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Print articleChina: Developing an Intellectual Property Protection Strategy for Today's China
December, 2005 - Lindsay Esler (Partner) & Annie Tsoi (Partner)
The Wider Economic Environment
In 1978, the Government of the People’s Republic of China embarked on a comprehensive program to reform China’s state-planned economy and introduce a free market economy. The new capitalist structures were initially intended to co-exist with the state-planned economy, but a massive surge in foreign investment has since stimulated the free market economy to eclipse the public sector in the industrialised south and eastern seaboard of the country.
There is a great deal of hyperbole surrounding China’s economy. As a prerequisite to the development of a logical intellectual property protection strategy in China, it is essential to build up a balanced view of the negative aspects to the situation, as well as the (more newsworthy) positive side.
Much is made of the fact that China represents a new market which contains approximately one-fifth of the world’s potential consumers. Emphasis should be placed on the word “potential”. Although demand for consumer products will undoubtedly increase amongst Chinese consumers, the reality is that the vast majority of Chinese consumers are not yet in a position to afford much more than the basic necessities of daily life. Today, with few exceptions, the only foreign companies which consistently prosper in China are those which have focused on its potential as a low cost manufacturing and export base, rather than relying on sales in the domestic market.
China needs to create more than 12 million jobs per year simply in order to keep pace with the growth in its population. Approximately 800 million people are still occupied in farming, often at little more than subsistence level. Although China has made significant progress in improving its education system, many of these people are not well educated and it is estimated that perhaps 200 million rural people are either unemployed or underemployed. It could take decades to absorb this backlog of potential labour.
The Chinese Government also needs to establish a comprehensive national pension scheme, provide healthcare, adequate housing and integrate an estimated 100-150 million migrant workers who have converged on China’s newly industrialised cities, mostly located in coastal regions. The western part of China remains significantly less economically developed than the coastal region (which accounts for some 80% of China’s export capacity, and a similarly high proportion of its counterfeits). Against this backdrop what priority will be given to intellectual property protection in the overall economic strategy of the Chinese Government?
The Chinese Government and Its Strategy on Intellectual Property Protection
Understandably, foreign companies (and consequently their governments) are extremely concerned about their ability to protect their intellectual property when doing business in China. As we shall explain below, the framework of intellectual property laws in China is actually quite comprehensive and the vast majority of problems which arise regarding intellectual property enforcement in China are due not to deficiencies in the law itself but to inconsistencies or weaknesses in the administrative enforcement bodies or the courts. The urgency with which these practical deficiencies are addressed will be determined by the Communist Party, as the ruling party in China’s Government.
Although nominally still communist, the leaders of the Communist Party have openly embraced principles of capitalism during the recent party Congress and they are thus unlikely to undermine any future reform of intellectual property protection. The leadership is well aware that the Government’s political acceptance relies upon rapid economic growth and they will place emphasis on the protection of intellectual property in proportion to the extent which intellectual property protection is deemed to impact on China’s economic growth.
On the negative side, the influence of the Government in China is pervasive and it reaches into foreign businesses both overtly by way of official approval requirements, and covertly, through the presence of party personnel who may be employed by foreign enterprises without revealing their official affiliations.
Bearing in mind this pervasive influence of the Chinese Government through both official and private channels, it would be naive to conclude that the Government is unaware of the serious problems which face foreign companies seeking to protect their intellectual property in China. The fundamental issues are firstly the extent to which the Chinese Government recognises that strong intellectual property protection is integral to sustained economic development and secondly, the extent to which the Government is prepared to commit resources to intellectual property protection, possibly at the expense of other urgently needed reforms.
Official Focus on Intellectual Property
Notwithstanding the legal framework which has been put in place, it is practically impossible for the Government to ensure that intellectual property laws will be immediately or consistently applied. It is usual in China for different levels of official significance to be placed upon enforcement of particular laws, depending upon the current economic agenda of the Government. It is also true that in certain fields (such as the protection of intellectual property), there is an established history of ignoring laws until strong State action is taken to enforce them. The Chinese Government has already mounted several anti-counterfeiting campaigns, with some demonstrable successes.
Chinese officials openly acknowledge the shortcomings of the existing system. In a speech given to mark World Intellectual Property Day, a senior official from the State Intellectual Property Office has confirmed that China proposes to shift its focus from introduction of new intellectual property legislation to law enforcement and supervision. This change in focus reflects the fact that China had already undertaken a comprehensive review of its intellectual property laws prior to its entry to the WTO. Since the legislation is now basically TRIPs compliant, the Government understands that greater emphasis now needs to be given to ensuring that the legislation is efficiently and consistently applied.
In terms of actual implementation, the Government retains control of the timing of the WTO reforms, despite the formal time frames which have been laid down in the WTO agreements. This is understandable, because many state owned enterprises (and indeed whole industry sectors) will require to be restructured or even shut down and this cannot happen overnight. The Chinese Government has to balance these enormous structural changes with its obligations to allow foreign companies to compete with Chinese enterprises across a wide range of fields. These obligations are managed on a sector by sector basis. Since China does not yet have, for instance, a strong domestic luxury goods sector, it may reasonably be expected that the Chinese Government will not face significant resistance from legitimate local industries if it assists foreign companies by improving intellectual property enforcement in the luxury goods field, which is badly affected by counterfeiting.
One further encouraging factor is that by its very entry to the WTO, China has agreed to become subject to an international dispute resolution body. This is both a fundamental change in approach and a clear indication of China’s long-term commitment.
Although WTO entry will facilitate trade generally without differentiating between genuine and counterfeit goods, it may reasonably be expected that China’s international obligations under the WTO will eventually lead to a decrease in the overall level of intellectual property infringement. The key question is when this will take place.
Research and Development
Although China’s economic growth rates may seem exceptional, they are comparable to those in other emerging Asian economies over the past several decades. The reason why the growth rate in China is so significant in global terms stems from two factors which truly are exceptional – firstly the size of the low cost Chinese labour force which has rapidly became available and secondly the fact that China’s economy is exceptionally open (at least as far as exports are concerned). As a consequence, China’s development not only has a substantial effect on global growth, but it also affects the economies of other countries by affecting the relative prices of goods, labour and capital in a way which has never happened so quickly before.
Nevertheless, if China is to fully develop its economy, it must be prepared to make at least a partial transition from a manufacturing centre to a research and technology leader. There are two principal theories about how China’s intellectual property regime will evolve. The first theory is that China is destined to follow the same path as Japan, Taiwan and South Korea, which evolved from low cost manufacturers into intellectual property-driven technological innovators. The second theory is that China is doomed to remain a second rate economy which will continue manufacturing mostly low quality goods and which will rely upon copying foreign technology rather than development of intellectual property through domestic companies. In the writers’ view, the likely answer falls somewhere between the two theories and although the latter interpretation is overly pessimistic, that does not mean that China will rapidly or totally metamorphose from the world’s factory into a developer of high technology products.
As domestic PRC companies increasingly develop their own intellectual property (and lobby for more robust protection) we may anticipate that the consistency of protection and Government commitment to intellectual property protection generally will improve at a relatively brisk pace.
We anticipate that large quantities of counterfeits will still be produced in China for many years to come. However, both the infringers and their products will become increasingly sophisticated and therefore difficult to distinguish from genuine products (which are increasingly likely to also be manufactured in China) and thus more difficult to even detect. We also expect that increasing emphasis will be placed on inter partes litigation in the Chinese Courts, rather than administrative enforcement against simple counterfeits. Foreign owners of intellectual property rights should anticipate (and budget for) significant expenditure in China on intellectual property protection by means of litigation.
If China is to eventually evolve into a high technology producer, this will profoundly affect a broad range of manufacture-based industries and national economies, not just labour intensive industries such as electronics assembly, clothing and toys. The Chinese Government is determined that this will come to pass. Mr. Xu Guanhua, the Chinese Minister of Science recently stated “We need to develop key technologies as fast as possible and produce more intellectual property. Patented strategic high technologies will sharpen our competitiveness and help safeguard our national security”.
At the broadest level, it seems that the Government’s priorities over the next five years are for increased emphasis to be placed on science and technology, education and healthcare. Substantial efforts and resources will be directed towards achieving these aims. According to the EU’s own figures, China will be investing a higher proportion of its gross domestic product in research and development than the European Union within five years.
China’s spending on research and development is growing in the double digits and foreign companies which have until now concentrated on manufacturing goods in China are clearly starting to place more emphasis on research and development in China. This will be extremely worrying for foreign governments which have tried to downplay the effects of globalisation by arguing that as low-paid manufacturing jobs increasingly migrate to developing countries, developed countries will compensate by concentrating on research and high technology. Those claims now appear increasingly hollow. On the plus side, the increase in research and development spending in China will help to improve intellectual property protection and will not necessarily result in a corresponding overall decrease in spending in countries which are already industrialised.
Intellectual Property Laws, Administrative Enforcement and the People’s Court
(A) China’s Intellectual Property Laws
Our research indicates that there are more than 1200 laws in China at national, provincial, city or county level which concern or touch upon intellectual property rights. This is a remarkable figure since China’s modern intellectual property laws were introduced just over 20 years ago to fill a legal vacuum.
The introduction of free market reforms made it necessary for China to introduce a raft of laws in various areas which had not previously been covered by any legislation at all. It is against this background that China’s earliest modern intellectual property laws were introduced.
Considerable effort has since been put into the improvement of China’s intellectual property laws and before China’s WTO accession, over 140 laws touching on various aspects of intellectual property were amended or replaced. China’s principal intellectual property laws are the Patent Law (which, unusually, covers patents, utility models and registered designs in a single statute), the Trademarks Law, the Copyright Law and the Anti-Unfair Competition Law. English translations of some of China’s principal intellectual property laws can be found on the website of the State Intellectual Property Office at http://www.sipo.gov.cn/sipo_English/flfg/default.htm.
Some foreign owners of intellectual property rights are frustrated by the lack of clarity in some aspects of China’s intellectual property legislation. For this reason, they decide not to register or enforce their rights in China. This “ostrich approach” will be an expensive mistake because in the long term, China will eventually become an extremely large consumer market.
In the writers’ view, it is always worth investing some time and effort to secure at least a basic level of protection in China, even if this is purely as a defensive measure and the foreign owner of the intellectual property rights has no intention to trade or operate in China.
Foreign companies should not attempt to follow a “self-help” approach. This may seem to be a simplistic statement, however some foreign companies do attempt to handle intellectual property issues by themselves without the help of competent professionals who have a comprehensive understanding of the local culture and legal system.
(B) Administrative Enforcement and the Court System
China’s huge territory and population mean that it is impossible for the central Government to enforce intellectual property rights throughout the entire country. The Government has therefore set up parallel organs of enforcement of intellectual property rights at local level. The local branches of the State Administration for Industry and Commerce are primarily responsible for enforcement against straightforward infringements of China’s Trademarks Law. There are also parallel state organs (although with considerably fewer resources) which are responsible for administrative enforcement of the Patent and Copyright Laws. While these agencies may be effective in simple cases of counterfeiting, their officers generally have no legal training. Almost invariably, these agencies will refuse to enforce anything other than a direct and virtually identical copy of an intellectual property right which has already been registered in China by the complainant.
Civil Court procedures are increasingly used for handling complex disputes and due to the more open nature of court proceedings, judges are much less likely than administrative officials to succumb to pressures of local protectionism. In addition to commencing Civil Court procedures, it is also possible (although still rare) for foreign companies to request prosecutors to lay criminal charges against infringers. Owners of intellectual property rights also have the option to launch a private prosecution to enforce their rights.
It is encouraging to note that Chinese companies are increasingly resorting to the courts to resolve intellectual property disputes and in fact, actions between local companies now account for approximately 90% of all intellectual property cases before the People’s Court.
Historically, problems have been reported with poorly trained and overworked judges (sometimes with minimal legal training), political interference, local protectionism and corruption. In fact, the quality of the courts has greatly improved in recent years and generally speaking, the courts in the larger cities are now of reasonable quality. The Chinese Government has made a concerted effort to improve the quality of the judges who are assigned to intellectual property cases in general (and those involving foreign entities in particular). The challenge now facing the Government is how to extend these improvements throughout the entire country.
(C) Strategies for Intellectual Property Enforcement
• Forum Shopping
The venue for intellectual property enforcement actions is the People’s Court located closest to where the infringement took place or closest to the defendant’s place of business. The place where the infringement took place refers to the location where the infringing products are manufactured, used or sold. Before taking legal action, it is prudent to make discreet enquiries regarding any possibly prejudicial factors which may affect a particular court. If any are found, the plaintiff should attempt to establish an alternative venue for the case to be heard either through purchase of infringing products at another location or by other legitimate means.
• Avoiding difficulties caused by local protectionism
Local protectionism is most often encountered in smaller cities, towns or villages where the economy is less developed. In some towns and villages, a factory making counterfeit goods could be the largest local employer. If a foreign company intends to conduct administrative raids on such factories, it must convince the local authorities of the harm of counterfeit products, not only to the foreign company, but also to China as a whole. If these explanations are not effective, the foreign company should enlist the assistance of a higher level of the relevant administrative authority, which will generally not be so affected by protectionist concerns.
• Guanxi (personal connections)
In most countries, it will be helpful to have good connections when doing business. In China, however, many foreign companies attribute an almost mystical significance to local connections. In many cases, these can indeed be helpful, just as locally-hired staff will assist the foreign company to overcome cultural differences. Local staff will instinctively understand that in China it is generally preferable to solve problems through dialogue and that showing commitment to a long-term relationship will go a very long way.
Based on the Confucian system, Chinese society does take great account of connections established through personal relationships. However, foreign companies should ensure that any advantages gained through local connections are in no way tainted by corruption. Although corruption is quite common at some levels of the Chinese bureaucracy, foreign companies should be particularly wary of local associates who claim that they have connections which will enable them to achieve a particular objective which is clearly contrary to Chinese law. Officials, no matter how highly-placed in the Government, do not have powers to override or circumvent legislation and any foreign company which takes up such an offer is clearly exposing itself to significant risk.
As a matter of common sense, it is also important to build a co-operative relationship with relevant officials at a company level, rather than relying on a single individual to handle all such relationships. Just as it would be in any other country, it is foolish to place responsibility for the official relationships of a company in China in the hands of a single individual.
• Do not underestimate the size of China
China has seven major dialects, 31 provinces, 650 cities, and 48,000 districts. There are huge disparities in income, weather, lifestyle, food, religion, and many other elements between north and south and east and west. The market is simply too disparate for China to be regarded as a single national market. When entering the Chinese market, foreign companies should obtain registered protection at national level, but plan their strategy as if China is a continent and not just a single country.
• Throw away your business textbook, but plan carefully
“There is great disorder under heaven. The situation is excellent“- Chairman Mao. This aphorism should be a lesson to foreign businesses. Domestic competitors will be well accustomed to the occasionally chaotic situation in China. Foreign companies should carefully review theories and rules developed in their home countries before attempting to apply them in the Chinese market. In particular, economic models which may have worked during the period before China assumed its present position in the world economy should be treated with particular suspicion.
As a general rule, foreign companies cannot expect to be able to blindly apply intellectual property strategies in China simply because they are effective in their home countries. Conversely, the complexities of undertaking business in China mean that foreign companies should take an even more rigorous approach in China than they would at home.
• Do not rely on legal tactics to enforce your intellectual property rights
It is important to take a holistic approach when planning an intellectual property strategy for China rather than trusting a particular legal strategy which may not actually be effective in practice. An intellectual property strategy should be pragmatic and should be directed towards ensuring that a company can promptly stop infringements at a reasonable cost and preferably in such a way as to deter other prospective infringers.
In order to reduce the risk of having to resort to enforcement action, companies may try to handicap infringers through constant technological innovation, reputational marketing, providing exceptionally high standards of service or using anti-counterfeiting markings or packaging.
• Co-operate with authorities
It is important to build up good relationship with local enforcement agencies. In practice, this may mean that it is necessary to take seriously official reports of possible infringement cases even when the quantities of counterfeits fall below the minimum level at which a foreign company ordinarily deems it economical to take action. If a foreign company shows no interest in taking action against a small quantity of counterfeits, experience shows that the officials will be reluctant to proactively assist that company in the future, regardless of the number of infringements which may subsequently appear.
• Plan, obtain and regularly review your registered intellectual property portfolio
It is far more cost effective to obtain defensive protection than to rely on litigation or enforcement action to protect your company’s rights. Registered protection should be obtained in China in proportion to the relative size of the jurisdiction, the prevalence of counterfeiting activity and the commercial importance of the particular intellectual property rights.
It is extremely important to ensure that protection is obtained for Chinese language versions of foreign trade marks. If a well-chosen, easily-remembered and convenient Chinese character version of a mark is not provided by a foreign trade mark owner, Chinese consumers will create their own informal Chinese version of the mark. This presents several problems, notably the risk of piracy of what is actually the most important local version of the mark and the possibility that the informal mark has a negative meaning or connotation.
• Record commercial arrangements in writing
Employees should be bound by comprehensive employment contracts which include, where appropriate, both non-disclosure and non-compete clauses. It is essential to take professional advice when preparing such agreements, since local legislation in some areas requires compensation to be paid to the employee in order for such clauses to be enforceable. Such clauses are, of course, no substitute for ensuring that access to commercially-sensitive information is restricted to the smallest possible group of employees.
It is also essential to enter comprehensive bilingual contracts with business partners. It is simplistic and incorrect to assume that commercial contracts cannot be enforced in China.
• Conduct regular intellectual property audits
It is important to identify potentially protectable intellectual property rights which are developed or newly disseminated in China and specific procedures should be set up to ensure that regular audits are conducted of a company’s intellectual property portfolio.
• Control use of intellectual property rights by local associates
A foreign company should never permit a local partner to register intellectual property rights in its own name. As a general rule, despite the legal obstacles, it is also important to retain full control of intellectual property rights which are used by a joint venture company and to prohibit registration of those rights in the name of the joint venture. Licences should be issued and registered in favour of local manufacturers, even if they are subsidiary companies, both to ensure protection of the manufacturer against official charges that they are not authorised to use a particular trade mark and also to ensure that the proprietor/manufacturer relationship cannot be subsequently challenged.
• Protection of intellectual property rights in China is a constantly moving target
In a period of such rapid evolution, nothing should be taken for granted and all possible steps should be taken to avoid loss of intellectual property rights which may prejudice the future operations of your company in a country which is home to one-fifth of the world’s population.
In 1978, the Government of the People’s Republic of China embarked on a comprehensive program to reform China’s state-planned economy and introduce a free market economy. The new capitalist structures were initially intended to co-exist with the state-planned economy, but a massive surge in foreign investment has since stimulated the free market economy to eclipse the public sector in the industrialised south and eastern seaboard of the country.
There is a great deal of hyperbole surrounding China’s economy. As a prerequisite to the development of a logical intellectual property protection strategy in China, it is essential to build up a balanced view of the negative aspects to the situation, as well as the (more newsworthy) positive side.
Much is made of the fact that China represents a new market which contains approximately one-fifth of the world’s potential consumers. Emphasis should be placed on the word “potential”. Although demand for consumer products will undoubtedly increase amongst Chinese consumers, the reality is that the vast majority of Chinese consumers are not yet in a position to afford much more than the basic necessities of daily life. Today, with few exceptions, the only foreign companies which consistently prosper in China are those which have focused on its potential as a low cost manufacturing and export base, rather than relying on sales in the domestic market.
China needs to create more than 12 million jobs per year simply in order to keep pace with the growth in its population. Approximately 800 million people are still occupied in farming, often at little more than subsistence level. Although China has made significant progress in improving its education system, many of these people are not well educated and it is estimated that perhaps 200 million rural people are either unemployed or underemployed. It could take decades to absorb this backlog of potential labour.
The Chinese Government also needs to establish a comprehensive national pension scheme, provide healthcare, adequate housing and integrate an estimated 100-150 million migrant workers who have converged on China’s newly industrialised cities, mostly located in coastal regions. The western part of China remains significantly less economically developed than the coastal region (which accounts for some 80% of China’s export capacity, and a similarly high proportion of its counterfeits). Against this backdrop what priority will be given to intellectual property protection in the overall economic strategy of the Chinese Government?
The Chinese Government and Its Strategy on Intellectual Property Protection
Understandably, foreign companies (and consequently their governments) are extremely concerned about their ability to protect their intellectual property when doing business in China. As we shall explain below, the framework of intellectual property laws in China is actually quite comprehensive and the vast majority of problems which arise regarding intellectual property enforcement in China are due not to deficiencies in the law itself but to inconsistencies or weaknesses in the administrative enforcement bodies or the courts. The urgency with which these practical deficiencies are addressed will be determined by the Communist Party, as the ruling party in China’s Government.
Although nominally still communist, the leaders of the Communist Party have openly embraced principles of capitalism during the recent party Congress and they are thus unlikely to undermine any future reform of intellectual property protection. The leadership is well aware that the Government’s political acceptance relies upon rapid economic growth and they will place emphasis on the protection of intellectual property in proportion to the extent which intellectual property protection is deemed to impact on China’s economic growth.
On the negative side, the influence of the Government in China is pervasive and it reaches into foreign businesses both overtly by way of official approval requirements, and covertly, through the presence of party personnel who may be employed by foreign enterprises without revealing their official affiliations.
Bearing in mind this pervasive influence of the Chinese Government through both official and private channels, it would be naive to conclude that the Government is unaware of the serious problems which face foreign companies seeking to protect their intellectual property in China. The fundamental issues are firstly the extent to which the Chinese Government recognises that strong intellectual property protection is integral to sustained economic development and secondly, the extent to which the Government is prepared to commit resources to intellectual property protection, possibly at the expense of other urgently needed reforms.
Official Focus on Intellectual Property
Notwithstanding the legal framework which has been put in place, it is practically impossible for the Government to ensure that intellectual property laws will be immediately or consistently applied. It is usual in China for different levels of official significance to be placed upon enforcement of particular laws, depending upon the current economic agenda of the Government. It is also true that in certain fields (such as the protection of intellectual property), there is an established history of ignoring laws until strong State action is taken to enforce them. The Chinese Government has already mounted several anti-counterfeiting campaigns, with some demonstrable successes.
Chinese officials openly acknowledge the shortcomings of the existing system. In a speech given to mark World Intellectual Property Day, a senior official from the State Intellectual Property Office has confirmed that China proposes to shift its focus from introduction of new intellectual property legislation to law enforcement and supervision. This change in focus reflects the fact that China had already undertaken a comprehensive review of its intellectual property laws prior to its entry to the WTO. Since the legislation is now basically TRIPs compliant, the Government understands that greater emphasis now needs to be given to ensuring that the legislation is efficiently and consistently applied.
In terms of actual implementation, the Government retains control of the timing of the WTO reforms, despite the formal time frames which have been laid down in the WTO agreements. This is understandable, because many state owned enterprises (and indeed whole industry sectors) will require to be restructured or even shut down and this cannot happen overnight. The Chinese Government has to balance these enormous structural changes with its obligations to allow foreign companies to compete with Chinese enterprises across a wide range of fields. These obligations are managed on a sector by sector basis. Since China does not yet have, for instance, a strong domestic luxury goods sector, it may reasonably be expected that the Chinese Government will not face significant resistance from legitimate local industries if it assists foreign companies by improving intellectual property enforcement in the luxury goods field, which is badly affected by counterfeiting.
One further encouraging factor is that by its very entry to the WTO, China has agreed to become subject to an international dispute resolution body. This is both a fundamental change in approach and a clear indication of China’s long-term commitment.
Although WTO entry will facilitate trade generally without differentiating between genuine and counterfeit goods, it may reasonably be expected that China’s international obligations under the WTO will eventually lead to a decrease in the overall level of intellectual property infringement. The key question is when this will take place.
Research and Development
Although China’s economic growth rates may seem exceptional, they are comparable to those in other emerging Asian economies over the past several decades. The reason why the growth rate in China is so significant in global terms stems from two factors which truly are exceptional – firstly the size of the low cost Chinese labour force which has rapidly became available and secondly the fact that China’s economy is exceptionally open (at least as far as exports are concerned). As a consequence, China’s development not only has a substantial effect on global growth, but it also affects the economies of other countries by affecting the relative prices of goods, labour and capital in a way which has never happened so quickly before.
Nevertheless, if China is to fully develop its economy, it must be prepared to make at least a partial transition from a manufacturing centre to a research and technology leader. There are two principal theories about how China’s intellectual property regime will evolve. The first theory is that China is destined to follow the same path as Japan, Taiwan and South Korea, which evolved from low cost manufacturers into intellectual property-driven technological innovators. The second theory is that China is doomed to remain a second rate economy which will continue manufacturing mostly low quality goods and which will rely upon copying foreign technology rather than development of intellectual property through domestic companies. In the writers’ view, the likely answer falls somewhere between the two theories and although the latter interpretation is overly pessimistic, that does not mean that China will rapidly or totally metamorphose from the world’s factory into a developer of high technology products.
As domestic PRC companies increasingly develop their own intellectual property (and lobby for more robust protection) we may anticipate that the consistency of protection and Government commitment to intellectual property protection generally will improve at a relatively brisk pace.
We anticipate that large quantities of counterfeits will still be produced in China for many years to come. However, both the infringers and their products will become increasingly sophisticated and therefore difficult to distinguish from genuine products (which are increasingly likely to also be manufactured in China) and thus more difficult to even detect. We also expect that increasing emphasis will be placed on inter partes litigation in the Chinese Courts, rather than administrative enforcement against simple counterfeits. Foreign owners of intellectual property rights should anticipate (and budget for) significant expenditure in China on intellectual property protection by means of litigation.
If China is to eventually evolve into a high technology producer, this will profoundly affect a broad range of manufacture-based industries and national economies, not just labour intensive industries such as electronics assembly, clothing and toys. The Chinese Government is determined that this will come to pass. Mr. Xu Guanhua, the Chinese Minister of Science recently stated “We need to develop key technologies as fast as possible and produce more intellectual property. Patented strategic high technologies will sharpen our competitiveness and help safeguard our national security”.
At the broadest level, it seems that the Government’s priorities over the next five years are for increased emphasis to be placed on science and technology, education and healthcare. Substantial efforts and resources will be directed towards achieving these aims. According to the EU’s own figures, China will be investing a higher proportion of its gross domestic product in research and development than the European Union within five years.
China’s spending on research and development is growing in the double digits and foreign companies which have until now concentrated on manufacturing goods in China are clearly starting to place more emphasis on research and development in China. This will be extremely worrying for foreign governments which have tried to downplay the effects of globalisation by arguing that as low-paid manufacturing jobs increasingly migrate to developing countries, developed countries will compensate by concentrating on research and high technology. Those claims now appear increasingly hollow. On the plus side, the increase in research and development spending in China will help to improve intellectual property protection and will not necessarily result in a corresponding overall decrease in spending in countries which are already industrialised.
Intellectual Property Laws, Administrative Enforcement and the People’s Court
(A) China’s Intellectual Property Laws
Our research indicates that there are more than 1200 laws in China at national, provincial, city or county level which concern or touch upon intellectual property rights. This is a remarkable figure since China’s modern intellectual property laws were introduced just over 20 years ago to fill a legal vacuum.
The introduction of free market reforms made it necessary for China to introduce a raft of laws in various areas which had not previously been covered by any legislation at all. It is against this background that China’s earliest modern intellectual property laws were introduced.
Considerable effort has since been put into the improvement of China’s intellectual property laws and before China’s WTO accession, over 140 laws touching on various aspects of intellectual property were amended or replaced. China’s principal intellectual property laws are the Patent Law (which, unusually, covers patents, utility models and registered designs in a single statute), the Trademarks Law, the Copyright Law and the Anti-Unfair Competition Law. English translations of some of China’s principal intellectual property laws can be found on the website of the State Intellectual Property Office at http://www.sipo.gov.cn/sipo_English/flfg/default.htm.
Some foreign owners of intellectual property rights are frustrated by the lack of clarity in some aspects of China’s intellectual property legislation. For this reason, they decide not to register or enforce their rights in China. This “ostrich approach” will be an expensive mistake because in the long term, China will eventually become an extremely large consumer market.
In the writers’ view, it is always worth investing some time and effort to secure at least a basic level of protection in China, even if this is purely as a defensive measure and the foreign owner of the intellectual property rights has no intention to trade or operate in China.
Foreign companies should not attempt to follow a “self-help” approach. This may seem to be a simplistic statement, however some foreign companies do attempt to handle intellectual property issues by themselves without the help of competent professionals who have a comprehensive understanding of the local culture and legal system.
(B) Administrative Enforcement and the Court System
China’s huge territory and population mean that it is impossible for the central Government to enforce intellectual property rights throughout the entire country. The Government has therefore set up parallel organs of enforcement of intellectual property rights at local level. The local branches of the State Administration for Industry and Commerce are primarily responsible for enforcement against straightforward infringements of China’s Trademarks Law. There are also parallel state organs (although with considerably fewer resources) which are responsible for administrative enforcement of the Patent and Copyright Laws. While these agencies may be effective in simple cases of counterfeiting, their officers generally have no legal training. Almost invariably, these agencies will refuse to enforce anything other than a direct and virtually identical copy of an intellectual property right which has already been registered in China by the complainant.
Civil Court procedures are increasingly used for handling complex disputes and due to the more open nature of court proceedings, judges are much less likely than administrative officials to succumb to pressures of local protectionism. In addition to commencing Civil Court procedures, it is also possible (although still rare) for foreign companies to request prosecutors to lay criminal charges against infringers. Owners of intellectual property rights also have the option to launch a private prosecution to enforce their rights.
It is encouraging to note that Chinese companies are increasingly resorting to the courts to resolve intellectual property disputes and in fact, actions between local companies now account for approximately 90% of all intellectual property cases before the People’s Court.
Historically, problems have been reported with poorly trained and overworked judges (sometimes with minimal legal training), political interference, local protectionism and corruption. In fact, the quality of the courts has greatly improved in recent years and generally speaking, the courts in the larger cities are now of reasonable quality. The Chinese Government has made a concerted effort to improve the quality of the judges who are assigned to intellectual property cases in general (and those involving foreign entities in particular). The challenge now facing the Government is how to extend these improvements throughout the entire country.
(C) Strategies for Intellectual Property Enforcement
• Forum Shopping
The venue for intellectual property enforcement actions is the People’s Court located closest to where the infringement took place or closest to the defendant’s place of business. The place where the infringement took place refers to the location where the infringing products are manufactured, used or sold. Before taking legal action, it is prudent to make discreet enquiries regarding any possibly prejudicial factors which may affect a particular court. If any are found, the plaintiff should attempt to establish an alternative venue for the case to be heard either through purchase of infringing products at another location or by other legitimate means.
• Avoiding difficulties caused by local protectionism
Local protectionism is most often encountered in smaller cities, towns or villages where the economy is less developed. In some towns and villages, a factory making counterfeit goods could be the largest local employer. If a foreign company intends to conduct administrative raids on such factories, it must convince the local authorities of the harm of counterfeit products, not only to the foreign company, but also to China as a whole. If these explanations are not effective, the foreign company should enlist the assistance of a higher level of the relevant administrative authority, which will generally not be so affected by protectionist concerns.
• Guanxi (personal connections)
In most countries, it will be helpful to have good connections when doing business. In China, however, many foreign companies attribute an almost mystical significance to local connections. In many cases, these can indeed be helpful, just as locally-hired staff will assist the foreign company to overcome cultural differences. Local staff will instinctively understand that in China it is generally preferable to solve problems through dialogue and that showing commitment to a long-term relationship will go a very long way.
Based on the Confucian system, Chinese society does take great account of connections established through personal relationships. However, foreign companies should ensure that any advantages gained through local connections are in no way tainted by corruption. Although corruption is quite common at some levels of the Chinese bureaucracy, foreign companies should be particularly wary of local associates who claim that they have connections which will enable them to achieve a particular objective which is clearly contrary to Chinese law. Officials, no matter how highly-placed in the Government, do not have powers to override or circumvent legislation and any foreign company which takes up such an offer is clearly exposing itself to significant risk.
As a matter of common sense, it is also important to build a co-operative relationship with relevant officials at a company level, rather than relying on a single individual to handle all such relationships. Just as it would be in any other country, it is foolish to place responsibility for the official relationships of a company in China in the hands of a single individual.
• Do not underestimate the size of China
China has seven major dialects, 31 provinces, 650 cities, and 48,000 districts. There are huge disparities in income, weather, lifestyle, food, religion, and many other elements between north and south and east and west. The market is simply too disparate for China to be regarded as a single national market. When entering the Chinese market, foreign companies should obtain registered protection at national level, but plan their strategy as if China is a continent and not just a single country.
• Throw away your business textbook, but plan carefully
“There is great disorder under heaven. The situation is excellent“- Chairman Mao. This aphorism should be a lesson to foreign businesses. Domestic competitors will be well accustomed to the occasionally chaotic situation in China. Foreign companies should carefully review theories and rules developed in their home countries before attempting to apply them in the Chinese market. In particular, economic models which may have worked during the period before China assumed its present position in the world economy should be treated with particular suspicion.
As a general rule, foreign companies cannot expect to be able to blindly apply intellectual property strategies in China simply because they are effective in their home countries. Conversely, the complexities of undertaking business in China mean that foreign companies should take an even more rigorous approach in China than they would at home.
• Do not rely on legal tactics to enforce your intellectual property rights
It is important to take a holistic approach when planning an intellectual property strategy for China rather than trusting a particular legal strategy which may not actually be effective in practice. An intellectual property strategy should be pragmatic and should be directed towards ensuring that a company can promptly stop infringements at a reasonable cost and preferably in such a way as to deter other prospective infringers.
In order to reduce the risk of having to resort to enforcement action, companies may try to handicap infringers through constant technological innovation, reputational marketing, providing exceptionally high standards of service or using anti-counterfeiting markings or packaging.
• Co-operate with authorities
It is important to build up good relationship with local enforcement agencies. In practice, this may mean that it is necessary to take seriously official reports of possible infringement cases even when the quantities of counterfeits fall below the minimum level at which a foreign company ordinarily deems it economical to take action. If a foreign company shows no interest in taking action against a small quantity of counterfeits, experience shows that the officials will be reluctant to proactively assist that company in the future, regardless of the number of infringements which may subsequently appear.
• Plan, obtain and regularly review your registered intellectual property portfolio
It is far more cost effective to obtain defensive protection than to rely on litigation or enforcement action to protect your company’s rights. Registered protection should be obtained in China in proportion to the relative size of the jurisdiction, the prevalence of counterfeiting activity and the commercial importance of the particular intellectual property rights.
It is extremely important to ensure that protection is obtained for Chinese language versions of foreign trade marks. If a well-chosen, easily-remembered and convenient Chinese character version of a mark is not provided by a foreign trade mark owner, Chinese consumers will create their own informal Chinese version of the mark. This presents several problems, notably the risk of piracy of what is actually the most important local version of the mark and the possibility that the informal mark has a negative meaning or connotation.
• Record commercial arrangements in writing
Employees should be bound by comprehensive employment contracts which include, where appropriate, both non-disclosure and non-compete clauses. It is essential to take professional advice when preparing such agreements, since local legislation in some areas requires compensation to be paid to the employee in order for such clauses to be enforceable. Such clauses are, of course, no substitute for ensuring that access to commercially-sensitive information is restricted to the smallest possible group of employees.
It is also essential to enter comprehensive bilingual contracts with business partners. It is simplistic and incorrect to assume that commercial contracts cannot be enforced in China.
• Conduct regular intellectual property audits
It is important to identify potentially protectable intellectual property rights which are developed or newly disseminated in China and specific procedures should be set up to ensure that regular audits are conducted of a company’s intellectual property portfolio.
• Control use of intellectual property rights by local associates
A foreign company should never permit a local partner to register intellectual property rights in its own name. As a general rule, despite the legal obstacles, it is also important to retain full control of intellectual property rights which are used by a joint venture company and to prohibit registration of those rights in the name of the joint venture. Licences should be issued and registered in favour of local manufacturers, even if they are subsidiary companies, both to ensure protection of the manufacturer against official charges that they are not authorised to use a particular trade mark and also to ensure that the proprietor/manufacturer relationship cannot be subsequently challenged.
• Protection of intellectual property rights in China is a constantly moving target
In a period of such rapid evolution, nothing should be taken for granted and all possible steps should be taken to avoid loss of intellectual property rights which may prejudice the future operations of your company in a country which is home to one-fifth of the world’s population.
