Battles for intellectual property are turning fierce in China and rights owners must know the tactics of both defence and attack, write Richard Li and Joy Jiao
The Chinese market presents tremendous opportunities, but also fierce competition. As the level of development of the Chinese economy increases, brand effect and the fruits of technical innovation play an ever larger role in market competition. If these intangible assets are not protected, they could fall onto the plates of hungry competitors.
Liu Minxuan, a senior partner at AllBright Law Offices in Shanghai, recounts that a new venture became a leader in its industry after several years of hard work. However, when it tried to register on the Tmall platform, it discovered that the trademark in Class 35 required for identification by Tmall had long ago been preemptively registered by a direct competitor.
Although that company was eventually able to preliminarily recover its trademark, “It frustratingly discovered that pirates had preceded it in pirating its trademark in nearly all of the other classes, greatly hampering the development of its business and exposing it to risks everywhere,” says Liu Minxuan.
“If that company had placed greater weight on intellectual property [IP] protection from the outset, registering its trademark in a greater number of classes, it likely would not have needed to desperately wage an all out war on each trademark [class], as now.”
Enterprises must learn how to use the law, as a shield to protect their IP rights, and as a sword to attack infringers. Fortunately, as China has placed increasingly greater importance on the protection of enterprises’ innovations and brand building, the legal weapons available to enterprises have become more potent.
Helen Cheng, an equity partner at Zhong Lun Law Firm in Shanghai, says that the Opinions of the Central Committee of the Communist Party of China and the State Council on Improving the Property Rights Protection System and Lawfully Protecting Property Rights, and the Opinions of the Supreme People’s Court on Fully Leveraging the Adjudication Function to Duly Enhance Judicial Protection of Property Rights, issued in November 2016, and the Outline for the Judicial Protection of Intellectual Property in China (2016-2020) issued by the Supreme People’s Court (SPC) in April 2017, all contain important provisions that will drive and assist in the establishment of an IP punitive damages system.
“It can be seen that China has in recent years consistently been endeavouring to intensify IP protection, intensify the punishment of bad faith infringement and force up the costs of infringement,” she says. “This trend will be of great assistance when enterprises claim damages against infringers through judicial means, and will also increase the deterrent effect on infringers to a certain extent.”
The Standing Committee of the National People’s Congress issued the Second Deliberation Draft of the Bill to Revise the Law Against Unfair Competition in September 2017. Han Jinwen, a partner at AnJie Law Firm in Beijing, states that, “according to the bill, the Law Against Unfair Competition proposes to increase the measure of damages for acts of unfair competition to RMB3 million (US$450,000), which is consistent with the rate for statutory damages specified in the current Trademark Law, greatly increasing the protection of rights holders.”
Severely cracking down on bad faith infringement was one of the key topics at both the China Trademark Festival and the China Patent Annual Conference held in early September 2017. During the Trademark Festival, the Trademark Office sponsored a practical forum entitled Stifling Bad Faith Registration in the Substantive Trademark Examination Procedure and Exploration of Hot Button Issues. At the Patent Annual Conference, the Commissioner of the State Intellectual Property Office (SIPO) also mentioned in particular that his office would introduce punitive damage measures to intensify patent protection and drive up the cost of infringement.
“This will have a major impact on enterprises’ brand building and protection of innovation,” says Chen Hao, a senior partner at DHH Law Firm in Beijing. “On the one hand, this will have a certain deterrent effect on bad faith infringers, will be conducive to cleaning up the IP environment, embolden enterprises to innovate, and reduce enterprises’ rights protection costs. On the other hand, in IP rights protection cases, [the aggrieved enterprise can] adduce evidence attesting to the infringer’s free riding on the well-known trademark or hoarding of trademarks, greatly increasing the probability of prevailing.”
Instances of winning the case but losing the market have been common in the past. Zhao Ye, a partner at DeHeng Law Offices in Beijing, argues that the most obvious judicial trend in recent times has been the increase in the amount of damages awarded by the courts. “Although the Supreme Court proposed increasing the measure of damages numerous times in the past 10 years, [until recently] there was no obvious change,” he says. “This round of changes began with the birth of the IP courts, particularly after 2016, when the Beijing Intellectual Property Court considerably increased the amount of damages awarded, leading the courts around the country in increasing the measure of damages.
“Taking patent actions as an example, the average amount of damages awarded by the Beijing Intellectual Property Court in patent cases in 2014 was RMB350,000; in 2016 it had increased to RMB1.024 million, and continued to increase to RMB1.103 million in the first half of 2017, representing an increase of three times,” says Zhao.
Han, from AnJie, also says that, “in IP rights protection cases there has been a marked increase in the measure of damages for infringement determined in the judgments of Chinese courts, with awards of several million, and even several tens of millions, seen quite regularly.”
For example, recently, in its first instance judgment in a case involving infringement of an industrial sewing machine invention patent, the Shanghai Intellectual Property Court ordered the defendant to compensate the plaintiff in the amount of RMB5.5 million for economic losses and reasonable expenses. The plaintiff, Brother Industries, is an internationally renowned industrial sewing equipment manufacturer and the holder of the invention patent in the case. The plaintiff discovered infringing products produced and sold by the defendant in numerous cities in China between 2010 and 2015.
In that case, “the court, taking into account such factors as the large number of infringing products, the breadth of the scope of infringement, the length of the duration of the infringement, the large sales volume, the large profits made on the products, etc., ultimately determined, in keeping with the spirit of the Opinions of the Supreme People’s Court on Several Issues Concerning the Intellectual Property Trial Service Situation Under the Current Economic Circumstances, a measure of damages greater than the maximum statutory amount,” says Liu Minxuan from AllBright. “This is the IP infringement case in which the highest amount of damages has been awarded in Shanghai to date. The judgment in this case clearly demonstrates the intensification of the protection of the lawful rights and interests of rights holders by the court, and manifests the court’s attitude towards, and resolve in, continually strengthening the judicial protection of IP rights.”
Zhao has noticed that the increase in damages awards has resulted in a series of marked changes, “first, a large increase in settlement amounts; second, a sharp increase in the number of cases, with the number of cases [accepted by] the Haidian court and the Beijing Intellectual Property Court increasing by close to 100%; and third, a lengthening in trial duration.”
Wei Xiaowei, a patent attorney and deputy director of the electrical patent department of the CCPIT Patent and Trademark Law Office in Beijing, argues that, “[The marked increase in awarded damages] has made innovation much more profitable for innovators, offers innovative enterprises a smoother development path and makes infringement more costly for infringers, making the road for enterprises that depend on copying to grow much bumpier.”
Zhang Yi, a senior partner at Highways Law Firm in Shanghai, says that the State Plan for the Protection and Application of Intellectual Property During the 13th Five-Year Plan, issued on 30 December 2016, represents the first time that IP has been incorporated into a key state plan in China. “The state’s overall IP plan starts with system top-down design and gives clear guidance for the development of the IP endeavour,” she says. “In particular, work will be done in improving the IP law systems, enhancing the level of IP protection and increasing the quality of, and benefits from, IP.”
In terms of patent protection, the SIPO adopted the Administrative Measures for Prioritized Patent Examination, officially implemented from 1 August 2017. Cheng, from Zhong Lun, says that compared with the corresponding regulations implemented in 2012, the new administrative measures “expand the scope of application of prioritized examinations, improve the conditions for their application, simplify the handling procedures and optimize the processing procedure”.
Xu Shenmin, a senior partner at Watson & Band in Shanghai, says the new measures “not only permit prioritized applications for invention patents, but also for applications for utility models and designs, reviews and invalidations, creating a complete prioritized patent examination system”.
Cheng says that an innovative enterprise can promptly learn whether a patent that it proposes to apply for falls within the scope of prioritized examinations of patent applications, particularly whether it falls into the new categories set out in the administrative measures, such as “an industry particularly encouraged by the People’s Government at the provincial level or level of municipality divided into districts”, or “in the internet, big data, cloud computing or other such sector that is characterized by rapid turnover in technology or products”.
“With respect to a technology that satisfies the requirements for prioritized examination, an enterprise may determine whether it needs to apply for such an examination based on its own requirements,” she says.
In terms of trademarks, on 1 March 2017, the SPC issued the Provisions on Several Issues Concerning the Trial of Administrative Trademark Right Grant and Confirmation Cases. Xu says that the provisions mainly address the yardsticks and procedural requirements for the trial of such cases by the courts, the review and adjudication acts of the Trademark Review and Adjudication Board (TRAB), and the method for, and factors considered in, determining the distinctiveness of a trademark.
Xu also notes that the provisions provide greater granularity in the provisions on the protection of well-known trademarks. Pursuant to the new provisions, “when protecting an unregistered well-known trademark, the factors that ‘are likely to cause confusion’ need to be examined, including the degree of similarity of the trademark representations, the degree of similarity of the goods, the distinctiveness and notoriety of the trademark for which protection is sought, the degree of attention of the relevant public, as well as evidence of the trademark applicant’s subjective intent and actual confusion,” he says.
“This provision will affect whether enterprises’ unregistered brands can be recognized as well-known trademarks and secure the protection due them, and enterprises’ decisions on brand building will also change accordingly.”
In terms of trade secrets, article 123 of the General Provisions of the Civil Code, which entered into effect on 1 October 2017, incorporates trade secrets as a type of IP within the scope of protection, and specifies the legal position of trade secrets as a basic civil right. The protection of trade secrets has consistently presented problems in IP protection, with the difficulties in gathering evidence and the stringent requirements in respect of the adducement of evidence.
Furthermore, “once a trade secret leaks it can result in irreparable loses,” says Frank Liu, a partner at Jincheng Tongda & Neal in Shanghai. “The protection of trade secrets in China has been progressively strengthened at the legislative level, demonstrating the importance that the legislative authorities attach to the protection of trade secrets, and this will aid enterprises in further protecting their trade secrets.”
On 8 September 2017, 12 authorities, including SIPO, the Ministry of Public Security, the Ministry of Commerce, the State Administration for Industry and Commerce, the SPC and the Supreme People’s Procuratorate jointly issued the Action Plan for the Protection of the Intellectual Property of Foreign-Invested Enterprises, deciding on a concerted nationwide crackdown on infringements of the IP of foreign-invested enterprises between September and December 2017.
“This plan is China’s first action plan that directly addresses the protection of the IP of foreign-invested enterprises,” says Frank Liu. “It is worth noting that the work involved in the plan covers a wide swathe, not only including the protection of trademarks, patents and copyrights, but also including cracking down on infringement of trade secrets, import and export goods that infringe IP rights, etc.”
Quan Xianzhi, a senior partner at Longan Law Firm in Beijing, has noted that the SPC is placing great weight on improving the IP guiding case system, with the batch of guiding cases it published in March 2017 all being IP cases. “This result is, on the one hand, conducive to greater uniformity in the criteria for IP judgments,” she says. “On the other hand, it enhances the importance the public attaches to IP, which is conducive to the protection of innovation and brand building.”
ERA OF BIG DATA
“With the arrival of the age of ‘internet+’, corporate IP protection is entering a new phase,” says Wang Hongyan, a senior partner at L&H Law Firm in Hangzhou. “I believe enterprises should pay greater attention to the protection of IP in the internet sector.”
The State Council issued the Several Opinions of the State Council on Accelerating China’s Development as an Intellectual Property Powerhouse Under the New Situation at the end of 2015. On 18 August 2017, the Hangzhou Internet Court was established. These can be viewed as response measures taken by administrative and judicial authorities in respect of the protection of IP against the background of technological innovation.
“The opinions expressly state the need to strengthen the consideration of rules for the protection of IP in such sectors as the internet, e-commerce, big data, etc., to formulate an IP protection policy of mass innovation, crowdsourcing, collective support and crowdfunding, and to drive the improvement of relevant laws and regulations so as to strengthen the IP protection of innovations in new businesses and new sectors,” says Wang. “As for the establishment of the Hangzhou Internet Court, the incorporation of online copyright dispute cases into the scope of cases accepted by it offers greater judicial support for enterprises’ IP rights protection work.”
Xu, from Watson & Band, argues that with the establishment of the Hangzhou Internet Court, new points of dispute have arisen in the trademark issue against the background of ‘internet+’. “For example, the issue of parallel imports among cross-border e-merchants, the nature of the marks of online stores, etc.,” he says. “This series of issues will accompany ‘internet+’ as a new business model, and the new legal issues deriving under this business model, such as capital appraisal, online shop transfer, etc., will become an important component of the regulation of IP.”
Frank Liu says that from the change in name of “Didi Dache”, due to alleged trademark infringement, to the RMB100 million claim lodged against “Jinri Toutiao” for alleged trademark infringement, and further to Mobike’s involvement in a patent infringement dispute, IP infringement cases in the internet industry can be unending. “I would recommend that [internet companies] carry out relevant brand or technology searches and evaluate the infringement risks, and when faced with an infringement claim take appropriate response strategies based on the details of use and the rights basis to effectively reduce infringement risks,” he says.
With a view to adapting to the new situation in the internet age, certain provisions on patent applications in the Patent Examination Guidelines, which entered into effect on 1 April 2017, have been revised. Wei, from CCPIT Patent and Trademark Law Office, says that in order to satisfy the demand of innovative entities for patent protection of new business models that combine computer technologies (e.g., internet technologies), the revised Patent Examination Guidelines specify that, “If a claim for a business model includes both content on business rules and method on the one hand, and technical features on the other, the potential for obtaining a patent therefore must not be precluded based on article 25 of the Patent Law.
“From this, the intent behind the revision of the examination guidelines is clear: as long as a solution contains technical features, it cannot be precluded as an object of patent protection solely because it involves a business model,” says Wei. “Accordingly, even an innovation that involves a business model, e.g., an e-commerce, sharing economy model, etc., can be accorded patent protection if it includes technological improvements.”
Wei recommends that enterprises rapidly change their way of thinking in light of the revisions to the Patent Examination Guidelines, and take a close look at their unique business model from the perspective of patent protection. “If such a unique business model uses internet-type computer technology, the enterprise can consider filing a patent application for this business model,” she says. “When preparing the application for a patent involving a business model, attention needs to be paid to highlighting the technical means and their technical effect that are involved in the solution to the greatest extent possible.”
A STITCH IN TIME
Wang, from L&H Law Firm, says that senior management of an enterprise “should attach great importance to the protection of the enterprise’s IP, comprehensively plan the enterprise’s IP strategy at the beginning of development in light of the enterprise’s circumstances, its future development plans and development targets, determine the anticipated targets for IP management at each development stage, and expressly specify the stage-by-stage targets for the development, protection and management of the enterprise’s IP.”
Cheng, from Zhong Lun, recommends that enterprises plan thoroughly for IP protection, duly select the entities applying for patents and registered trademarks, and have the necessary licensing agreements signed among connected parties. “Comprehensive protection of one creative idea may be carried out by different methods, such as trademark registration, copyright registration, application for a design patent, etc., that is to say that the most appropriate protection method should be duly selected while not getting too hung up on a single protection method,” she says.
Cheng also states that an enterprise should establish a sound confidentiality system, specifying non-disclosure obligations, the vesting of IP rights and non-compete obligations with relevant employees in advance. “An enterprise should, through its rules and regulations, reduce to the greatest extent possible the possibility of employees accessing trade secrets of the enterprise that fall outside their duties, and further remind and constrain employees by specifying their non-disclosure obligations so as to avoid to the greatest extent possible employees disclosing the enterprise’s innovations, causing the enterprise to incur unnecessary losses,” she says.
Making advance preparations for trademark registration is also important. “Before brand creation and promotion, it is necessary to first register the trademark to prevent preemptive registration by others,” says Quan from Longan. “China’s Trademark Law specifies the first-to-file system for trademarks, that is to say, whoever registers first secures the trademark rights, something that is overlooked by many companies. For example, the trademarks of the two giants in the bicycle sharing sector, Mobike and ofo, have been preemptively registered by others.”
Li Yuncheng, a trademark attorney and the group leader of the domestic trademark department of the CCPIT Patent and Trademark Law Office, says, “Although the Trademark Law also provides a certain protection mechanism for unregistered trademarks, the degree of protection accorded registered trademarks is markedly greater than that accorded unregistered trademarks.” Viewed from the perspective of applying for registration, Li argues that particular consideration needs to be given to the
“First, determination of the trademark to be applied for: both the Trademark Law, which contains clear provisions on the composition of a trademark, and the Trademark Examination and Review Standards, which also contain clear guiding yardsticks in respect of the absolute grounds and relative grounds for denying registration of a trademark, can serve as reference basis for the design of a representation,” he says.
“Second, similarity search: a trademark similarity search can be carried out on the Trademark Office’s official site, but the search will unavoidably be subject to a blind gap of about six months, a risk point that one should be aware of.
“Third, in terms of the selection of the applying entity, attention needs to be paid to avoiding a rejection of the mark due to its being identical or similar to the prior trademark of an affiliate. Consideration also needs to be given to such issues as future operation of the trademark and the vesting of the value of the intangible asset.
“Fourth, planning of the application timing: from the perspective of trademark protection, ‘first use of trademark’ is without a doubt the preferred approach, but such a method may be maliciously exploited by a competitor, [potentially allowing the competitor] to deduce the subsequent business plan from the trademark application, presenting a certain degree of commercial risk.
“Finally, planning for the countries or regions in which applications are to be filed: in recent years, the preemptive registration abroad of the trademarks of Chinese enterprises has frequently occurred.”
Chen, from DHH, says that before using or applying for a trademark or patent, a comprehensive search should be carried out first to avoid being caught up in a dispute involving the infringement of another’s IP. “When applying for a trademark, the applicant should adopt a multi-trademark strategy or primary/secondary mark strategy, so as to avoid placing all of its eggs in the same basket,” he says. “In the course of using a trademark, an enterprise should periodically carry out monitoring to promptly discover any infringements and take effective measures to stop them, and should also retain evidence of use to be able to provide the same in a rights protection procedure.”
With respect to patent protection, Quan says it requires novelty in the patent application. “In simple terms, the content for which protection is requested in the application cannot be content that another could obtain through public means before the patent application, e.g., through such means as purchase, etc.,” she says. “This is also something that many enterprises, particularly small and medium-sized enterprises, easily overlook. Many enterprises fail to think about patent protection before selling a product, only getting around to it once the product becomes a hit. For the purposes of the Patent Law, this is content that has already been disclosed.”
From this it can be seen that that an enterprise should be aware of the need to protect patented achievements. Ma Yuanchao, a partner at Zhong Lun Law Firm in Shanghai, says enterprises should learn to distinguish legal concepts from technological and economic concepts. With respect to a technology for which it proposes to apply for a patent, the enterprise needs to promptly assess the probability of securing a patent. “On the one hand, an enterprise needs to pay attention to the scope of objects that can be protected with a patent, and determine which achievements can be awarded a patent,” he says. “On the other, sometimes things that can be deemed an ‘improvement’ or ‘progress’ in a technical field are not necessarily consistent with what the Patent Law terms an ‘improvement’ or ‘progress’.”
Ma says that, with respect to an achievement for which a patent application can be made, the filing should be made as soon as possible. “The work of protecting it as a secret needs to be duly carried out, protecting such achievement by taking specific and real preventive measures, confidentiality system, etc.,” he says.
Zhao, from DeHeng, says the “patent thicket” and patent abuse issues are becoming more marked by the day, potentially causing risks for business operations. “The granting of an injunction is the normal outcome of a patent action in China, and such form of relief is refused only rarely,” he says.
“The number of patents [involved] in existing products, particularly semiconductors or communication terminals, can be counted in the tens of thousands. Under such a circumstance, the infringement of any one of the patents may result in a ban on the sale of the entire product. Special attention needs to be paid to patent risks when selecting a supplier, or in contract negotiations.”
Zhang, from Highways, says that in terms of the protection of the fruits of innovation, enterprises first need to correct their traditional practice of placing emphasis on quantity and de-emphasizing quality. If they wish to enjoy the additional profits that scientific and technological innovations generate, they first need to create quality IP. “The specific method of proceeding is carrying out technology mining and setting up a technology layout in light of one’s own research and development plan, and product development schedule, and, through patent applications filed in a deliberate and step-by-step manner, ultimately generating a patent portfolio with a significant number of patents that are in a clear hierarchy, are fully efficacious and are both offensive and defensive in nature,” she says.
Zhang states that technical solutions not suitable for patent protection should be protected in the form of trade secrets. “The number of trade secret cases has been increasing rapidly in recent years, which obliquely reflects the serious deficiency in the cognizance and protection of trade secrets by enterprises,” she says. “The establishment of a sound trade secret protection system is an issue that scientific and technology innovation enterprises must place great emphasis on, and face.”
Quan reminds us by noting that technical secrets protection requires that the item to be protected first be a secret. “That is to say that once it is disclosed, it cannot be protected as a technical secret. Accordingly, an enterprise needs to first establish the appropriate confidentiality system to prevent the disclosure of its technical secrets.”
Liu Minxuan, a senior partner at AllBright Law Offices in Shanghai, has noticed that in recent years under the guidance of the State Intellectual Property Office (SIPO), many provinces and municipalities are actively exploring a patent financing model where borrowers create pledges over their patents as security for the repayment, which is appropriate to the specific circumstances of local MSME (micro, small and medium-sized enterprises). “As intangible assets, IP cannot only be used by holders and licensees. Also important is that they can be provided as collaterals,” he says.
Liu adds that to promote development of patent financing, the SIPO has been strengthening theoretical research and practice review of relevant policies while highlighting communication and co-ordination with the PBOC, CBRC and other relevant authorities. SIPO data show that the new patent financing deals taking place in the first half of 2017 in China add up to RMB31.8 billion, growing by 92% on a year-on-year basis and involving 1,493 pledges that represents a year-on-year growth of 41%. “Patent financing has become an increasingly important financing model for enterprises,” says Liu.
Take Shanghai Yuking Water Soluble Material Tech as an example. In order to meet its urgent need for liquidity, the company obtained a credit line of RMB2 million under the “IP Financing Card” programme of Pudong District, Shanghai, by creating a pledge over its core patent.
The ‘Red Can’ dispute
In its final verdict issued in August 2017 in relation to the “Red Can” dispute between Wang Lao Ji and Jia Duo Bao, the Supreme People’s Court brought an end to a dispute history of five years between the two herbal tea producers by ruling that as a solution, they may share the title to the packaging design known as “Red Can”.
According to Ma Yuanchao, a partner at Zhong Lun Law Firm in Shanghai, the “Red Can” case is unlike ordinary trademark licensing arrangements where the licensor is the party that creates all or most value of a trademark. During the term of the licence agreement, Jia Duo Bao made substantial investment in the packaging design, operation and marketing of the red-can herbal tea, which eventually rose to national prominence.
Therefore, upon termination of the trademark licence agreement, the licensee added much more value to the licensed trademark than the licensor did.
Ma pointed out that the dispute was particularly attributable to the lack of mutual agreement on whether the title to the packaging design of goods should be vested in the licensor or licensee of the trademark. Now that the herbal tea had become a well-known product owing to the licensee’s investment in packaging design and marketing, should the title to the packaging design be returned together with the trademark to the licensor or retained by the licensee upon termination of the license agreement?
Ma advises that measures taken by enterprises to protect their brands must take into account other rights and interests derived from trademarks, which include packaging design uniquely applied to well-known products. “When entering into a trademark licensing arrangement, the trademark holder must pay attention not only to use and loyalty of the trademark, but also to the ownership of other rights and interests derived from the trademark,” he says. “Questions that need to be clarified include who should be the owner of any packaging design applied to the product, and whether the licensee is still allowed to use the packaging design upon termination of the licence.”