WASHINGTON — Alibaba’s troubles just keep mounting.
This story first appeared in the March 6, 2015 issue of WWD. Subscribe Today.
While chairman and founder Jack Ma earlier this week said the greatest threat to the Chinese Web giant is itself, government regulatory agencies are putting it under increasing scrutiny. The latest is the U.S. Trade Representative’s Office, which said in a report Thursday that the agency is growing concerned about recent allegations of counterfeiting and digital piracy on Alibaba’s consumer-to-consumer platform Taobao.
Trade officials cited several steps the company and the Chinese government have taken to address the concerns, which is why USTR has declined to re-list the online marketplace on its annual “Notorious Markets” report and list. The list does not represent findings of legal violations or reflect an analysis by the U.S. government of general intellectual property protections or enforcement activities in a country. Instead, the study is aimed at prodding foreign governments to address intellectual property allegations raised, intensify efforts to combat piracy and counterfeiting and to pursue legal actions where warranted.
The report had little impact on Alibaba’s shares, which closed up 0.6 percent Thursday at $86.10.
Details about new steps Alibaba plans to take to combat counterfeiting and piracy, including a new rights holder complaint system and a separate penalty system, also came to light on Thursday.
In the USTR report, officials pointed to a Chinese State Administration for Industry and Commerce white paper that raised concerns about the sale of counterfeit products on Alibaba’s e-commerce platforms. The white paper was later retracted after Alibaba agreed to cooperate with the SAIC.
Another concern cited in the USTR report was the appearance of Taobao in three of the top 10 cases named by the National Copyright Administration of China in its “Sword Net Action Campaign” last year, involving pirated movies and other audiovisual products and software.
“USTR is concerned about these developments but does not relist Taobao at this time,” the agency said. “USTR encourages the company to continue working with all stakeholders to address ongoing complaints [and] will continue to monitor the situation.”
USTR removed Taobao from its report in 2012 in what it said was a “recognition of efforts to address rights holder and consumer complaints.”
Alibaba has been under intense scrutiny in the past several months for its business practices, most recently drawing attention from the U.S. Securities and Exchange Commission. According to Alibaba, the SEC has asked for information about a meeting the company had last summer with a Chinese regulator over allegations of selling counterfeit goods, before it made a public offering in New York last fall.
The Chinese government has taken a carrot-and-stick approach recently to Alibaba — criticizing its business practices on the one hand and then praising them on the other. Ma has responded by adopting a humble approach, at one point admitting that Alibaba wasn’t “too big to fail.”
U.S. trade officials, who briefed reporters under the condition of anonymity on Thursday, said they have been encouraged by Alibaba’s stakeholder engagement as well as the assurances the Chinese company has provided, noting that the group has reportedly removed millions of listings of counterfeit and pirated products from its e-commerce platforms.
One U.S. trade official said the USTR list is intended to prod foreign governments to address IPR challenges and praised the Chinese government for being actively engaged with Alibaba.
Meanwhile, Alibaba is going on the offensive to combat counterfeiters.
“Alibaba Group is dedicated to the fight against counterfeits. We work closely with our government partners, brands and industry associations to tackle this issue at its source,” a spokesman said in an e-mail in response to the report. “We also utilize technology like data mining and big data to scrub our platforms of counterfeits.”
James Wilkinson, senior vice president and head of corporate international affairs at Alibaba Group, submitted public comments to USTR on Oct. 24.
“Taobao continues to engage in dialogue with U.S. rightsholders both with respect to individual take-down requests and on ways to refine and streamline the notice and take-down system,” Wilkinson said in a letter to Susan Wilson, director for intellectual property and innovation at USTR.
He told U.S. trade officials that Alibaba will introduce a new “three-strike” penalty system and a new tiered complaint system for expedited take-downs on Taobao some time in the first quarter.
Under the “three-strike” system, a merchant will accrue one strike each time a justified complaint about a listing on the merchant’s storefront is submitted. If a merchant accumulates three strikes stemming from complaints from the same rightsholder for the same intellectual property right, the merchant will be banned from the Taobao platform.
Wilkinson said the new penalty system will supplement Taobao’s existing point-based penalty system, which could potentially “ban merchants from the platform for repeated sales of counterfeit products that infringe on multiple intellectual property rights.”
The new tiered complaint system will be accessible to rightsholders that have a track record of making “justified requests,” which he described as “either uncontested or that are resolved in the rightsholder’s favor.”
Rightsholders will need to register their IP with Taobao to submit take-down requests, an existing requirement under the current system. They must also sign a commitment letter pledging to cooperate with Taobao, “dedicate the resources necessary” to submit “justified” requests and work with Taobao if legal action results from a take-down.
Under the new tiered system, rightsholders will be grouped into tiers, including an A-plus tier, he said.
Rightsholders in this tier must have a “very good” record of submitting justified requests and will only need to “identify allegedly infringing listings and provide an explanation justifying the allegation,” including choosing an explanation from a drop-down list.
Taobao will conduct a review and expects to remove allegedly infringing listings within one to three working days, where warranted.
This top tier will also include rightsholders with few take-down requests until they “develop a track record that would justify placing them in a different tier,” Wilkinson said.
There is also a “common complaint tier” for rightsholders that do not have a strong record of submitting “justified” requests, who must provide proof of alleged infringement. Those listings, if deemed the take-down request is justified, will be removed within about five to seven working days.
The third tier is a “special complaints” tier that all other rightsholders will be placed in.
Wilkinson said Taobao took down 99.2 million allegedly infringing listings between January and September 2014. Of those, 33.1 million were removed as a result of “special campaigns” Taobao conducted with 1,208 U.S. rightsholders, which resulted in the imposition of penalties on 200,000 sellers, he said.
In addition, Alibaba and several major U.S. brands worked in conjunction with authorities in China targeting eight counterfeiting rings during that time period. To date, 21 suspects have been arrested and nine counterfeiting rings have been disbanded, Wilkinson said.