[Editor’s note: The audience at the World Trade Week panel on Wednesday was populated by small and mid-sized American business owners in the New York City area, most of whom had just begun to contemplate entry into the China market. My remarks were aimed at providing them – as well as the internet audience -- with introductory information on intellectual property rights in China. More experienced readers may not find the following text suitable in its entirety, but the story at the top is kinda fun.
Here comes the disclaimer: this is general information not intended as legal advice specific to any individual’s particular situation. The use of “you” and “your” below does not refer to the reader personally, but reflects the choice of an informal substitute suitable for an oral presentation, rather than the stiffer “one.” That last sentence was totally pedantic, wasn’t it?]
Remarks by Rich Kuslan at World Trade Week, New York, May 24, 2006
Today, I’d like to speak to you about Intellectual Property (IP) Rights – what value, if any, does knowing what these rights are, have for you, when doing business in China? Let’s get to some possible answers by way of a story.
A Funny Thing Happened to Me on the Way to the Chinese Market
Recently in China, a friend introduced me to a medium-sized Chinese auto parts importer. Let’s call him Mr. Liu. Mr. Liu’s business was growing and he was looking internationally for sources of branded product to import. To be a bit clearer, he was looking for product with a popular international, i.e., non-Chinese, brand name on it. Chinese customers often are more likely to have confidence in and purchase foreign branded parts. What Mr. Liu wanted had to be imported, and not procured domestically, so that it would display unopened packaging that could genuinely say on it “original import packaging” or in Chinese ?????
This sounded like it was going to be too easy. I introduced Mr. Liu to a major, well-respected American parts distributor, whom I knew well, let’s call him Bob, who quoted an excellent introductory price on product made in the manufacturer’s factory in the United States. I’d expected a favorable response to this offer, and yet the response was less than pleasant. Mr. Liu told me that he could purchase the same product (same model number and specifications) with the same company brand on it made in Korea at a significant discount. I approached Bob, who, after a pregnant pause, told me that none of the maker’s factories were located in Korea. In other words, the Korean product referred to by Mr. Liu was counterfeit.
Back to Mr. Liu. When he said he wanted foreign branded product, he didn’t mean that it had to be made by the company that actually owned or had been granted rights to manufacture the popular brand. The product had to appear to be correctly branded so that it would “persuade” the Chinese consumer that he was buying genuine parts. Mr. Liu told me straightforwardly that the Korean product was nearly 60% cheaper and almost as good as the American product. Best of all, it was branded with the very persuasive name and logo of the American maker. You can guess the outcome of this story. No sale. But the American company was now aware of counterfeiters stealing market share and not doing so by exporting counterfeits to the U.S., but to other nations and specifically posing a threat to future business potential in China. Bob and the parts maker were extremely interested in tracking the counterfeit product to the Korean factory.
Imagine the damage to your reputation and revenue potential when fakes of lesser quality invade a market you have high hopes for?
The more fascinating story I heard from Mr. Liu, was this. A Chinese auto parts maker exported product made in its Chinese factories to be re-packaged outside of China and then re-imported as so-called “genuine foreign-made” imported product. I have not been able to confirm this story, but I believe it. Such things happen.
Protection Against IP Infringement in China
If you have a product or a service you wish to sell into Asia, you have intellectual property that others can make use of to their commercial advantage while harming your interests. So, what can you do to protect yourself from intellectual property infringement in China? What are the challenges you might face? And what likelihood of achieving the results you set out to achieve?
Let me preface this discussion with the results of a recent American Chamber of Commerce study. According to their survey of U.S. companies in China, 55% said they were hurt by violations of intellectual property rights and 41% believed counterfeiting of their products increased in 2005. I note this despite 1) increased US and European pressure on the Chinese government to curtail IP infringement and 2) objective confirmation of increased Chinese government activity to do so. So you can see where I am going… You can assume that protection of your IP interests will be an uphill battle, but one that you must engage in for your own benefit, if you should wish to survive and even perhaps thrive in the Chinese business environment.
What is intellectual property anyway? There are many definitions, so let’s describe it in a general way. Briefly, it refers to just about anything you can think up and express, and which you might be able to make some money from. In this country, and in most others, the government protects assets created by the intellect in a variety of forms, for example, in patents for inventions and designs and the like; in trademarks, like the brand names and their logos; and in copyrights, of stories, songs, films, etc., even of pantomimes. In other words, the person who comes up with these imaginative inventions of the mind has certain rights in them and others can’t make use of them, generally speaking, without permission, usually procurable by the payment of money. That is why Gucci and Louis Vuitton get hopping mad when they see counterfeits sold openly without their permission or the payment of license fees, in many Chinese markets, like the infamous Xiang Yang market of Shanghai, which, by the way, the Shanghai government has promised to shut down on June 30. Wonder where it will move to?
What can you do to protect yourself against the theft of these intangible assets? You can put valuables, like coins and jewelry, in a safe deposit box in the bank. But to make commercial use of them, by selling them, for example, they must be displayed, and you’d go to great lengths to ensure that physical valuables are not easily stolen by someone who sees what you’ve got.
If you intend to sell your product or service in China; or even if you have a product or service not yet for sale in China, but which you do not wish to see counterfeited somewhere in the world to your disadvantage, you will need to proactively guard against theft of your IP and monitor to make sure no one is stealing it. But, if theft occurs, that when you become aware of it, you go after the thief vigilantly. Otherwise, among other things, a claim to rights in those IP assets may vitiate.
Forms of IP in China and the Administering Agencies
Let’s briefly describe the several important forms of IP in the Chinese environment and what government agency administers them. [Editor’s Note: For the sake of simplicity, I chose not discuss trade secrets in this talk.]
First, for you to enforce your rights, patents and trademarks must be registered in China. Copyrights, on the other hand, do not have to be registered, but it may be worthwhile to register them. More on this in a moment.
Some detail on patents. Patents come under the purview of the State Intellectual Property Office (SIPO) ???????in Beijing, which examines patents at the national level, and runs the administration of the local SIPO offices, including the provincial offices which usually direct enforcement. If you do not have a registered company office in China, you may not submit patents on your own, but must use the services of a local patent agent. Usually, your stateside law firm will help you find a patent agent.
Trademarks are registered, administered and enforced by the Trademark Office, under the State Administration for Industry and Commerce (SAIC) ???.
A note for those who do not register their trademarks in China, and find their trademarks under attack, the Anti-Unfair Competition Law, administered by the Fair Trade Bureau under the SAIC umbrella, may provide some relief, albeit obtained with difficulty, where your company name has been used without your permission, or someone has represented his product (a counterfeit of yours) as being genuine when it was not.
Copyrights may be registered with the National Copyright Administration for a duration of 50 years (or author’s life plus 50 years). What happens if you don’t register? Well, then, prove the date rights inured to you – something simplified greatly by production of the official certificate from the copyright administration itself.
Formal registration of patents trademarks and copyrights aren’t the only methods of IP protection. Other methods include confidentiality agreements concluded prior to negotiations, as well as contractual licensing that specifically penalizes distributors who make use of your IP without permission and/or payment. But in China the use documentation is generally a weak stricture upon behavior, certainly necessary but much less effective and far more difficult to enforce in China than in the U.S. Not simply because the courts and law are of suspect reliability. But Chinese are extraordinarily flexible. Often, Chinese will approach companies with whom they’ve has only recently concluded protracted negotiations with a written contract only to ask that terms be changed – wasn’t the negotiation supposed to prevent that, think Americans? Chinese think, well, no, the situation has changed, so our agreement should as well.
An IP Protection Strategy in Brief
Let’s widen the discussion to include other things you can do as a part of an IP protection strategy as you expand your China business. Fundamentally, we are talking about three things: Protection, Monitoring and Vigilant Prosecution.
You need to know what you have before you can protect it. What IP assets do you have? Which of these do you need to protect? And how do you protect them? Here are a few suggested activities.
1) Identify and catalog your IP assets.
2) Determine what, if any, of these assets are already in use in Chinese markets.
3) Determine what you must protect, what you can but don’t have to protect and how to protect them.
4) Determine possible methods by which you’ll remain vigilant if infringement be found.
5) Register your IP assets as necessary.
First, the IP audit – have you really thought hard about what IP assets you have? If you haven’t done so already, an IP audit will allow you to determine what intellectual property you have that needs to be protected – for example, a name, logo or design you use to identify and distinguish a product or service. When has it been in use? Is it currently in use? Do you plan to use it in future? If so, where have you used or plan to use it? Have you registered it? Where? Etc. Once you’ve catalogued your IP assets, you’ll be better able to plan the next steps of an IP strategy, part of which is calculating estimated costs of protecting your IP assets.
People naturally wish to keep cost down to a minimum, but here a penny saved may make you pound foolish. Why? Several reasons, but here’s one. China is a first to file nation, unlike the US, meaning that the first one to the Trademark Office in China with, for example, the application for your design logo will become the registered holder of rights in that logo, even if that isn’t you and even if you’ve used it in commerce first.
This happens to even the biggest companies. Remember the 1992 Olympic Games in Barcelona where, it was rumored that a major worldwide athletic gear maker, based in the U.S., paid a great deal of money to a Spanish company that owned its trademark in Spain, because the Spanish company had filed first. Just because your market entry plan doesn’t have you actually doing business in China for a while, doesn’t mean someone else won’t come along and beat you to the punch. Perhaps it has already happened, but you don’t know about it.
The cost to register a trademark in China, going through a domestic US law firm, is generally around $1,000, a lot cheaper than having to pay the expense later for a cancellation proceeding. Major companies have run into this situation – where someone other than the true owner of a trademark has registered that mark in China. The foreign company is then forced to fight it out by proving it has a prior claim by virtue of its being a famous name brand (a claim that, if proven, can trump certain claims to brand names held others) – so, are you like a Gucci or a Starbucks in your industry?
That said, however, it may not be a good idea to register in China every patent you own. You may not wish to publicize through the patent system your invention or design lest it fall into the hands of those who might infringe upon it. You, your R&D people and your attorneys will need to consider whether the registration of your patent is more rather than less advantageous to you, depending on your plans to use that patent in China, its value to you, the likelihood of its unlicensed use, etc.
A note: you should not permit under any circumstances, your distributor or your potential distributor to register your IP. Ideally, you will have conducted your IP review and taken steps to protect yourself before you enter into negotiations. Why? You may find yourself foreclosed from using your own brand. Companies have discovered, after severing ties to a belligerent on non-performing distributor, that the distributor registered the IP in its own name, and was selling counterfeit product it made itself.
You can’t put all your eggs in one basket and expect your distributor to monitor your market for you. It may turn out that your distributor is the one who is making unlicensed or impermissible usage of your IP. Briefly, there are several ways to monitor the market:
1) Spend time in the market searching for products/services like yours. If you keep your eyes open, you will very likely find something.
2) Hire a clipping service in China to return any articles and ads containing important keywords relevant to you – your company name, logo, products, etc.
3) Where greater expense is justified, the services of a full-time investigator, like Kroll, may be of value.
Once you become aware of the infringement of your IP in China, there are two routes you can follow in China, with a third route possible in certain circumstances.
1) an administrative action against the infringer
2) a civil action, that is, a lawsuit you initiate, against the infringer
3) in egregious cases, a criminal action led by the Public Security Bureau may be launched against the infringer. Very often these cases carry with it strong political overtones, and they are unlikely if the volume of infringement is small.
An administrative action in China goes through government channels of administration. The government agency you go through depends on the form of the IP involved.
1) Trademarks: the AIC at the local level accepts trademark infringement complaints. The AIC also accepts unfair competition complaints. As to patents, you can request the local office of SIPO to initiate an investigation of patent infringement. As to both trademarks and patents, fines, injunctions and confiscation of infringed product can issue, but you will not receive payment of damages, or your fees and expenses involved in pressing these administrative actions. (On a side note, the trademark office is reportedly severely understaffed. An example: at least 30,000 case backlog, opposition exam filings, that is, contesting trademarks held by others, that were filed in 2005 will, it’s estimated, most likely be processed by 2014.)
2) The Chinese Customs can stop cross-border shipments (exports and imports) of infringing product, but you must first register with the Customs Office and pay a fee of about USD250 per mark). You must also first know that there will be a shipment of infringing goods and then notify Customs as well as post a bond while product is warehoused awaiting a decision on confiscation. The entire cost, including raids and cost of investigation by a private service run several thousand dollars at a minimum.
A note administrative actions relating to copyright initiated by foreign IP holders have, I have heard, not been particularly successful.
A civil action is a lawsuit in the Chinese courts, held before a judge, and is also a possible avenue of attack on an IP infringer.
Differences Between Administrative and Civil actions
There are several major differences between administrative and civil actions.
• Administrative actions proceed faster that lawsuits.
• Evidentiary requirements in administrative actions are less strict.
• Administrative actions are usually cheaper, perhaps a tenth the cost of a major lawsuit.
• However, you may be awarded damages in a lawsuit, if you win. You get nothing except the possibility of action against the infringer with an administrative action.
Depending on the locality where you begin an administrative action, you may find a lack of competence in the local administrative office as well as resistance to your claim of infringement, simply because the infringer is also local. The larger cities, such as Shanghai, usually evince a higher level of competence.
A Few Notes on Lawsuits in China
In a civil action, the discovery process, such as we have in the U.S., does not exist in the Chinese system, so the gathering of evidence from the other party in preparation for trial is simply not possible. You may have greater difficulty finding evidence therefore. However, a judge can actively look for evidence.
In addition, Chinese courts do not follow the system of precedent – that is, looking to established case law to understand the meaning of regulations. Instead, judges may interpret statutes very differently.
And corruption in the court system is rife. In sum, you are in quite a different legal environment from that which you know in your home country.
A Final Recommendation
While you should be represented by competent counsel, you also should strive to learn as much about the conditions existing in your target markets and not simply leave the detail up to the “experts.” Your own knowledge, gained from personal experience, will help you better gauge the right course of action, especially in those situations where the right decision seems just outside of your reach – a phenomenon you will often encounter in China.
The A Brief Introduction to Intellectual Property Rights in China by AsiaBizBlog, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.