December 4, 2013

IP Protection in China – Still a Misnomer?

This article was first published in the Australian Intellectual Property Law Bulletin (2013) 26(5).

Take-away Tips

  • Protect all registrable intellectual property before selling or manufacturing in China.
  • Consider China early – China has a system of first to file for trade marks and patents, so be the first to file.
  • Once your intellectual property is registered, register it with Customs.
  • Get local advice on dealing with infringement.
  • There are still challenges to protection and enforcement of intellectual property in China but things are getting better.

 

Introduction

It goes without saying that China is a country that has been experiencing rapid change and economic growth. With a reported total population of 1,354.04 million,1 mainland China is the most populous country in the world. It has the world’s second largest economy with a gross domestic product (GDP) of US$7.318 trillion2 in 2011. Its share in world GDP is projected to increase from 8% to 15% between 2010 and 2030.3

Its population size and growing economy make it an attractive target market for business. However, it is a notoriously difficult country in which to do business, not least of all due to its track record in the protection of intellectual property rights (IPR). Businesses have had to weigh up the potential benefits of entering one of the largest markets in the world with the risks in relation to their intellectual property.

Subsequently, with concerns about the ability to enforce IPR in China, many foreign companies have chosen not to protect their IPR there or to avoid China altogether. But, is this still the best approach to take?

This article looks at the current state of play in relation to protection and enforcement of IPR in China.4

Intellectual Property in China – a Brief History

It wasn’t until the introduction of China’s Open Door Policy in late 1978 that China began to develop western style IPR protection.5 This has largely been as a result of pressure from foreign interests such as the United States and European Union and China’s desire to join the World Trade Organisation (WTO).6

Today China has a comprehensive intellectual property legal system. Though some would say it still has a long way to go, particularly in relation to enforcement and penalties. It is also still known for its high levels of piracy and counterfeit goods.7 However, it is making progress in addressing these deficiencies and is openly striving to become a country driven by innovation.

On 5 June 2008 China released its Outline of the National Intellectual Property Strategy (Outline). The opening paragraph of the Outline states that:

This Outline is formulated for the purpose of improving China’s capacity to create, utilize, protect and administer intellectual property, making China an innovative country and attaining the goal of building a moderately prosperous society in all respects.8

The Outline includes an action plan for IPR protection and enforcement and there has been a great deal of activity undertaken in this area with visible progress.

Protecting Intellectual Property in China

The main types of IPR in China are trade marks, patents, designs, copyright and trade secrets. Other than trade secrets, all are protectable through registration.

The China Trade Mark Office has ranked number one for trade mark applications since 2001. In 2011 it had 1,388,399 trade mark applications lodged with 91.7% of those lodged by residents of China.9

China’s State Intellectual Property Office of the PRC (SIPO) became the world’s largest patent office in 2011 on the basis of patent applications numbers with 526,412 applications filed, 79% of which were filed by Chinese residents.10

To give these numbers some perspective, the number of trade mark applications in China in 2011 was more than 4.5 times that of the number two ranked country, the United States. The US was also ranked number two for patent applications but with much closer numbers at 503,582 applications.

This enormous volume of intellectual property filings has been criticised as flooding the country with poor quality applications and registrations and bad faith registrations. The current focus in China now seems to be shifting from encouraging volume of applications to improving the quality.

Trade Marks

The protection of trade marks in China operates on a first to file basis, unlike Australia’s system of first to use.11 As a result, the first to file an application to register a mark in China will generally have priority over the first to use that mark in China.

There are a number of exceptions, including some protection for well-known trade marks and in relation to ‘bad faith’ registrations. Bad faith registrations may be successful if the registrant can be shown to have had knowledge of the mark prior to its application. Both arguments can be used for opposition to a trade mark application and actions for trade mark cancellation. Well-known trade mark status can be difficult to prove as the aggrieved party has to show its mark was well-known in China at the time of registration. Similar evidentiary issues exist for bad faith registrations.12

The process of trade mark registration is similar to Australia. Applications are lodged with the China Trade Mark Office or through Madrid Protocol applications. Once registered, trade marks are protected for a period of 10 years and are renewable.

As you can imagine, with the volume of trade mark applications being lodged in China the examination process is slow. It is also becoming increasingly difficult to achieve trade mark registration in China. This is in part due to the volume of trade marks on the register. In addition, the China Trade Mark Office takes a conservative approach to prior marks. The Office finds conflict with identical words even where there are other differentiating words, it also finds conflict with similar words. There are ways to deal with trade mark conflicts but they take time and money.13

The Good and Bad

While it is becoming increasingly difficult to register a trade mark in China, it is also becoming increasingly important. Other than ‘famous’ marks, unregistered trade marks have virtually no protection in China. The first to file system of registration has given rise to bad-faith trade mark registrations or ‘trade mark squatting’ as it is often known.

Trade mark squatting is where brands are registered as trade marks in China by persons other than the owner of the brand, usually with the intention to sell back the right to use the mark to the original creator or to trade on its international reputation.

It is also an issue for companies that manufacture their goods in China, even where they don’t sell any goods there. There are stories of brands for goods manufactured in China being registered as trade marks and then registered with Chinese Customs. The goods are then seized on export and the companies held to ransom in order to ship their own goods out of China.14

The latest round of amendments to the Trade Mark Law contains provisions intended to help address this issue.15 These amendments include adopting the principle of ‘good faith’ during registration and use of trade marks and requirements that trade mark agencies cannot accept instructions if they know their clients are engaging in malicious registration.16 Still, the best way to prevent trade mark squatting is to be the first to apply for the trade mark in China.
To register or not – what to advise clients

Due to China’s perceived lack of enforcement of IP rights, companies have often been advised not to bother with registering their trade marks in China. However, trade marks are enforced and generally in favour of the registered owner.

In light of these issues, it is important for companies planning to manufacture in China or sell goods or services there to look at trade mark registration early. Manufacturers should register their marks at least in English and others should register in both English and Chinese. The process currently takes around fourteen months.17 At the least, it is recommended to engage Chinese lawyers to conduct searches of the trade mark register and to set up a ‘watch’ for any applications lodged for marks the same as or similar to the intended trade mark.

The Stats Say it All

To some extent this message is already getting through. China is now the number 1 country in which Australians file overseas trade mark applications. The number of applications filed by Australians in China in 2012 was 2,571 and made up 19% of all overseas applications by Australians.18

Patents and Designs

There are three types of patent in China, invention patents, utility model patents19 and design patents.20 The duration of an invention patent is 20 years, full examination is required before grant of the patent and the process takes around 2 years. The duration of utility model and design patents is 10 years, they are not substantively examined and are generally granted in 3-6 months.21 As with trade marks, patent law in China operates on a first to file basis.
China does not permit patent protection for certain types of invention such as scientific discoveries, rules and methods for mental activities, methods for the diagnosis or for the treatment of diseases, animal and plant varieties22 and substances obtained by means of nuclear transformation.23

Patent applications must be in Chinese and can be lodged directly or through an international Patent Cooperation Treaty (PCT) application. A PCT application can be lodged in English, however, a Chinese translation must be submitted within 20 months of the application.24

Copyright

China has a system of copyright registration. However, copyright is also protected without being registered.

Copyright registration is administered by the Copyright Protection Center of China (CPCC). While registration is not a requirement, it can assist to simplify infringement action. For copyright such as software, rights holders need to weigh up the benefits of registering copyright with the potential detriment of making source code publicly available.

Enforcement

While China has a system for protection of IPR, it has often been criticised for failing to enforce those rights.25 China still has a very high level of counterfeiting activity. To show the point, in 2012 64.51% of goods detained by Customs as suspected of infringing IPR in EU countries originated from China. This increases to 77.09% when considered on the basis of estimated value of the goods.26 The problem is similar for the US with products from China accounting for 72% of the IPR infringing products seized by US Customs by value in 2012.27

This has lead to reluctance by rights holders to protect their intellectual property through registration in China, let alone try and enforce it there.

Enforcement of IPR in China is not without its difficulties. However, things are changing. A 2012 survey of its members by The US-China Business Council put intellectual property rights enforcement as the 5th most important business concern with operating in China. However, of those members, 48% reported that China’s protection of IPR had somewhat improved over the last year.28 The US ambassador to China, Gary Locke, was recently quoted as proclaiming that ‘for every foreign company calling for stronger IP protection, there are really more Chinese companies call for the same… progress is occurring.’29

Avenues for Enforcement

The system for enforcement of IPR in China is quite different to Australia. There are five main avenues for enforcement.

There is the usual unofficial channel of enforcement such as sending letters of demand and negotiating a resolution. There is also customs enforcement, administrative enforcement, civil litigation and criminal enforcement. The best approach to protecting IPR can be to use a combination of these at once.

It is recommended that all registered IPR is registered with Customs and that this is supported with monitoring the market and supplying intelligence in relation to infringements to Customs.

Enforcement Problems

There are a number of criticisms commonly made in relation IPR cases in China and a few of these are addressed here.

There is no system of discovery and evidentiary procedures can be quite onerous for foreign parties. Documentary evidence that originates outside of China must be translated into Chinese and notarised and legalised.

There is no system of common law in China and reasons for judgement are often not published. This has resulted in complaints of inconsistency in approach between courts and a lack of transparency. In recent years the Supreme People’s Court has begun to publicise illustrative intellectual property cases that can be used as guidelines by local courts in judging IPR infringement cases. Though we note there is no obligation for them to do so.30

Enforcement rates for judgements in China can be low, particularly in regional areas, it is therefore recommended to stick with major centres for any IPR infringement action.31

Damages have often been quite low, though this is improving with some recent high damages awards and amendments to legislation either already implemented or underway. There have also often been complaints of protectionism towards Chinese parties in proceedings. Analysis of results of judgements often do not bear this out with more judgements falling in favour of foreign parties.32 This is of course not the full picture but does give some comfort.

Conclusion

A lack of enforcement is no longer a reason avoid IP registration in China. In fact, it is a significant risk not to register IP there. It is recommended that all IPR is protected in China through registration before entering the Chinese market or manufacturing in China. Due to the large volume of registered IP in China, it is also important to ensure that any product you plan to enter the Chinese market with does not infringe any existing third party rights in China.

With an improving economy it is becoming a status symbol for Chinese citizens to purchase legitimate high end branded products. Through this and an increase in local innovation, the Chinese are beginning to value intellectual property more. This is creating internal pressures to improve IPR protection in addition to the external pressures from trading partners. While there are still problems with enforcement of IPR in China, things have improved significantly and are continuing to improve with many new reforms underway.

Footnotes

1. National Bureau of Statistics of China, China’s Economy Achieved a Stabilized and Accelerated Development in the Year of 2012 (18 January 2013). This figure includes the ‘population of 31 provinces, municipalities and autonomous regions, and servicemen in CPLA; but not including residents in Hong Kong SAR, Macao SAR, Taiwan Province and overseas Chinese’.
2. World Trade Organisation Statistics Database, country statistics for China (April 2013) <http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CN>.
3. World Trade Organisation, World Trade Report 2013: Factors Shaping the Future of World Trade (World Trade Organisation, 2013) 91.
4. Trade secrets are not addressed in this article. However, it is worth noting that trade secret theft is a significant and growing problem in China: see Acting United States Trade Representative Demetrios Marantis, 2013 Special 301 Report, (Office of the United States Trade Representative, May 2013) 13 and 20.
5. Stoianoff, Natalie P, ’The Influence of the WTO over China ‘s Intellectual Property Regime‘ (2012) 34(1) Sydney Law Review 65, 69. See also Alford, William P. ‘To Steal a Book is an Elegant Offense: Intellectual Property Law In Chinese Civilisation’ (Stanford University Press, 1995) for a more detailed history of intellectual property in China.
6. Stoianoff, ibid: This article by Stoianoff considers what factors have influenced the development of China’s intellectual property laws.
7. Copyright infringement was estimated in the Office of the United States Trade Representative 2006 Special 301 Report (28 April 2006) to be between 85% and 93% in 2005.
8. ‘Outline of the National Intellectual Property Strategy’, (Issued by the State Council of the People’s Republic of China, 5 June 2008).
9. All figures are from the WIPO Statistics Database.
10. Does not include design patents or utility patents.
11. The first to file system is more common throughout the World than Australia’s system of first to use. Other countries that operate on a first to file basis include Japan, Singapore, Malaysia, Indonesia, Taiwan, Vietnam, France, Germany and Spain.
12. Abrams, Stan, ‘Piss-poor Media Coverage of Malicious Trademark Registration Rules’ on Stan Abrams, China Hearsay (26 December 2012) <http://www.chinahearsay.com/piss-poor-media-coverage-of-malicious-trademark-registration-rules/>.
13. Harris, Dan. ‘China’s Changing Trademark Environment. Why You Need to Register Your Trademark Now.’ Harris & Moure, pllc, China Law Blog (12 September 2012) <http://www.chinalawblog.com/2012/09/chinas-changing-trademark-environment-why-you-need-to-register-your-trademark-now.html>.
14. See for example Kligers Partners Lawyers. ‘Blind Sided in China’ (29 May 2013) <http://www.kligers.com.au/media/news/article/80-blind-sided-in-china.html>.
15. Amendments were passed on 30 August 2013 that come into effect on 1 May 2014.
16. ‘China passes new trademark law to curb infringements’, Intellectual Property Protection in China (online) 4 September 2013 <http://www.chinaipr.gov.cn/newsarticle/news/headlines/201309/1773863_1.html>.
17. Dresden, Mathew. ‘Register Your China Trademark Now. Then Register It Again With Customs’ on Harris & Moure, pllc, China Law Blog (9 April 2013) <http://www.chinalawblog.com/2013/04/register-your-china-trademark-now-then-register-it-again.html>.
18. IP Australia, ‘Australian Intellectual Property Report 2013’ (IP Australia 2013) 15-16
19. Similar to innovation patents.
20. Similar to design registration. Unregistered designs are afforded significantly less protection in China than in Australia.
21. UK Foreign & Commonwealth Office. ‘Guidance Factsheet on Intellectual Property in China’ (9 July 2013)
22. Though China does protect plant varieties through registration under separate legislation.
23. State Intellectual Property Office of the PRC website FAQ’s at <http://english.sipo.gov.cn/FAQ/>.
24. Ibid.
25. Kassner, Gillian. ‘China’s IP Reform: State Interests Align with Intellectual Property Protection (Again)’ JOLTdigest, Harvard Journal of Law & Technology (online) 24 April 2012 <http://jolt.law.harvard.edu/digest/patent/chinas-ip-reform-state-interests-align-with-intellectual-property-protection-again>.
26. European Union, ‘Report on EU customs enforcement of intellectual property rights; Results at the EU border 2012’ (European Union, 2013) <http://ec.europa.eu/taxation_customs/resources/documents>.
27. 2013 Special 301 Report, above n7, 35.
28. The US-China Business Council. ‘China Business Environment’ 28 May 2013 <https://www.uschina.org/reports/china-business-environment-tue-05282013-1050#IPR%20enforcement>.
29. As quoted in ‘Is the Middle Kingdom getting serious about protecting intellectual property?’ The Economist (online from the print edition) 21 April 2012 <http://www.economist.com/node/21553040>.
30. Yang, Shengping ‘Patent Enforcement in China’ Landslide Volume 4, Number 2  (November/December 2011).
31. Stoianoff, above n12 86.
32. Above n56.