Battles for intellectual property are turning fierce in China and rights owners must know the tactics of both defence and attack, write Richard Li and Joy Jiao
The Chinese market presents tremendous opportunities, but also fierce competition. As the level of development of the Chinese economy increases, brand effect and the fruits of technical innovation play an ever larger role in market competition. If these intangible assets are not protected, they could fall onto the plates of hungry competitors.
Liu Minxuan, a senior partner at AllBright Law Offices in Shanghai, recounts that a new venture became a leader in its industry after several years of hard work. However, when it tried to register on the Tmall platform, it discovered that the trademark in Class 35 required for identification by Tmall had long ago been preemptively registered by a direct competitor.
Although that company was eventually able to preliminarily recover its trademark, “It frustratingly discovered that pirates had preceded it in pirating its trademark in nearly all of the other classes, greatly hampering the development of its business and exposing it to risks everywhere,” says Liu Minxuan.
“If that company had placed greater weight on intellectual property [IP] protection from the outset, registering its trademark in a greater number of classes, it likely would not have needed to desperately wage an all out war on each trademark [class], as now.”
Enterprises must learn how to use the law, as a shield to protect their IP rights, and as a sword to attack infringers. Fortunately, as China has placed increasingly greater importance on the protection of enterprises’ innovations and brand building, the legal weapons available to enterprises have become more potent.
Helen Cheng, an equity partner at Zhong Lun Law Firm in Shanghai, says that the Opinions of the Central Committee of the Communist Party of China and the State Council on Improving the Property Rights Protection System and Lawfully Protecting Property Rights, and the Opinions of the Supreme People’s Court on Fully Leveraging the Adjudication Function to Duly Enhance Judicial Protection of Property Rights, issued in November 2016, and the Outline for the Judicial Protection of Intellectual Property in China (2016-2020) issued by the Supreme People’s Court (SPC) in April 2017, all contain important provisions that will drive and assist in the establishment of an IP punitive damages system.
“It can be seen that China has in recent years consistently been endeavouring to intensify IP protection, intensify the punishment of bad faith infringement and force up the costs of infringement,” she says. “This trend will be of great assistance when enterprises claim damages against infringers through judicial means, and will also increase the deterrent effect on infringers to a certain extent.”
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Liu Minxuan, a senior partner at AllBright Law Offices in Shanghai, has noticed that in recent years under the guidance of the State Intellectual Property Office (SIPO), many provinces and municipalities are actively exploring a patent financing model where borrowers create pledges over their patents as security for the repayment, which is appropriate to the specific circumstances of local MSME (micro, small and medium-sized enterprises). “As intangible assets, IP cannot only be used by holders and licensees. Also important is that they can be provided as collaterals,” he says.
Liu adds that to promote development of patent financing, the SIPO has been strengthening theoretical research and practice review of relevant policies while highlighting communication and co-ordination with the PBOC, CBRC and other relevant authorities. SIPO data show that the new patent financing deals taking place in the first half of 2017 in China add up to RMB31.8 billion, growing by 92% on a year-on-year basis and involving 1,493 pledges that represents a year-on-year growth of 41%. “Patent financing has become an increasingly important financing model for enterprises,” says Liu.
Take Shanghai Yuking Water Soluble Material Tech as an example. In order to meet its urgent need for liquidity, the company obtained a credit line of RMB2 million under the “IP Financing Card” programme of Pudong District, Shanghai, by creating a pledge over its core patent.
The ‘Red Can’ dispute
In its final verdict issued in August 2017 in relation to the “Red Can” dispute between Wang Lao Ji and Jia Duo Bao, the Supreme People’s Court brought an end to a dispute history of five years between the two herbal tea producers by ruling that as a solution, they may share the title to the packaging design known as “Red Can”.
According to Ma Yuanchao, a partner at Zhong Lun Law Firm in Shanghai, the “Red Can” case is unlike ordinary trademark licensing arrangements where the licensor is the party that creates all or most value of a trademark. During the term of the licence agreement, Jia Duo Bao made substantial investment in the packaging design, operation and marketing of the red-can herbal tea, which eventually rose to national prominence.
Therefore, upon termination of the trademark licence agreement, the licensee added much more value to the licensed trademark than the licensor did.
Ma pointed out that the dispute was particularly attributable to the lack of mutual agreement on whether the title to the packaging design of goods should be vested in the licensor or licensee of the trademark. Now that the herbal tea had become a well-known product owing to the licensee’s investment in packaging design and marketing, should the title to the packaging design be returned together with the trademark to the licensor or retained by the licensee upon termination of the license agreement?
Ma advises that measures taken by enterprises to protect their brands must take into account other rights and interests derived from trademarks, which include packaging design uniquely applied to well-known products. “When entering into a trademark licensing arrangement, the trademark holder must pay attention not only to use and loyalty of the trademark, but also to the ownership of other rights and interests derived from the trademark,” he says. “Questions that need to be clarified include who should be the owner of any packaging design applied to the product, and whether the licensee is still allowed to use the packaging design upon termination of the licence.”