THE RISKS OF intellectual property rights (IPR) infringement in China are well known. The media frequently reports examples of blatant IP infringements, raids on fake DVD markets, cases of patent owners with invalidated patents and joint venture partners stealing technology. There is no doubt that there are challenges involved when a company brings its IP to China, but the reality is that the IP system is becoming increasingly sophisticated. With careful preparation, it is possible to maximize the commercial opportunities offered, while minimizing the IP risks.
Historically, many IP problems have arisen from an immature system rather than from any innate Chinese intention to commit IP violations. China’s Patent Law dates only from 1984, whereas most Western countries have a century of experience behind them. The civil courts heard nearly 10,000 civil IP cases in 2005 and there were 10,000 administrative trademark raids. This is one of the largest IP caseloads in the world, and some Chinese cities now have highly specialized IP courts that dispense fair decisions to locals and to foreign companies alike.
Many find it easy to take the view that China is at fault for the rampant problem of IP infringement. The cause of the counterfeit problem in China, however, is as much about Western corporate failures as it is about Chinese institutional failure. The rush to enter China resulted in many early corporate entry strategies failing to place enough attention on the protection of IP.
Many rights owners chose to send operational staff to establish their business in China-staff who had little or no understanding about the country or the need to invest in IP protection strategies. Many rights owners did little to properly protect their IP when entering joint venture arrangements. Others chose not to invest in IPR protection, content simply to see rising market share and volume. Many others relied on complex agreements drafted by common law lawyers in English, then translated for a civil law system in China.
The IP laws passed in China since the early 1980s generally meet international standards. There is now a huge range of judicial solutions for dealing with IP problems, with new options developing all the time. The People’s Republic does
provide and support a framework on which preventative measures can be practiced and where they will be effective.
Many companies operate n China successfully and are able to exploit their IP effectively. Careful and early planning is the key to an effective IP protection strategy. The following checklist provides a useful guide to issues to consider when operating in China.
Internal IP review
It is crucial to conduct comprehensive review of the company’s existing IP portfolio. This should include trademarks. Patents, know-how and copyright of items such as software, manuals, drawings and specifications, as well as the policies and procedures the company has in place to protect its IP.
Checks on Chinese partners
Companies need to carefully select and partner they use in China, whether it be a sub-contractor, manufacturer, distributor or agent. It is crucial to conduct due diligence on these companies to identify their level of IP awareness as well as any weak points that create a potential risk for the company’s IP. It is necessary to confirm that these companies have a proven record with protection of IP, including their own brands and reputations.
Once a partner is selected, the agreement needs to contain very specific IP protection clauses. These should include a right to audit the partner’s processes and procedures to ensure compliance with the company’s expectations. Companies must also exercise their audit rights under these agreements to maintain awareness with the partner firm.
IP registration in China
China follows a first-to-file rather than a first-to-use principle in relation to registration, so it is important to register IP as early as possible. International patents are not recognized here, so if a company fails to file in China, it will have no rights.
Trademarks
Companies should also register their Chinese brands-otherwise an unknown Chinese party might do so. Trademark registrations tend to be the most straightforward rights to enforce in China. Authorities are familiar with the process and the registration certificate clearly shows the rights involved.
The case of Starbucks is a recent example of what can go wrong. The US-based coffee-shop chain registered its ‘Starbucks’ trademark and device in China in 1999. It did not, however, register the Chinese character version of ‘Starbucks’ until December 1999 in class 35 (a service class) and until February 2000 in classes 30 (coffee) and 42 (another service class). In March 2000, a Chinese company was established with a name that included the Chinese characters for ‘Starbucks’, which it proceeded to use to brand its cafes and goods.
Starbucks brought an action against the company in the Shanghai No 2 Intermediate People’s Court. In the end, it won the case on the grounds that the defendant company had registered its name in bad faith, had not provided sufficient evidence of selecting the name independently and that Starbucks’ use of its trademark (although outside China) predated the defendant’s.
Patents
The Chinese system allows for the registration of design, invention and utility model patents. Design patents are used to protect a new design of a shape or pattern. With both utility model and invention patents, it is important that the translation of the grant is carefully drafted so as not to restrict its scope. Similar requirements as to novelty exist in China as in other jurisdictions, so it is important to include China in the initial filing programme to ensure strong patent protection.
Applications for the revocation of patents are becoming an increasingly common response to patent infringement claims in China. This is called retaliatory invalidation, and confirming the validity of your patent is important before considering an attempt to enforce it against an informed infringer.
Copyright
Although copyright arises automatically on creation in China (in the form of software, manuals, drawings, specifications, etc), there is a voluntary recordal system that can assist in making enforcement of copyright more straightforward and which provides a public record of the existence of the copyright. As in the US, this voluntary recordal system is prima facie evidence of subsistence and ownership, and the defendant is left to prove its otherwise independent creation and non-copying.
Trade secrets/know-how
Trade secrets, such as technical or operational information that is unknown to the public, are the most difficult type of IP to protect, as they rely on the ability to maintain confidentiality. The regulations place a very high onus on the plaintiff to prove the steps it took to ensure that the information was kept confidential. At a minimum, companies need to mark confidential terms, restrict access to trade secrets by controlling reference/access groups, and implement confidentiality policies and agreements with employees.
Production and supply chain process
The production process and the supply chain are key risk areas for leaks of confidential information and for infringement of IP. There are frequent examples of waste materials from authorized factories being used to create counterfeit products. There are also numerous examples of genuine products leaking ‘out of the back door’ of authorized factories and ending up in the market as grey goods (i.e. genuine, but unauthorized).
Managing employees
One of the main risks for infringements of IP in China is employees. Companies must ensure that their HR processes contain express IP protection policies, including:
strong employment contracts (with non-competes, confidentiality provisions and other restrictive covenants);
policies for exit interviews and processes;
education of employees about the importance of, and policies for, IP protection. and
trade secret protection policies, including restricting access to confidential information. Companies must actively control what walks out the door with existing employees and ensure that non-competes are enforced against key employees.
Conclusion
While the IP environment remains challenging in China, the judicial system of enforcement is becoming much more sophisticated. The regulatory framework does allow a company with a well-executed IP strategy to successfully exploit its IP in China.