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The truth about IP investigators


Enquiries into alleged corruption in Hong Kong have cast light on the hidden role of IP investigators in the fight against counterfeiting. Emma Barraclough reports


On May 12 the police found the body of a Hong Kong Customs officer outside a multi-storey car park. He had jumped to his death just hours after being released from questioning by Hong Kong's anti-corruption watchdog, the Independent Commission Against Corruption. The ICAC said it had arrested the Senior Superintendent on suspicion of accepting bribes from the chairman and an associate director of an investigations agency, in return for providing them with confidential information about Customs activities and referring business to them. ICAC officials arrested five other people in the operation, codenamed "Jiujiang", including the two senior officials from the investigations company, and a senior executive of a recording industry association from whom the Customs official was alleged to have accepted a number of unauthorized loans. The ICAC is still investigating the case and refuses to discuss the details, but its initial announcement temporarily shone a little light into the normally undercover world of IP investigations. It also highlighted the potential problems for any organization or individual accused of overstepping the blurry line between achieving results by tapping well-connected contacts and achieving results by, at best, dubiously legally means.

IP investigators have an increasingly important role to play in the fight against counterfeiting. As the trade in fake products booms in Asia, and the manufacturing and shipping techniques used by the counterfeiters become ever-more ingenious, IP owners are more likely than ever to turn to specialists to help track down the source of the problem. Would-be investigators, particularly in China, have spotted a lucrative gap in the market that they are clamouring to fill.

But investigating counterfeiting is a dangerous business. No longer are fakes a sideline business for small-timers in Asia. In late July, for example, Hong Kong Customs officials smashed the largest counterfeiting syndicate in the city, seizing more than HK$62.5 million ($7.7 million) worth of fake clothes and leather goods. With volumes this high, the counterfeiters have plenty of incentive to do everything they can to protect their business and there are many stories of them doing just that. In 2003 an investigator hired by a luxury goods maker to raid a factory in China was followed and beaten so badly that he spent the next six weeks in hospital. Last year a Chinese factory owner threatened enforcement officials and investigators during one raid. They responded by calling in the anti-riot police. With danger levels this high, investigators need to be tough and prepared to take some risks of their own. But it is crucial for IP owners that investigators stay on the right side of the law.

Grey area

Unlike the legal profession, the private detective industry has little regulation. In many countries there are no exams, no professional continuing education credits and no disciplinary body that has a mandate to step in when it suspects malpractice. In the UK, for example, anyone can set himself up as private investigator. Although a new government body – the Security Industry Association – will begin to license private investigation companies from next year under the Private Security Industry Act 2001, it has not yet announced the criteria it will use to make its decision, says Stuart Price of the Association of British Investigators, a voluntary UK industry association.

In Hong Kong, investigation companies can join the Hong Kong Security Association, a trade body dominated by businesses that offer security guard services and alarm systems. But it offers no code of practice setting out how private investigators should conduct their businesses. "We believe that they have their own internal codes, particularly the big international companies," says KH Tang, a spokesman for the association.

In China itself, investigation firms occupy a grey legal area and there are no clear definitions or regulations dealing with the way in which they should be managed or controlled. Because of their uncertain legal status, companies involved in undercover work frequently describe themselves as consultants or market research companies to avoid trouble with the authorities when they apply for a mandatory business licence.

"The government seems to think that only they, and not private investigators, should enjoy diaocha qunli (investigation rights)," says Zhou Zhongqi of CCPIT. "I suspect that they are reluctant to give them very clear legal status because they want to maintain a monopoly on any investigation going on."

In reality, there is a growing acceptance of the role of freelance investigators by the Chinese authorities, says Zhou, in part because it can be almost impossible to collect evidence any other way.

But in jurisdictions without tough, self-regulating industry bodies or government regulation, just what do lawyers need to know before they instruct investigators to make sure they are operating on the right side of the law?

Managing an investigation

  • Consider letting lawyers handle the relationship with investigators. They are likely to know more about the rival agencies, and, importantly, can act as a buffer between the client and the investigation.

  • Get recommendations of firms from peers: avoid untested firms and non-specialist IP firms, which may be more used to carrying out other, less respectable detective work.

  • Consider the rules on evidence. Don't let your case, or your reputation, be jeopardized by evidence gathered using legally questionable techniques.

  • Be wary of putting too much pressure on your investigators to seize large volumes of fakes – it could encourage less scrupulous firms to order fakes to be made to meet their targets.

  • Consider attending raids from time to time to monitor your investigation team, in cases where the enforcement authorities allow you to take part.

  • Question potential investigation firms about their experience and connections in different regions if your counterfeiting problem is localized.

  • Be wary of relying on sighting reports sent by investigators that you have not dealt with before, particularly when the investigator only offers to send more information in return for money. Instead, encourage your own employees to be on the lookout for fakes in their own markets.

Keeping close to the people who matter

A lot of investigation companies pride themselves on their close connections with law enforcement agencies. Log on to many US investigators' websites and you find photos of smiling faces against backdrops of the Stars and Stripes, highlighting their years of experience in the FBI, District Attorney's offices or Customs. In China, where guanxi, or good connections, are an important part of business life, investigators need to be particularly well connected to get results. Having a good relationship with the Chinese enforcement authorities can often be about more than just getting good information. At times it is about being able to carry out the investigation, or a raid, at all. With local officials implicated in counterfeiting every now and then, from being in the pay of the infringers, to impeding efforts to shut down factories that provide jobs to people on their patch, good guanxi with bureaucrats and law enforcers can be a crucial part of an anti-counterfeiting operation. But few investigators can claim to have really strong relationships right across such a vast country as China, says Anne Choi of Wilkinson & Grist. "Many people claim that they can do lots of things and you have to work with them before you can check whether or not it's true. We look into their background, ask them probing questions and talk to other people," she says.

Taking risks with tactics

There are real dangers if those connections go beyond cooperation and become corrupt. Although China scored just 3.4 – against a clean score of 10 – in a corruption perception index prepared by global anti-bribery organization Transparency International last year, the risks for crooked officials who fall out of favour with their superiors can be high. Periodic crackdowns on graft regularly result in long jail terms and death sentences being handed down against bribe-takers.

There are also dangers for brand owners. Most international companies have expensive reputations to protect that require them to be seen to be staying on the right side of the rules. But breaching the law can pose a risk to more than just their international standing.

US anti-bribery laws are some of the toughest in the world, and any US company that pays backhanders to officials overseas is playing a high-risk game. "Whether acting for US clients or other foreign clients, we are required by ethical rules to instruct investigators not to violate either US or local anti-bribery laws," says Catherine Sun of Weil Gotshal & Manges.

If being seen to be observing the law is a priority for a company, it should make an effort to find out what the agency is up to and ask the investigators to certify that they are not breaching any rules. "Just turning a blind eye isn't acceptable," says Lindsay Esler of Deacons.

But there are ways of stretching the rules. One former investigator who worked for an industry association explained it was part of his job to supply police and Customs officers with samples of the genuine product against which they could better identify any fakes. There were no guidelines as to how many samples they required, so he would often deliver box-loads of the stuff and never ask for it to be returned.

Horror stories

Another danger for brand owners is that investigation agencies may not always act in their clients' best interests. Anecdotal horror stories circulate between Hong Kong's lawyers about investigators and many report first-hand experience of shady behaviour.

There was a rumour that one firm in Hong Kong allegedly faked seals from the Chinese authorities used to stamp certificates to give the impression that the officials had actually carried out a raid, says Barry Yen, an IP partner at So Keung Yip & Sin. If true this would take counterfeiting to another level. Brand owners do not simply have to worry about fakes, which is bad enough, but also have to consider whether the raid was really carried out which is even worse. Stories like this are all very disconcerting for a lawyer, says Yen. Rather than take documents at face value, brand owners and their lawyers should make an effort to check with the authorities alleged to have supervised the raid that it did actually take place. One way is to consider whether it is possible to attend raids but that raises the separate issue of safety.

Rather than investigating businesses already making fakes, other unscrupulous agencies might make a so-called trap order, requesting a factory to make counterfeits to their specification. They can then arrange for the fakes to be seized by local enforcement bodies and present them to the brand owner as the fruits of their investigative labour. This can be very tempting when IP owners put excessive pressure on investigation firms to seize volumes of products to meet their targets and by a failure to select firms carefully, says Nick Redfearn of Rouse & Co International: "The end result is a fictitious seizure."

Other lawyers report cases of investigation companies conspiring with factories to make fakes and then feeding information about the existence of infringements to the legitimate brand owner in the hope of winning business from them. "Even if the factory is fined in the raid that follows, the penalty and the cost of the manufacturing could still be less than the fee the brand owner pays the company for its investigative work," says Anne Choi.

There are other instances where investigators are reported to have tipped off factory owners, or cut deals with them to hold back some of the counterfeits that can be seized in a seemingly successful second raid.

To minimize these risks, lawyers advise brand owners to choose reputable agencies recommended to them by word of mouth, or better still, let lawyers handle the link. "Clients don't always realize the importance of spending money on investigations and sometimes they go directly to the investigator," says Henry Wheare of Lovells. "But because it involves legal rights we tell clients that lawyers should manage the relationship with investigation agencies."

Using the evidence

While brand owners often say they simply want the counterfeiting to stop, in many parts of Asia closing down one factory rarely puts an end to the problem. Although private investigations can often unearth enough evidence to convince the administrative authorities to carry out a raid, administrative sanctions can be very small and companies may feel they have to bring a civil action or press for criminal charges to deter counterfeiters. Here, it is crucial that the evidence accumulated by investigators will stand up in court.

"Evidence collection is always a big headache," says Zhou Zhongqi. Without clear-cut US-style rules on discovery and third-party depositions in China, local lawyers may have to rely more heavily on evidence provided by undercover investigations. One option is to use an administrative raid as a way of getting so-called clean evidence for use in a trial. "The Administration for Industry and Commerce and the Technical Supervision Bureau [the Chinese administrative bodies in charge of enforcing trade mark rules] generally don't care how evidence is collected. Even if it is tainted, they can carry out a raid and then you can use the seized goods in later litigation," says Catherine Sun.

Brand owners wanting to bring a lawsuit in Hong Kong also need to plan their litigation strategy thoroughly and monitor their investigators closely.

Although evidence obtained by a carefully constructed trap order to a factory already suspected of infringement may be admissible in court, a speculative order to a previously-law abiding manufacturer is unlikely to be regarded sympathetically by a Hong Kong judge.

Philip Lam learnt this the hard way. In the 1980s the inventor had been granted patents in the UK and Hong Kong over a type of wristwatch. But rather than manufacture the watch himself, he developed a far more lucrative business. Lam arranged for a company controlled by his associates to solicit orders from local manufacturers to make the watch and then he fired off infringement lawsuits when they agreed. The threatened litigation usually settled out of court. But when Lam came in front of Justice Sears in the Hong Kong Court in 1990 to seek yet another injunction to prevent an alleged infringement, he received a strong rebuke. The judge told Lam he had considered reporting him for extortion and said the court should quash all the earlier injunctions. "Mr Lam is not permitted to induce people to break the patent that he has in this way," he said.

Brand owners are also at risk of weakening their legal case if they rely solely on investigators to identify fakes in court. There have been cases in Hong Kong where defendants have challenged whether the person identifying the alleged counterfeits is qualified to do so. This opens up defences, especially in criminal cases, so IP owners and their lawyers need to make sure they have paid attention to authorizing inspections.

Choosing carefully

The danger for brand owners is two-fold. The first is that over-zealous investigation by an undercover agent will jeopardize either his client's reputation (in the case of bribes) or legal case (if evidence is not collected and handled properly). The second is that an investigator may employ sharp practices against his own client. There are undoubtedly respected (and respectable) investigators in Hong Kong and China (a number of names were repeatedly mentioned by lawyers), but, as one lawyer pointed out, IP owners need to bear in mind that investigators inhabit a legal grey area making their living pretending to be someone and something that they are not. Cultivating long-term relationships where the client and the investigator have a common interest can help minimize the real risks.

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