China: Recent Developments And Routes For Enforcing Intellectual Property Rights In China

Article by Aaron Wininger and Peiyu Sun

China's growing population of over 1.3 billion potential consumers, coupled with their rapidly growing disposable income, is becoming a huge marketplace for products protected by intellectual property laws (IP). The disposable income of Beijing urban residents reached 17,653 yuan per capita (over $2,200 USD) in 2005. China has also become one of the world's main manufacturing bases for products protected by IP laws. Further, China's GDP reached over $8 trillion (USD) in 2005, based on purchasing power parity. As such, based on these numbers alone, the opportunity, occurrences, and profitability of IP infringement in China is steadily on the rise.

According to recent postings by the United States Embassy in Beijing, China is the number one source of counterfeit goods seized by U.S. Immigrations and Customs Enforcement. However, targets of IP piracy and infringement are not just U.S. or foreign companies, but also Chinese companies. For example, on a recent visit to street corner in Shanghai, DVDs of movies currently playing in theaters worldwide were available for 4 yuan (about 53 cents, U.S.). With some haggling, volume purchase discounts appeared possible. Bootleg DVDs included recently released American films such as "Transformers" and "Fantastic Four: Rise of the Silver Surfer," as well as many popular, recent Hong Kong movies. Since the main market for Hong Kong movies is China, this rampant piracy could facilitate the decline of legal distribution and profitability of the once-lucrative Hong Kong movie industry. This is just one small example. However, overall, in an effort to conform to the commitments made to secure entry into the World Trade Organization (WTO), China has made stringent efforts in strengthening the enforcement of IP rights.

In order to protect IP rights, the IP owner must first register its patents and/or trademarks in China. A foreign patent or trademark will not protect a company from infringement, except with respect to the importation of products from China. Copyrights, as in the U.S., do not need to be registered in China, but registration is recommended to assist in proving ownership. However, registration of IP rights in China only applies to the mainland and does not include the Macau or Hong Kong Special Administrative Regions.

Patents. To register a patent, an applicant must file a patent application with the State Intellectual Property Office(SIPO). There are three types of patent protection in China: (1) inventions (similar to utility patent applications in the U.S.); (2) utility models (similar to utility model applications available in Germany and Japan,which generally undergo minimal examination as a mere formality, but can have their validity challenged when enforced); and (3) designs (similar to design patent applications in the U.S., which protect the ornamental design of an object). China patent applications can be filed based on U.S. or other foreign patent applications as long as the Chinese patent application is filed within one year of the earliest filed application, or six months for design patent applications (or thirty months if a Patent Cooperation Treaty application was filed). However, these applications will be examined independently of any other examination that might have previously occurred in a foreign country.

After filing, the applicant must request examination of the invention patent application. It is typical for an application to be rejected and then approved upon amendments made by the applicant. Once approved, an invention patent is valid for twenty years from filing, while patents for designs and utilities are good for ten years from filing. Note that it is possible to file both utility model and invention applications for the same invention. This can be advantageous because the examination for utility models is much shorter than the longer, more substantive examination process for invention patent applications. However, the utility model would need to be abandoned before granting of the invention patent.

Trademarks. In order to register a trademark in China, a trademark application must be filed with the Trademark Office of the State Administration for Industry and Commerce of China. There are four types of trademarks in China: (1) trademarks that indicate origin of goods produced, manufactured, processed, selected or marketed; (2) service marks showing the origin of services; (3) collective marks indicating membership in an association or organization; and (4) certification marks controlled by an organization to indicate that goods or services of non-members of the organization have a certain origin, quality, or other characteristic.

Once filed, the trademark application is examined. Trademarks are granted on a first-to-file basis. If same or similar trademarks are filed on the same day, only the first one filed will be examined. Amendment of the application may be required for approval. Once approved, the application is published for opposition. If not opposed within three months, or if an opposition is adjudicated as unjustified, then the trademark is registered. Registrations are valid for ten years from approval of registration and renewable for ten-year terms. Failure to use the mark for three consecutive years can lead to cancellations of the mark.

Layout-Designs of Integrated Circuits. Layout-designs for integrated circuits (ICs) can also be protected under Chinese law. Applications for layout-designs must be filed with the SIPO. After examination, if no reason for rejection is found, the SIPO will issue the registration, which is valid for ten years from the date of filing, or the date of first commercial exploitation, whichever comes first.

Copyrights. In China, copyrights do not need to be registered in order to have protection. However, copyrights can be voluntarily registered with the National Copyright Administration. The term of a the copyright is life of the author plus fifty years. If the work was created as a term of employment, the term is fifty years from publication.

There are two main routes for IP enforcement in China: administrative and judicial. The judicial route is somewhat similar to the American system in that an IP owner files suit for relief in court. The administrative system enables IP owners to enforce their IP rights without going to court. Although damages are not available to the patent holder, the infringer can still be fined, and any illegal earnings might be seized by the administrative agency. If the IP owner is not satisfied with the results, the IP owner can proceed to judicial remedies.

Administrative Route. To apply for relief, the patent holder files an application with the appropriate administrative agency. There are no fees required for the filing, but fees may be assessed if collection of evidence is required for a decision. The agency will generally establish a panel of three or more officials with expertise in the area. There is no discovery available; any investigation by the IP owner should be done before filing the application, and the investigation results should be included in the application. There is no time limit for the agency to resolve the matter, but a decision is generally reached promptly.

If there is a finding of infringement, the Agency will order the infringer to cease manufacturing, producing, and selling the product or method. If the infringer does not comply with the order, then the Agency can apply to the court for enforcement. Either party to an administrative hearing can appeal a decision to the court; however, the order is not stayed during any appeal.

The advantage of going the administrative route is that decisions tend to be reached quicker and are more cost-efficient, as compared to the judicial route. The procedures and evidentiary rules are simpler. However, in using the administrative route, there may be a higher possibility of local favoritism and protectionism.

Judicial Route. China's judiciary system has four levels: the Basic People's Court, the Intermediate People's Court, the High People's Court, and the Supreme People's Court. Jurisdiction is based on where the infringement occurred or where the defendant is domiciled. The plaintiff bears the burden of proof in most cases. There is no discovery between parties, but the court can do its own discovery. Remedies include damages (recovery of any profit made by defendant or payment of a reasonable royalty) and injunctions. Generally, injunctions are more "valuable" than damages, because damages tend to be low by U.S. standards. For example, Starbucks recently won a court victory with damages of only 500,000 yuan (about $62,000 USD) in a trademark infringement suit against Shanghai Xingbake Coffee Shop. This is believed to be one of the largest damages awards for a trademark infringement suit in China. However, the injunction against the Chinese Company was more valuable, because they are now barred from using the Starbucks name and logo. Using the judicial route, a court decision should be made within six months from docketing, with extensions of time available. Cases involving foreign corporations may take up to a year because of the need to secure and authenticate evidence from a foreign country.

Customs. A third route of IP enforcement in China is the registration of the IP right with Chinese Customs, which can then seize and dispose of the infringing products. Not only will this prevent the importation of a product into China covered by the IP law, it also prevents the sale and export of the product from China. As China may be the sole source for an infringing product, this can be a very efficient means of stopping infringing products at the source and preventing the products from entering other markets. Instead of having to register IP with customs in each country, which can be expensive and time consuming, the IP owner only needs to register IP with Chinese Customs. However, this generally only applies to copyrights, trademarks, and design, not utility models or invention patents, because customs may be unable to determine infringement of a utility model or an invention patent due to its technical complexity.

Enforcing U.S. Patents on Chinese Imports. Another alternative is to file suit for IP infringement in the U.S. or other large markets that import Chinese products This tends to be the most effective for U.S. patents. Although this will not completely stop infringement in China, it will prevent the import and sale of infringing products in the U.S., which, ironically, is one of the largest markets for the infringing products. A U.S. lawsuit can also be effective in forcing a global settlement or resolution. For example, Taiwan Semiconductor Manufacturing Corporation (TSMC), a Taiwanese company, recently sued Shanghai-based Semiconductor Manufacturing International Corporation (SMIC) in an American court over patents registered in the U.S. Ultimately, SMIC settled for $175 million. While the damages may not have been what TSMC had hoped for, this outcome was probably more favorable than any resolution that might have been available from a Chinese court.

With important World Trade Organization commitments and the potential of damage to its developing Chinese industries, it is clearly in China's interests to enforce intellectual property rights. With newly enacted laws, China has been steadily improving and increasing their enforcement of intellectual property rights in a non-biased manner. Registration of intellectual property rights in China is important and should be done promptly so the intellectual property rights can be enforced when needed. As China's economy, now estimated as the fourth largest in the world, steadily grows, the enforcement of intellectual property should keep pace.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.