Guidelines for Starting an IP Practice in China

When prognosticators focus their attention on the world economy, two regions rise to the top: the Middle East and China. According to The Economist Intelligence Unit, China's GDP is predicted to grow by 8.6% in 2010, the second-largest growth predicted worldwide (behind Qatar). As more multinational companies turn their attention to, sell products to and open offices in China, intellectual property work will continue to skyrocket. According to most observers, it is already the fastest-growing area of law in China, and the business boom should fuel its growth well into the future.

How are international law firms responding? What are the barriers, if any, to entry? What are the best ways to set up an IP practice in China? This article answers those questions and provides a basic roadmap if you are contemplating entering this market.

IP Growing in China

If you doubt how large the IP market is in China, consider some of the following statistics. In 2007 (the latest year for which worldwide data is available), the number of patent filings in China totaled 245,161, the third-largest number of any country (behind the U.S. and Japan), according to the World Intellectual Property Organization (“WIPO”) (www.wipo.org). China, the U.S. and Japan together accounted for 59% of the world's patent filings that year. And for the first time, a Chinese company ' Huawei Technologies ' topped the global list of commercial applicants with the highest number of patent filings. It was followed by Panasonic of Japan and Philips Electronics of the Netherlands. China also replaced the European Patent Office as the fourth-largest issuer of patents (behind Japan, the U.S. and the Republic of Korea). Of the top 20 patent offices, China had the third-largest increase (18%) in the number of patents granted between 2006 and 2007. Since 1995, the number of patent filings in China has increased an average of 24% annually. Preliminary WIPO figures show that while U.S. patent applications declined in the first half of 2009, they continued to soar (increasing 19% year-over-year) in China.

In addition, China's residents applied for and were issued the largest number of trademarks in 2007, accounting for 20% of the applications and 11% of the registrations worldwide. The number of China's trademark applications increased an average of 11% each year between 2003 and 2007.

The number of industrial design applications filed worldwide in 2007 totaled 621,000, a 15% increase from 2006. The IP office of China was responsible for 43% of those, and for 26% of the 512,000 registrations. Between 2003 and 2007, its industrial design applications increased by an annual average of 30%, dramatically surpassing the worldwide average of 12%.

As history has shown, countries that create intellectual property eventually enforce it. Since 2006, more patent lawsuits have been filed in China than in any other country, even compared to the litigious U.S. To cite just two recent cases: In December 2008, Samsung of South Korea was ordered to pay compensation to Holley, a Chinese telecommunications firm; in April 2009, Schneider Electric of France settled an infringement case by paying over $23 million to Chint Group of China. Victories and lucrative awards like these will no doubt encourage other lawsuits.

Getting Started

What should a firm do to establish a foothold in China? Whenever possible, it is best for a firm to build a local corporate practice first. But there are some notable exceptions. Bird & Bird, for instance, generally relies on referrals from its UK and European client base for its China IP business. Another way to avoid the “corporate first” mantra is to have a particularly strong niche. Many Chinese companies want to enter the international export market, particularly in the high-tech industry. There is definitely a role for IP lawyers to play in those ventures, without the need for a corporate practice to open the door.

Where should a firm start? Since China's Patent Office is in Beijing, one might expect law firms to locate their IP offices there. But that is not always the case. Firms have established different models. If your firm already has a Shanghai office, and you have a considerable amount of corporate work, there are definite plusses to locating your IP office there, too. However, if you are working with departments in the Chinese government and want access to the Patent Office and the regulators, it would be wise to establish an office in Beijing. Whichever city you choose as your IP base, you will undoubtedly spend time traveling between the two.

Cross-border functionality is also increasingly important. Most Chinese companies want their firms to be able to represent them in multiple jurisdictions, so international lines of communication are extremely important and must remain fluid. It is also desirable to have experience with Section 337 investigations before the U.S. International Trade Commission and to have arbitrated cases, both in the U.S. and abroad, particularly those involving licensing and technology transfer disputes. Such litigators will be able to navigate the IP waters more smoothly.

A Dynamic Legal Landscape

Of course, local IP regulations can be daunting. In 2008, China's Patent Law was revised for the third time since its 1984 enactment (the new rules took effect in October 2009). The latest amendments plug several loopholes and attempt to bring the laws more in line with international standards. Included among the changes are the adoption of an absolute novelty standard to reduce patent hijacking, new disclosure rules for inventions that rely on genetic resources, and an increase in penalty and damage fees for patent infringements.

The nation's trademark law is expected to be amended within five years and the copyright law will be revised in stages ' all with the goal of bringing the country's IP regulations up-to-date by 2020.

Another change the government is pushing for is to have Chinese companies move from the licensee role to that of licensor. Their motivation is clear: Chinese companies pay around $2 billion a year in licensing and royalties to American firms alone. As Chinese companies make this transition, they will be seeking an increasing number of patents abroad. They won 1,225 patents in the U.S. in 2008, according to the U.S. Patent & Trademark Office, up from just 90 in 1999.

This shift can already be seen in a new Chinese regulation requiring sellers of high-tech products to have them accredited based on “indigenous innovation” (i.e., local intellectual property) before they can be listed in a government procurement catalog. More than 30 business groups from the U.S., Europe, Japan and South Korea submitted a letter urging the government not to proceed with the new rule, stating that it “reduces competition and limits the ability of Chinese government agencies to make purchases solely on the basis of quality and price.” The regulation is backed by the Ministry of Science and Technology, the Ministry of Finance, and the National Development and Reform Commission. China's government purchases, including non-technical products, rose 28% in 2008 to $81.9 billion.

Specific Skills Are Sought

Who should you hire to staff your China office? Connie Carnabuci, head of Freshfields' China IP practice, says the demand for qualified IP lawyers continues to outstrip supply. “The ideal candidate would have PRC law training, business level fluency in Mandarin and English, training in at least one international jurisdiction, a comparative law mindset, professional composure and judgment, and the ability to advise a Board/senior executives.” Given the relative infancy of the legal services market in China, it can be quite difficult finding all of these qualities in one individual.

Even some PRC nationals who have benefited from international exposure and received training and post-graduate degrees abroad may be unlikely to possess all of the desired traits. Continued investment in the individual is essential, especially in the areas of drafting documents in English, analyzing technical information and being able to present advice in a persuasive and authoritative manner to clients. Since the main industries currently generating IP work in China are life sciences, electronics, semiconductors and telecommunications, it also helps if the lawyer has some scientific or technical training. Cases involving digital publishing and Internet piracy are also gaining traction.

Contrary to what might be expected, most law firms prefer to hire candidates with English as their first language rather than Mandarin, since most legislation and regulations are available in English. Even so, it is essential to have someone on the team who understands PRC law, how Chinese companies operate and important cultural nuances, since it is not always apparent what is going on behind the scenes of a Chinese company.

Partnerships Are Key

Some firms have gained an advantage by establishing strategic partnerships. In fact, most foreign-based law firms use local patent attorneys to prepare regulatory documents. Chinese IP boutiques Panawell & Partners and An, Tian, Zhang & Partners (“ATZP”) provide such services to many Western law firms and multinational corporations. ATZP Partner An Xiado explains their role: “Our work includes patent and trademark prosecution and litigation where foreign firms are not allowed to act, and patent analysis, where we work together with foreign lawyers. We handle most of the enforcement and litigation work; the foreign firms do most of the transactional work.” At present, patent litigation in Chinese courts can only be handled by Chinese law firms, and the bulk of the litigation is between local companies. Once Chinese companies start to bring more actions against foreign companies and the court protocols loosen, non-Chinese law firms will have a much bigger role to play.

Another type of partnership worth considering is an alliance with an IP consulting firm. The number of these firms is expanding rapidly. There are several in the San Francisco area alone, including Ovidian Group, Pluritas, and IPotential. Each has hired or was founded by IP lawyers. The World Intellectual Property Organization estimates that intellectual property will account for more than $6 trillion in global trade by 2020, up from $3 trillion in 2005; and Ernst & Young predicts U.S. companies could reap $500 billion from patent licensing in 2015, up from just $110 billion in 2000, so they are obviously banking on the niche's growth. “Intellectual property has become an industry unto itself,” confirms Joe Siino, founder and CEO of Ovidian Group and a former patent lawyer at Yahoo! Inc.

Basic Recommendations

The basic building blocks for launching a China IP practice are to:

• Recruit or transfer a broad-based IP partner to be the leader.
• Ideally build the practice around an established corporate practice. If you do not already have one, develop it or partner with a Chinese firm that would also help generate IP work.
• Focus initially on IP transactional work.
• Concentrate on your own institutional clients first, then expand your services to multinationals active in China, as well as some local companies.
• Leverage the expertise and resources you have already established in the U.S., UK and elsewhere.
• Go after big cases and discount for them.

We would also suggest, even before establishing an office in China, that your firm and individual IP lawyers increase their profile there by conducting regular marketing trips to meet with Chinese companies, writing articles on related topics, speaking at conferences, sponsoring seminars, assisting the government with the development of laws and policies, and joining public/private committees (e.g., the Quality Brands Protection Committee). Firms that are already in China ' and those on the brink of entering the market ' should be extremely well positioned as more high-end multi-jurisdictional IP work develops. The work you do there now to build this business will be an important investment in your firm's future.