The legal landscape for IP protection in China has never been better: virtually all IP laws have been upgraded in the past decade after China's accession to the World Trade Organisation and meaningful redress can now be obtained in IP enforcement actions in China.
As Chinese companies build up their IP portfolio, the number of IP disputes in the country is also rising. In 2010, almost 42,000 first instance civil IP cases were concluded in the People's Courts at all levels – a 36% increase from a year ago. Although only 3.3% – 1,369 cases – of those cases were foreign-related, they were chosen as five of the top ten IP cases featured in the Annual Intellectual Property Report of the Supreme People's Court of China (SPC) published in 2011.
As the enforcement of domestic Chinese IP rights becomes more common, an increasing number of foreign companies are being named as defendants in IP lawsuits in China. While much has been said about non-Chinese companies going after IP pirates and counterfeiters in China, it is headline news when the familiar hunters become the hunted. But if foreign companies prepare diligently, adopt the right tactics and make an effort to understand the situation on the ground, the risk of being sued by a domestic rival or IP troll can be notably reduced.
Monetary compensation available from the Chinese courts is usually modest. However, in a number of recent cases where local IP owners have enforced their rights, several multinational companies were hit with record-breaking damages awards such as:
Holley Communications v Samsung Electronics (2008) where Samsung was ordered to pay Rmb50 million ($7.9 million) to Holley Communications for infringing an invention patent directed to dual-mode handsets, an amount equivalent to approximately one third of Samsung's profits generated from the infringing handset; Wuhan Jingyuan Environmental Engineering v Fujikasui Engineering and Huayang Electric (2009) where Huayang, a Taiwanese power plant operator, and Fujikasui, a Japanese power plant equipment manufacturer, were jointly ordered to pay Rmb50.6 million ($8 million) plus royalties for infringing Jingyuan's invention patent on seawater desulphurisation equipment at the end of an eight-year battle between the parties. The damages awarded, corresponding to the price of the infringing equipment sold, were the highest amount ever affirmed by the SPC in a patent infringement case; and Chint v Schneider Electric (2009) in which Schneider was found by the Zhejiang Wenzhou Intermediate People's Court to have infringed Chint's utility model patent and was ordered to pay Rmb335 million ($53 million) in damages, an amount equivalent to two-year profits generated by the infringing products. Though Schneider eventually settled the case for Rmb157 million ($25 million), it was still the largest known settlement in China for IP infringement.
The potentially grave financial exposure aside, because many foreign companies have moved their production lines to China, a preliminary injunction or a ruling of infringement can cripple their supply chain in China and cause major disruption to business worldwide. This trend is not limited to patent cases and all foreign companies doing or planning to do business in China must now take heed. Many of the risks associated with these IP landmines, however, can be managed and mitigated by remembering key lessons learned in the battlefield.
Understand the ground rules
Expect to lose if you don't know the rules of a game; it may be trite but many foreign companies do not seem to appreciate this basic principle. Many operate on incorrect assumptions, thinking that the legal position in China is similar to that in their home jurisdiction. Others wrongly believe that they can bypass unfamiliar Chinese IP laws by simply designating a foreign governing law in their dealings. There are also some newcomers who are surprised to learn that they can be sued for trade mark infringement when using their own name in China, annoyed to find out that one of their gadgets infringes a utility model patent of a Chinese competitor, or shocked to receive a claim from the former employer of a recently hired engineer asserting ownership over an invention made by them. Misunderstanding the nuances of IP litigation in China is also common. Accordingly, those who venture into the country without an appreciation of local IP laws and procedures will become easy prey in the increasingly litigious environment in China.
The linguistic challenge
Getting lost in translation is the crux of many foreign-related IP disputes. This problem can arise in many different contexts, from conflicting bilingual contractual provisions to mistaking the identity of an IP owner – the recent iPad trademark dispute between Apple and Proview is one example.
Translation is more of an art than a science because there is no one-to-one correspondence between Chinese and the other languages. Inability to recognise this inherent limitation can lead to the making of incorrect IP decisions, such as misconstruing the scope of a Chinese patent by reviewing only its foreign-language counterpart, or relying on search results generated by a machine and failing to promptly oppose the Chinese equivalents of foreign-language trade marks.
Conduct clearance searches
When foreign companies decide to transfer their IP to China, such as by shifting manufacturing operations over, most would be concerned about the risk of losing their IP to local pirates and counterfeiters, while few would recognise the risk of infringing domestic IP in China. Even fewer would consider the need to assess these risks in China as best practice, even though those same foreign companies routinely analyse the IP landscape of other major markets in which they sell their goods.
To minimise the risk of becoming the next target of IP enforcement action, foreign companies should also exercise the same level of diligence in China by conducting thorough clearance searches to verify that their core technologies, designs and trade marks are free to be launched and used in China. Obviously, securing local protection for their IP will help to ensure the freedom to practise them in China. Local trade mark filings by foreign companies should cover their name and leading brands in the native language as well as their Chinese-character equivalents, including those coined by the Chinese public. Local patent filings may also serve as relevant prior art in invalidation proceedings, support a counterclaim for infringement, or provide leverage in a settlement discussion.
Clear the scene
Prompt action must be taken to clear any blocking IP rights unveiled in a due diligence investigation. Foreign companies commonly discover their house marks or product names are registered by Chinese trade mark pirates and do not know there are time limits for challenging these bad-faith registrations.
Likewise, a foreign company should not wait to challenge a Chinese patent. China has a bifurcated patent litigation system: infringement is determined mostly by the courts, while the validity of a patent is exclusively decided by the State Intellectual Property Office. Those who are unaware of this fundamental procedural point can be taken aback when they find out that an infringement claim cannot be defended by a counterclaim for invalidity in the People's Courts and a Chinese judge is not required to stay an infringement suit pending the result of an administrative invalidation proceeding. The stipulation in Chinese Patent Law that a subsequent invalidation decision will generally have no retroactive effect upon any judgment of patent infringement already pronounced and enforced by a court is a further reason for seeking invalidation early in most cases.
Respect lesser-known IP
A large amount of new IP emerges in China every year – over 960,000 patents in 2011 and 1,340,000 trade marks were granted in 2010 alone, over 90% of them to Chinese IP owners.
More than 40% of the granted patents in China are utility models, which are essentially shorter-term apparatus patents, for example, for technical solutions relating to the shape and/or structure of products. Because they are quick and inexpensive to obtain and granted without substantive examination, utility models are often dismissed as lower quality patents vulnerable to invalidation challenges. This misperception has led many foreign companies to pay little attention to or even exclude them from their analysis of the competitive IP landscape. However, 85% of patent litigation cases in China concern utility model and design patents and recent cases such as Chint v Schneider Electric prove that the consequence of infringing a utility model patent is no less devastating.
Cultivate relationships locally
Experienced foreign IP owners know that China is not a homogeneous country when it comes to IP enforcement. Local favouritism is alive and well in China, and central government IP enforcement policies can take years to trickle down to the provincial and local level. This makes it common for Chinese IP owners with strong ties in one locale to sue on their home turf. In fact, all of the Chinese patent owners in the Holley Communications, Wuhan Jingyuan and Chint cases chose to enforce their patents in their local courts.
Forum shopping is also a strategy available to defendants in IP lawsuits in China and foreign companies sometimes have more options than their local counterparts. When threatened with IP action, prominent IP counsel well-connected in the area should be included in the defence team and joining forces with entities facing similar claims may be considered.
Foreign companies should also bear in mind that the People's Court is not the only forum for resolving IP disputes in China. They must also try to build and maintain strong ties with contacts at local government and IP enforcement authorities in all localities where they are doing business.
Appreciate cultural differences
Motivated by the potential massive payout, it is foreseeable that more local IP owners will attempt to take on deep-pocketed foreign companies in the People's Courts in the future. However, IP trolls are still far and few between in China.
Most Chinese enterprises are adverse to open conflicts. The costs and uncertainties of litigation are certainly relevant considerations, but as many old China hands can confirm, losing face is often a more important factor in China. Most Chinese companies will resort to litigation only if they are being driven to the corner by their adversaries.
When confronted with an IP dispute, the majority of Chinese companies would prefer to strike a deal and foreign companies are advised to try and settle the differences in a way that saves face for both parties and strive to achieve a win-win solution whenever possible.
Foreign companies must also be prepared to deal with the non-legal dimension of any IP disputes in China. Local media tend to tyrannise foreign companies when they are accused of infringing indigenous innovations, while Chinese IP holders taking on foreign companies will usually be portrayed as national heroes. As a result, any highly publicised infringement suit against a foreign company and the widespread undesirable media coverage may result in long-term negative impact on its reputation and goodwill in China and beyond and suitable counter PR measures will be necessary.
China will continue to be a challenging environment for IP protection and enforcement in the foreseeable future given its recent emergence as the world's second largest economy. However, if IP owners come prepared and avail themselves of the proper protection and preventative measures available, many of the costly IP pitfalls and lessons learned by early entrants into the Chinese market can be avoided.
Cedric Lam is a partner of Dorsey & Whitney. He leads the firm’s IP practice in Asia and co-heads its office in Hong Kong. He has 15 years’ experience in counselling IP transactions and implementing IP protection and commercialisation strategies in Greater China. Cedric has been recognised repeatedly as an Asialaw Leading Lawyer in IP. He is also experienced in anti-counterfeiting and other enforcement matters, and has served as Asia-Pacific regional legal counsel to one of the largest associations of IP owners in the US. He has published more than three dozen IP articles and book chapters and speaks frequently on IP subjects. Cedric is also admitted to practise before the Canadian Intellectual Property Office.
|Monique M Lee|
Monique is an IP associate in the Hong Kong office of Dorsey & Whitney. Her practice focuses on IP matters in Greater China and the US and she has handled a wide array of contentious and non-contentious matters. Monique is a member of the New York bar and a registered foreign lawyer in Hong Kong.