IP risk control under the Belt and Road initiative

The Silk Road Economic Belt and the 21st century Maritime Silk Road (the Belt and Road initiative), proposed by President Xi Jinping in September 2013, passes through more than 60 countries and regions from Lithuania to Indonesia. PwC’s analysis shows that PRC companies spent US$221 billion on overseas M&A transactions in 2016, which exceeds the aggregate sum of the previous four years. More than 58% of officers from Chinese enterprises believe that the Belt and Road initiative provides investors with enormous opportunities, especially in railways, highway construction, power stations and transmission networks, airports, terminals, data network construction, land use planning, real estate development, urbanization and tourism.

According to the principal of the Ministry of Commerce’s Service Trading Office, China’s service imports and exports achieved double-digit growth in the first half of 2017, when exports of intellectual property (IP) rose by 458.4% on a year-on-year basis. However, Chinese enterprises are facing growing IP risks as they are increasingly involved in investment, M&A, technical co-operation, service provision and trading activities in countries along the Belt and Road, and as China takes steps to transform from “made in China” to “intellectualized in China”. Enterprises should look ahead at what might happen, and be prepared.

Data from the State Information Centre show that the Chinese economy almost equals the sum of the 60-plus economies along the Belt and Road. In other words, countries along the routes are generally less developed than China. Enterprises investing in these countries face unprecedented potential risks and challenges compared with investing in developed markets such as the US and countries in Western Europe.

Variations in IP systems of these countries expose investors to additional risk. The principle of territoriality in IP means that IP arises only in the jurisdiction where the rights to IP are granted or confirmed, and IP will not take legal effect or necessarily be entitled to legal protection elsewhere other than in this jurisdiction. For example, a patent or trademark registered in the PRC will not be entitled to protection in other countries or regions. Works still in the term of copyright protection in one country may have passed into the public domain in another. Besides, racial, cultural and linguistic differences, varied development levels of IP systems in countries along the Belt and Road, and the lack of international IP co-operation mechanism in many of them – there are even countries that do not have a basic IP protection system – expose investing enterprises to additional risks.

Obtaining and maintaining an IP involves increasing risks and difficulties. From the perspective of technology protection, Chinese enterprises are facing greater risks of infringement and technology loss in countries along the Belt and Road, where patent review processes run slowly and enforcement procedures are complicated and uncertain in a relative sense. From the perspective of trademark application, many of these countries implement the first-to-file principle as China does, which is likely to be taken advantage of to register trademarks that are already in use. For example, many well-known brands in China were registered in foreign countries by irrelevant entities. Examples include registration of “Wang Zhi He” in Germany, “Gui Fa Xiang 18th Street” and “Liu Bi Ju” in Canada, “Gou Bu Li”, “Tong Ren Tang” and “Yi De Ge” in Japan. Cases like this are far more likely to happen in countries along the Belt and Road than in developed markets, given the generally lower level of their economic development.

There are higher risks of disputes. The 2016-2017 Going Global Survey on Chinese Enterprises, jointly issued by LexisNexis and the China Institute of Corporate Legal Affairs, indicates the sharp rise in the number of claims against Chinese parities, particularly in connection with IP issues. The US government had initiated at least 23 section 337 investigations into Chinese enterprises from 1 January 2016 to 3 March 2017. According to relevant reports, Chinese entities account for 48.1% of all section 337 investigations initiated by the US government in 2017, compared with 40.6% in 2016 and 29.4% in 2015. We expect accelerated growth in IP disputes as Chinese enterprises are intensifying their business co-operation with countries along the Belt and Road.

TAKING PRECAUTIONS

Enterprises are facing tangible IP risks under the background of the Belt and Road initiative. But risks can be kept under control if precautions are taken properly.

First, in order to prevent the risk of asymmetric information, a specialized adviser with cross-cultural and cross-regional experience and presence can be hired to conduct an all-round investigation and assessment on IP and other risks of the project and even the local country, although this means higher upfront spending.

Second, the granting of an IP is usually subject to approval of a competent authority in the local country. While it takes on average more than one year to register a trademark in China, it may take much longer in countries along the Belt and Road, given their efficiency and organizational settings. Therefore, the IP presence in local countries must be built in advance.

Third, given the significantly higher probability of being involved in IP disputes, an enterprise needs to pay special attention to the dispute settlement and enforcement mechanism in the local country at the outset of investing. In order to minimize risk, and to the extent permitted by law, it should seek to negotiate the most favourable dispute settlement clause, for example, a clause that requires disputes to be solved through international arbitration.

As a national strategy, the Belt and Road initiative provides unprecedented opportunities that come with unprecedented risks. Enterprises capitalizing on the opportunities will enjoy promising growth prospects if they have a sufficient understanding of relevant risks, and take precautions proactively.

Wang Yadong is a partner and Lu Lei is a senior attorney at Rui Bai Law Firm