This article was originally published in the March 08 edition of the magazine "China Contact"
The figures published by German customs every year are alarming. In 2006 customs impounded electrical equipment with a total value of approximately EUR 110 million while seizure measures were effected at the border. Customs authorities effect seizures in order to prevent the import and export of counterfeit products. Roughly 70 % of the electrical equipment seized by customs came from the People's Republic of China and Hong Kong.
How can a European enterprise protect itself against product piracy in China? On the legislative level the People's Republic of China made considerable efforts to better protect owners of industrial property rights. The effective implementation of industrial property rights is, however, still inadequate. There is no standard solution grappling with all problems. With a diligently formulated strategy, the so-called IP strategy, an enterprise may, however, try to minimize the consequences and impacts of product piracy. Unfortunately, the IP strategy of many enterprises is confined and limited to statements, such as: "We are doing nothing, since we are imitated anyway." However, this might have fatal consequences. A comprehensive IP strategy must consist of a combination of legal, internal/in-house, technical and political components. As a rule, a unilateral strategy including only one of these components might hardly be promising.
The legal measures include the registration of industrial property rights, a diligent and careful contract management and the enforcement of industrial property rights by way of legal proceedings.
Two objectives are pursued with the application for registration of industrial property rights in the People's Republic of China. First of all, an application for registration provides for the necessary legal basis in order to be able to proceed against counterfeiters in the PRC at all, since, in practice, the Chinese legal system does not afford the possibilities of taking action against product pirates if the own industrial property right is not protected in the PRC. There exists no automatically accruing right in a registered design which is similar to the non-registered community design in the European Union. Furthermore, it is, in general, impossible to proceed against a manufacturer of so-called colourable (slavish) imitations on the basis of the law against unfair competition.
But even if an enterprise - within the scope of an IP strategy elects not to take an action against product pirates in the People's Republic of China an application for registration of industrial property rights is important, since - with a well-timed application - it will be prevented that counterfeiters arrange for registration of the industrial property right not yet applied for registration. What first sounds preposterous is, unfortunately, reality for many enterprises in the PRC. The costs incurred by an application for registration of industrial property rights do not act as a deterrent for counterfeiters in the PRC, since such a registration makes commercial sense and is worthwhile in the long run. In the event of a trademark registered in the PRC, cancellation proceedings if successful at all last, at least, five years. Similar applies to patents, designs and utility models. During this period the counterfeiter may use the registered industrial property rights exclusively and may even prohibit the rightful owner from using them within the People's Republic of China.
This was impressively confirmed by a court in Wenzhou in a patent litigation case in September 2007 where a subsidiary of the French Schneider Electric Group was adjudged to pay damages in the amount of approx. USD 43 million. The company had built components, for which the Chinese plaintiff had Chinese patents registered, in its products. The objection raised by Schneider Electric that the patent should not have been registered, since the components had already been state of the art and have been used by Schneider Electric since long was acknowledged neither by the court nor by the Chinese patent office.
On the other hand, the application for registration of patents or utility models results necessarily in a disclosure of the process worth of being protected. It is, therefore, understandable that there is an increasing number of publications stating that applications for the registration of patents and utility models would be counterproductive and that enterprises would protect their know-how better if they safeguard it as business secret. We share this view only in part. If it is relatively easy to copy a product by reverse engineering, then an application for registration of a patent or utility model is worthwhile anyway on the strength of the aforesaid considerations. However, as far as the process know-how is concerned it should actually be considered whether internal security makes the observance of secrecy possible which may then protect a product better against being copied than a patent application. Business secrets must be protected by a sound contract management with enforceable secrecy clauses. Then one can proceed against an infringement, inter alia, also according to the rules of unfair competition.
The Chinese legal system provides for a so-called dual system in the enforcement of industrial property rights. On the one hand, industrial property right owners in the People's Republic of China may institute civil proceedings against counterfeiters. Apart therefrom, industrial property right owners could also initiate administrative proceedings where the competent authorities may issue orders to cease and desist, determine penalties, make raids and seize any copied products. In cases of particularly severe infringements the public prosecutor should be involved. Thus, Chinese law does have possibilities to take and enforce legal measures against product pirates. Unfortunately, in practice, these proceedings are often time-consuming in particular, if local authorities have no interest in enforcing them.
Another question, which has to be dealt with by the electrical industry, is the problem of product liability. In the People's Republic of China both sellers as well as manufacturers of products can be held liable in tort. After all, only manufacturers of the final product and not suppliers should be regarded as manufacturers within the meaning of product liability law. The manufacturer will be liable irrespective of whether he has neglected his duties. He will, however, not be liable if he has not marketed the product, for example, since it is a complete fake. The manufacturer, however, will be liable for counterfeit components supplied by sub-contractors if these counterfeits are (deliberately or unknowingly) installed and built in his final product and cause damage. Therefore, it is important for enterprises to ensure by internal/in-house and technical measures that no sub-standard counterfeits could intrude their supply chain.
The problem of product piracy is increasing not only in the People's Republic of China. Enterprises affected are, therefore, obliged to develop an IP strategy as early as possible, thus, curbing product piracy as best as possible and within a reasonable scope. The aforementioned advice by some, to completely refrain from registering patents in the PRC is, however, rather too general and is not helpful to address complex problem of patents protection and infringement in the PRC.
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.