The threshold of change

Home-grown and foreign companies in China are both benefiting from the country’s progressive legislative reforms in intellectual property protection. But they also face new challenges as rapid technological advancements usher in a new era. Sophia Luo reports

The digital economy is developing at a bewildering rate and with it the business landscape is increasingly diversifying. With the rapid emergence of new business models and practices, and the prevalence of infringement issues, the intellectual property (IP) industry in China is facing a plethora of fresh opportunities and challenges.

To this end, the high-profile new round of amendments to the Trademark Law and Anti-Unfair Competition Law not only pave the way for more robust IP protection, but also bring a higher level of uncertainty around enterprises’ IP planning and compliance strategies. In particular, the legislative values conveyed by the proposed revisions deserve close attention and timely action from businesses.

The hot spots in the era of the digital economy also vividly manifest themselves in judicial practice. Relevant cases involving the types of IP, judgments of damages, determinations of jurisdiction, determination standards, trial efficiency and so on offer a wealth of knowledge for enterprises.

Meanwhile, foreign companies in China have benefited from strengthened legislation and judicial practices, resulting in some encouraging changes in IP protection.

Amid the disruptive evolution of artificial intelligence, it is crucial for enterprises to comprehend the associated risks and take necessary precautions with compliance.

Riding high on the trend of IP co-governance, enterprises now are encouraged to be more proactive in joining efforts with e-commerce platforms to deepen co-operation and exploration in onshore and offshore IP protection.

LEGISLATIVE UPDATES ON HORIZON

As a crucial event in the domestic IP field, the Trademark Law welcomed its fifth round of revisions earlier this year since it was introduced back in 1983, as the China National Intellectual Property Administration (CNIPA) issued a draft amendment to the law seeking public opinion in January 2023.

The proposed revisions strengthen the regulation on malicious pre-emption of trademarks. Guo Chunfei, a senior partner of Tiantai Law Firm in Beijing, says that companies should pay particular attention to the legal boundary of “applying for trademark registration in large numbers not for the purpose of use”.

“Disrupting the normal order of trademark registration” is ambiguous to some extent, she says, and the judging standard can be subjective, which may have a certain impact on an enterprise’s application filed to prevent someone else from applying in goods or services unrelated to the mark of the owner, and pre-application of a trademark by a company for a realistic future business.

Meanwhile, the draft amendment reinforces the protection of well-known trademarks. Guo says that companies will no longer be able to use well-known trademarks not registered in China to “piggyback their popularity” on different kinds of goods.

The draft further strengthens the obligation to standardise the use of trademarks. For instance, it stipulates that every five years after the registration of a trademark, the registrant should explain how the trademark has been used, or the valid reasons for its non-use, to the IP administrative authorities. Otherwise, it may face the risk of trademark cancellation.

“Although the clause can indeed reduce the occurrence of the old problem involving non-use of trademarks after registration, like defensive trademarks, it will undoubtedly increase the burden on both companies and IP administrative authorities, and this is coupled with a lack of supporting regulations,” says Guo.

“Hence, it remains to be seen how this clause will be structured in the final version. Enterprises should be aware of the legislative value of attaching importance to the actual use of trademarks conveyed by the revised draft.”

Regarding the “principle of prohibition of repeated registration”, which is considered a major breakthrough in the proposed amendments to the Trademark Law, Rong Chao, an IP expert and partner at Boss & Young in Shanghai, says it will make rights holders discard the idea of duplicate registrations and could to some extent tackle the problem regarding entanglements of procedures.

But in practice, Zhao Gang, an equity partner at Zhong Lun Law Firm in Beijing, says the repeated registrations of trademarks by many companies are meant to address procedural idling – where cases may have to go through various departments including patent and trademark offices, and the courts, which may delay final adjudication on matters – facing prior applications or registered trademarks.

“In the absence of an effective solution to the procedural idling issue, the direct introduction of the principle will have a significant impact on the overall arrangements of trademarks for companies and their access to getting trademark registered,” says Zhao.

“Disputes may emerge over the determination of ‘same trademark’ and ‘same goods and services’ according to the draft, and the requirement for applicants to prove the exception of repeated applications increases the burden of proof,” he explains.

In light of many significant adjustments and breakthroughs in the existing Trademark Law from the proposed amendments, and with many enterprises going global and pressing ahead with their overall planning of trademarks, Hatty Cui, the general manager of IP specialist Rouse China in Beijing, says companies “should also evaluate the stability and certainty as to overseas trademark application on the basis of trademark registration or application in China”.

In addition to the Trademark Law, the latest proposed revisions of another piece of legislation will also boost IP protection. The new round of amendments to the Anti-Unfair Competition Law comes as a well-timed response to new unfair competition behaviour, with the State Administration for Market Regulation publishing its draft for comment in November last year.

Zhao, of Zhong Lun, says the draft expands and perfects the categories of regulated unfair competition in the digital economy and other fields. This includes webpage designs, self-media names, application/software names or icons, and commercial marks that hold a certain level of influence.

The particular emphasis of the draft amendment on the issue of administrative protection of trade secrets sends a meaningful signal that is worthy of companies’ attention.

Zou Wen, a partner at Fangda Partners in Shenzhen, says that the industry previously focused more on civil protection, criminal protection and problems at the intersection of criminal and civil affairs.

Stronger administrative protection of trade secrets is a benefit, but on the other side of the coin, she says, “Companies may be caught in civil, criminal and administrative risks of infringing others’ trade secrets due to the introduction of talent, technology or improper behaviour of employees, so there is a need to build compliance in advance to mitigate relevant risks”.

In accordance with legislative procedure, it may take three to five years for the revised draft to become a formal law, during which time the relevant provisions may still be subject to changes. However, Guo, of Tiantai, stresses that the revisions themselves often reflect practical issues of concern to the legislative authorities, and even if they end up not passing in their entirety, enterprises should closely watch, comprehend and strengthen the management of relevant compliance.

NOTABLE JUDICIAL WINDS

In line with reforms in IP legislation, a good many new trends in various aspects of judicial practice are worth noting.

Guo cites statistics from the latest annual report of the Intellectual Property Court of the Supreme People’s Court (SPC) for 2022, which finds that 53.5% of the newly accepted second-instance substantive civil disputes in 2022 were invention and utility model patent infringement cases.

Disputes relating to new industries and fields – such as new-generation information technology, biomedicine, high-end equipment manufacturing, standard essential patents (SEPs), drug patent linkage, layout design of integrated circuits, and new plant varieties – have all increased significantly.

When it comes to court jurisdiction, Zhao, of Zhong Lun, suggests that companies should be aware that the current understanding of the courts on “information network infringement” has changed, so they can choose the right court to hear their cases.

In a trademark infringement dispute recently handled by Zhao and his team, the plaintiff they represented – a tech company based in Zhejiang province – filed a lawsuit against the defendant, a consulting service firm in Shaanxi province, for using the same or similar logo to the plaintiff’s registered trademark in the defendant’s WeChat official account.

In this case, the defendant’s infringing acts were committed on the internet and the damage was also related to the internet. However, when determining jurisdiction of the case, the court of the plaintiff’s residence held that such infringement fell into the category of “information network infringement” and could not be under its jurisdiction.

In a further demonstration of the judiciary’s clear attitude toward jurisdictional rule reform, Guo cites the SPC Civil Ruling No. 42, in August last year, as an example of the controversies and considerations surrounding the jurisdiction of IP litigation.

In this copyright-related information network infringement case, the defendant’s jurisdictional objection has been handled through a dramatic process. Guo says that “the SPC ruling has changed the years-long situation of judicial practice where the court of both the plaintiff’s domicile and the defendant’s domiciles had jurisdiction over information network disputes. It makes clear that for disputes over the right of domestic information network communication, where the defendant’s domicile can be confirmed, the court where the plaintiff is located has no jurisdiction.” The significance of such a case as a role model also makes it listed in the 50 typical IP cases of Chinese courts in 2022.

In terms of granting compensation, courts have been proactively exploring the “dual-track compensation system”, which applies both punitive and statutory damages.

Guo, of Tiantai, says when determining the amount of compensation in JUKI Corporation v Zhejiang Jukai Sewing Sci-Tech (2022), based on the defendant’s subjective intention of infringement and the circumstances of infringement, the Shanghai Intellectual Property Court applied punitive damages set at three times the compensatory damages to the ascertainable part of overseas exports, and statutory damages to the unascertainable part.

The past year has seen an increase in the number of new objects protected as trade secrets.

Zou, of Fangda, cites three cases concluded by the Shenzhen Intermediate People’s Court, the Hangzhou Intermediate People’s Court and the SPC in 2022 to deduct that algorithms, real-time backend data on livestreaming platforms, and parents of hybrid varieties can all be protected by law as trade secrets. “This trend, and related cases, have important implications for companies to determine the scope of protection for their trade secrets,” she says.

Not only is the number of trade secret cases on the rise, but the difficulty of infringement determination is on the decline. Zhao Ye, a partner at Jingtian & Gongcheng in Beijing, says that courts at all levels have actively explored rules for determining the infringement of trade secrets, especially for weak links in the protection of technical secrets, and made the most of various means to reduce the burden of proof for rights holders.

Zhao says an example was a case concluded by the SPC in 2021, where the court held that the rights holder could claim that the whole set of, as well as one or some of, the technical information recorded in the drawings belonged to the technical secret.

FOREIGN RIGHTS PROTECTION

Benefiting from reforms in domestic IP legislation and judicial practice, the mindset and practices of foreign enterprises in defending their IP rights in China are changing for the better.

“In an environment where the law protects the legitimate rights of foreign enterprises, the abuse of rights gets punished, and foreign rights holders are awarded substantial damages,” says Li Zhao, a partner with Global Law Office based in Beijing.

“Foreign enterprises have generally become more positive and confident in terms of litigation mindset, with a growing number of foreign enterprises choosing China as the go-to place for the settlement of IP disputes.”

Cases in point include the trademark infringement of Schneider Electric, the copyright infringement of Dassault Systèmes, and the trademark ownership dispute of Red Bull listed in a recent report published by the SPC on the judicial work on IP in Chinese courts.

Guo, of Tiantai, offers another example. In a patent infringement case of the “interlocking intramedullary nail” invention, heard by the SPC, due to the refusal of the infringer to submit account books, the court amended the judgment in favour of the foreign rights holders’ compensation claim of RMB20 million (USD2.9 million), in full amount.

Shen Huijuan, a partner at Chang Tsi & Partners in Shanghai, observes notable changes in the mindset of foreign companies towards resorting to litigation for IP rights protection as follows:

• Foreign companies are increasingly proactive in obtaining and protection of IP rights, and are increasingly aware of the importance of early registration to secure such rights;
• They are now attaching more significance to evidence collection and post-litigation enforcement, including the investigation, notarisation and collection of factual evidence, especially the collection and preservation of electronic evidence; and
• Their litigation purposes are more diversified, placing more emphasis on negotiation and legal action as a mean of promoting co-operation, rather than simply seeking to stop infringement or curbing competitors. Obtaining civil compensation is now also an important demand of foreign companies in their IP litigation.

China’s recent accession to the Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents – also known as the Apostille Convention – is scheduled to take effect in early November.

Li, of Global Law, says that in the judicial field, if the consular legalisation procedural requirement of foreign documents (such as certifications on entity qualification and some evidence material) can be abolished, the economic cost and time taken with litigation for foreign investors and companies will be greatly reduced, especially for the massive administrative disputes of IP rights authorisation and establishment every year. The Ministry of Foreign Affairs estimates that the simplified procedure will reduce the time required by 90% on average.

Courts have also taken measures to instruct enterprises on how to use extraterritorial evidence in Chinese judicial proceedings. The Xiamen Maritime Court issued the Guidance on Several Issues concerning the Collection and Review of Extraterritorial Evidence in July last year.

Guo, of Tiantai, says this is the first judicial guidance designated for extraterritorial evidence issued by the national maritime court, and the court in Fujian province, making it more convenient for foreign companies to obtain extraterritorial evidence such as electronic data.

Despite encouraging improvements in the overall environment for IP protection, Frank Liu, a partner at Shanghai Pacific Legal, says that, “according to most cases we have handled, a lack of strategy tailor-made for practices in China is mainly to blame for foreign companies’ IP protection efforts ending up with unsatisfactory results”.

Liu advises that foreign enterprises should attach greater importance to their overall IP arrangement, face up to the complexity of the Chinese market and its distinction from their home markets, and establish an efficient decision-making mechanism and objective assessment system of cases.

TACKLING TECH CHALLENGES

As the sudden arrival of ChatGPT brings the newest wave of AI-generated content (AIGC), depicting a promising picture for the burgeoning digital economy in future, there are also hidden dangers for IP protection that have drawn the attention of lawyers.

Given the risks associated with ChatGPT, Huang Hui, a partner at Wanhuida Intellectual Property in Beijing, summarises the following key considerations that enterprises need to closely monitor:

1. 1. The copyright protection status of content created by ChatGPT;
   2. The potential for content generated by ChatGPT to infringe on IP rights, necessitating strict compliance review;
   3. The need to manually verify the authenticity of ChatGPT-generated content to avoid misquotes and false advertising; and
   4. Concerns surrounding data compliance and privacy protection when using a ChatGPT application programming interface to train AI.

The wave of AIGC is still in its infancy and IP, such as that related to copyright, is constantly evolving. According to Liu, of Shanghai Pacific Legal, “copyright protection and ownership issues are never fixed, which deserves continual attention from enterprises”.

Liu notes that, in accordance with the existing applicable laws in China, the cross-border transmission of data is a relatively sensitive issue. Enterprises must continue to monitor whether trade secrets will be leaked, lost or made across borders during their processes, as well as maintain internal training, supervision and inspection.

Considering the popularity of ChatGPT and other disruptive technologies, which may lead to intensified market competition, enterprises may face more severe competitive risk. Rong, of Boss & Young, advises that “enterprises should maintain a keen insight into markets, develop flexible market strategies, and constantly improve their technological level and capacity for innovation”.

Since ChatGPT technology is a black box model, in which inputs and outputs can be viewed but the internal process is unknown to the tester, “companies also need to pay attention to its interpretability, otherwise they may face lawsuits or regulatory issues,” warns Bill Gao, a senior partner of Landing Law Offices in Shanghai.

As an embodiment of the digital economy, the internet has given rise to the boom of the platform economy, which also poses a mix of more complicated challenges to IP protection.

Sharing and co-governance of IP co-operation is trending, and e-commerce platforms have played a vital role. Huang, of Wanhuida, says: “The collaboration between enterprises and e-commerce platforms has gone far beyond the traditional business scope, with helpful exploration made in the application, creation, protection and compliance of IP rights.”

Issues concerning IP rights protection in e-commerce include the complexity of online transaction scenarios and the concealed nature of online circulation channels.

Zhao, of Jingtian & Gongcheng, says: “Platform governance has proven to be an effective solution to the protection of e-commerce IP rights. For instance, by using big data related to online transactions on e-commerce platforms, crackdowns on illegal acts of infringement and counterfeiting can be carried out more effectively.”

Major e-commerce platforms in China have basically established a rule-based system, especially with IP protection, according to Cui, of Rouse China.

Gui Jinling, counsel at Chang Tsi & Partners in Beijing, says, for instance: “Complaints on Alibaba’s platforms need to be directed to its dedicated intellectual property platform for a one-stop resolution and follow-up. While platforms such as Pinduoduo, Douyin, JD.com and Meituan have also launched their own complaint platforms, subsequent complaints and follow-up actions need to be carried out independently.

“Hence, companies should fully understand and capitalise on complaint mechanisms across different platforms, ” she adds.

Cui advises that, besides proactive and effective communication with platforms, enterprises should participate in various initiatives and training programmes for rights protection launched by platforms for brand owners and relevant parties. They could also seek assistance from related organisations in the place where the platform is located, such as IP protection centres, to establish a constructive dialogue with platforms and obtain stronger support from them.

“Of course, companies themselves also need to proactively establish a comprehensive IP portfolio, obtain more support from judicial, administrative and law enforcement through offline rights protection, and present these results to the platforms to boost their confidence in supporting the rights protection actions of corporations,” says Cui.

With burgeoning cross-border e-commerce trade, Huang, of Wanhuida, advises enterprises to join hands with e-commerce platforms to deepen their co-operation, explore early warnings of IP compliance, and enhance overall planning of IP rights overseas.

Faced with a new environment for intellectual property (IP) where opportunities and risks coexist, lawyers share their insights on the emerging industry trends and developments from multiple aspects.

Zhu Zhigang, a partner at Wanhuida Intellectual Property in Shanghai, says: “Judging from the overall trend, the crackdown on malicious acts in trademark applications, as well as rigorous granting and review from the authorities, will lead to a sharp decline in litigation related to trademark validation procedures and relevant administrative litigation.

“Meanwhile, infringement will occur in areas of unfair competition, such as company name, product packaging, the shape of a product, and brick-and-mortar shop or online store decoration, making infringement litigation more complicated,” says Zhu.

“In addition, the trend of big damage awards will be challenged by the current economic downturn. Balancing the strict protection of IP rights and economic development will test the wisdom of Chinese courts.”

In October 2022, the Xi’an Intermediate People’s Court rendered its
first-instance judgment in the copyright infringement and unfair competition case of Tencent Video v TikTok, in which Tencent sued the short video platform for infringing its exclusive streaming right of the online drama Mojin: The Worm Valley. The awarded damages of more than RMB32 million (USD4.6 million) triggered unprecedented discussion.

Li Zhao, a partner at Global Law Office based in Beijing, regards this as a vivid example of how the regulation of copyright infringement on platforms has become an issue that no industry players can ignore.

“Due to the huge base of internet users and the lowering of the technical threshold for video creation, platform copyright infringement is characterised by its sheer scale, involving a large number of subjects and frequent recurrence,” he says. “The current legal framework has proven to be inadequate in tackling this problem at a reasonable cost, with more regulatory obligations and responsibilities being shifted to platforms.

“Whatever the trend, reform in the regulation of platform copyright infringement is inevitable and deserves the constant attention and discussion relevant companies give it.”

In recent years, the administrative adjudication of significant patent infringement disputes by the China National Intellectual Property Administration has become a new way of safeguarding rights.

Zhao Ye, a partner at Jingtian & Gongcheng in Beijing, says: “Compared with the traditional judicial approach, administrative adjudication on patent infringement disputes and patent invalidation procedures are closely interconnected, and take a relatively shorter period.

“If patent owners and relevant parties win the lawsuit, they can quickly obtain an effective injunction,” he says. “Such a way of defending rights is certainly worth further exploring.”

Closed cases that have been made public include Yichang Changjiang Pharmaceutical Company Limited v Boehringer Ingelheim, while accepted but not closed cases include the widely reported Huawei
v Xiaomi case this year.

As intangible assets such as IP gradually replace tangible assets such as traditional plants and raw materials as the dominant part of enterprise assets, Guo Chunfei, a senior partner at Tiantai Law Firm in Beijing, says: “In the long run, the conversion of IP into obligatory rights, as well as IP capitalisation and securitisation, will become important means of financing for companies.”

However, in practice, Guo says: “There are still risks associated with using IP as a means of financing, such as the excessive complexity of value assessment and difficulty in preventing title defects.

“Moreover, the revision and development of supporting policies and laws have a far-reaching impact on the conversion of IP into obligatory rights, as well as IP capitalisation and securitisation. Enterprises with IP assets need to keep a close eye on these developments,” he adds.

As the establishment of the proposed National Data Bureau becomes a reality, Zhao Gang, a partner at Zhong Lun Law Firm in Beijing, advises enterprises to pay attention to the important stages in the data flow process including raw data acquisition, data processing and value addition, and authorisation of data usage.

“They should also set standards of data acquisition and usage in advance,” says Zhao. “With more extensive and deeper use of data, enterprises can accumulate their own data rights and interests ahead of time to maintain core competitive edges in the era of ‘data factor’ that has already arrived.”