A focus on innovation in the new five-year plan follows a year of legal change in intellectual property. By Colin Galloway

Five-year plans are always a good indicator of the government’s economic priorities. The endorsement in March of the 12th five-year plan by the National People’s Congress is no exception. Although the new plan offers, as usual, a sweeping vision of China’s future, it has a particular focus on the importance of innovation to the future of the country’s economy.

Premier Wen Jiabao’s presentation to the central committee of the Chinese Communist Party last October named “weakness in innovation” as the fourth of 10 major challenges faced by China. It also elevated the creation of an “innovation-driven” society into a national priority over the coming five years. This newfound focus on innovation as a lynchpin of future economic growth makes it fair to assume that over the long term, protection of Chinese IP will also be pushed to the fore.

For now, that may be little consolation to IP rights holders still struggling against infringement in China.

According to Simon Clark, a partner and head of intellectual property at Berwin Leighton Paisner in London, the vast majority of his clients “do not bother” to try to enforce their IP rights in China, “based on cost and the perception that a factory that is producing copies of their products (which have included furniture, carpets and giftware) can be closed down and set up again within days in a nearby location, thereby requiring the legal process to start all over again”. Clark says that some clients have “taken the commercial decision” to work with the infringers in an attempt to control them through a business relationship rather than the legal enforcement of IP rights.

Gordian Hasselblatt, Partner 合伙人, CMS Hasche Sigle CMS德和信律师事务所Gordian Hasselblatt, a partner at CMS Hasche Sigle in Cologne, Germany, points out that the successful enforcement of IP rights can be difficult because “Chinese companies often cannot be found at their addresses”. Even if they are located, he says the high cost of enforcement “is not always counterbalanced by the degree of success … because of the risk of illiquidity or insolvency of the infringer”.

And Enrique Diaz, a senior partner at Goodrich Riquelme Asociados in Mexico, says his firm has “faced corruption by the trademark office’s authorities as well as absurd rulings, even when the case seems easy and obvious”.

But while challenges undoubtedly remain, the emphasis on innovation in the five-year plan raises hopes of a steady – if slow – improvement. There are also grounds for hope in a number of legal developments which have taken place over the past 12 months, and which are described below.

Rules on trademark trials

One of the most important changes to China’s IP rules over the last year was contained in the Supreme People’s Court Several Issues Concerning the Trial of Administrative Cases Involving the Granting and Confirmation of Trademark Rights Opinions, issued in April last year. The Opinions were issued to aid the resolution of trials in the highly regarded Beijing No. 1 Intermediate People’s Court that involve appeals against decisions of the Trademark Review and Adjudication Board (TRAB). Such appeals began to be accepted by Chinese courts as a result of China’s accession to the World Trade Organization, and have now become common and increasingly technical, creating problems for judges trying to apply trademark legislation. Cases generally involve dissatisfied trademark applicants suing the TRAB over a rejected application, although they can also involve “any materially interested party”, such as someone attempting to cancel a third party mark or someone involved in failed opposition proceedings.

Clifford Borg-Marks, Special Counsel 特别顾问, Bird & Bird 鸿鹄律师事务所The Opinions consist of technical guidelines that apply to a range of topics in relation to how courts should apply the law in specific factual circumstances, such as those involving foreign-language trademarks or similar goods or services. According to Clifford Borg-Marks, special counsel with Bird & Bird in Beijing, the Opinions follow a trend set by recent IP regulations to address practical issues and specific problems reported to the authorities by lower-level courts. “These are very helpful to the court, but beyond that they also give an indication of what types of argument [lawyers] can put forward to the trademark office and to the TRAB when we file oppositions and cancellation actions against third-party trademarks – so we look at this Opinion very often.” Although not strictly binding on the TRAB, the Opinions are influential because the TRAB “wants to reduce the number of cases filed against them and they tend to not like being on the defendants’ stand”.

George Fu 傅强国, Managing Partner 主管合伙人, Watson & Band 华诚律师事务所The managing partner of Watson & Band, George Fu, has come to a similar conclusion. “The Opinion takes the form of a guiding document. In both its overall structure and in the language it uses, it is different from a judicial explanation,” he says. “However, at some point in the future, certain contents of the Opinion will be elevated to have the same effect as a judicial opinion.”

One of the Opinions’ more significant provisions states that courts should afford a higher degree of protection to marks with a “good market reputation” that have been used “for a relatively long period of time”. According to Peggy Zhu, a trademark attorney in the Beijing office of Ella Cheong Patent Design and Trademark Agents, “I’m not sure if it is right to say that the law has changed, because these criteria have been adopted in trademark adjudication for a long time. But the Opinions mean it is now explicitly stated and everybody knows it”.

The Opinions also direct that the courts will take a strict stance on marks which have seldom or never been used when deciding whether to grant or confirm their status. Further, the Opinions adopt common sense criteria, directing judges to assess whether the average customer is able objectively to distinguish the trademark involved in the suit from others in the market.

Another area affected by the Opinion relates to bad faith registrations. In the past, if a trademark belonging to a foreign company was registered by the company’s Chinese agent or representative (such as a distributor), the company could apply to cancel the mark on the basis of bad faith. The Opinions now widen that right to include scenarios where a foreign company has merely entered into negotiations. As Zhu says, “previously the company had to file the licence or distribution agreement with the distributor or licensee to prove the existence of a business relationship. Under the Opinions, as long as the trademark owner can provide evidence proving negotiations, the company can establish an argument of bad faith”.

Finally, the Opinions clarify how courts can determine whether a trademark is too generic to qualify for protection under the PRC Trademark Law. This is another commonly litigated issue that often creates problems for judges. The Opinions state that in these cases, courts need to decide whether a generic name for the relevant goods has been established, either by law or by usage. A mark that has been designated as generic as a result of some regulatory process or according to a national or industry standard will be deemed as a “statutory generic name”. In addition, if a term has been included in a reference book or a dictionary to describe a type of product, for example, this can be construed as evidence that the name has become generic by usage. The Opinions again mandate a common sense approach in cases where potential buyers see a mark as one that can represent a collection of different products (such as Vaseline, which became a mark applicable to soap and shampoos in addition to its original usage for petroleum jelly, for which it has become a generic name in some markets). In those cases, the marks can be determined as generic names by usage.

SIPO creates a new patent regime

The amended Patent Administrative Enforcement Rules, issued by the State Intellectual Property Office (SIPO), came into force on 1 February. In the past, lawyers say, SIPO was reluctant to exercise its right to oversee the administrative enforcement of patent rights, instead playing a mainly conciliatory role. Patent owners therefore had little choice but to pursue litigation to protect their IP. Today, however, SIPO seems intent on creating an administrative enforcement regime for patents that has real teeth, similar to that applicable to trademark infringement, in which rights holders have recourse to the State Administration for Industry and Commerce (SAIC).

Under the amended rules:

  • provincial and municipal patent authorities (i.e. intellectual property offices) may delegate the ability to undertake enforcement action to county-level authorities;
  • rights owners may ask SIPO to collect evidence on their behalf where it is “objectively not possible” for them to do so on their own. This is a real improvement over the previous regime, where patent owners had to collect their own evidence in the presence of a notary, after which it would be subject to analysis by the relevant intellectual property office. Significantly, any evidence obtained in this way may also be used by rights owners in any subsequent civil proceedings, where evidence gathering has historically also been problematic;
  • authorities have the right to seize infringing goods, shut down manufacturing facilities and impose fines; and
  • authorities must complete cases involving patent infringement within four months, with a one-month extension allowed for complicated cases. In cases involving passing off, the limit is just one month, subject to a 15-day extension.

In practice, however, many practitioners have questioned how much the rules will benefit patent owners.

Catherine Zheng 郑慧明, Partner 合伙人, Deacons 的近律师事务所According to Catherine Zheng, a partner at Deacons in Hong Kong, “fighting patent infringement is just not as easy as trademark issues, which are very straightforward – the timeframe of just four months is quite short.” Patent issues often involve complex products or processes that are incomprehensible to a non-expert. Officials in local patent offices will generally not have extensive technical backgrounds, meaning they will have problems determining the merits of any given case by themselves.

This problem is complicated by a shortage of staff at SIPO. While the SAIC has more than 3,000 offices and some 550,000 staff across the country, SIPO cannot come close to this level of resources. The new rules allow city and provincial branches of SIPO to delegate cases to district or county-level offices, but there remain few staff available to pursue infringers. According to Scott Wang, a patent attorney at the Beijing office of China Patent Agent (HK), “even in offices in big cities, the resources are very limited. For example, in Shanghai the patent office department handling infringement cases, called the regulation department, has maybe fewer than 20 people.”

The time limit issue may also expose foreign companies to action by patent trolls – local companies that register patents in bad faith in order to force foreign patent owners to pay damages or agree cross-licensing deals to use their own technology in China. According to Zheng at Deacons, “Chinese parties are getting more sophisticated. Some of them know how to use the patent system in China in terms of filing for patents that are not, in the view of international clients, worthwhile. But those patents can be used as a sword attacking foreign companies who have Chinese manufacturing facilities.” Zheng adds that “with such a short timeframe for administrative action, it is almost impossible for any foreign company to defend a case if they are pursued by the Chinese patentee because evidence collection takes more than four months. I think some foreign clients may suffer.”

Administrative action will not necessarily be procedurally straightforward either. In contrast to trademark counterfeiters, patent infringers are likely to be real companies with real operations and sometimes substantial assets. They may, therefore, be more willing to fight. Wang at China Patent Agent (HK) believes that some dissatisfaction with administrative action has recently arisen. “Even if the patent office decides there is an infringement, the losing party can still appeal to the court, and then make a further appeal to the provincial court. So the actual period will be much longer than court proceedings alone,” he states. In addition, some say patent office officials are often prone to local protectionism, which can be problematic because patent owners must use the intellectual property office in the home area of the infringer. In court actions, however, rights holders have greater scope to forum-shop in order to find an independent venue in which to have their cases heard.

Patent administrative action may be useful in certain types of case, however. Wen Cao, a patent attorney at NTD Patent & Trademark Agency in Shanghai, notes that the number of patent passing off cases in China has increased significantly recently. “The rules now authorize intellectual property offices to seize infringing products, and because these situations are similar to [counterfeiting] actions handled by the local AIC in trademark cases, if there is very good evidence to show passing off, it may be helpful for the local patent office to take action.” The same may apply to more simple patent infringement cases, such as those relating to utility model patents.

Anti-monopoly law and IP

The PRC Anti-monopoly Law came into effect in August 2008. Article 55 deals specifically with how the law applies to IP cases, and has caused some concern among foreign businesses. The rule states: “The provisions of this law do not apply to business operators exercising their intellectual property rights in accordance with the provisions of relevant laws and administrative regulations relating to intellectual property. However, the provisions of this law are applicable to the case where a business operator abuses its intellectual property rights in order to eliminate or restrict competition.”

One interpretation of this vaguely worded provision is that foreign patent holders may be targeted on the basis that the premium prices they charge in China for their products (which are protected by their IP rights) amount to an “abuse”. According to Borg-Marks, “what foreign companies tend to fear is that somehow article 55 will be interpreted in a way that will protect Chinese companies against intrusion into the market by foreigners”.

For this reason, York Wang of Beijing Janlea Trademark Agency suggests that certain exemptions should be established in the much-anticipated guidelines on the application of article 55 of the Anti-monopoly Law, whereby IP owners behaviour that limits competition in the legitimate exercise of their IP rights should not be subject to the Anti-monopoly Law.

The guidelines are being drafted by the SAIC. Fu of Watson & Band says that in the internal discussion draft of the guidelines, “the abuse of intellectual property in order to eliminate or restrict competition” has been clearly defined as the three types of monopolistic behaviour in the PRC Anti-monopoly Law. That is, monopolistic agreements, the abuse of a dominant position, or a concentration of operators which results in or may result in the restriction or elimination of competition. However, Fu also points out that “the guidelines are rather sketchy and their practical effectiveness needs to be strengthened”.

So far, no proceedings have been brought against foreign companies under article 55. Indeed, only a handful of article 55 cases have been heard at all. This may be because the law is so vague that no one knows what it actually means. As a result, many practitioners expect that when the guidelines are published, possibly by the end of this year, a glut of actions will arrive in courts. While foreign companies will therefore have to wait to see if their fears are unjustified, Borg-Marks adds that “generally I don’t think there is any intention to differentiate between foreigners and Chinese abusing their IP rights because it doesn’t seem to be in anyone’s interest to take this line.”

In any event, the issue is likely to be determined by a high-level court. “At some point, the Supreme People’s Court is going to have to come up with an interpretation of what article 55 means, and I think that’s going to be more important than any guidelines,” concludes Borg-Marks.

Registration of copyright pledges

The State Copyright Bureau introduced the Registration of Copyright Pledges Measures on 1 January. The Measures govern how copyright can be pledged as security, which generally occurs in order to obtain finance. Although previous rules relating to registration of copyright pledges were issued in 1996, under the new rules:

  • the State Copyright Bureau is appointed as the sole agent entitled to maintain a register of copyright pledges, which is available to the public;
  • both the copyright owner and the pledgee must make a joint application to record the pledge, and any pledge that is not recorded in the register is invalid; and
  • the main contents of any contract relating to a pledge must be recorded in the register together with other required information. Once a pledge is registered, the Copyright Bureau will issue a certificate.

The practice of pledging copyright (mainly in respect of computer programs) as security for loans is uncommon in China, but is fast increasing. The government is keen to promote the practice and the amended copyright pledge rules follow Notice no. 199 [2010] of the Ministry of Finance and other bodies that encouraged small- and medium-sized businesses to participate.

According to Borg-Marks, the new rules encourage banks to take IP rights as security for loans. “It’s seen as a measure to promote innovation, to help someone who has a great idea and wants to actually work or wants to extend it internationally and get it registered in, say, the United States or Europe,” he says. The rules mirror similar systems in other countries, where pledges are commonly granted in return for venture capital finance.

Measures for registration of patent pledges were promulgated last year, and measures for the registration of trademark pledges were promulgated in 2009.

Criminal infringement of IP

Most IP practitioners in China believe that the only effective way to fight IP infringement activity is to prosecute infringers under the criminal law. Historically, however, authorities have been reluctant to resort to criminal sanctions for IP infringement. There is an institutional reluctance to prosecute, and various applicable laws have set thresholds or other preconditions that have proved difficult for rights owners to meet. More recently, however, some regulations have been changed to make prosecutions easier.

In February, for example, the PRC Criminal Law was amended to abolish thresholds for criminal liability for the manufacture and sale of counterfeit pharmaceuticals. This means criminal action is now possible irrespective of the value of goods involved. According to August Zhang, a lawyer at the Beijing office of Rouse, “this is the first time a criminal threshold has been abolished – there are no other products apart from pharmaceuticals, but I think this is just the beginning of a trend.”

In January, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security issued the Several Issues Concerning the Application of Law in Handling Criminal Cases of Intellectual Property Rights Infringement Opinions. These Opinions cover a wide range of issues, but perhaps their most interesting provisions relate to copyright counterfeiting and the sale of counterfeit goods over the internet, which has fast become one of China’s biggest distribution channels for counterfeit goods.

Paragraph 10, for example, confirms a high-profile decision made by the Huqiu District Court in Suzhou in 2009, in which a popular website known as Tomato Garden offered copies of various Microsoft Windows operating systems for download.

The fact that the site’s owners gave these away for free meant that huge amounts of counterfeit software were distributed. Prosecution proved difficult, however, given that the PRC Criminal Law requires the infringing act to be “for the purpose of making a profit”. According to Zhu, “the court was in a dilemma because it could not find a precise legal basis for charging the infringer for a copyright crime. But because the infringer gained advertising fees for putting ads on the website the court was able to charge the infringer for making advertising fees.” Four defendants were subsequently convicted and imprisoned.

Paragraph 10 of the Opinions effectively amends the definition of “for the purpose of making a profit” under the PRC Criminal Law to include:

  • charging fees directly or indirectly by embedding paid advertising in other people’s works, or by bundling other people’s works;
  • charging fees directly or indirectly for provision of paid advertising on websites, by transmitting other people’s works through the information network or by making use of the infringing works uploaded by others;
  • charging membership registration fees or other fees for transmitting the works of other parties through an information network in the form of a membership system; and
  • other circumstances in which profit is made by taking advantage of others’ works.

The Opinions also seek to define or clarify issues relating to distribution of works over the internet. Uploading infringing digital content for others to download could be an act of “distribution” within the meaning of article 217 of the PRC Criminal Law. Paragraph 13 of the Opinions creates a threshold system for establishing criminal liability that is defined by the number of infringing works downloaded, rather than any monetary amount. This is a much easier way to determine liability than trying to prove the value of an artistic work.

Donnie Wang 王洁岽, Rouse 罗思国际Wang of Rouse agrees, and adds “the distribution of infringing works over the internet is rampant, but because the previous thresholds for criminal prosecution were unclear, it was difficult to bring an infringer to justice.” The Opinions set out clearly for the first time that if a person distributes other people’s works over the internet and attracts over 50,000 clicks, or if he distributes other people’s works in the form of a membership system which has more than 1,000 members, he meets the criteria for criminal prosecution.

In addition, the Opinions seek to settle jurisdictional questions raised by the inherently decentralized nature of internet commerce, where web servers, bank accounts, email addresses, and the physical locations of warehoused goods, sellers and purchasers can be far-flung, easily changed, and hard to track. According to Borg-Marks, “there has always been an issue of where jurisdiction lies, where the criminal activity has taken place. Is it where the server is located, for example? The Opinions have very helpfully widened the scope of jurisdiction to almost wherever you can access the internet and download an infringing works from an infringing site”. Borg-Marks continues: “it helps in practice if you don’t have to find a server, because usually these people selling online change IP addresses and their servers all the time to keep everyone guessing.”

Professor Jiang Zhipei, a former presiding judge of the intellectual property division of the Supreme People’s Court, also believes that the Opinions will help to identify and punish criminals who infringe IP rights via the internet. He says they clearly state that “cases of criminal infringement of intellectual property shall be investigated by the public security bodies in the place where the infringement occurred,” and that “in the event of an infringing website though which infringing works are distributed or infringing goods are sold, the place of the websites server, or the place where the website accesses the internet, or the place where the founders or managers of the website are located; the place where the person who uploaded the infringing works is located; and the place where the rights holder suffers actual loss” may all be designated as the place where the crime took place.

Diego Palacio, Partner 合伙人, Palacio & AsociadosThe Opinions also address the vexed question of criminal thresholds. In particular, where a factory raid uncovers a batch of counterfeit goods together with further goods of the same type to which a trademark has yet to be applied, authorities may in the past have been unwilling to prosecute in respect of the unbranded products. This has led many more sophisticated counterfeiting operations to delay applying brands until the last minute, or even to shift the venue for applying the brand to a separate location. Under the Opinions, police are now authorized to include the unbranded goods as counterfeits for the purpose of determining the threshold of criminal liability. This will also be relevant to sentencing.

Wang of Rouse points out that “the Opinions do not require the enforcing departments simultaneously to seize the fake trademarks that are to be attached to unbranded products and the unbranded products themselves”, as long as other evidence is sufficient to prove that the unbranded products were intended to infringe the registered trademarks of others. “This regulation also has reference value in administrative enforcement cases,” he adds.

Chinese companies move to protect IP rights abroad

Until quite recently, few Chinese companies had substantial business operations overseas. Chinese companies therefore had little inclination to act to protect their IP rights in foreign jurisdictions. This is beginning to change, however. The number of lawsuits involving Chinese companies in foreign courts has expanded significantly in recent years. Often, their cases create an uncanny sense of déjà vu. According to Tobias Cohen Jehoram, a partner at De Brauw Blackstone Westbroek in Amsterdam, Chinese IP owners operating abroad “oddly enough face the same kind of IP hijacking issues foreign companies face in China, [except that] the action against such hijackers is usually more successful”.

Germany, for example, has witnessed several cases involving trademark trolls. In one, a Chinese bean curd maker named Wangzhihe attempted in 2006 to register its mark in Germany, only to find it already registered by a German department store named OKAI. Wangzhihe claimed OKAI’s registration was malicious: OKAI was a Wangzhihe franchisee and was thus familiar with the company’s logo. In November 2007, a Munich court ruled in favour of Wangzhihe (a decision upheld on appeal in April 2009), issuing an injunction and revoking OKAI’s registration of the mark. This was the first of several similar cases.

But Gordian Hasselblatt, a partner at CMS Hasche Sigle in Germany, identifies two hurdles Chinese companies need to jump over in Germany. The first hurdle is registering rights in the Chinese script. “The second hurdle is that German courts are obviously still inexperienced with Chinese IP rights,” he says. “This makes it necessary to obtain legal opinions from independent law professors et al. on questions of Chinese IP law.”

Christine Weimann, a Spanish and European patent and trademark attorney at ABG Patentes in Madrid, has “noticed some increasing activity of Chinese citizens who live in Spain with interest in protecting trademarks”. And in Japan, partner Akira Kawamura at Anderson Mori & Tomotsune reports assisting Chinese IT companies with IP-related litigation and arbitration “in order to protect their rights in Japan as well as other countries”.

But while the volume of such litigation is greatest in large economies such as the US, Japan and the EU, law firms in smaller countries have also experienced a surge in IP-related work from Chinese clients. Diego Palacio, a partner at Argentinian-based Palacio & Asociados, reports similar instances of pre-emptively registered marks in South America. “Chinese companies keep finding identical or similar trademarks already registered by their former importers,” he says. In South Africa, according to Pretoria-based Vanessa Lawrance of Hahn & Hahn, there has been an increase in trademark applications from Chinese companies, together with a corresponding rise in trademark-related litigation. “There’s obviously an upward trend because it’s definitely busier on the litigation side than two or three years ago,” she says. “The litigation I’m seeing is mainly instigated by South African or other companies against Chinese, particularly for such things as oppositions.”

This growth in IP-related activity by Chinese rights owners is likely only to increase as they move towards better protecting their IP assets, and as awareness grows internationally that Chinese companies have significant assets in foreign jurisdictions that might be targeted via litigation. Still, even the biggest Chinese companies often neglect to secure their IP. As recently as 2009, the trademarks of more than 60 large Chinese companies, including the Bank of China and the China Investment Corporation, were found to have been registered by two Chinese individuals in Canada. According to China’s National Bureau of Statistics, some 15% of well-known Chinese trademarks are believed to have been pre-registered by overseas companies, mostly in the Asia Pacific region.

Some sophisticated players seem to grasp the value of a proactive IP policy. Huawei Technologies recently successfully applied for an injunction to prevent the sale of the networking assets of its OEM partner Motorola to Nokia-Siemens in a complex case heard in a US Federal District Court. Many others, however, remain naïve about the attendant risks of cutting corners in this area.

This reluctance to act has been explained in various ways. Some suggest PRC businesses are reluctant to put real value on their intangible assets. More than one lawyer has suggested that Chinese businesses often consider the costs associated with protecting their IP to be excessive. According to Daniel Poh, a lawyer with Marks & Clerk in Singapore, “IP protection should not be a case of going with the lowest bidder, or squeezing the bottom line of the IP service providers. As they say, if you pay peanuts, you get monkeys.”

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