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If imitation is indeed the sincerest form of flattery, then the Chinese can be very sincere flatterers indeed. But if you prefer prosperity over flattery it would be wise to take precautions against losing your shirt (or at least the rights to it) in one of the world's most dangerous IP jungles. It isn't that the legal regime is deficient – it's enforcement that's lacking. For the present at least, China is a net importer of intellectual property. A relatively lawless IP environment is advantageous to China's short-term interests, just as a strictly enforced IP environment suits the interests of net IP exporters such as the United States. This issue has been constant irritant in relations between China and Western nations, as well as Japan. Nevertheless, China's enforcement of intellectual property has steadily improved in recent years.
Protecting intellectual property (IP) in China requires a multi-pronged strategy including registration, workplace security, employee contracts, commercial contracts and enforcement.
Registrations
China's IP registration regimes are more or less consistent with international standards.
Trademarks - are protected on a first-to-file basis, with an exception for well-known trademarks. Do not rely on the “well-known” exception, however (unless you are Coca-Cola), because whether a particular trademark is “well-known” or not is a time-consuming argument that keeps IP lawyers in business all over the world. If a trademark uses words, the Chinese language equivalent should also be registered.
China has adopted the international Classification of Goods and Services under the Nice Agreement, and has also adopted the international registration regime under the Madrid system.
FIE Business Names – must be in Chinese and registered with the local Administration of Industry and Commerce before an application to set up a Foreign Invested Enterprise can be submitted (see this site's Company Startup Guide for details on company name registration). Since China does not have a national register of business names, registrations are valid only within a particular locality (and an FIE business name cannot be registered in any location except its location of establishment). Trademark registrations offer better protection in this respect.
Patents & Designs - are protected on a first-to-file basis. China is a member of the Paris Convention, so filings in a member country within applicable time limits can also gain priority in China. More ominously, compulsory licenses may be granted (i) to qualified enterprises if the owner of the patent fails to license the patent on reasonable terms, and (ii) in the event of a national emergency. Because of this, many foreign companies do not register patents for sensitive technology in China. See Technology Transfers and Licensing for related information.
Copyrights - Copyrighted material may be registered with the China National Copyright Administration. As in the United States, copyrights are not granted on a first-to-file basis. Registration does serves as useful evidence of ownership of a copyrighted work, but it is not a legal precondition to enforcement.
Software – is considered copyrighted material and may be registered with the China National Copyright Administration. Registration requires the filing of source code (with some code blacked out). As a consequence, many foreign companies refuse to register their software in China.
Domain Names - are protected on a “first-to-file” basis. A foreign company
must have an FIE or Representative Office in order to register a “.cn” domain name in China.
Workplace Security
It is strongly advised to create a “plumbing” system to control IP leakage in the workplace.
IT systems and any hard copies of IP should be kept in an access-restricted, secure location.
Confidential information should be distributed on a strict “need to know” basis.
Confidential material should be marked “Confidential Information” in Chinese in anticipation of possible litigation in Chinese courts.
Employees
Independently investigate the reputation and trustworthiness of applicants for sensitive positions during the recruitment process.
Labor contracts should be prepared carefully. You should consider including the following in all labor contracts:
Confidentiality obligations
Non-compete clauses - Post-termination non-competition clauses should be limited to a reasonable geographic area and time limit. Compensation is also required to be paid during the period of non-competition.
Assignment – Although China recognizes the work-for-hire principle, the labor contract should clearly assign ownership of intellectual property created in the course of employment; otherwise IP rights may prove practically impossible to enforce against an employee who creates an IP-related work for hire.
Product Selection
Despite the additional tax breaks and incentives available, think carefully before manufacturing products that require new and sensitive technology in China. Components requiring new and sensitive technology may be imported into China in a secure manner for integration with the rest of the product.
Commercial Contracts
Since many commercial arrangements, even sourcing materials and components, can necessitate an exchange of intellectual property, adequate protections should be included in the contracts and associated documentation.
Administrative Enforcement Action
Various government organs have the power to take administrative action against IP infringers:
National Copyright Administration - The NCA is the “big gun” of the Chinese IP enforcement arsenal and is endowed with broad enforcement powers. They may order cessation of the infringing activities, confiscate illegal income, confiscate and destroy illegal copies, and impose fines.
State Administration of Industry and Commerce - The SAIC and its local AICs have a reputation for efficient trademark enforcement action, including investigations and raids. The SAIC also handles disputes regarding business names, registered trademarks, trade secrets, and passing off activities.
Customs - may confiscate products that infringe trademarks, copyrights and patents.
China Patent Office - may help with patent enforcement through investigation, mediation and raids.
General Administration of Quality Supervision, Inspection and Quarantine - may get involved if product quality and health issues are at issue.
Administrative enforcement is a relatively inexpensive and efficient alternative to litigation, and it is easier to win a conviction.
Litigation
If administrative action fails to bring the desired result, litigation may have to be resorted to. Chinese courts can issue injunctions and award damages, although in practice their enforcement powers are typically weaker than in Western nations.
Criminal Prosecution
Criminal liability, including imprisonment, can be imposed for IP violations, although successful prosecutions are rare. Financial thresholds that must be met before criminal liability can be assessed can be difficult to prove. These thresholds include:
RMB50,000 turnover for knowingly selling goods with counterfeit registered trademarks
RMB50,000 turnover or RMB30,000 profits if trademarks are applied to goods without authorization
International Enforcement
Products that infringe intellectual property rights can be interdicted by customs at the destination port. It is also possible to seize the overseas assets of infringers located in China.
Technology Transfers and Licensing
Foreign investors often license technology and intellectual property such as trademarks, patents, copyrighted material and trademarks to the FIEs they invest in. A foreign party may also license technology to unaffiliated Chinese companies, such as in manufacturing or management contracts. Unlike joint venture contracts, licensing contracts can be governed by foreign law.
Proper licensing will help the foreign party control its technology and secure the payment of royalties (registration is required for the latter). Only the brave, however, will dare to license sensitive technology to an entity which the foreign party does not control.
Technology transfers are understandably less common than licensing and are usually used as part of the foreign investor's contribution of technology to a Foreign Invested Enterprise as Registered Capital.
Technology Restrictions
Chinese foreign trade law recognizes three categories of technology: Permitted, Restricted, and Prohibited. These are contained in a catalogue that lists specific technologies.
Permitted technology is simply technology which has not been classified as Restricted or Prohibited.
Restricted technology may not be imported without a license, and is generally related to the chemical, petrochemical, biochemical, biological, and petroleum refining industries.
Prohibited Technology is technology that is considered to endanger national security, the public interest, or public morals by placing people's lives or health at risk or destroying the environment.
Paperwork
A license for restricted technology must be approved by and registered with the Commission of Foreign Trade and Economic Cooperation (COFTEC). COFTEC will adjudicate a license application within 30 days. Licensing contracts for Restricted technology are effective only after COFTEC issues the corresponding Technology Import License.
Prohibited technology may not be brought into China.
Certain types of Permitted technology, while not subject to licensing requirements, are still subject to filing with COFTEC.
Technology transfers relating to certain major projects must be registered with and approved by the Ministry of Commerce. Trademark licenses must be filed with the
China Trademark Office within three months of execution in order to remit royalties out of China. Foreign trademarks must be recorded at the China Trademark Office in order to remit royalties out of China. Trademark recordation takes about a year and a half.
Improvements
A foreign company may not prohibit a licensee from improving the licensed
Technology, and these improvements become the property of the improver.
Technology as FIE Capital Contributions
Technology may be contributed as part of an FIE's Registered Capital; however, the FIE will then become the owner of the technology and the foreign contributor will have to license the technology from the FIE if it wants to use it.
Technology contributed as capital is required to be appraised upon importation and should also be appraised by the Ministry of Commerce or the relevant local COFTEC as soon as the FIE is approved.
Since the Company Law requires 30% of the Registered Capital of an FIE to be contributed in currency (20% of the initial installment of Registered Capital), it follows that alternative forms of contribution, including technology, cannot total more than 70% and 80%, respectively.
China's accession into the World Trade Organization started four years ago. With this commitment to regulatory and economic restructuring, China has indeed been a country of economic opportunity for multinational corporations.
In theory, WTO accession means that WTO members can enjoy IP protections. In China, secure those patent protections carefully. Dot the i's, cross those t's and 'watch your language.' Also, anticipate litigation.
According to attorneys A. Jason Mirabito and Carol Peters, in a March 2005 article published in Chip Scale Review: "In the past there was little enforcement of IP in China. However, in 2002, Chinese courts litigated more than 6,000 civil cases involving IP issues. About 2,000 cases involved patent suits. The rest were trademark and copyright actions."
Those 2002 statistics pale compared to recent figures, reported by the International Herald Tribune: In 2005, "Chinese courts dealt with 12,205 civil intellectual property cases, an increase of 32 percent from 2003 and a few dozen two decades ago."
Consider one recent case, which demonstrates that China's legal savvy is climbing with its growing stake in US markets and the global economy. The case also demonstrates the role of US courts in patent and IP protection, along with the perseverant or 'energized' stance required by US companies threatened by counterfeit goods or the prospect of piracy.
Energizer & Eveready vs. Just about Everybody
The dispute started in the spring of 2003, when Energizer Holdings, a US company, and its subsidiary Eveready filed a lawsuit with the International Trade Commission (ITC). The complaint addressed a signature product, a long-lasting battery design —- affecting in particular a line of zero mercury-added alkaline batteries that Energizer has held a patent on for three decades. Also mentioned in the suit are games, toys, and other products manufactured with batteries whose designs are protected.
Energizer asked the ITC to issue a cease-and-desist order and to ban US imports of these products, claiming the batteries exported to the United States by the 26 manufacturers, affiliates or distributors named in the suit had infringed on Energizer's US patent. Among the multiple respondents named in the complaint, nine were Chinese manufacturers, including Fujian Nanping Nanfu. Nanfu Battery is one of China's largest alkaline battery manufacturers and suppliers. Energizer requested the ITC investigation under Section 337 of the US Tariff Act.
At the time of the original filing, China was considered the world's largest manufacturer and exporter of this specific battery with an estimated 75-80 percent of its goods being exported to overseas markets. According to a China press report, "Chinese batteries usually cost between a 10th and a third less than US-made ones, making them very popular in overseas markets."
The ITC handed down a preliminary ruling in 2004, deciding that nine manufacturers from the Chinese mainland and Hong Kong infringed upon Energizer's patent, and recommended banning imports of the batteries. But four months later, the ITC closed its investigation, and ruled that Energizer's patent was invalid because it was …"indefinite as a matter of law…." Or, in the legalese: "The Commission held that Eveready's "proffer of alternative constructions of 'said zinc anode' was an admission of indefiniteness."
In plain terms, the main patent claim, or its language, was incorrectly written. Attorneys Mirabito and Peters reported that the Commission determined "there was no infringement of the Energizer Holdings patents, and the continued importation of Chinese batteries was permitted."
It Just Keeps on Going and Going…
True to the brand as "the battery that never quits," Energizer kept on "going and going," and appealed the ITC's final decision to the U.S. Court of Appeals for the Federal Circuit. In the suit, Energizer named the ITC as defendants. Energizer's main contention was that the issue regarding language was not substantial enough to invalidate the patent.
The Court's January 25, 2006 ruling, and a follow-up March 20 mandate reversed the earlier ITC opinion, finding that the ITC erred and the patent draft was written correctly enough.
"In that regard, we conclude that 'anode gel' is by implication the antecedent basis for 'said zinc anode.' The Commission's holding of invalidity on the ground of indefiniteness is reversed."
In the unanimous ruling, the Court directed the Commission to proceed in accordance with the Administrative Law Judge's prior ruling that the Energizer patent is valid, according to Legal Times analyst, Emma Shwartz.
It was a happy day at Energizer headquarters in St. Louis. "We are pleased that this case has been sent back to the ITC for review," said Michael Pophal, Senior Patent Counsel at Energizer, quoted in a company press release. "By issuing this mandate, the appeals court has cleared the way for additional inquiry into whether those companies that import mercury-free alkaline batteries into the United States are doing so illegally. If it is indeed determined that they are doing so illegally, the ITC will then determine the appropriate remedy for that illegal activity."
As before, Energizer will seek the general exclusion remedy in the ITC. If the ITC upholds the company's claim, this remedy will bar infringing batteries, including those made or sold by the remaining respondents from importation or sale in the US, and will permit sanction enforcement by US Customs.
What's Next? A Changing Landscape?
Energizer expects a favorable outcome from the ITC. But even as they await the ITC review, the Internet-surfing public has been reading about the recent ITC mandate in starkly opposite terms: in China, recent press accounts erroneously have been reporting that the Court ruled in favor of Chinese manufacturers. They fail to report that the jury, with respect to the ITC, is still out.
It appears that a gentle, collaboratively toned communication between Energizer and China has helped the situation. Many of the erroneous reports have been pulled from news sites.
While Energizer seems to be battling questionable imports the longest and hardest, they aren't the only company doing battle with Chinese manufacturers and companies alleging technology violations of patents, trademarks and IP infringements. The litigious ranks include Hitachi-IBM and Cisco, who won its patent battle over the Shenzhen-based Huawei in 2003. Cisco eventually proved that Huawei, arguably the top Chinese provider of switches and wireless infrastructure, had copied the U.S. companies' firmware code line for line into its products. Huawei settled.
Still, other recent cases are coming to favorable conclusions for plaintiffs defending goods in China courtrooms, an indicator that China is serious about its place in the WTO and in the global economy.
-- In late 2005, java giant Starbucks Coffee won its two-year-old case against 'Xingbake' (translation Star Bucks), for trademark and logo infringement. The case was decided in Shanghai No. 2 Intermediate People's Court, and was considered a landmark judgment and litmus test of China's amended trademark laws. Xingbake has filed an appeal.
-- In 2004, Swiss agribusiness and agricultural chemical maker Syngenta was awarded an apology and compensation after its patent infringement lawsuit was successfully concluded against a Chinese business group. The case was heard in a Nanjing court, one known for its expertise in intellectual property.
There is little doubt that China's government will quickly improve its IP stance, but this analyst believes the most effective pressure will come from its own domestic companies, particularly as they evolve from a heavily manufacturing-depending economy to a service and integrated products economy. This more sophisticated economic profile makes IP rights even more critical, because more Chinese companies will have more at stake when IP is violated.
Recent positive announcements make it clear that rule of law increasingly will be guiding China's economy. In the meantime, keep your intellectual property under a close watch, and build trust with your Chinese partners. Good contracts, good guanxi, and good sense will prove invaluable.
Sources: Chip Scale Review, International Herald Tribune, China Daily, China.org, Legal Times, Syngenta, Energizer Holdings / Eveready Battery, Starbucks, Energizer Court of Appeals Ruling. For details about the specific Energizer/Eveready case, see http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=ENR&script=410&layout=-6&item_id=845832