Article by John Orange & Sean Zhang, ©2006 Blake, Cassels & Graydon LLP
John Orange and Sean Zhang visited China recently to assess the IP landscape. In this article, they provide a brief update of what is happening in China and how our clients may take advantage of the recent changes in China in formulating their global IP strategies.
The protection of intellectual property (IP) rights is crucial to the success of many foreign investors and enterprises who wish to profit from China’s fast growing market. Effective protection of IP in China has always been a concern to foreign investors. As many foreign investors have discovered, counterfeiting, passing off and other forms of IP infringement are common in China. At the same time, Chinese companies are investing heavily in sophisticated technology and require an effective IP system to protect their own investment.
The level of IP activity in China is high. For example, there were more than one million new trade-mark and patent applications in 2005. The total number of patent applications filed in 2005 was 476,264, of which over 170,000 were applications for inventions (other applications were for design and utility model patents). This is the same level of filings as in the European Patent Office and comparable to the United States Patent and Trademark Office. Notably, about 50% of those filings are by Chinese entities. According to the data compiled by China’s Patent Office, the total number of new filings in 2005 increased by more than 30% over the previous year. Similarly, Chinese entities have also increased their filings abroad, especially new filings of international applications through PCT (Patent Cooperation Treaty) filings. By contrast, the annual filing rate in Canada is generally flat and was about 40,000 patent applications in 2004, with about 15% of those from Canadian firms.
These data may point to a different attitude toward IP in the corporate world in China than what one might glean from street scenes. There is a general awareness of IP among executives of Chinese companies. Many Chinese companies have made IP protection part of their business strategies. There is significant litigation involving Chinese firms as both plaintiffs and defendants, including cases in which foreign firms were made defendants.
This general awareness in the corporate world may be partially attributed to the gradual transition to a market economy in China. Further, in preparation for China’s entry into WTO, China has made significant changes to its laws governing IP. Some of the recent interpretations and opinions issued by the Supreme People’s Court, the highest court in China, have also clarified a number of crucial issues relating to the interpretation of China’s IP laws, and lowered the thresholds for bringing criminal charges against infringers. These have all helped to create a climate that is becoming more friendly to IP owners.
Aggressive IP strategies of Chinese firms have practical implications for western companies doing business in China. Improvements are likely to be protected through patent applications filed in China, creating a barrier to accessing new developments. The increased foreign filing interest by Chinese entities may mean that those improvements are also protected in western companies’ home markets, again inhibiting further development. A well thought out technology transfer agreement and a domestic IP strategy is needed to address these issues.
Different types of patent protection are available in China, making it easier to protect improvements. Aside from patents, “utility model” protection is available for inventions. Utility models are intended to cover simpler mechanical types of improvements. They have a shorter life but are not examined and therefore are cheaper to obtain. Although not available in Canada, they can be filed in China on behalf of western companies and form a valuable option in the overall IP strategy.
Enforcement remains a concern. Generally speaking, it has become easier to obtain court orders in China to stop infringements. In China, IP cases are heard by special divisions within the court system. Judges of these divisions are becoming more and more sophisticated in adjudicating IP disputes. Typically, evidence of infringing products or acts can be more readily obtained in China. Once infringement is proven by evidence, court orders inhibiting further infringement can be obtained. On the other hand, it is still difficult to get damage awards. This is mostly due to the lack of court procedures equivalent to western countries’ document production processes. Absent such processes, it can be difficult to obtain relevant financial evidence.
These new developments are significant, especially to owners of patentable technologies. Companies infringing patentable technologies are unlikely to disappear overnight, as they typically have considerable manufacturing assets (in contrast to copyright infringers who may have limited assets and no fixed place of business). Obtaining orders against these manufacturers can therefore be of real value. In some cases, patent owners choose to negotiate licenses with the infringers.
Whether to prevent competitors or imitators from using China as a manufacturing base or to enter Chinese markets with its own products, a company may want to consider including China in its global IP strategy. China has a first-to-file system. It is therefore important to file for IP protection in China as early as possible. This is especially so for utility model applications, which are subject to only a formality review, and trade-mark applications, which may proceed to registration without regard to true owner’s use or registration outside China. Without its own IP in China, a company may find itself as a defendant or without any bargaining power when it later enters the Chinese market.
IP rights, once granted, last a decade or longer. Despite the still-existing concerns over IP protection in China, it is advisable to take a long-term view towards IP protection and factor in the trend of IP protection in China. Those who take advantage of the recent positive changes in China, and take steps to invest in IP assets there, may be best positioned to profit from the growing Chinese market and protect their own markets in Canada.
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.