Originally published 12 February 2010
Keywords: China, outsourcing transactions, PRC, IP, protection, infringement compensation, foreign patent
Intellectual property (IP) frequently plays an important role in outsourcing transactions. For example, either the supplier or the buyer — or both — may bring intellectual property to an outsourcing. Intellectual property, moreover, may be developed through or in connection with an outsourcing by either or both parties acting individually or jointly. Arrangements defining the appropriate uses of and protections for such IP are often among the most important considerations in the outsourcing agreement between supplier and buyer.
Common forms of intellectual property in the People's Republic of China include trademarks, patents (inventions, utility models and designs), copyright, confidential know-how and technology. Despite relatively recent enactments in China, the country's intellectual property laws encompass the full array of subjects and areas expected in modern IP regimes. And like other countries IP regimes, China's laws are constantly evolving.
The legal basis for intellectual property protection in today's China — including laws, regulations, judicial opinions and administrative measures — ranges from broad civil law principles to specific, detailed rules covering matters such as integrated circuits and new plant varieties. China's IP protection laws have developed rapidly and significantly, and one is challenged to keep abreast of this high-speed legal change. Within the past few months, for example, China's third amended patent law has come into effect. Over the same brief period, China's trademark law has undergone major consultations designed to address potential and emerging issues, and these developments are sure to result in wide-ranging impacts.
A sound understanding of China's rapidly evolving IP laws is an essential element of doing business in the People's Republic. Knowledge of the changing legal framework governing intellectual property in the PRC enables businesses to leverage the benefits of IP and to mitigate its concomitant risk. Consequently, it is fundamentally important to the effective structuring and management of successful outsourcing arrangements vis-à-vis Chinese suppliers. This article aims to highlight some recent key developments in China's IP law and to give readers a sense of the nation's intellectual property regime and its continuing development.
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In April 2009, the Supreme People's Court of China issued an important opinion addressing certain issues related to the adjudication of intellectual property disputes. The opinion, which is applicable at all court levels in China, contains precise judicial guidelines to courts on how they should approach various trademark and unfair competition issues. The Court's guidelines are intended to promote ideals expressed in the National Intellectual Property Strategy announced in 2008. They include:
- Courts need not award damages or account for profits relative to a mark that is registered but not put into actual use (for example, intended for extorting infringement compensation), although injunctions may still be granted against unauthorised use.
- Trade names or their abbreviations that have attained certain market reputation and public recognition through actual trade use are afforded protection against unfair competition.
- An enterprise name that is properly obtained overseas cannot be defended if its use within the People's Republic amounts to trademark infringement and/or unfair competition under Chinese law.
Well-known trademarks represent a category of trademarks that is afforded wider protection under Chinese law. At present, foreign marks or brand names not registered as trademarks in the PRC can receive protection under the nation's trademarks laws only if they qualify as well-known trademarks within China. Given the importance and power of well-known trademarks, this is an area in which the Chinese government is striving for consistency in administrative and judicial practice and for a strengthening of protections.
As part of these continuing efforts, the Supreme People's Court of China issued a judicial opinion in May 2009 offering guidance on a number of questions concerning well-known trademarks:
- The circumstances under which a court may or may not decide if a mark is "well-known" are defined. For instance, the court may determine if a mark is well-known in a trademark infringement or unfair competition claim that involves the mark's identity or similarity relative to an enterprise name. On the other hand, if a trademark infringement or an unfair competition claim fails for want of some other statutory criteria, the court may not make a determination.
- Factors to be taken into account when considering whether a trademark is well-known in China include the mark's fame and history of use, the market share of goods bearing the mark, past recognitions, and the extent and geographical scope of associated advertising activities. Supporting evidence in the form of industry rankings, market surveys, valuation reports and the like are recognized as appropriate considerations by the court.
- The Court found that "confusion" relative to trademark infringement occurs when the public may not recognize that products bearing a well-known trademark and a mark under complaint come from the same source. Similarly, confusion exists when the public may not understand that a license, association or other like agreement has been arranged between respective traders.
On 1 October 2009, the revised patent law of China came into effect. This law has resulted in significant changes to China's patent system, from the preliminary stage of patent application to enforcement of patents in the courts. Some key changes in the new law are:
Higher standard of novelty
In an application for an invention patent or utility model under the old patent law, prior use of the invention outside China (except for disclosure in a publication) did not defeat the novelty of the invention. China's revised patent law removes this territorial limit and lifts the standard of novelty by stipulating that the applied-for patent must not belong to the state of the art known to the public inside or outside China before the application date.
Foreign patent applications
Under prior law, foreign companies wishing to apply for and maintain patents in China were required to engage patent representatives from among a limited class of agents designated by the State Council. The revised patent law allows all patent agents in China to handle foreign-related patent applications. Consequently, foreign applicants can now choose from a significantly larger pool of patent agents to handle their patent matters in China.
Under the old law, Chinese entities (including individuals) wishing to apply for foreign patents for their inventions developed in China were required to make their first patent application filing in China. The revised patent law removes this first-filing-in-China requirement. At the same time, however, the revised law imposes a new measure requiring that all local and foreign entities wishing to apply for foreign patents for inventions or utility models completed in China must first apply to the State Patent Office for a "confidentiality scrutiny." If this process is not followed, the subject invention or utility model will not be granted a Chinese patent.
The new law codifies and increases the range of statutory damages applicable in certain infringement situations. For example, where the rightful owner's loss or the infringer's illicit profit is difficult to quantify, the court may take into account factors such as the type of patent and the nature of infringement, and it may award damages ranging from RMB 10,000 to RMB 1,000,000. Under previous law, the cap on damages in such situations was RMB 500,000.
Technology import and export
In China, the import and export of technology is subject to a control regime that is principally set out in the Regulations of the Administration of Technology Import and Export. It is important to note that these regulations do not simply govern technology businesses. Rather, the term "technology import and export" is defined very broadly to encompass any kind of patent (or patent application right) assignment or license, confidential know-how, transfer or technology training. Consequently, a large number of transactions in all categories of business have become subject to control.
Under this regime, certain categories of technology are prohibited from import and/or export entirely, while others require prior approval by the Chinese government. From time to time, China publishes a catalogue of prohibited and restricted categories of technology. Violation of these restrictions may attract criminal sanctions.
Technologies that do not fall into prohibited or restricted categories are free for import and export, provided that the relevant contract is properly recorded with the Chinese commerce authorities. In February 2009, the Ministry of Commerce revised its recordal requirements by stipulating a 60-day recordal period for technology import and export contracts after their effective dates. Although the penalty for non-observance is not defined, outsourcing parties must recognize and comply with this requirement, as it represents the basis for handling tax and remittance matters arising out of any import or export activity.
Trade secrets are protected in China under the Anti-Unfair Competition Law. To qualify as trade secrets, data must constitute technical or business information that is:
- Not known to the public
- Of practical use and capable of bringing economic benefits to the owner
- Subject to confidentiality measures adopted by the owner
These criteria are defined and clarified in administrative regulations and, increasingly, in judicial interpretations. A significant judicial interpretation was issued by the Supreme People's Court in 2007 to provide important guidance on fundamental concepts such as "public domain" and "confidentiality measures."
For example, the category of data that is "not known to the public" is interpreted as information not commonly known to, or easily obtained by, relevant members in the trade. The Court's interpretation provides several examples of what constitutes public information, including information that is common knowledge or industrial practice in the relevant sector; information that can be easily obtained without any charge; and information that solely concerns a product's size or structure and that is readily discernible by the relevant public.
Relative to "confidentiality measures," courts will consider a number of factors, including the nature of the information, the intention of the information owner, and the form of measure(s) adopted. A number of circumstances in which confidentiality measures will be found to have been taken by the information owner are also described. These include the affixing of a confidentiality label on the device that stores the information, the use of a confidential code, and the execution of confidentiality agreements.
The law, however, does not provide blanket protection for trade secrets, and it contains some extremely important limitations. One such limitation provides that obtaining trade secrets through reverse engineering of publicly available products will not constitute infringement.
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These developments represent only a recent few of the dynamic and far-reaching changes in China's intellectual property laws. The impact that these laws can have in outsourcing strategies must not be overlooked. Awareness of the relevant legal issues provides any company with powerful tools in formulating and negotiating successful outsourcing arrangements.
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