Protecting Intellectual Property In China - Part II

Thursday, June 1, 2006 - 01:00

Editor: What courts and agencies handle patent matters in China?

Hu: The court structure in China includes local courts at the district and county level, intermediate courts at the city level, high courts at the provincial level and a supreme court at the national level. There are administrative agencies that you can go to for protection. Most U.S. companies overlook the administrative agencies because they are used to dealing with the courts in the U.S.

You have to go to an intermediate court, except that in a city that has a special IP court, you should go to that court instead. The special IP courts are in Shanghai, Beijing and other major cities. If the infringement takes place in an area where there is no special IP court, the chances of a foreign company receiving fair treatment decreases. That is unfortunate, but in the U.S. there are also courts that are hostile to foreign companies.

The judges in the special IP courts are highly sophisticated, having been specially trained in the U.S., Japan or the E.U. They are very aware of the importance of IP protection and are quite eager to do the right thing.

Where at all possible, U.S. companies should try to have their IP lawsuits in China heard in the special IP courts. Litigants, however, do not always have a choice of where a lawsuit is filed or defended. Similar to the venue rules in the U.S., venue in China depends on such factors as where the parties reside and where the infringement occurred.

The government agencies responsible for IP in China are specialists who can be very helpful. The State Intellectual Property Office (SIPO) is the Chinese equivalent of the U.S. Patent and Trademark Office. While the SIPO handles proceedings that challenge a patent's validity, it does not handle enforcement actions other than to try to play the role of a mediator.

Editor: How are trademarks registered and enforced in China?

Hu: The State Administration for Industry and Commerce (SAIC) is responsible for trademark matters in China. The SAIC has the authority to issue warrants and to seize counterfeit goods. Registrations are handled by the SAIC for the central government. Enforcement actions must comply with local requirements, which for the most part are like those in the U.S. The special IP courts that I mentioned have jurisdiction over patents, trademarks, trade secrets and copyrights.

A large foreign company, such as Coca-Cola, can be fairly confident that its trademark will not be misappropriated by a major Chinese corporation. There are administrative agencies and courts that can help it. However, the company faces difficulty trying to curb street vendors that sell items bearing its logo because enforcement is too difficult.

Editor: Are copyright principles in China similar to those in the U.S.?

Hu: Yes. Works of Chinese as well as works of foreigners first published in China are protected by copyright whether they are published or not. Under international reciprocity agreements to which China is a party, matter protected by U.S. copyright law is also protected in China. Although copyrights need not be recorded, recording with China's National Copyright Administration does give the copyright holder advantages in enforcing its rights.

Editor: What trends have you observed in Chinese patent litigation? Is there any basis for the complaint that Chinese IP protection is inadequate?

Hu: The first reported patent litigation in China against a foreign entity was filed in 1989. By 2000, 1,595 patent lawsuits had been filed. By 2004, the number had grown to 2,549, which was a 20 percent increase over the number of patent lawsuits filed in 2003.

Intellectual property protection in China is not perfect, but everything in China has to be looked at on a relative scale. There are high-profile news items about the piracy of such things as movies, music and computer games or knockoffs of Mickey Mouse products. These problems are not unique to China. The scale of the country is much bigger. Therefore, everything that happens becomes magnified - and therefore can be serious for the IP owners.

In a recent presentation to an international audience, the former Commissioner of China's Patent Office observed that Americans complain about the lack of patent enforcement in China. However, between the years 2000 to 2003, of all patent cases filed, fewer than 4% were filed by foreign companies. He asked, "If Americans are not filing patent enforcement actions, how can they know whether China is adequately protecting patent rights or not?"

I believe that there are two reasons why foreign companies do not use the enforcement mechanisms that China makes available. One is because they have been told the protection is inadequate and therefore take no action. The other is that they do not understand how the system works. They view it as very foreign. Another statistic that came to my attention shows that European companies are actually more aggressive than U.S. companies in using those mechanisms. More European than U.S. companies have filed patent enforcement actions in China. Americans are often frustrated by the slowness in which patent cases are handled in the Chinese courts and by the perceived inadequacy of remedies actually awarded. In addition, answers to some questions of law remain murky, as they have yet to be developed. Because of the diligent efforts of the Chinese courts, the situation is improving every day.

Editor: How do the remedies in China for IP infringement compare with those available in the U.S.?

Hu: Judicial remedies are quite similar in providing for damages and injunctive relief. An IP owner, however, should not expect much monetary relief. The Chinese judicial system does not provide for discovery. Without access to an accounting of the infringer's profits, IP owners find it difficult to prove their damages. Chinese IP law limits statutory damages to a maximum of RMB500,000 - the equivalent of about $60,000. If actual damages can be shown, there is in theory no cap on the award. However, when a U.S. chemical company won a high-profile patent case in the late 1990s, the court awarded about U.S. $32,000, which was the largest damages award in Chinese history at that time. I would guess that the monetary award was less than the legal fees and related expenses in that case.

Injunctions are good in theory. They are usually effective if you are pursuing a large company, because such a company will comply. They are not effective against smaller companies that will simply change their names and ignore the court order.

Criminal penalties for copyright and trademark infringement include prison terms. Prison conditions in China are far worse than those in the U.S. Because criminal infringement actions are often brought against the company's CEO, it is not uncommon to find someone serving as CEO in name only so that the management of the company would not be affected if the in-name-only CEO is required to serve a prison term. U.S. companies have been reluctant to pursue criminal remedies.

If goods being shipped to the U.S. infringe a trademark or copyright, the Chinese customs authorities have the power to seize the shipment. Seizures are not uncommon, but they do require the copyright and trademark owners to provide such details as the date and location of the shipment because the authorities do not have the staffing and other resources necessary to obtain such information on their own.

Remedies for patent, trademark and copyright violations also include a mandate that the infringer make a public apology. In the U.S., an apology may not have much effect. In China, however, saving face is very important. Exposure to the risk of having to make a public apology can serve as a strong deterrent to infringement in China.

Editor: What are some likely sources of IP claims in China, and what are some strategies to avoid or defend against such claims?

Hu: U.S. companies very rarely bring IP claims against other U.S. companies in China. Most often, Chinese companies do sue their foreign competitors. In addition, patent trolls have arrived in China. Paying $30,000 or $40,000 to settle a patent troll's IP claim may not seem significant. Being too quick to settle, however, may have the undesirable long-term result of encouraging future actions by patent trolls.

The best strategy for avoiding or defending against such actions is to file for patent, trademark and copyright protection with the appropriate Chinese agencies. The enforcement environment in China is rapidly improving. If filings are not promptly made, a company may be vulnerable to a lawsuit for using its own IP.

Editor: What practical advice do you have for our readers?

Hu: There are practical considerations that may account for what is perceived to be a less than aggressive stance by Chinese authorities. Foreign investment dollars are pouring into China. I have yet to hear of any company that was deterred from coming into China because of concern about its IP climate. China is viewed as a new frontier by foreign investors and the Chinese are good at leveraging the desire to participate. Chinese joint venture partners frequently require IP transfers. If the foreign company balks, they simply woo its competitors. In this environment, it is difficult for foreign investors to convince Chinese authorities to give IP protection a higher priority.

Lawsuits are shunned in China. Initially an effort should be made to resolve a dispute or enforcement issue without intervention of the courts or the specialized IP administrative agencies. If you get local authorities involved, they will try to help if they can. This is illustrative of the value of maintaining good relationships. The Chinese call this practice "guanxi." Local authorities in China appreciate foreign investment. Never discount the importance of local influence. When they understand the importance of issues to you and the impact on their economy, they may surprise you by how they act on your behalf. If you have maintained guanxi, help may come to you in unexpected ways. Finally, don't forget to do your homework. Thoroughly investigate the business climate and your potential partners before entering the marketplace.

Editor's Note: This is another in our series of "seminar interviews" in which we capture some of the highlights of presentations on significant legal issues for corporate counsel sponsored by leading law firms. This interview is based on the presentation that was given by Mr. Hu at a program that took place on April 25 in Philadelphia, which is part of Akin Gump's continuing CLE Series for Corporate Counsel. Announcements about any future Akin Gump programs in this series may be found at Part I of this interview appeared in our May issue.