China's IP Is Not Entirely Out of the Haze Yet

When China first bid for WTO membership, its intellectual property-related laws were one of the main obstacles to its joining the organization, as WTO membership required China to comply with the Agreement on Trade-Related Intellectual Property Rights (TRIPS). In its WTO accession documents, China declared its commitment to bringing its legal system in conformity with the TRIPS Agreement. Since then, China has come a long way. Nevertheless, not all problems have been resolved.

China is aware that solid and effective intellectual property protection is a key factor for its economic future. No industry can ignore the Chinese market with its enormous population and market potential. However, companies considering operating in the Chinese market ought to know a few facts about China's intellectual property law before entering what is predicted to be the biggest untapped market in the world.

Patents, Copyrights and Trademarks

In order to bring Chinese legislation in compliance with the TRIPS Agreement, China has enacted a number of new laws and revised many existing laws and regulations. For instance, patent protection has been extended from 15 years to 20 years as required by the TRIPS Agreement. Prior to recent amendments, several administrative actions by the Chinese Patent Office (CPO) were immune to any legal proceedings, which meant that final decisions were not subject to judicial review. As a result of recent amendments, it is now possible to have final decisions on validity and ownership of utility models and industrial designs decided by the People's Court.

In some aspects, the Chinese patent law system differs significantly from the U.S. patent system. Unlike the U.S. system, it adheres to the “first-to-file” system, which is similar to the European system. Chinese patent law also requires absolute novelty, whereas U.S. patent law provides for a 1-year grace period for filing an application.

Copyright law has also been subject to many changes. Copyright protection has been extended to mask work and models. Further, owners' rights have been extended to include the right to limit online transmission of copyrighted material.

Final decisions on trademark registrations have been taken out of the hands of the CPO. Instead, judicial review lies within the competence of the Trademark Review and Adjudication Board.

With respect to the enforcement of intellectual property rights (IPRs) in China, in the past, the main complaint was that the IPRs were so ineffectively enforced that they failed to deter possible infringers or even compensate the plaintiffs. However, persons presently found guilty of patent, trademark, or copyright infringement are required to pay actual damages or, if actual damages cannot be assessed, statutory damages up to '500,000 (~$60,400 US). Actual damages comprise lost profits, infringers' gains, or reasonable royalties. Criminal liability is also an option to penalize infringers.

Further, recent revisions clarified and strengthened the use of preliminary injunctions. Previously, preliminary injunctions were not available. Now, a patent, trademark or copyright owner can request the People's Court to issue a preliminary injunction as well as a property preservation order before litigation is brought to conclusion.

Problem Areas

Despite the aforementioned changes, Chinese IP law is still not entirely in compliance with the TRIPS Agreement. For instance, Chinese law prohibits the patenting of inventions that “violate the laws of China,” and “are contrary to social morality.” This formulation seems to be a broader definition than the corresponding provision in the TRIPS Agreement, and thus does not provide much clarity concerning patentability in China.

Furthermore, trade secret and know-how protection is still not properly incorporated into the Chinese system. A recent survey indicated that several companies complained about losing valuable technologies in China through unfair means, such as theft by employees. See Keith Maskus, “Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms,” at 17-18 (Dec. 16, 2002, University of Colorado, Boulder). Especially in the area of sophisticated technology, cases of selling design specifications and technical data are frequent. The concepts of ethics and compliance with the law in the realm of scientific and technical research are often not incorporated into the Chinese mentality.

Although Chinese IP legislation has been brought in conformity with the TRIPS Agreement, this does not guarantee that the laws are adequately enforced. Long delays in enforcement actions of IPRs remain a major complaint of foreign businesses. When finally addressed, enforcement actions are often arbitrary and nontransparent. The enforcement of IPRs in China on the administrative level can be conducted by a number of governmental structures. Local officials may be reluctant or even resistant to the enforcement of newly developed IP laws in fear of antagonizing a powerful local structure or hampering the neighborhood's source of livelihood, since infringing enterprises often provide local sources of revenue and employment.

Moreover, a lack of qualified personnel impacts the enforcement efforts. Although the Chinese legal system significantly changed over the past few years, legal and technical expertise for administrative and judicial implementation of these changes remains limited, despite the creation of special training programs in IPRs. This problem differs depending on geographic location. In Beijing and Shanghai, for example, courts and administrative agencies are more familiar with IP issues, whereas in more remote regions, the lack of understanding is more prevalent. It will take time before China has a sufficient number of qualified IP specialists to meet the demands of its growing economy.

Practical Tips for Foreign Companies

The Chinese Patent Office requires foreigners to appoint local counsel to represent them before the State Intellectual Property Office. In addition, foreign patentees should realize that Chinese patents do not provide protection in Hong Kong and Macao. These territories maintain their own independent patent systems.

Further, companies entering the Chinese market should be aware of the deficiencies of the Chinese intellectual property system. Therefore, these companies should use various tactics to reduce the risk of losing their IPRs. First, businesses could form joint ventures with local enterprises rather than outright licensing their technology. In this manner, foreign companies are better capable of controlling use of their proprietary information.

Second, businesses can reduce the risk of unfairly losing technical data by splitting various production processes among different facilities, thereby avoiding having all the know-how exclusively concentrated with one facility.

Third, both foreign and Chinese companies can take special measures to prevent tarnishing of their product by low-quality counterfeiters by, for instance, selling only to customers requiring a guarantee of quality, such as hospitals or governmental agencies. Establishing a full vertical distribution chain fully monitored by the producer also permits the producer to closely monitor the quality of the product. However, these methods are rather costly and thus are generally not available to smaller and less-established companies trying to enter the Chinese market with a new product.

Finally, in anticipation of future enforcement problems, companies are encouraged to cultivate relationships with central and local government authorities.

Conclusion

As a developing country, China has been afforded a transitional period to fulfill its obligations under TRIPS. The WTO accession agreement subjects China to transitional reviews annually in the first 8 years following accession, and a final review in the 10th year.

Since China's accession to the WTO, the Chinese intellectual property legal system has been subject to tremendous changes. Despite all these changes, China still has a long way to go. It will take time for the changes to actually be fully integrated into the intellectual property practice.

However, companies considering operating on the Chinese market should not necessarily be discouraged by the difficulties related to the fast-developing Chinese economy. Instead, foreign companies can take precautionary measures in order to protect their technology and to avoid misappropriation of intellectual property rights.

When China first bid for WTO membership, its intellectual property-related laws were one of the main obstacles to its joining the organization, as WTO membership required China to comply with the Agreement on Trade-Related Intellectual Property Rights (TRIPS). In its WTO accession documents, China declared its commitment to bringing its legal system in conformity with the TRIPS Agreement. Since then, China has come a long way. Nevertheless, not all problems have been resolved.

China is aware that solid and effective intellectual property protection is a key factor for its economic future. No industry can ignore the Chinese market with its enormous population and market potential. However, companies considering operating in the Chinese market ought to know a few facts about China's intellectual property law before entering what is predicted to be the biggest untapped market in the world.

Patents, Copyrights and Trademarks

In order to bring Chinese legislation in compliance with the TRIPS Agreement, China has enacted a number of new laws and revised many existing laws and regulations. For instance, patent protection has been extended from 15 years to 20 years as required by the TRIPS Agreement. Prior to recent amendments, several administrative actions by the Chinese Patent Office (CPO) were immune to any legal proceedings, which meant that final decisions were not subject to judicial review. As a result of recent amendments, it is now possible to have final decisions on validity and ownership of utility models and industrial designs decided by the People's Court.

In some aspects, the Chinese patent law system differs significantly from the U.S. patent system. Unlike the U.S. system, it adheres to the “first-to-file” system, which is similar to the European system. Chinese patent law also requires absolute novelty, whereas U.S. patent law provides for a 1-year grace period for filing an application.

Copyright law has also been subject to many changes. Copyright protection has been extended to mask work and models. Further, owners' rights have been extended to include the right to limit online transmission of copyrighted material.

Final decisions on trademark registrations have been taken out of the hands of the CPO. Instead, judicial review lies within the competence of the Trademark Review and Adjudication Board.

With respect to the enforcement of intellectual property rights (IPRs) in China, in the past, the main complaint was that the IPRs were so ineffectively enforced that they failed to deter possible infringers or even compensate the plaintiffs. However, persons presently found guilty of patent, trademark, or copyright infringement are required to pay actual damages or, if actual damages cannot be assessed, statutory damages up to '500,000 (~$60,400 US). Actual damages comprise lost profits, infringers' gains, or reasonable royalties. Criminal liability is also an option to penalize infringers.

Further, recent revisions clarified and strengthened the use of preliminary injunctions. Previously, preliminary injunctions were not available. Now, a patent, trademark or copyright owner can request the People's Court to issue a preliminary injunction as well as a property preservation order before litigation is brought to conclusion.

Problem Areas

Despite the aforementioned changes, Chinese IP law is still not entirely in compliance with the TRIPS Agreement. For instance, Chinese law prohibits the patenting of inventions that “violate the laws of China,” and “are contrary to social morality.” This formulation seems to be a broader definition than the corresponding provision in the TRIPS Agreement, and thus does not provide much clarity concerning patentability in China.

Furthermore, trade secret and know-how protection is still not properly incorporated into the Chinese system. A recent survey indicated that several companies complained about losing valuable technologies in China through unfair means, such as theft by employees. See Keith Maskus, “Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms,” at 17-18 (Dec. 16, 2002, University of Colorado, Boulder). Especially in the area of sophisticated technology, cases of selling design specifications and technical data are frequent. The concepts of ethics and compliance with the law in the realm of scientific and technical research are often not incorporated into the Chinese mentality.

Although Chinese IP legislation has been brought in conformity with the TRIPS Agreement, this does not guarantee that the laws are adequately enforced. Long delays in enforcement actions of IPRs remain a major complaint of foreign businesses. When finally addressed, enforcement actions are often arbitrary and nontransparent. The enforcement of IPRs in China on the administrative level can be conducted by a number of governmental structures. Local officials may be reluctant or even resistant to the enforcement of newly developed IP laws in fear of antagonizing a powerful local structure or hampering the neighborhood's source of livelihood, since infringing enterprises often provide local sources of revenue and employment.

Moreover, a lack of qualified personnel impacts the enforcement efforts. Although the Chinese legal system significantly changed over the past few years, legal and technical expertise for administrative and judicial implementation of these changes remains limited, despite the creation of special training programs in IPRs. This problem differs depending on geographic location. In Beijing and Shanghai, for example, courts and administrative agencies are more familiar with IP issues, whereas in more remote regions, the lack of understanding is more prevalent. It will take time before China has a sufficient number of qualified IP specialists to meet the demands of its growing economy.

Practical Tips for Foreign Companies

The Chinese Patent Office requires foreigners to appoint local counsel to represent them before the State Intellectual Property Office. In addition, foreign patentees should realize that Chinese patents do not provide protection in Hong Kong and Macao. These territories maintain their own independent patent systems.

Further, companies entering the Chinese market should be aware of the deficiencies of the Chinese intellectual property system. Therefore, these companies should use various tactics to reduce the risk of losing their IPRs. First, businesses could form joint ventures with local enterprises rather than outright licensing their technology. In this manner, foreign companies are better capable of controlling use of their proprietary information.

Second, businesses can reduce the risk of unfairly losing technical data by splitting various production processes among different facilities, thereby avoiding having all the know-how exclusively concentrated with one facility.

Third, both foreign and Chinese companies can take special measures to prevent tarnishing of their product by low-quality counterfeiters by, for instance, selling only to customers requiring a guarantee of quality, such as hospitals or governmental agencies. Establishing a full vertical distribution chain fully monitored by the producer also permits the producer to closely monitor the quality of the product. However, these methods are rather costly and thus are generally not available to smaller and less-established companies trying to enter the Chinese market with a new product.

Finally, in anticipation of future enforcement problems, companies are encouraged to cultivate relationships with central and local government authorities.

Conclusion

As a developing country, China has been afforded a transitional period to fulfill its obligations under TRIPS. The WTO accession agreement subjects China to transitional reviews annually in the first 8 years following accession, and a final review in the 10th year.

Since China's accession to the WTO, the Chinese intellectual property legal system has been subject to tremendous changes. Despite all these changes, China still has a long way to go. It will take time for the changes to actually be fully integrated into the intellectual property practice.

However, companies considering operating on the Chinese market should not necessarily be discouraged by the difficulties related to the fast-developing Chinese economy. Instead, foreign companies can take precautionary measures in order to protect their technology and to avoid misappropriation of intellectual property rights.