China: Chinese Government Issues Draft Notice Regarding 2010 National Indigenous Innovation Product Accreditation Criteria

In April the Chinese Ministry of Science and Technology ("MOST"), the National Development and Reform Commission ("NDRC"), and the Ministry of Finance ("MOF") jointly issued the Draft Notice Regarding the Launch of the National Indigenous Innovation Product Accreditation Work for 2010 (关于开展2010年国家自主创新商品认定工作的通知(征求意见稿)) (the "Draft Notice"). The Draft Notice amends the prior rules that were issued in 2009. Products that meet these standards, which are designed to promote domestic innovation and foster the development of new technologies, are eligible for preferential treatment in China's government procurement practices.

Under the Draft Notice (available in Mandarin here: http://www.most.gov.cn/tztg/201004/t20100409_76710.htm), eligible products include computing and application hardware, telecommunications hardware, modern office equipment, software, new-energy products, and high efficiency energy-saving products. Any legally established Chinese entity (including foreign-invested enterprises) may apply. Qualified products must have the following characteristics:

• The product meets all the requirements under Chinese law and complies with national industrial and technology policies.
• The applicant owns the product's intellectual property ("IP") rights in China or has a license to use the IP in China. The product must not be subject to any IP-related disputes.
• The applicant holds the exclusive rights to the product's registered trademark or has the right to use the trademark in China.
• The product's technology is advanced and conserves resources, raises energy efficiency or reduces pollution. Alternatively, it represents a clear improvement in terms of structure, quality, material or craftsmanship, as well as performance over previous products.
• The product's quality is reliable. Any special administrative requirements must be met and licenses obtained by the relevant departments of the State Council. Products that fall under China's compulsory product certification regime must have relevant certification.
• The product is either already available in the market or shows market potential.

It is important to note that meeting these requirements is a necessary, but not necessarily sufficient, qualification for preference in government procurement practices. Many types of products, such as those related to information security, must clear additional certification hurdles in order to be eligible.

According to the Draft Notice, the product certification process will be administered by the MOST's Center for National Science and Technology Project Planning (http://program.most.gov.cn), with individual applications submitted to the relevant regional Science and Technology department. Applications will be accepted until September 10, 2010. Following submission of the application, the regional Science and Technology department, in conjunction with NDRC and various financial bureaus, will complete an initial examination by October 20, 2010. Recommendations from the first stage of the review process will then be forwarded to MOST, which, in conjunction with NDRC and MOF, will issue the list of qualified products by the end of 2010. After a public review period, and if there are no public objections, the finalists will be included in the Catalogue of National Indigenous Innovation Products (国家自主创新商品目录), qualifying them for preferential treatment in the government procurement process.

The Draft Notice, which was made available for public comment through May 10, 2010, addresses some of the concerns of foreign-invested enterprises ("FIEs") regarding China's domestic innovation incentive program. For example, some FIEs voiced objection to the requirement under the 2009 rules that limited accreditation to products based exclusively on domestically developed and owned IP. The 2010 criteria relax this requirement, permitting accreditation for products based on IP that has been licensed for use in China. In addition, foreign companies sought to strike the previous program's limitation to trademarks and brands that were first registered in China. The 2010 rules instead stipulate that the applicant must have exclusive rights to the product's trademark, or use of the trademark, in China. Further, prior standards required that an eligible product be based on advanced technology "that reaches or surpasses international standards." This requirement is absent in the 2010 rules. Instead, the Draft Notice lists a range of energy conservation and efficiency criteria as well as improvements over prior products as the basis for qualification.

Many principles in the Draft Notice, such as the scope of the required license for foreign IP, remain ambiguous and require further clarification. In addition, the Draft Notice fails to reconcile potential conflicts between local and regional accreditation programs, which in some cases may be more restrictive than the proposed rules, and the new national standards. The final version of the rules may take into account some of these concerns.

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