Despite China's clichéd reputation as being a haven for infringers, IP owners have an increasingly broad set of tools to enforce their rights in China. IP infringement in China is something of a self-fulfilling prophecy: IP owners believe China does not have an effective IP system to protect their rights and accordingly do not take aggressive action to stop infringers.

The reality is that China's IP system, as with most jurisdictions, requires owners to pursue infringers. China does have various mechanisms of varying efficacy that IP owners can use to protect their rights. Balancing value and effectiveness remains a complex proposition, however.

Available remedies

Intellectual property owners have three basic classes of remedy against infringement in China: cessation of infringement (injunction); monetary compensation (damages); and punitive measures (punishment).

Injunction

An injunction and its related measures is the most important enforcement tool available to the majority of intellectual property owners.

Interim relief, particularly the sealing-up of goods and premises, can be obtained through the administrative or judicial system but it is generally easier through the former. It should be noted that although interim relief has historically been relatively difficult for patentees to obtain, the recent revision of the Patent Law appears – at least on paper – to correct this issue.

The ordinary goal of IP infringement cases is to, at the very least, obtain a permanent injunction against the infringer; an order requiring the infringers to cease and desist the infringing conduct.

One other popular option is the confiscation and destruction of the infringing articles. The courts are somewhat reluctant to make an order for destruction, although this depends upon the particular IP at issue. If the infringing article has no legitimate use, then the courts will be more likely to make a destruction order.

Damages

Damage awards are only available through judicial proceedings. It goes without saying then, that enforcement strategy should include litigation if financial compensation or cost recovery are important goals.

As a general principle of Chinese law, damages are intended to make the injured party whole again; to compensate, rather than to punish the wrongdoer. Intellectual property cases are no exception and the standard quantum of damages is therefore the loss suffered by the plaintiff as a result of the infringement.

The amount of damages must be supported by evidence; if the plaintiff's loss is difficult to prove then the defendant's profit (directly resulting from the infringement) is an alternative measure. If profit and loss are both problematic, then damages of between one and three times reasonable royalties may be awarded. Finally, if the court cannot determine royalty rates, it may award statutory damages depending on the type of IP at issue.

Unlike with other civil proceedings in China, a portion of attorney fees may be recoverable in IP cases. However, the total fees recoverable are usually much lower than the actual costs incurred.

Because of the principles surrounding compensation, the lack of punitive damages, high standards of proof and historical reasons mean that average damage awards in China remain small. Lawsuits are rarely self-financing and the prospect of damages should therefore not be the sole reason to choose litigation unless strong evidence of losses is readily available and the defendant is sufficiently large and well-established to be able to pay.

Punishment

Administrative authorities and courts sitting in either a civil or criminal capacity have powers to punish intellectual property rights infringers through fines and the confiscation of profits and infringing articles. Importantly, any money collected goes entirely to authorities rather than to the owner or owners of the rights in question. Criminal courts alone may imprison offenders.

The important thing about punitive measures is that they fall under the umbrella of law enforcement, and are not intended to directly benefit a specific IPR owner. As such they are not the focus of most IP enforcement strategies.

Enforcement options

Administrative agencies

Traditionally, administrative agencies have been the first resort of aggrieved rights holders due to the perception they act faster and are cheaper to use.

A large number of administrative agencies exist on national, provincial and local levels. As a general rule, IP infringement is handled at a local level, as follows: Administrations for Industry and Commerce (AICs) handle trade mark and unfair competition cases; Copyright Administration Bureaus (CABs) handle copyright cases; and Intellectual Property Offices (formerly Patent Administration Bureaus, or PABs) handle patent cases.

Depending on the industry in question, recourse may also be sought from other agencies such as the Quality and Technical Supervision Bureau (QTSB), the Administration for Quality Supervision, Inspection and Quarantine (AQSIQ), and the Food and Drug Administration (FDA).

Although administrative agencies have the power to initiate investigations and gather evidence on their own initiative, in practice a complaint is required together with materials establishing a preliminary likelihood that a law or regulation within the agency's purview has been violated.

The most important element of an administrative agency's powers is its on-site inspection or raid, during which infringing articles and related records may be seized and premises sealed. In the event of a dispute, however, administrative agencies will generally not issue a corrective order until after they have reached a final decision. Furthermore, unless the parties specifically request mediation on the amount of compensation for infringement, agencies do not have the power to determine this issue.

The fundamental drawback of administrative enforcement is that complainants are not compensated – instead, the government receives any fines levied against the infringer. In addition the jurisdiction of administrative agencies is typically quite local in scope, and multiple complaints may be required when dealing with infringement on a regional or national level.

A further problem with administrative enforcement is the risk that the administrative agency may collude with the infringer or simply refuse to act. Collusion is likely to be more of a problem in smaller cities where the infringer has developed a strong relationship with the local authorities.

Civil litigation

With the development of China's legal system, the courts are becoming a more and more popular route for pursuing intellectual property infringers.

But variations in expertise and experience between courts as well as lingering local protectionism issues mean that plaintiffs are well advised to choose carefully where they bring a case. Judicious joinder of secondary defendants – in patent infringement cases, end users are highly recommended – can be an important tool in forum selection. The defendant's home territory is not generally the preferred forum for litigation but other important considerations include the degree of economic development of a region and the level of the court.

Chinese courts operate on four levels: district, intermediate, high, and supreme. IP-related lawsuits are traditionally the preserve of specially-designated intermediate courts in big cities and provincial capitals. But the number of courts with original jurisdiction over IP matters has grown in recent years. High courts have original jurisdiction over particularly high-value disputes and in some areas district courts may be available to hear the smallest cases. But senior courts are preferable due to their generally greater sophistication and experience.

Potential litigants must face two main hurdles. The first of these revolves around providing evidence. In keeping with China's civil law traditions, there is no discovery and evidence exchange procedures are limited at best.

The second problem is closely related: in order to file a case, it must first be accepted by the court, which requires supporting evidence. Under China's Civil Procedure Law all evidence must be in its original form, although with the court's consent copies may be submitted. Potential litigants may obtain an evidence preservation order – of particular relevance in IP cases – however, the court may insist upon the provision of security in making such an order.

Under China's judicial system, parties have a right of appeal. Unlike some legal systems, an appeal in China reconsiders the entire case, which means the parties have the right to submit new evidence. This has led to a tendency for losing parties to invariably appeal the first decision.

The biggest drawback with using civil proceedings to protect IP rights is that they are often more time consuming and expensive than the other options. However, it should be noted that civil proceedings in China are comparatively quicker and cheaper than most jurisdictions.

When damages are sought, one popular approach is to split the hearing of the matter. An initial hearing will occur for the purposes of determining whether infringement has occurred. Once infringement has been found, the IP owner then commences action in relation to the damage that it has suffered.

Criminal enforcement

As a general rule, criminal liability for intellectual property infringement in China is limited to large-scale or repeat cases of commercial counterfeiting. Although the possibility of private prosecution exists, the vast majority of criminal cases are handled by the police and public prosecutors.

There are several barriers to a successful criminal prosecution. Intent must be shown as well as infringement; specific thresholds of seriousness need to be met; and the burden of proof is much higher than in civil cases. A practical issue is that the police are generally very reluctant to involve themselves in cases that they perceive as having a civil element.

Since there are no direct benefits to an individual IP owner – although a custodial sentence stops the targeted infringer in their tracks and the 'feel-good' factor can be high – criminal enforcement does not normally feature highly in most intellectual property strategies. Nonetheless, it remains an option, particularly when the incidences of infringement are serious.

Customs enforcement

When infringement crosses borders, customs enforcement can play a particularly useful role. Although the vast majority of such cases are outbound, China's customs regulations are unusual in that infringing goods may also be seized upon exportation.

Owners of patents, registered trade marks, or copyrights may take advantage of customs enforcement, for which there are two options.

If an IP owner learns of an infringing shipment, they may apply to customs authorities directly (protection by application or passive protection). Customs will detain the shipment provided that the IP owner puts up a guarantee equal to the value of the goods in question, after which the IP owner has 20 working days in which to go to court and apply for judicial protection. For protection by application, customs authorities do not have the right to determine infringement and will not take any action without an IP owner making a specific request.

For a nominal fee, IP owners may also apply in advance for so-called protection by function or active protection, in which case customs authorities will actively monitor imports and exports. If a shipment is suspected of infringement then it will be held and the IP owner's designated contact person notified. The IP owner then has three working days to apply for detention of the goods, and must again provide a guarantee. Customs authorities will then investigate and attempt to determine infringement. They are empowered to seize infringing products, issue administrative punishments to infringers, and pass criminal cases on to police. If officials are unable to reach a decision, then the IP owner may go to court for judicial determination.

Passive protection is far more useful for import cases than for export, since in the latter case the required information is generally also sufficient to target the manufacturer for administrative action and seize goods at the source, without the need for a security guarantee or subsequent court action. Active protection, on the other hand, is an extremely useful tool against literal infringement or outright counterfeiting of manufactured products.

Conclusion

China's IP system contains various enforcement mechanisms for IP owners to utilise in protecting their rights. Ultimately, the most appropriate option in any given circumstance is dependent upon various factors, most importantly the intellectual property owner's goals and objectives, but also including the type of IP at issue, the costs that the IP owner is prepared to bear and the location of the infringer.

John Lee

John Lee is a licensed Chinese attorney with Lehman, Lee & Xu's Beijing office, specialising in intellectual property, licensing and franchising matters. John is a recognised IP scholar and author, and he has co-authored works such as Intellectual Property Appraisal and Market Exploitation, Essentials of Copyright Law, and the Practical Handbook of Art Law.

Eion Murdock

Eion Murdock is a foreign legal consultant at Lehman, Lee & Xu, where he specialises in contentious and non-contentious intellectual property and technology cases. Eion's day-to-day matters include management and enforcement strategy, IP-related due diligence, and regulatory issues. Lehman, Lee & Xu is one of the largest and most diversified intellectual property law firms in China. Established in 1992 by some of China's most well-respected legal practitioners, the firm was the eighth private Chinese law firm approved by China's Ministry of Justice. With offices across the greater China area, Lehman, Lee & Xu has consistently been acknowledged as one of China's top service providers in all areas of intellectual property law.