Intellectual property, and how to protect it
CBBC has produced comprehensive guidelines about Intellectual Property in China, with guidance and advice on how companies should go about protecting their rights, see IPR Forum. Here, we summarise some of the main issues.


The cultural and historical context
Until the 1980s, intellectual property in the People’s Republic had been protected along Soviet lines, in keeping with socialist ideology: an inventor who in other countries might apply for a patent might, in China at that time, receive an award and a token prize instead of any longer-lasting legal rights.

Virtually all businesses are at risk from piracy, passing off, industrial espionage or some other form of IPR risk in China today. IPR problems have grown - as has China’s involvement in the global economy over the last two decades.

When a Chinese company manager sees something interesting at a trade show his or her immediate thought may be ‘can I make the same thing more cheaply and sell it in China?’ rather than ‘is this protected by patents? And do I need to pay a licence fee to the IP owner?’.

Some Chinese companies, driven by short-term profitability needs (and in a pattern familiar from other countries at similar stages of rapid economic development), prefer to adopt a ‘shortcut’ route by launching products based (legally or illegally) on other people’s technology, rather than investing in the development of their own. In many cases this has resulted in immediate financial success, but it has also led to an increase in IPR disputes. The resulting long-term damage to corporate reputations affects not only small Chinese companies but also famous Chinese conglomerates.

With China joining the WTO - and thanks to the government’s continuous educational efforts - more and more managers are learning to respect other people’s IPR; they are also becoming better at recognising the value of their own and at protecting it. Recent years have seen a soaring number of patent applications to by Chinese companies and individuals. There have also been widely publicised IPR cases demonstrating that Chinese companies are taking a more aggressive approach in safeguarding their IPR.

The Chinese market today sees hundreds of flowers blooming - brands, technologies, marketing approaches - and an equal variety of forms of abuse. Outright copying of trademarked goods, packaging, logos and designs - what is usually meant by ‘piracy’ - is only the most obvious example. A uniquely Chinese variant on trademark piracy is the use of a product name that sounds like a trademark, but is written with different characters than those used in registering the trademark.

Beyond rampant copying, businesses in China must also be wary of ‘leakage’ of trade secrets and patents and copyright infringement. All this occurs in an environment in which the strength, efficacy and willingness to help of the judicial and administrative authorities at many levels varies tremendously. Even worse, there are those in some local administrations who see the economy of their local area devoted to producing pirated goods and therefore may be reluctant to intervene.

The laws and regulations
China’s accession to the World Trade Organisation (WTO) in 2001 has resulted in trading conditions for foreign businesses in China becoming easier year by year (in theory, at least), according to a defined programme of liberalised conditions. China’s IPR performance continues to be a major area of scrutiny and there is an annual appraisal by WTO members trading with China.

Despite the comprehensiveness of the laws, many difficulties with Chinese legal processes remain. In an environment where the risk of detection of IPR crime is slight, the penalties applied by the courts and administrative authorities are generally low and the climate of widespread piracy favours the infringer, Chinese IPR law tends to be seen as an irrelevance – by both abuser and abused.

Patents: are the primary vehicle for protecting technology in most technology based-businesses. The basic idea behind the patent system in China is the same as that in the UK: in exchange for publishing details of an invention, the state grants the inventor a monopoly over his invention for a period of 20 years.

The relevant patent legislation in China is the Patent Law 1984 (as amended in 1992 and 2000) and the Regulations for the implementation of Patent Law of 2001.

Trademarks: In China a trademark can be protected as a registered trademark under the People’s Republic of China Trade Mark Law of 1982, as revised in 1993 and in 2001. The Trade Mark Law extends trademark registration to words, designs, letters, numerals, three-dimensional symbols, colours and colour combinations, provided the requirement of distinctiveness is satisfied.

It is still possible to enforce unregistered marks in China under the Anti-Unfair Competition Law and revised Trademark Law if the mark has acquired well-known status or reputation. However it should be noted that this is a particularly complex legal area.

In common with the UK, China operates a first to register system. This means no evidence of prior use is required as a prerequisite to registration. This system is subject to abuse, particularly in relation to popular foreign marks.

Copyright: China’s copyright laws are set out in the Copyright Law 1990 as amended October 2001. The Chinese Copyright Law provides protection from plagiarism for original works of literature, art, natural science, social science, engineering technology and the like which are expressed in the following forms:

1. written works
2. oral works
3. musical, dramatic and choreographic works
4. works of fine art and photographic works
5. cinematographic, television and videographic works
6. drawings of engineering designs & product designs and descriptions thereof
7. maps, sketches and other graphic works
8. computer software
other works as provided for in laws and administrative regulations

Copyright works do not require registration to qualify for protection. However registration with China’s National Copyright Administration can help to establish evidence of ownership before commencing proceedings for enforcement. It is important to remember that copyright does not confer a monopoly right, it merely protects the expression of an idea. Infringement takes place when the work is copied, not the idea itself.

Design and Utility Model Patents: The legislation dealing with registered designs and utility models in China is the same as that for patents: the Patent Law 1984 (as amended in 1992 and 2000). This law defines ‘inventions-creations’ as inventions, utility models and designs.

Design Patent: To be eligible for a design patent, the shape, pattern, colour or combination of these must be novel as at the date of filing.

Utility Model Patent: To be eligible for a utility model patent the product in question must provide a new technical solution in respect of the product’s shape, structure or a combination of these which has a practical application. The requirement is for ‘prominent features’ and ‘notable progress’ over the state of the art as a prerequisite for the grant of a patent for an invention, in contrast with the requirements for a utility patent: ‘substantive features’, ‘representing progress’.

Enforcement
In China a major difference from UK practice lies in enforcement, with two routes available. The first and most prevalent route is the administrative enforcement procedure, whereby the patent owner files a complaint at a local administrative office. The other is the judicial route, where legal proceedings are initiated in the courts. This dual route system applies to all forms of intellectual property.

Avoiding IPR Problems
Many respond to this challenge by essentially ignoring the risks, planning to ‘risk abuse for a fast buck’ or to ‘make my money before the pirates catch up’; some take this philosophy even further and assume that suborning or actively participating in IPR infringement is ‘how it’s done’.

Beware of taking this approach: the experience of IPR practitioners in China does not tend to support these views. Most who ignore the risks seem to find out that the pirates catch up far more quickly than the legitimate business’s cashflow; and those who work with the pirates simply muddy the waters for all and contribute to even more civil and criminal offences – which may well be found out and prosecuted.

• Find the right partner: do not suspend your business principles and instincts in China. If being scrupulous in checking out a prospective business partner makes sense elsewhere, it makes even more sense in China given the intellectual property risks to which you may be exposed. Due diligence investigation (or at least, something approaching it) can be conducted in China.

Work out the best deal with them: Once you feel you have found the right commercial partners, follow through by thinking carefully about the structure of your relationship with them. Do not regard this stage of negotiations as planning for problems – a common but unfortunate view of contracts - but rather as planning for success. Envisage the constructive relationship you need and adopt a structure that will support it.

One question many potential investors face is which type of structure - joint venture (‘JV’) or wholly foreign-owned enterprise (‘WFOE’) - offers their intellectual property assets better protection. A JV with the right partner might provide a powerful ally who can prevent, or take timely action against, potential infringements; but many leaks or instances of piracy originate from JV partners. If piracy begins at the ‘back door’, then might the tighter control inherent in a WFOE be attractive? But, equally, an independent operation might find itself without influential partners who could be valuable in other ways, especially during the set-up phase.

The only sensible approach is not to allow IPR matters to be the deciding factor. Better to vet your partners carefully, develop sound relationships with commercial counterparts and relevant government organisations - and choose a structure that makes good sense from an overall business perspective. It follows that you should not proceed with partners in whom you have less than full confidence.

• Check out employees: Just as ‘due diligence’ checks can now be made in China, so too is the vetting of candidates for employment possible nowadays. Pay particular attention to the key personnel you hire and keep tabs on their activities throughout the course of business: more than one firm has discovered that managers or other highly responsible representatives have caused major commercial headaches and losses – including setting up ‘shadow’ operations in competition with their employers’ business.

• Keep checks on customers: Know-how may be leaked through your customers, who are likely to be less vigilant in protecting IPR they do not themselves own. You should gain the full support of your customers in protecting your IPR.

• Gather data and information: Use your local sales team or representative office in China as well as external resources -such as specialist investigation firms - to spot possible infringements. If IPR abuse is detected, it will be essential to collect evidence in support of possible administrative or legal action.

Agents and distributors, often the main channel to the customer and the market, can provide first-hand monitoring of infringements. Consider the use of incentive schemes to motivate such efforts. You might also provide IP protection training including ways to identify possible counterfeits or other infringement operations.

• Suppliers need vetting, too: Many companies – whether they have invested in enterprises in China or make use of outsourcing arrangements – will need to take the plunge in providing local manufacturers with drawings against which to quote. Obtaining a number of competitive quotations implies that several potential suppliers are discarded during this process, which is an obvious vulnerability. Using known suppliers, vetting those you do not already know and involving companies involved in managed outsourcing (accessing sub-suppliers on your behalf) are all ways of diminishing this risk.

You should obtain agreements with subcontractors about how to handle any overproduction, which should be recorded and notified. Ideally unannounced audits of production facilities should be performed, as both a preventative and an investigative measure.

• Involving the public: Public education efforts have been under way for some years. The government has launched campaigns and has staged seminars across the country. Assisted by foreign organisations, including the European Union, these efforts are aimed at improving the knowledge and awareness of judges, lawyers, administrators, managers, and the public at large.