Complaints by foreign businesses regarding protection of intellectual property rights in China have been a consistent feature in media reports since large scale foreign investment commenced some 20 years ago. However, China's economic revolution over the same period means that opinions based on negative experiences in the past must be constantly reassessed.
Admittedly, enormous problems regarding intellectual property enforcement still exist in China and these will remain a feature of the business environment for many years to come. However, it is important to fully understand the developments in legislation, enforcement mechanisms and official policy which have taken place, in particular since China's accession to the WTO.
This article highlights some of the most recent developments in the fields of procedure and Government policy and concludes with a series of suggestions based on real life experiences which may assist companies to avoid the mistakes which have been made by other businesses. One of the most depressing features noticed by attorneys practising in intellectual property enforcement in China is the number of companies which repeat the same mistakes which have been made by other companies. Perhaps this may be explained by the absence of an effective means through which companies can benefit from the experience of others and hopefully these suggestions may at least partially address this problem.
Despite frequent generalisations to the contrary, the framework of intellectual property laws in China is actually quite comprehensive. The vast majority of problems which arise regarding intellectual property enforcement are due not to deficiencies in the law itself but to inconsistencies or weaknesses in the administrative enforcement bodies or the courts. As will be seen, the Chinese Government has recently taken several very positive steps in the field of intellectual property protection.
The Influence of Chinese Government Policy on Intellectual Property Protection
Bearing in mind the pervasive influence of the Chinese Government in private business through both official and covert channels, it would be naive to assume that the Government is unaware of the serious problems which face foreign companies seeking to protect their intellectual property in China. The urgency with which practical deficiencies are addressed is determined by the Communist Party, as the ruling party in China's Government.
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.
Although nominally still communist, the leaders of the Communist Party have openly embraced principles of capitalism during the party Congress held in late 2005 and they are thus unlikely to undermine future reforms of intellectual property protection simply for ideological reasons. The leadership is well aware that the Government's political endorsement relies upon rapid economic growth. They will therefore place emphasis on the protection of intellectual property in proportion to the extent to which intellectual property protection is deemed likely to stimulate China's economic growth.
While consistent and well-planned lobbying by foreign Governments may have some impact on the progress of intellectual property reform in China, it is important to recognise that intellectual property protection is just one out of a huge number of social and economic issues with which the Chinese Government must simultaneously address.
The New Emphasis on Intellectual Property in State Planning
Practically speaking, it is impossible for the Government to ensure that intellectual property laws will be immediately or consistently applied throughout China. 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 (including the protection of intellectual property), there is an established history of ignoring laws until strong State action is taken to enforce them. With this in mind the Chinese Government has already mounted several well-publicised 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 2005, a senior official from the State Intellectual Property Office has confirmed that China proposes to shift its focus from the 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. The legislation is now basically TRIPs compliant, and the Government clearly 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.
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.
Recent Developments in improving the Transparency and Effectiveness of Intellectual Property Protection
During 2005 the Chinese Government introduced a series of new measures which will contribute to both the transparency and effectiveness of intellectual property protection.
• On-line searching introduced for Chinese Trademarks
On 26 December 2005, Mr. Qinghu, the Director General of the Chinese Trademarks Office announced the introduction of a new on-line search system which enables third party users to access information free of charge via the Internet. The information available under this new system (which does provide an English language interface, although all of the search results are in the Chinese language) includes details of similar or identical trademarks, trademark statuses and details of marks owned by a particular proprietor. Interestingly, a facility is provided to enable third parties to submit suggestions for corrections of any errors in the official records which may be disclosed while searching. The introduction of on-line searching, although still subject to qualifications and limitations regarding the type and likely accuracy of the data, represents a welcome step forward.
• Improvements to the website of the Chinese Trademarks Office
The Chinese Trademarks Office has introduced various features on its website which will be of assistance to foreign businesses, including translations of some of China's principal intellectual property laws. These can be found on the website at http://www.sipo.gov.cn/sipo_English/flfg/default.htm.
Free access is also given on the website to copies of the Shangbiao Gonggao, the China Trademark Gazette, in which several thousand advertisements of trademarks which have been accepted for registration are published each week.
• Revised Trademark and Adjudication Rules
The Trademark Review and Adjudication Board (TRAB) is the appeal body for decisions taken by the Chinese Trademarks Office on issues of registrability, cancellation and opposition. Amendments to the procedural rules followed by the TRAB were announced at the end of October 2005. The new rules will clarify and simplify the procedures for taking an appeal to the TRAB. In practice, it is likely that the amendments will help to reduce the substantial backlog of cases being handled by the TRAB.
• Publication of Examination Guidelines
For the first time ever, the Chinese Trademarks Office has published the examination guidelines which are used by official examiners to determine the registrability of trademarks. The publication of these guidelines will greatly increase both the transparency and the predictability of the application process and it is particularly encouraging to note that a consultation period was allowed before the rules were finalised and published.
• New measures for official seizure of counterfeit goods
In a move which is possibly inspired by a desire to reduce the number of counterfeits available before the Olympic Games are held in Beijing in 2008, administrative enforcement officials in major cities have been given the authority to seize on sight products if they bear certain luxury brand names. The rationale for the new initiative (which was trialled in Beijing) is that luxury goods manufacturers do not distribute their products through street vendors, so it may automatically be assumed that any such products which are offered for sale in this way are not genuine.
The Impact of Technological and Economic Development
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 writer's 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 fully 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 correspondingly brisk pace.
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. As a consequence we may 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”.
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.
Practical Suggestions to Improve Intellectual Property Enforcement
• Obtaining registered protection for intellectual property rights.
Many foreign owners of intellectual property rights become frustrated by problems they have already encountered with enforcement of intellectual property in China. They may then make a decision not to bother to register or enforce their rights in China. This approach will be an expensive mistake in the long term, because China will eventually become an extremely large consumer market.
In the writer's view, it is always worth investing the time, resources 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.
• Seek professional advice
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.
• 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.
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 diverse 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.
• 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.
• 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 trademarks. If a well-chosen, easily-remembered and convenient Chinese character version of a mark is not provided by a foreign 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 trademark and also to ensure that the proprietor/ manufacturer relationship cannot be subsequently challenged.
Conclusion
Foreign businesses with dealings in China may take heart from the recent (and ongoing) improvements in the sophistication of China's intellectual property legislation and its specialist courts. In particular, the recent moves to increase official transparency seem likely to improve the competitive position of foreign businesses. The publication of the Examination and Review and Adjudication Board Guidelines are a particularly welcome new development and they appear to illustrate an increasing confidence on the part of the Chinese Intellectual Property Office to expose its decision making processes to external scrutiny.
If one overriding message may be drawn from recent developments, it is that no matter what setbacks may have been experienced in the past, foreign businesses should not be discouraged from future engagement with China. The Chinese Government seems to be increasingly focused on addressing the negative messages concerning intellectual property protection in China which may limit the continued foreign investment which is essential for the development of the country.
By Lindsay Esler, Managing Partner and Head of Intellectual Property Department of Deacons, Hong Kong [email: [email protected]]
[This article was first published in the Feb 2006 issue of Metropolian Corporate Counsel. |