August 2003

In theory, protection of intellectual property rights in China has almost reached international standards. The importance of intellectual property, a relatively new idea in China, is now widely recognised. Authorities and businesses in China understand that protection of intellectual property not only benefits foreign investment but also domestic companies. In court, various intellectual property cases have been settled, in favor of the intellectual property right owner. In addition, the country's top law schools now offer courses on intellectual property law.

China is a signatory to key international intellectual property agreements. Relevant legislation has been implemented, most prominently on trademark, patent and copyright laws, and regulations on software protection.

In reality, however, China still faces serious problems in the area of intellectual property protection. Often, local protectionism and a lack of truly independent enforcement authorities prevents prosecution and punishment of intellectual property infringers.

Over the past years, continued progress has occurred and the Chinese government has made the protection of intellectual property a priority. State Council leaders have demonstrated their understanding of the widespread economic losses suffered by foreign and Chinese companies alike due to Intellectual Property Rights violations. It has become clear that the lack of Intellectual Property Rights protection is a severe constraint on the development of creative products. Additionally, since China's accession to the World Trade Organization (WTO), a growing number of counterfeit and pirated products are being exported, which increases the risk of friction with trading partners and damages China's international reputation.

For those who attempt to protect their Intellectual Property Rights via the courts, there are still many impediments to successful litigation. The resources of the police, prosecutors, and relevant administrative agencies are insufficient, and the court system has a shortage of adequately trained judges. Resolving the few cases brought before the court can take almost a year. The government is making an effort to train more judges through improved funding of university law departments and training programs such as the EU-China Intellectual Property Program.

China's copyright law

China's copyright law spells out the nature of copyright protection, confirms its ability to be assigned and prescribes the contract terms for copyright assignment.

Strong enforcement measures have been introduced to combat copyright infringement. The burden of proof is placed on the party suspected of infringement. Publishers, manufacturers, or distributors unable to prove that their copying is authorized are being held liable.

China's patent law

The remedies of original right holders have been strengthened. For instance, design patents may not conflict with another's prior legal rights. Prior legal rights include copyrights, trademarks, enterprise names and unique packaging or branding associated with well-known products. The rights of an original patent holder shall prevail in a patent dispute.

Offering for sale counterfeit goods is viewed as an infringing activity. This means that preemptive action can be taken against those offering to sell counterfeit goods but who have not participated in their manufacture, distribution, or wholesale.

Patent administrative authorities handle infringement cases and have the power to order the infringing party to stop all such acts immediately. However, due to a lack of resources enforcement remains problematic.

The law attempts to ensure compensation for the patent owner by providing judges with a variety of calculation methods, such as, an amount equivalent to the royalties the patent owner should have received for such use. Where this is impracticable, fixed amounts may be awarded in compensation. However, these sums still fail to provide an effective deterrent.

China's trademark law

Collective trademarks, certification trademarks, three-dimensional signs and geographical indications have been included in the trademark law. Courts have the power to order an infringing party to cease its use and in some cases order property preservation.

When a trademark is removed from goods and replaced by a different trademark for the purposes of further sale, this is recognized as an infringing activity. The Administration for Industry and Commerce (AIC) must destroy all infringing goods, regardless of whether or not the trademark can be removed and fines may be issued.

Extending slightly beyond the strict requirements of the WTO, the trademark law provides a clear deterrent effect and significant certainty.

Anti-counterfeiting measures taken by the Chinese Government

Counterfeiters are threatened with criminal liability and imprisonment, as opposed to civil penalties. Illegal gains must exceed a minimum amount before a criminal prosecution can be brought. If it cannot be shown that the quality of the contraband is inferior, the illegal gains must be even higher. Small-scale counterfeiters often escape with low fines offering minimal deterrent whereas the Intellectual Property Right holder's compensation is usually very small.

Remittance of royalties for licensed Intellectual Property Rights

There is widespread concern regarding recent difficulties in arranging the remittance of royalties for licensed Intellectual Property Rights. The State Administration for Foreign Exchange has issued notices requiring banks to inspect specific documents related to the recording or approval of Intellectual Property Right licenses and tax-paid certification or tax-exempt certification. Unfortunately, it is very difficult and often impossible to process the required documentation in a timely manner.

China is facing the challenge to translate the improved legal framework into a significantly improved environment at the local level. Strengthening the existing alternatives to litigation would help relieve the pressures faced by the legal system. Many Chinese jurists believe that the application of global standards, including arbitration, to settle economic disputes will become a common practice in China. Though the majority of domestic companies are not yet familiar with international arbitration practices, WTO regulations will be applied in order to protect the legal interests of both domestic and foreign organizations.

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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.