The enormous potential of the Chinese market carries with it significant risks on the intellectual property (IP) front. For every success story there is a horror story. Counterfeiting and piracy of well-known brand names is commonplace. There are many tales of multinationals losing out because their Chinese manufacturers have registered their trade marks in their own name or have claimed to the have invented the technology they have been contracted to produce and obtained patent registration themselves.
IP litigation in China is full of surprises and the challenge this poses can be a serious obstacle the to business. None of this, however, should prevent a business from entering China. With proper protection of IP rights and proper guidance on the intricacies of doing business in China, this enormous market can be safely tapped.
Law and Enforcement
The law in China meets international standards. Trade mark, designs, software and patents can all be registered and unfair competition in business is dealt with by an anti-unfair competition law. There are specialist IP courts with specialist judges in Beijing and Shanghai, and in many of the major cities. There are also administrative bodies outside the court system which have responsibility for enforcing IP rights.
Counterfeiting and Piracy
Respect for IP rights is said to be improving, but it is still common to find the counterfeit fashion items and accessories of well-known brands being sold at respectable shopping malls in major cities or just over the border from Hong Kong. Similarly, electrical goods with 'borrowed' technology or bearing the same or confusingly similar logos to household brands are widespread
Prudent steps to protect IP rights from the beginning will give more options when rights are being infringed. As in most countries, the registration of trade marks in China is relatively simple and inexpensive. It can be done by direct application to the Trade Mark Office or as part of an International Registration.
Registration, renewal and other dealings with the registration must be conducted through one of the trade mark agencies designated by the Government to handle applications from foreigners These agencies are now independent of the Government and are run as private firms.
Registration certificates are significant in China, and the advantage of registration is that enforcement becomes earlier. Trade marks can be enforced through the courts or through the Administration for Industry and Commerce (AIC) .The latter route is used most commonly by Western companies seeking to gain some measure of control over the counterfeiting problem.
The AIC structure is a hierarchy with representatives in every province, city and village. Upon the filing of all relevant evidence and a well- drafted complaint, the relevant AIC will conduct an immediate investigation often resulting in an immediate raid of the wrongdoer's premises and the seizure of the infringing product. The AIC has the power to confiscate and destroy infringing merchandise, fine infringers, order damages to be paid and order that infringers make a public apology. The procedure is quick and inexpensive. Companies that face problems with counterfeiting have had great success in reducing the problem to a manageable level by using the AIC as part of a comprehensive anti-counterfeiting strategy.
A tip for Western companies entering China which is often overlooked, is the choice and registration of a Chinese language trade mark to go alongside the Western brand name. There have been a number of high-profile relaunches of Chinese brands where the one originally chosen was subsequently found to have an inappropriate or undesirable connotation. Also to be avoided is the situation where no Chinese name is given. This can lead to third parties developing and registering a Chinese version of the Western brand name or a local nickname being adopted by consumers, which again may not have the most desirable connotation.
There are peculiarities of Chinese trade mark laws that must be observed. It is common for Western companies to have their trade marks owned by the parent company with the local operating companies taking a licence to use them. In China, licences must be in writing and signed, and must be recorded with the Trade Mark Office. Failure to record a trade mark licence may result in cancellation of the licenced trade mark. Licences only last for the term of the registration and must be renewed upon renewal of the trade mark.
Protecting Technology in China
The Chinese Patent Law provides protection for inventions, utility models and designs. As in most countries that provide patent protection, an invention or utility model must meet three requirements in order to receive recognition: novelty, inventiveness and practical applicability.
Novelty means the invention or utility model must not have been disclosed in the public domain before the date of filing. Novelty can be destroyed by publication anywhere in the world or use in China (as opposed to world-wide use under the laws of some other countries). As China is a signatory to the Paris Convention, any signatory state will enjoy a 'priority right' which permits them to file Chinese applications for an invention patent or utility model within a year of filing in another signatory state without destroying novelty.
To show inventiveness, an invention must have 'prominent substantive features' and 'represent a notable progress' compared with the existing technology. The inventiveness requirement for registering a utility model is less stringent than an invention as it only requires the utility model to have 'substantive features' and 'represent progress'. Practical applicability means that the invention or utility model can be made or used and be capable of producing 'effective results'.
In respect of applications for utility models or designs, the Patent Office will conduct a preliminary examination to determine whether the applications documents comply with the requirements of the Patent Law, such as the formalities only. No substantive examination of the application will be conducted. This has caused difficulties for Western companies where local companies have taken advantage of the lack of substantive examinations and obtained registrations for technology owned and even registered in other countries by the Western company. In extreme cases, the local companies use the illicitly-obtained registration to prevent sales by the legitimate owners.
Patent litigation in China
The patent system in China is based upon the German patent system. Although the modern patent regime is relatively new, patent litigation is not uncommon. Over the past few years there have been several Western companies who have found themselves as a defendant in patent litigation in China. As in Germany, issues of infringement are dealt with in the courts while issues of validity are dealt with in the Patent Office A defendant, therefore, will typically find itself arguing one side of the litigation in one forum and the other side in another.
A practical difficulty is that the Patent Office often takes longer to reach a decision than the Court, so a defendant could find itself in a position where it is found to infringe and is ordered to pay damages, and yet there are parallel proceedings to invalidate the patent. A subsequent finding of invalidity will not mean that the unfortunate defendant is reimbursed the damages already paid.
The court process in China can be unpredictable and frustrating. Trials that in many Western countries would run into days or weeks of court hearing can be decided in a matter of hours. A trial of one day is a long trial. Experts opining on the technology involved and the state of the art are used, but not in the same way as in trials under English law. Generally, expert evidence is presented by a court-appointed committee of experts. It might be presented as a written report or the experts might sit through the trial not giving evidence as such but acting as a form of expert jury who gives advice to the judge. Unlike a true jury, however, the experts will not come to a conclusion: they the will simply offer an opinion to the judge.
Copyright Law and Software
As in many other jurisdictions, with the exception of software, the Copyright Iaw in China does not require registration. The Software legislations have specific provisions concerning computer software. Computer software owners cannot file an infringement action in the courts or with an administrative body in respect of unregistered computer software. However, a practical drawback of registration is that disclosure of the source code is required. Commercially this is very unattractive.
Software can be registered under the Patent Law, but it is subject to stringent restrictions. The software concerned is required to form an integral part of a computer. For computer software that is marketed independently and separately from and hardware, the software owner can only rely on the Software Regulations.
China provides an exciting market for all industries: cosmetics, fashion, pharmaceuticals, computers, software, mobile telephones and health products are all being snapped up by an increasingly sophisticated and cosmopolitan consumer base.
The challenge for many companies is to retain control of their IP rights. The laws provide a good registration regime comparable with the highest of international standards. The first key to the success of companies with valuable IP that are entering China is to obtain the relevant registrations. Contrary to popular belief, enforcement of intellectual property rights is possible, although without proper guidance it can be a minefield.