November 2008

Intellectual property (IP) protection is one of the major concerns that western companies have while deciding whether to collaborate with Chinese companies or even enter the China market. The IP protection history in China is very short. For centuries, the Chinese people had not had any sense of protecting their own inventions or respecting the inventions of others. Not until 1984, when the Chinese government established its first patent law. The Chinese government has realized that creating a positive IP protection environment is not only important to protect the rights of foreign companies collaborating with their Chinese partners, but also critical to foster a creative environment for technology advancement of Chinese companies.

The Current IP Environment

The government, mainly through the State Intellectual Property Office (SIPO) has made tremendous efforts to promote the IP protection environment. These include: amending the patent law numerous times to make it more acceptable to the rest of the world; enhancing the law enforcement capabilities so that every county and city in China has a local IP protection office in order to more effectively implement the law; increasing the fine and punishment for any breach of IP (IP violation in China is considered a criminal action and anyone who is convicted faces both fines and prison time); promoting the awareness and self-consciousness of IP protection among the Chinese people through nationwide educational TV programs; collaborating with US and European governments to establish the IP protection guidelines; and inviting foreign government officials and journalists as guest speakers at various IP protection forums held in China.

Furthermore China plans to release its national intellectual property rights (IPR) strategy in 2008 which aims at improving the protection system, strengthening law enforcement and raising public awareness. Media-effective trials against IP-infringers have been held and an annual "World Intellectual Property Day" has been introduced for this purpose.

Types of IP Protection

Patents
A patent provides companies with an exclusive right to license or commercialise their patented invention. In China, there are three different types of patents: inventions, utility models and designs. Once approved, an invention patent is valid for twenty years from the filing date, while patents for designs and utility models provide legal protection for ten years from filing. The latest amendment to the Patent Law allows chemical and pharmaceutical products and the processes for manufacturing them, as well as food, beverages, and flavourings to be patentable.

As patents registered in foreign countries provide minimal protection in China it is advisable to make separate registrations. If certain deadlines are considered, foreign patents can serve as a base that simplifies the filing for the Chinese patent. For normal patents, this term ends 12 months after the first foreign registration, for design patents after 6 months only.

Trademarks
Trademarks can be defined as company names, phrases, logos, images or designs. Trademarks represent the source of products or services. China follows the same system as most countries in that international recognition of a trademark is only granted, if the trademark has been registered in five other jurisdictions previously. If the trademark is only registered in the company's home country, it is not covered in China. But even with international protection, it is advisable to register the trademark in China separately as courts might have difficulties to recognize the international documents if they are not familiar with them.

Trademark applications are divided into 43 separate classes . At least one class and its associated goods or services has to be specified for the trademark. The application (in Chinese language) takes on average 12-18 months. During the application procedure the mark is not intellectual property of the company yet, but in case of infringement during this time, a warning letter can be issued. In case this is ignored it is possible to sue, once the application has been approved.

After a successful registration, trademark protection is provided for ten years. It is recommended to register the trademark as soon as possible as China has the "first-to-register"-rule. This means that whoever files a trademark first (by filing date) has priority to other applicants for the same trademark. If ignored, trademark-infringers are likely to capture valuable brand names and other foreign trademarks.

Trademark protection is advisable especially for small-medium enterprises whose trademark is only popular in their home-markets. Marks which are recognized as "well-known" enjoy a special protection.

Copyright
Unlike the patent and trademark protection, copyrighted works do not require registration for protection. Protection is granted to individuals and firms from countries belonging to international copyright conventions or bilateral agreements of which China is a member. However, copyright owners - especially owners of software and foreign audiovisual copyrights - may wish to voluntarily register with China's National Copyright Administration (NCA) to establish prior evidence of ownership, should enforcement actions become necessary.

Unfair Competition
China's Unfair Competition Law (UCL) provides some protection for unregistered trademarks, packaging, trade dress and trade secrets. The Fair Trade Bureau, under the State Administration for Industry and Commerce (SAIC) has responsibilities over the interpretation and implementation of the UCL, and protection of company names.

Enforcement of IP regulations

Although China has adopted various laws to protect IP, the enforcement of such laws remains problematic because the court system is still in reform and administrative bureaus have limited authority.

In 1998, China established the State Intellectual Property Office (SIPO), with the mission of coordinating IP enforcement efforts by merging the patent, trademark and copyright offices under one authority. This has yet to occur. Today, SIPO is responsible for granting patents (national office), registering semiconductor layout designs (national office), and enforcing patents (local SIPO offices), as well as coordinating domestic foreign-related IPR issues involving copyrights, trademarks and patents.

Protection of IP in China follows a two-track system, administrative and judicial. IP rights holders may file a complaint at the local administrative office or a complaint in court. Administrative actions are far more common, although judicial actions have been increasing.

Determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law. There may be geographical limits or conflicts posed by one administrative agency taking a case, involving piracy or counterfeiting that also occurs in another region.

In most cases, administrative agencies cannot award compensation to a rights holder. They can, however, fine the infringer, seize goods or equipment used in manufacturing products, and/or obtain information about the source of goods being distributed.

Company Case Study

It An interesting example comes from the Italian chocolate maker Ferrero Rocher, who in March 2008 won a lengthy court case against a Chinese manufacturer Montresor over its signature hazelnut-centered chocolates wrapped in gold foil. Montresor was ordered to stop producing the "look-alike" chocolates and to pay Ferrero damages of up to RMB 500,000.

Ferrero began its legal action against Montresor in 2003. The problem came about that, although the company had registered its name Ferrero Rocher, it failed to register its Chinese trade mark. The Chinese mark was instead registered by Zhangjiagang Dairy Factory One which started producing chocolates under the same mark. The Chinese mark was then allocated to Montresor which began to market a look-alike. Ferrero was unable to sue under the Trademark Law and had to rely instead on the Anti-Unfair Competition Law which required it to show confusion.

The Tianjin No.2 Intermediate People's Court's decision in 2005 had originally found against Ferrero on the basis that Montresor's product was better known in China than Ferrero's. This was appealed to the Higher People's Court of Tianjin which ruled in 2006 that Montresor had copied Ferrero's trade dress. Montresor then appealed this decision to the Supreme Court.

The Supreme Court found Ferrero Rocher's chocolate to be a "well-known product" under the Anti-Unfair Competition Law. It is clear from the judgment that it is necessary to show that a product is well-known to the relevant public in China. The Court looked at factors set out in the definition of the law, which includes taking into consideration the duration and extent of sales of the product, the product's revenue and market share, the duration, extent and geographical area of advertising.

Further Protection Strategies for Companies

There are many approaches a foreign investor can take when dealing with IP. Most importantly, an IP rights holder needs an accurate understanding and as much information as possible about any counterfeiting problem. Because of language and cultural differences, and the vastness and to some degree disorganization of China, this can be a major challenge. The IP rights holder can build a database including details of the infringing products, locality of the infringement (source and destination if stopped in transit), identity of the party or parties involved (retailer, importer and, if possible, original source), markets supplied, method of distribution and enforcement action taken. Intelligence can be gathered via private investigators or informants, staff, licensees or local attorneys, or in some instances administrative agencies (e.g., notification from a customs agency). Staff and licensees (and their staff) should be educated about counterfeiting and trained to identify, differentiate and report infringements.

It may be in the interest of IP rights owners with counterfeiting problems to collaborate and coordinate on an industry-specific basis and gain strength in numbers, including such efforts as public education and lobbying.

Conclusion

There are numerous internal and business policies that companies can undertake to reduce the exposure of IP misuse in the first place, including internal IP control; non-disclosure of trade secrets and know-how; careful selection and monitoring of business partners in China, including distributors and licensees; or avoidance of business partners. Although this may make market penetration more difficult, it will protect a company's vital assets from being exploited. It is advisable for companies to seek advice on IP issues before entering the market.

If you require assistance with the above subject, please contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.