Fake Apple StoreJessica Angelson, a 27-year-old U.S. blogger living in Kunming, China, was walking around her neighborhood last month when she noticed a store that looked surprisingly familiar. She took pictures and posted them. The photos showed glowing fruit-shaped logos, fresh-faced employees in blue T-shirts and beautiful gadgets on display for customers to play with. An Apple (AAPL) store? Angelson had never heard of an Apple store in Kunming, a small city in the China's Southwestern Yunnan province. And Apple's website only listed locations in Beijing and Shanghai.

"[It was] the best ripoff store we had ever seen," Angelson wrote on her blog BirdAbroad. Hours later, the post went viral. Thousands of news outlets picked up the story, spreading shock and ever-more photos about what was now being called "the ultimate knockoff." As it turned out, the fake was so good that even its employees been duped. To Americans, the Kunming Apple was terrifyingly perfect, an uncanny imitation of those glass and steel structures that have become monuments of technology on our own national landscape. It was as if the Statue of Liberty herself had been counterfeited.


Fake Disney Store Since then, other reports of Chinese copycat stores have proliferated. Last week, Reuters, the Wall Street Journal and hundreds of others reported on the phenomenon, citing fake stores for many Western brands -- including Ikea, Subway, Dairy Queen and Disney (DIS) -- that display the craft of "increasingly sophisticated counterfeiters." 11Furniture, also in Kunming, struck a similar chord as the fake Apple. After all, who would have thought that Ikea -- that yellow monolith of home decorating that has crushed many a competitor -- could be copied?

Legal Loopholes

Despite the media frenzy, copycat stores are nothing new in China, says Annie Tsoi, a top Intellectual Property lawyer based in Hong Kong. Unlike most other countries, China doesn't allow retail services like department stores or supermarkets to be trademarked. "It's a loophole," Tsoi explains. "To enforce their rights [in China], trademark owners have to rely on other means, such as the Anti-Unfair Competition law, which requires fulfillment of certain criteria."

The Anti-Unfair competition law protects only "well known" goods with "unique" names, packaging or decorations, according to an article by patent attorney Gary Wu of Kangxin Law, an Intellectual Property firm with locations in China and Hong Kong. In other words, if a business decides to use a name or package design that would cause consumers to confuse its products with those of another company, it's considered unfair competition.

Of course, notions such as "well known" and "unique" are difficult to prove in court. "That makes enforcement of misuse of a name relatively difficult," Tsoi explains.

This difficulty doesn't mean that China is a free-for-all of brand hijacking and intellectual-property violations, as many recent stories have suggested. In 2006, Starbucks won a suit against Xingbake coffee for having too similar a logo and name. And since the media firestorm, Chinese authorities have ordered unauthorized Apples in Kunming and elsewhere to remove the company's logo from their businesses.

Meanwhile, it's unclear if some of the other recently "exposed" copycats, such as like Dairy Fairy or 11Furniture, are actually doing anything illegal. 11Furniture, the IKEA copycat, features a blue and yellow color scheme, catalog-perfect display rooms and wooden pencils to mark purchases.

Although it does look a lot like Ikea, consumers don't seem to actually confuse 11Furniture with the Swedish retailer. "At the real Ikea, the layout is much neater and the decorations are laid out properly, you really can't compare them," Kunming native Xiao Lee told Reuters.

Ikea Systems, the worldwide Ikea franchiser, told DailyFinance that it's "still evaluating" whether 11Furniture is violating its trademarks.

Hungry Consumers

Torsten Stocker, who leads the China consumer-goods practice of U.S. consulting firm Monitor, says that examining the legality of these copycat stores can sometimes make us forget the reason they are there -- demand. The Chinese are getting richer all the time: average per-capita income for China's urban residents grew 12.3% last year. Meanwhile, retailers like Apple and Ikea have yet to expand to smaller cities like Kunming.

"I think one needs to make a distinction between a clear 'counterfeit' (calling it 'Apple Store' when clearly it isn't) and a 'copycat' (which I think the Chinese Ikea and DQ versions are)," Stocker said in an email. While counterfeits are clearly violating intellectual property, Stocker predicts that the most successful of the copycats may eventually "evolve their own business models, product portfolios and brand identities. At the same time, original brand owners will look at this as a type of competition and think about what demand these copycats are serving that they should capture themselves."

If 11Furniture and Dairy Fairy are as different from their western counterparts as Sam's Club is from Costco (COST) -- or as Pinkberry is from the gads of other U.S. chains that milked the 2009 froyo craze -- what is all the fuss about?

"Perhaps this whole issue made headlines because it plays into common fears that 'everything gets copied in China,'" Stocker, a German native, suggests.

Indeed, amid high rates of U.S. unemployment and concerns about China as the recently downgraded U.S. Treasury's largest creditor, it's hard to dissociate the media frenzy about copycat stores from larger fears about China overtaking the U.S. as the world's premier superpower.

Chinese Menace or American Paranoia?

For Greg Autry, author of the newly-released Death By China, these fears are very real. "America is being deindustrialized," he says. "[We] need to be the land of ideas, but we can't succeed if China doesn't respect ideas."

Autry sees the copycat stores as yet another function of China's innovation vacuum. "There is this pervasive cultural attitude – that I believe comes from the Communist ideology – that nobody really owns ideas and copying somebody else's success is not only OK, but always the smartest thing to do."

While China plays a huge role in producing many of the goods in question, it's true that most of its homegrown companies and brands have yet to attain global visibility. In 2009, Newsweek reported on China's failure to create global brands, citing the Chinese approach as one that looks at brands as "a fact set or a skill set to acquire, not an art to master."

It's difficult to say how much the "copycat" stores truly threaten innovation and to what extent they are simply the targets of injured American patriotism. Both are likely true. It's also true that Apple, a poster child of American innovation, has been more concretely threatened by retail counterfeits than other companies like Dairy Queen or Ikea.

As Autry points out, the fact that Apple produces so many of its products in China puts it in a tricky situation with regard to the counterfeit stores. According to Autry, it's hard for the company to take up a hard line on intellectual property with the Chinese government while also benefiting from some of its deregulation. "Labor is kept under control, the currency is kept artificially low and there are no regulatory resources," he states. "These are advantages [for Apple]. Having one or two fake stores is nothing compared to the billions they are saving on production."

New York Store Takes the Hit

Perhaps this can explain why the most recent Apple trademark lawsuit, filed five days after Jessica Angelson's blog post, was not in Kunming or even in China, but in New York City. On July 25, Apple filed a trademark suit against Apple Story and Fun Zone, both stores in the Flushing neighborhood of Queens, N.Y.

Neither of the parties' lawyers would return phone calls about the lawsuit, although Janice Po Chiang, the store owner, did agree that it was "strange" that Apple would single out such a small retailer. Apple Story, a tiny boutique in the all-Chinese New World Mall, doesn't sell any Apple products. Instead, it sells cases for phones and tablets. The case's documents have been sealed, but Apple presumably takes issue with Apple Story's name.

Meanwhile, the recently exposed fake Apple stores in China have been responding "sluggishly" to the logo ban, ChinaDaily reports. As of Monday, owners had only covered the logos with bits of paper. Employees were still wearing Apple T-shirts. "If you come back a few days later, everything will be back as it was," one store manager in Zhongguancun, a region northwest of Beijing, told the paper.


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