Protecting intellectual property in China requires good strategy, and foreign businesses too often show weakness through ignorance. Richard Li explores the latest laws and trends, and asks what weapons corporate counsel need to be clever warriors for their companies
The development of China’s economy has entered a stage where more emphasis is being placed on quality, making the protection of outstanding brands and innovative achievements increasingly pressing. In terms of strengthening efforts to protect intellectual property (IP), China has rolled out a series of important measures in the past few months, increasing the penalties for infringement, and further improving the intellectual property (IP) judicial adjudication regime.
However, certain enterprises, particularly foreign ones, still lack sufficient understanding of China’s IP protection regime. Corporate counsel responsible for IP need to stay abreast of the most recent legal and judicial trends, while also improving internal communication and management mechanisms, as only in this way can they effectively protect their company.
Zhang Yi, a senior partner in the Shanghai office of Hiways Law Firm, notes that in the past few months the senior state leadership has been sending out strong signals on strengthening IP protection. In his keynote speech at the opening ceremony of the first China International Import Expo, in November 2018, President Xi Jinping raised this issue and mentioned the introduction of an IP punitive damages system.
And at the dual national meetings this year – the National People’s Congress and the Chinese People’s Political Consultative Conference, both held in early March – Premier Li Keqiang reiterated that IP protection was to be comprehensively strengthened, with improvements to be made to the infringement punitive damages system.
So the general direction has been set, and a significant number of specific developments in the protection of IP by China’s legal and judicial systems has also been achieved.
On 26 November 2018, the Supreme People’s Court adopted the Provisions on Several Issues Concerning the Application of the Law in the Examination of Cases Involving Act Preservation in Intellectual Property Disputes, which entered into effect on 1 January 2019. Helen Cheng, a partner in the Shanghai office of Zhong Lun Law Firm, says these judicial interpretations comprehensively address such issues as jurisdiction, application, examination, and provision of security relating to act preservation (i.e., court orders to restrain actions that may cause harm) in IP disputes, not only improving and making uniform the regulations on act preservation, but also ratcheting up the protection of IP.
“As intangible property, intellectual property has always faced the problem of the difficulty of making up the losses incurred once it is infringed,” says Cheng. “Even if the rights holder ultimately prevails, it might still lose its competitive advantage due to infringement. Accordingly, the judicial philosophy of intellectual property protection has gradually shifted from after-the-fact relief to before-the-fact prevention, and act preservation is an important measure for before-the-fact prevention for rights holders.”
On 5 December 2018, the State Council passed the Bill to Amend the Patent Law (Draft) and submitted it to the Standing Committee of the National People’s Congress for deliberation. “The highlights in the current Patent Law draft are quite numerous, putting forth revised measures for ‘chronic patent illness’, an acute problem in practice, and genuinely strengthening the level of patent protection,” says Cheng. “For example, with respect to the difficulty of adducing evidence, the draft clarifies the infringer’s burden of proof in co-operating in providing relevant information, which will aid in reducing circumstances in which a rights holder is unable to obtain reasonable damages due to the difficulty of adducing evidence.
“With respect to the issue of inadequate damages, the draft increases the penalties for the passing off of a patent, adding a ‘not less than the amount and not more than five times’ punitive damage system for wilful infringement. Additionally it increases the upper limit on statutory damages from RMB1 million (US$149,000) to RMB5 million, markedly enhancing the level of protection of rights holders.”
On 1 January 2019, the Intellectual Property Tribunal of the Supreme People’s Court was established in Beijing, mainly tasked with hearing appeals of IP cases with a strong technical accent, such as those involving patents, on a nationwide basis. Jack Su, a senior partner in the Shanghai office of Wanhuida Peksung, considers this a “milestone event on the path toward the judicial protection of intellectual property in China”.
Zhong Lun’s Helen Cheng adds that, “through adjusting the intellectual property case appeal mechanism at the state level, the Intellectual Property Tribunal of the Supreme People’s Court can unify and standardize the adjudication criteria for relevant cases, thereby increasing the authoritativeness of the judiciary and significantly enhancing the level of judicial protection of relevant intellectual property”.
The E-Commerce Law implemented on 1 January 2019 also addresses the issue of IP. “In the E-Commerce Law, the protection of intellectual property becomes one of the key responsibilities and obligations of e-commerce platforms, enhancing intellectual property awareness in the internet age,” says Hiways’ Zhang.
On 18 March, Li Keqiang signed a State Council order publishing the Decision of the State Council on Revising Certain Administrative Regulations. Changes relating to IP include: (1) in the Implementing Regulations for the Law on Sino-Foreign Equity Joint Ventures, it deletes the provision on the term (10 years) of the technology transfer contracts of equity joint ventures and the provision that, after the expiration of the term, the receiving party may continue to use the transferred technology, so promoting the development of equity joint ventures and the technology transfer market by bestowing greater freedom on the parties to such agreements; and (2) in the Administrative Regulations for Technology Import and Export, it deletes the provision that liability for infringement under a technology import or export contract is borne by the transferor, the provision that any improvements made to the technology during the term of validity belong to the party making the improvement, and certain restrictive terms.
“The background to the Administrative Regulations for Technology Import and Export as originally issued is mainly that, when advanced foreign technology was imported into China, the Chinese party, as licensee [transferee], was generally in the weaker position when entering into an agreement, so relevant mandatory provisions were formulated to protect the interests of the Chinese party,” says Jerry Xia, a partner in the Shanghai office of AnJie Law Firm.
“However, in recent years, as the domestic economic situation in China has witnessed relatively major changes, and an increasing quantity of Chinese technology has begun to be exported abroad, the above-mentioned provisions were deleted to maintain the healthy development of the technology import and export markets. This revision has been well received abroad and, in particular, granting national treatment to foreign enterprises when negotiating technology transfers with domestic enterprises affords greater flexibility and can promote more cross-border technology transactions.”
China has also recently intensified efforts to crack down on bad faith acts. Xia says that recently, the State Intellectual Property Office (SIPO) imposed penalties on a number of patent agencies and agents that engaged in “irregular patent filings”, and may place them on its blacklist (the so-called delinquent persons list). “This action illustrates the state’s new direction in cracking down on junk patents,” he says.
In February this year, SIPO issued Several Provisions for Regulating the Application for the Registration of Trademarks (Draft for Comment), the objective of which is to further crack down on bad-faith pre-emptive registration of trademarks. “Anyone who discovers a bad-faith pre-emptive registration may report the same to the State Intellectual Property Office, and the pirate could be placed on the delinquent persons list,” says Xia. “The significance of this move is extremely positive, and is conducive to deterring potential pirates.”
Corporate counsel voices
We asked intellectual property inhouse counsel about the challenges in their work and what they see as the most significant legal developments
Client blind spots
Liang Chaoyu, a partner in the Beijing office of Guantao Law Firm, says relevant IP laws and regulations are relatively sound, but many clients still feel that their IP will not be protected. He says this is due to their insufficient understanding of the situation in China and their failure to take into account that situation when formulating their IP plans.
“The clients that I deal with, more or less, all have some blind spots or misunderstandings,” says Liang. “For example, the scope of protection of a patent is demarcated by the technical solutions determined by the claims, and is not just a matter of securing a patent certificate and that’s it. The key is whether the patent is both inventive and has an appropriate scope of protection. A lot of clients don’t understand this point, blindly seeking the granting of patents, mistakenly believing that once they have obtained a certificate, that’s all there is to it, and they are entitled to legal protection.”
Huo Aimin, the deputy director of legal division at CCPIT Patent & Trademark Law Office, says some of his foreign clients have an insufficient understanding of China’s IP protection regime and practice, and overly rely on their experience in their home countries, using the same to formulate their IP protection plan and strategy for the Chinese market.
“With respect to trademarks, too many [foreign clients], influenced by the first-to-use principle and IP protection practice in their jurisdictions, fail to actively and timely submit trademark applications,” says Huo. “And even if they apply for and register a trademark, the scope of the goods or services for which it is designated will also be too narrow, or their knowledge on the localization in China of their foreign-language trademarks is insufficient, they fail to promptly apply for the registration of a Chinese-language trademark, and their awareness of the importance of registering defensive marks is insufficient.”
Huo says his clients’ awareness of the importance of also registering copyrights in figurative marks is insufficient. “When registering a figurative mark, consideration can also be given to submitting an application for copyright registration so that prior rights can be evidenced when necessary.”
Wanhuida Peksung’s Jack Su says it’s important to note the differences between Chinese and foreign trademark regimes. “In contrast with such countries as the UK and the US, trademark rights in China are secured through applying for the registration of trademarks, and when applying for such registration, the applicant is not required to have used, or be preparing to use, the trademark that it is applying to register,” he says.
Small and medium-sized enterprises from the UK or US that out of habit only submit an application for registration after commencing to use their trademarks in the Chinese market will often find, when they apply, that their trademarks have been preemptively registered by another. “To enter the Chinese market as quickly as possible, such enterprises are left with no choice but to buy back their pirated trademarks,” says Su.
Quan Xianzhi, a senior partner in the Beijing office of Longan Law Firm, says some clients are unaware that under article 56 of the Trademark Law the exclusive right to use a registered trademark is demarcated by the trademark, the registration of which has been approved, and the goods for which it is designated. “A significant number of clients believe that so long as they have registered a trademark they can prohibit others from using such trademark for any goods,” she says. “In fact, save for well-known trademarks, a client enjoys exclusivity only on those goods the use for which has been approved by the Trademark Office.”
Quan adds that certain foreign companies also do not understand China’s utility model and design patents. “In fact, in many circumstances, China’s utility model and design patents are more advantageous than invention patents,” she says. With respect to utility model patents, many countries do not have them, or they are not held in high regard.
“For example, the US does not have utility model patents so that, when filing for patents in China, US companies will often overlook utility models,” she says. “Japanese clients also often consider utility models not to be very useful. In fact, in China, as compared with invention patents, utility models are not required to undergo a substantive examination, meaning that the grant thereof is usually easier and can be obtained in a shorter period of time, allowing for earlier protection.
“As design patents are required to undergo a substantive examination in the US and South Korea, US and South Korean clients will often, when filing for a design in China, bring the thinking of their home countries to bear when filing for a design patent in China, believing that obtaining a patent for a design in China is also difficult. In fact, a design only needs to pass preliminary examination in China, making the grant thereof fast and easy.”
Jessica Xu, a partner in the Beijing office of JunHe, says some enterprises lack holistic IP strategy planning. “The scope encompassed by IP is extremely broad, including copyrights, trademarks, patents, domain names, trade secrets, etc.,” she says. “An enterprise’s failure to carry out systematic strategizing and holistic planning for such intellectual properties will directly lead to an IP rights foundation that is insufficiently comprehensive, and increase the difficulty of subsequent risk monitoring and rights protection.
“For example, in the trademark field, the strategy of many enterprises in applying for trademark protection is not reasonable, failing to match the enterprise’s actual business situation when registering a trademark and selecting the goods and/or services for which it is designated. In essence, this reflects the enterprise’s insufficient understanding and knowledge of IP and results in the failure to form an effective and orderly intellectual property management system.”
Xu warns that enterprises need to raise their awareness about guarding against IP risks. “In practice, many enterprises stress infringement and overlook prevention, but, from the perspective of rights protection, this way of thinking more or less puts the cart before the horse,” she says. “Taking trademarks as an example, some enterprises put little store in routine trademark monitoring, lacking an infringement advance warning mechanism.”
Trademark monitoring is one of the basic services that Xu offers clients, mainly monitoring information on trademarks preliminarily approved in the Trademark Gazette that are identical or similar to her clients’ trademarks. “The primary objective is to take rapid and forceful opposition action to guard against potential infringement from the very outset, as opposed to waiting until such trademarks have been registered and caused substantial damage to the client’s interests before moving against the infringement,” she says.
Xu adds that conscientiously collecting and keeping evidence of use is also key to protecting an enterprise’s intangible assets. “In reality, some clients have actually used their trademarks in their production and operations but, because they failed to duly collect and preserve evidence of such use, they were unable to present admissible and valid evidence of use when a third party asserted, in a procedure for the cancellation of a trademark that has not been used for three years in succession, that such trademarks have not been used, resulting in the cancellation of their trademarks,” she says.
AnJie’s Jerry Xia says it is common for some foreign companies to believe that if, in a contract involving IP, they opt for the laws of a foreign country as the governing law, they need not worry about the provisions of Chinese laws, but this understanding is mistaken. “If a contract involves performance in China, or if part of the outcome of a dispute needs to be enforced in China, then thought must be given to relevant Chinese laws and regulations,” he says. “In particular, certain mandatory laws and regulations need to be fully considered at the outset when formulating and negotiating a contract, and it needs to be ensured that the relevant provisions in the contract will be enforceable in China in future.”
Xia says that always opting for arbitration abroad for dispute resolution may result in high legal fees and a procedure costly in time and energy. “Actual cases show that Chinese courts and Chinese judges are increasingly professional, particularly the new intellectual property courts and tribunals,” he says. “Multinational corporations can boldly consider instituting legal actions in Chinese courts to protect their intellectual property as, compared with arbitration abroad, court costs in China are relatively low, procedures are quick, enforcement is convenient, and coercive measures may be applied for and judgments/rulings can be appealed.”
For a corporate counsel, in addition to understanding the provisions of laws, he or she must also be familiar with the enterprise’s own business characteristics, and learn how to duly carry out management and communication work in the enterprise.
Zhong Lun’s Helen Cheng says that corporate IP legal personnel require superior occupational qualities. “An outstanding intellectual property in-house counsel not only requires a sound legal grounding, but also needs to understand the company’s business operations and profit model, as only in this way can he or she better serve the enterprise through IP protection and operation,” she says.
“At this point in time, China’s IP judicial practice is in a stage of rapid development, with an abundance of laws, regulations, typical cases and difficult practical issues continuously emerging. Furthermore, enterprises’ business operations and profit models are often relatively novel. All of this poses not insignificant challenges for intellectual property in-house counsel.
“In the face of this, I would recommend that IP in-house counsel keep an open mind, maintain co-operation and exchanges with the enterprise’s commerce department and external lawyers, and seek to understand and stay abreast of the most recent IP legislative and judicial trends through multiple channels.”
In rapid consumption industries such as food and beverages, Wanhuida Peksung’s Jack Su says that to satisfy consumers’ changing tastes, a company’s R&D and business departments need to rapidly respond to market changes. IP in-house counsel also need to rapidly review the local business staff’s intellectual property questions involved in brand marketing, advertisement design, product research, development and improvement, and timely and completely reflect the marketing and design concepts to the head office in hopes of securing rapid approval. “As the bridge between the local business staff and the head office, in-house counsel constantly face communication challenges,” he says.
Guantao’s Liang Chaoyu argues that the main challenge facing corporate IP legal personnel is the discrepancy between what the enterprise or boss expects from IP and the results that can actually be achieved. “The senior officers, even the boss, of many enterprises have a shallow understanding or minimal knowledge of intellectual property and, as a result, formulate many objectives and requirements that are unrealistic,” he says, “and if those ultimately cannot be realized, they feel that it is the corporate intellectual property legal personnel that failed or did not duly perform their duties.
“For example, the granting of patents and the registration of trademarks require a certain amount of time and the carrying out of certain procedures, and also require advance planning and preparation, but many enterprises fail to do so, and when it becomes necessary they have the corporate intellectual property legal personnel go and try to resolve the matter. And obviously they can’t.”
JunHe’s Jessica Xu notes that the responsibility for the management of IP in certain enterprises is dispersed, with the registration of relevant IP and the ultimate protection of rights spread out among different departments, with the corporate legal department involved only at the contract review stage. She says such enterprises should optimize their allocation of functions, “unifying all intellectual property-related functions in the legal department or the intellectual property department”.
Su says communication between the corporate IP legal personnel and business department can be problematic at times. “The legal departments of some enterprises do not have an independent litigation budget, and if an act of infringement is discovered, the financial support of the business department is required for litigation expenditures,” he says.
“However, sometimes communication is not easy, and this requires the legal department to regularly maintain good communication with the business department, and to endeavour to demonstrate the marked contributions of intellectual property work to enhancing the results of the business department.”
CCPIT Patent & Trademark Law Office’s Huo Aimin says that in the course of IP rights confirmation and protection, asserting rights and putting forward claims requires evidentiary support, and corporate IP legal personnel need to provide assistance in the gathering of such evidence.
“In routine work, they need to co-ordinate the co-operation of colleagues in public relations, marketing and other departments, and duly carry out the work of evidence filing,” he says. “I would recommend the formulation of an evidence filing handbook for internal use, to guide relevant colleagues in duly carrying out the routine evidence preservation work.
“When a specific case is involved, co-operation with relevant internal departments of the company and the prompt gathering of evidence is required so that the same can be used to support the handling of the case.”