14)
Yes, that's right. The 10x compensation policy is clearly written in the platform rule. When you sign the underlying agreement with the platform, you agree to be bound by this policy, and to be liable to compensate consumers who are harmed by your counterfeit.
We believe this compensation is warranted for two reasons. The first reason is that it produces the right effect to be a strong deterrent. You could have sold 1,000 units and only one was caught. If you only need to pay 10 times the value of this single unit, you will still want to take the risk, because the penalty is not proportional to the rewards. But if you are required to pay 10 times the value of entire 1,000 units you sold, you might actually think twice before selling fake products on a platform.
The second reason is that we believe consumers are harmed when they purchased a fake product, not when they found out that they purchased a fake product. So these consumers need to be compensated, regardless of whether they are aware that they bought a fake product. So these are the two reasons that make this a right policy.
Under this policy, the obligations of the merchants are exceedingly onerous, compared to what the consumers are entitled to under the Chinese consumer protection law. We had many disgruntled merchants challenging the validity of this policy in court, as well as protesting in front of our office buildings. Our founders were actually threatened by these merchants who actually go to their homes to threaten them.
We put in tremendous effort to defend this policy at different levels and in different provinces. We eventually prevailed in upholding this policy when our case was mentioned by the highest court in China as an exemplary case for self-regulation by an internet platform. One key factor that won the court’s support is that all proceeds of the compensation go to the consumers. We, as a platform, are not benefiting from this.
Podcast host (26:38)
Let’s talk about what the US and Europe have been doing and their recommended best practices to combat trafficking, counterfeit and pirated goods for the e-commerce market. This includes enhanced enforcement measures such as sprucing up the legal and liability frameworks to stop illicit trade online. PDD is a company that's listed on the NASDAQ. Are these measures in line with what PDD is doing?
Andre Zhu (AZ) (27:23)
I think so. The brands, platforms, trade associations, and government agencies must realize that we're on the same side in fighting counterfeits. People may have different expectations on each other, on what can be done and should be done. But I think by now, people have realized that we must work together if you want to win this battle against counterfeits.
So as you said, the government agencies and trade associations have published best practices for e-commerce players in the private sector. The European Commission (EU) have recommended best practices in the memorandum of understanding on the sale of counterfeit goods via the internet.
The US Department of Homeland Security recently issued a report to the President on combating trafficking, counterfeit and pirated goods. They also made 10 recommendations on what the private sector, particularly e- commerce platforms, can do. The International Trade Association has also given its version of the best practices for various market participants.
The reason for government agencies to come up with best practices and recommendations, instead of regulations, is because e-commerce as an industry is still developing and evolving. It is changing very quickly. If you look at some of the rules recently enacted in different jurisdictions, once they're passed, they're already outdated.
New business models are emerging on a daily basis and in the marketplace. I mean, how do you deal with platforms that exist entirely in the mobile network without a website? How do you deal with e-commerce players on the social media or content platform like the live stream platform?
Podcast host (29:25)
Yes, it's so important to come together as one and fight the common enemy.
Andre Zhu (AZ) (29:30)
Exactly. So we as a platform constantly measure ourselves against these best practices in the market. Most of the best practices, set out some general principles on what should be done, stating that platforms should take preventive measures, but don't really give any specific guidance.
Our platform has developed some specific measures that could be useful to other platforms. Our 10x Compensation Policy against counterfeiters is unique and more effective than the recommended best practices in the market. I like to see it being shared and promoted in the industry.
Since we launched our IP portal, we have significantly improved the handling time for takedown requests and we're further improving it. But we're trying to do it in a more cautious manner, to avoid the system being abused by malicious filings. Since last year, we have stepped up our outreach program to brands and trade associations. Now we work with trade associations to organize roundtable meetings with brands to understand their concerns about the platform and resolve specific issues they have about the platform. We also started a quarterly update schedule with our brand partners to update them on the results of our proactive efforts.
Podcast host (31:01)
Before I let you go, I can't help but go back to my earlier role play as the bad merchant on PDD. What is the worst that could happen to me in China as someone who violated and infringed on intellectual property rights?
Andre Zhu (AZ) (31:31)
Under Chinese law, it is a criminal offense for merchants to sell fake products with a value of over 50,000 RMB, which is equivalent to about USD7,000.
We work with brands and law enforcement agencies to put counterfeit sellers behind bars. You could be facing up to seven years’ jail time for selling counterfeit products in China.
In 2019, we provided over 1000 leads to law enforcement and helped to arrest over 200 criminals. I certainly hope you're not one of them.