Business market shift raises IP issues

By Frank Liu and Ding Xiaodi, Shanghai Pacific Legal
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Numerous multinational companies have adjusted their Chinese market operations in the past two years in response to changes in the economic environment. While specific reasons for these adjustments vary, some common intellectual property (IP) issues may arise when businesses shift their markets.

Key concerns

Arrangements for change of rights holders. When a company undergoes market adjustment it may merge, split or dissolve existing entities. This can have implications for the IP rights registered or filed in China such as trademarks, patents or copyrights that the multinational applied for while developing its presence in the market.

If these rights were registered under a unified arrangement – either in the name of the overseas headquarters, or company specifically established to manage IP rights – the change in the Chinese subsidiaries or joint ventures may not directly affect the rights themselves.

However, issues arise if the IP rights are registered in the name of a Chinese company that cannot become the rightful holder due to a merger, demerger or dissolution. In this case, it is essential to proactively handle the transfer of relevant rights holders in accordance with the corresponding processes for each type of right such as patents, trademarks and copyrights. Failure to do so may negatively impact disposal of these rights.

Frank Liu, Shanghai Pacific Legal
Frank Liu
Shanghai Pacific Legal

Arrangement of rights licensing. During business operations in China, companies must pay special attention to existing IP licences when a change in rights holders occurs. This includes: understanding the type of licence (exclusive, sole or simple licence); the scope of the licence (duration and territory); and whether the licence contains any specific provisions regarding the change of rights holders.

Additionally, the commercial area of the licence, such as whether it pertains to production or distribution, is also crucial. Dealing with the stock of goods currently in production, or already produced but awaiting sale after termination of a licence under specific circumstances, requires advanced planning and arrangement.

Arrangements for confirmation and enforcement of rights. IP rights require perennial maintenance to ensure their validity and effectiveness in retaining brand reputation and market share. Throughout the process of enforcing and protecting these rights, there may be instances of invalidation, cancellation or infringement litigation.

When dealing with ongoing administrative and judicial procedures for confirming and defending IP rights, timely communication with relevant authorities is essential, particularly when the rights holder is undergoing a subject change.

Necessary procedures should be supplemented in accordance with regulations. Before the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents takes effect, if an IP rights holder or party to a case is transferred to a foreign country, relevant formalities may need to be notarised and legalised.

Adequate time should be reserved to arrange these corresponding formalities if the trial’s timeframe affects the company’s business plans.

Arrangements for production and sales. In the initial arrangements for production and sales, the licence agreement with third-party producers and distributors often includes provisions for the production and stock of goods on the termination of the licence.

For instance, it may outline a reasonable period for selling the goods, and specify materials and processes for production. If such details were not thoroughly agreed during initial licensing, they must be addressed and negotiated well in advance before the market shift, to avoid disputes or potential damage to IP rights due to ambiguous agreements.

Potential issues

Ding Xiaodi, Shanghai Pacific Legal
Ding Xiaodi
Shanghai Pacific Legal

Conflicts of licence terms. After a merger or acquisition, there is a transfer of IP rights ownership. Neglecting to review the licence terms of these rights could lead to conflicts.

For instance, if the original rights holder had licensed certain IP rights to company A before the merger – with an agreement that the merger wouldn’t affect the licence, but the acquiring company overlooks this clause and subsequently licenses the same IP rights to company B as the new rights holder – it creates a conflict between the two licence agreements.

Resolving such conflicts would require considerable time and effort. Therefore, existing licences of IP rights need to be carefully checked before the transfer of rights holders in order to avoid licence conflicts between different licensees.

Rights duration limitation. During the transfer of rights holders, it’s crucial to promptly review the status of IP rights and pay attention to important matters such as the grace period for trademark renewal and payment of annual patent fees. Failure to do so may lead to the invalidation of valuable IP rights.

Some companies have faced unfortunate situations where their important trademarks became invalid due to delayed renewal, and others subsequently registered identical or similar trademarks, resulting in the loss of accumulated goodwill over the years on trademarks.

Other issues. During the transfer of rights holders, careful examination and proactive planning are necessary for aspects such as the scope and timing of IP licence agreements. If the IP is jointly owned, it is essential to co-ordinate with the co-owners in advance of the corresponding change of rights holder, and subsequent matters.

In summary, when enterprises adjust the domestic market, they often concentrate more on commercial aspects and encounter pressing deadlines, leading them to overlook the potential impact of a change in rights holders on critical IP rights.

To avoid such oversights, proactively addressing the implications of IP layout, and changes in rights holders is of utmost importance. Only through proactive measures can IP rights be effectively utilised to benefit the business in various scenarios.

Frank Liu is a partner and Ding Xiaodi is a senior associate at Shanghai Pacific Legal

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Shanghai 200040, China
Tel: +86 21 6086 0199
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