China's intellectual property landscape is changing at an ever-increasing pace. Key drivers include the growth of the domestic market and the government's vision of an innovation-based economy. One dimensional, infringer-driven IP strategies focused on reactive enforcement are becoming inadequate. The market now demands a multi-dimensional, competitor-targeted strategy with litigation at its heart. And as the case studies on Mars and Diageo demonstrate, a sophisticated IP outlook is key to creating and maintaining a real advantage over tomorrow's competitors.

The shifting IP landscape

For many foreign businesses, China was long seen as having just two types of IP threat: domestic infringers and foreign competitors. Each required a strategy, but never would the two meet. Administrative enforcement worked for everyday infringers and business-to-business negotiation behind litigation posturing worked with fellow international competitors.

But domestic Chinese companies are developing at a pace never seen before. With their increasing levels of IP awareness and investment, failure to distinguish the everyday infringer from tomorrow's competitor and deal with them accordingly will leave foreign businesses licking their wounds in a few years time as their competitive advantage and profit margins disappear.

The infringer-turned-competitor phenomenon has already been seen among former OEM manufacturers for international rights owners, but with the developing sophistication of Chinese companies the infringer-turned competitor route will be open to all. No longer will the former infringer depend on using a foreign rights owner's know-how, gained as a manufacturer or supplier, as the launch pad.

Domestic companies will move up the value chain and, as they do, foreign businesses need to move from looking at the infringements themselves to understanding the companies (tomorrow's competitors) producing them. Simple IP enforcement strategies must become multi-dimensional IP establishment and enhancement strategies, led by litigation, that strengthen rights and produce real long-term deterrents to create competitive advantage.

China's vision and the policy drivers

That Chinese companies will become serious competitors, and rapidly, is inevitable. It has already happened in some industries. The growing domestic market produces real competitive forces that drive innovation. The Chinese government's mission is to turn the economy from a manufacturing-based one to one based on independent innovation by 2020. From the 11th Five-Year Plan endorsed in 2006 by the National People's Congress and the State Council's Medium- to Long-Term Plan for Science and Technology Development issued the same year, through the State Council's National IP Strategy published in 2008, to the never-ending stream of opinions and directives at a more local level that have followed, the Chinese government's will to achieve this mission cannot be underestimated. The impact of these policies can be seen in the statistics.

China, as a country of origin, is already the sixth largest filer of PCT applications globally. The number of Chinese originating applications has nearly quadrupled since 2004. At this rate China will overtake France and Korea by 2012 to stand fourth behind only the US, Japan and Germany, the traditional powerhouses. In 2008, for the first time ever, the single largest filer of PCT applications was a Chinese company, Huawei, the telecoms company. And in 2009, for the first time, domestic companies overtook foreign companies as grantees of Chinese invention patents. This switch will not be reversed.

The picture is similar for trade marks: applications in China in the first half of 2009 reached 380,000, up 7.7% despite the international financial crisis. That took the total number of applications for trade mark registration to 6.77 million, with 2.4 million proceeding to registration, making China the world's top trade mark filing country for the seventh consecutive year. Moreover, China has become the most designated country in the Madrid Union.

The quality of these IP applications is equally important. One-time infringers are moving away from spending on junk patents and bad faith trade mark applications to investment in local brands and technologies and related protection. In time these companies will own mature brands with international market reach and investment in real local R&D will result in Chinese originating patents being designated in the key international markets of the US, Japan and EU.

This is already happening for leading Chinese companies. One leading assessment put a record 88 Chinese brands in the top 500 global brands for 2009.

Dealing with future competitors

For businesses operating in China, the key to creating competitive advantage for your IP portfolio is identifying tomorrow's competitors and developing an IP strategy that meets the challenges they present.

A sophisticated strategy will consider the problem from many perspectives. Below we set out the key elements needed in the toolkit, distilled into three principal areas: building a smart portfolio of rights; developing a next generation enforcement strategy; and supporting this with a tailored lobbying and communication plan.

A smart portfolio of rights

For all rights, the imperative is to ensure there is quality and not just quantity. Key elements include:

• Making a clear assessment of what is to be protected, led by consideration of what needs to be protected from a business point of view, not just what can be protected;
• Developing both registered and unregistered rights to achieve that protection;
• Constantly bolstering unregistered rights through use of proactive evidence gathering systems to document, for example, distinctiveness, use and marketing spend;
• Establishing a coherent strategy for attacking third party trade marks, consistent with the filing strategy; and
• Ensuring there is a constant feedback loop that analyses information on infringements and the activities of competitors to inform future filing strategy.

A modern enforcement strategy

When it comes to enforcement, the imperative is to ensure the commercial value of the actions taken. Successful businesses will rarely face a shortage of infringements; what matters is to identify the real threats and to maximise the quality and impact of the proceedings. Key elements include:

• Leading the strategy with litigation. Unlike administrative action, litigation is an opportunity to run sophisticated arguments, develop a footprint of rights, create real deterrents and to establish competitive advantage.
• Proactive choice of venue. China's flexible jurisdiction rules enable differences between courts to be exploited. CIELA, Rouse's litigation analysis tool for China, available at www.ciela.cn, delivers critical information on win rates, levels of damages, speed of proceedings and likelihood of injunctions for the 29 leading IP litigation venues in China.
• Using administrative action as a pre-litigation tool. This can still be valuable as a quasi preliminary injunction and evidence preservation method in preparation for litigation.
• Using interim asset preservation actions to put pressure on defendants.
• Understanding the dynamics of the infringement market. Is it the manufacturers, the designers, the wholesalers or the retailers driving the activity?
• Proactive competitor analysis. Identifying which companies represent the real threat in the medium term by examining their key brands, market penetration, distribution channels, product ranges, economic power, geographical reach and political influence.
• Active use of settlement negotiations. Negotiated settlement, in particular court-mediated settlement, can deliver effective results avoiding issues involved with the enforcement of judgments. CIELA provides focused data to predict court damage awards and therefore inform commercial settlement positions.

Lobbying and communicating

Engagement with the authorities in China has never been more critical. Similarly, publicity for litigation victories can be used to maximise the value of decisions. Important elements include:

• Proactive lobbying. Increasingly the Chinese authorities are seeking input from rights owners as they work to provide the IP regime needed to sustain an innovation-led economy. Businesses can still play a part in shaping the development of this system.
• Litigation communication strategy. Using the private trade media and state-run official media to communicate litigation achievements. Well-delivered messages can deter infringers and develop the rights owner's reputation before the courts.
• Engagement with the enforcement authorities. Disseminating court decisions that establish or enhance a business's IP protection to administrative authorities is a crucial strategy for supporting future administrative action and fighting the authorities' caution in more borderline cases.

Case study one – Diageo

Diageo, the owner of the Johnnie Walker brand of whiskies, had for some time been involved in a war against copycat Johnnie Walker goods, particularly its Black Label whisky. Third parties were using elements of the distinctive get-up – the square bottle, the slanted black label, the Striding Man device – to sell low quality, misleading products that diluted the strength of Diageo's brand.

The limitations of administrative action

Substantial numbers of administrative actions had some beneficial effects through seizing goods and issuing fines, but failed to deliver any substantial deterrent. Given the high margins available to infringers, standard administrative fines were seen simply as a cost of doing business and infringers developed methods to reduce their exposure to large seizures. Some regions suffered from local protectionism, which created barriers to enforcement behind which infringers learned to hide.

Diageo quickly realised much more had to be done to protect its brand and its market, and, in early 2007, adopted a strategy that placed litigation at the centre.

Preparation is key

Preparation for the campaign began with a thorough review of the infringing landscape. Two key elements were: an investigation of the copycats to understand the industry dynamic and to identify the driving force; and the division of the infringers into priority categories. This allowed the development of what was called a "brand protection footprint" that became Diageo's guiding strategy for the programme.

Diageo identified a small number of key targets against whom much more serious action, including litigation, would be taken. The deep research also made clear each target had different characteristics and that each therefore needed a specific strategy.

The defining battle of the early campaign for Diageo was against Blueblood, a substantial Shanghai company distributing Polonius (below left), a clear rip-off of Johnnie Walker (below right). Undeterred by the risks of infringement, Blueblood were brazenly infringing Black Label and thereby emboldening other, smaller infringers.

Preparation was again vital. An in-depth investigation into Blueblood and its distribution network led to two administrative complaints before the Shanghai authorities as the initial line of attack. Raids followed and careful preparation led to the seizure of substantial amounts of Polonius rip-offs. Although significant fines were levied against Blueblood – over Rmb750,000 ($110,000) – the infringement continued, another indication of the lack of real deterrence when using administrative enforcement.

Diageo was therefore determined to pursue this key target further and began civil proceedings in Shanghai, the defendant's home town.

Real deterrence through litigation

The claim was for unfair competition, based purely on Blueblood's copying of the bottle shape and labelling. Finding that the Johnnie Walker get-up enjoyed a reputation, the court found the bottles had been unlawfully copied and granted an injunction and compensation of Rmb1.25 million ($183,000) on the basis of the illegal profits Blueblood had made from its massive trade in Polonius. This judgment against Blueblood in its home territory brought the infringements to an end.

Diageo has used its victory as a further deterrent by including details in cease and desist letters sent to many secondary targets. And to complement this, Diageo embarked upon a positive education campaign in critical Chinese markets highlighting the benefits of creating strong, distinct branding for one's products.

Diageo has also been actively lobbying for more consistent enforcement of unfair competition cases, both through direct engagement with key authorities and through training offered by Quality Brands Protection Committee, the brand owners' trade body in China, each using the Shanghai court's decision as an example of best practice.

Diageo's enforcement programme in China now has a total focus on litigation as the agent of change in the infringing market. Commenting on the value litigation brings to Diageo, Caron Tayler, senior IP counsel of Diageo, said: "The positive commercial benefit litigation has brought is clear to me. It allows us to enhance our IP footprint and maintain the distinctiveness and competitive advantage our premium brands enjoy."

Case study two – Mars

Mars has long been selling many of its international confectionery brands in China, including Dove, Snickers and M&M's. The early years of infringement were characterised by identical trade mark infringement with some counterfeiting, but over time the picture became much more subtle, with a marked shift by infringers into lookalike products that did not misappropriate any of the principal registered marks but which sought to reproduce the look and feel of Mars products to their own advantage.

The limitations of administrative enforcement

Before 2005, an enforcement strategy built around administrative enforcement had served Mars adequately, but as the infringement landscape became more complex the limitations of the administrative authorities' ability and willingness to assist were becoming apparent. This was coupled with a noticeable trend of repeated infringement by the same companies over a number of years, many from the same city: Jinjiang in Fujian province was a prime example.

In 2006, Mars rethought its enforcement strategy and realised that, despite uncertainties with the system, radical changes had to be made to prevent the slow erosion of the distinctiveness of its key brands and the consequential undermining of its premium market position.

Mars' vision was clear: its future enforcement strategy had to do more than merely stop individual instances of infringement; it had to push the boundaries of protection for Mars' registered and unregistered rights while also creating true deterrence among infringers. And that could only be achieved with a comprehensive litigation strategy.

Protecting the previously unprotected

The success of Mars' strategy is exemplified by a case it brought in 2008 against a Chinese infringer from the hot-spot city of Jinjiang producing a Snickers look-alike product called Bestnutlet (below left). With Snickers (below right) being a major sponsor of the forthcoming Beijing Olympics and Mars putting huge resources into the product's development in China, the ability to prevent any serious erosion of its distinctiveness was key. But the Bestnutlet product copied none of the registered elements of Snickers, only replicating the (then unregistered) parallelogram and other elements of the packaging.

What previously would have been a hopeless case to bring to the administrative authorities now represented an opportunity to demonstrate the extension of Mars's rights beyond the Snickers mark itself and into the brand's other elements.

Evidence is everything

To support such an ambitious campaign, Mars recognised the need proactively to develop an evidence bank demonstrating the promotion, distinctiveness and use of the Snickers brand and get-up as a whole in advance of action. This means it can better assess the strength of its unregistered rights and that it is prepared for litigation whenever required, a real benefit given the stringent evidential burdens in China.

The choice of court was also important. Mars wanted a decision that would have influence in the defendant's home town but wanted to avoid any local protectionism. It also needed a court with experience to hear sophisticated arguments, and ultimately settled on nearby Quanzhou Intermediate People's Court.

The finding of infringement and the associated injunction and damages award came as a ringing endorsement of Mars' preparation and strategy. Rhonda Steele, Mars' marketing properties manager for Asia Pacific, says: "In a relatively young and developing jurisdiction like China, you have the chance to create the jurisprudence that will work for you in the longer term. Litigation has become central to our enforcement strategy and will only become more important in the drive to stay ahead of the competition, both local and international."

Rouse advised Diageo and Mars on their litigation strategies in China

Tim Smith

Tim Smith is an executive and deputy international service head of Asia Litigation for Rouse. Tim joined Rouse in December 2008 from IFPI, the international trade body representing the recording industry, where he was senior legal adviser managing litigation for the industry worldwide. Tim has managed litigation in more than 20 jurisdictions and has particular experience in IP infringement strategies in China, where he ran a number of high-profile litigation cases before joining Rouse, including the ground-breaking action for the recording industry against Yahoo! China. Based in London, Tim works directly with Rouse's Asian practice advising clients on IP enforcement strategies for all types of IP. In particular, Tim advises on high-profile and complex litigation cases. Tim is admitted to the Roll of Solicitors in England and Wales and has a postgraduate diploma in UK, US and EU Copyright and related rights from Kings College, University of London (Distinction). He also has a postgraduate diploma in IP Law and Practice and a BSc (Hons) in Mathematics from the University of Bristol.

Frank YU

Since joining Rouse in 2003, Frank has undertaken a wide range of enforcement matters for pharmaceutical, power tool, and automotive clients. Frank is an associate in Rouse's Beijing office, working on a wide range of IP enforcement matters in China. One of Frank's key clients is Mars, the largest fast moving consumer goods company in China. Frank's experience includes the management of administrative actions, negotiations, civil litigation and criminal action. He has designed, implemented and managed many brand protection and enforcement-related projects, involving media and internet monitoring, public relations campaigns, consumer research and the design and printing of market surveys and audits. He works very closely with different investigation resources and government officials and contributes articles on a regular basis to LegalStudio, a professional legal online publication. Frank's professional qualifications include a BA from Second Foreign Studies University, China and an LLM from the University of International Business and Economics in China.

Carol WANG

Carol joined Rouse in 2002 and advises on enforcement issues concerning all aspects of IP in China. This includes trade marks, copyright, patents, unfair competition and trade secrets. One of her key clints is Diageo. Carol also has particular expertise in copyright and design protection in China and experience in advising on copyright infringement of works of applied art, online downloads and large-scale piracy. She has been involved in several influential copyright cases for major toy manufacturers, publishing associations and recording companies. Her professional qualifications include a postgraduate certificate from the certificate programme in IP Law, Queen Mary's College, University of London and a certificate of an advanced course for copyright law and related rights from WIPO. Carol also has an LLB in international business law from Fudan University and a BA in English for business and trade from the University of Shanghai for Science and Technology.