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Steering the future of IP programmes

Jing He and Bing Cheng of AnJie give an overview of recent issues affecting IP policy in China, which seem to indicate a move to greater transparency and freedom for the judiciary

Leading in-house counsel and practitioners are showing a keen interest in IP policy changes. The reason is simple. IP law and practices, including those in China, are facing unprecedented changes at a faster pace. While an effective IP system should prioritise protecting property interests, fostering innovation and entrepreneurship as far as economic development is concerned, the reality is that decisions on how the IP system is to change has often been clouded by other policy issues, be it employment, healthcare, industrial policy, antitrust and fair competition, or foreign trade. This is why conversations within the IP community are much less about the problems of weak enforcement in China. Instead, people have shown a much greater interest in understanding what is underneath the law and practice and what is next on the horizon. Without mastering the policy aspects of IP practice, it would be harder and take longer to come up with forward-looking and effective IP solutions.

We take this opportunity to highlight the key IP policy issues in China.

Reform of the judiciary system

China has announced that the upcoming Fourth Plenum in October 2014 will focus on the review of the development of the socialist rule of law. It is widely expected that the judiciary reform will be well under way, creating a significant impact on the civil enforcement of IP rights. One focal point may be the independence of court judges to adjudicate processes free from external influences, which has been given higher priority than in the Third Plenum resolution.

The Shanghai government has started a pilot judiciary reform programme, part of which is to change the budgeting arrangements and shuffle the head count of judges and court clerks to ensure the courts are well supported and funded. China has about 2,000 IP judges handling a docket of over 100,000 civil IP cases. The staffing and budgeting changes will make visible differences as soon as soon the national and local governments start making the moves.

Another key area in the judiciary reform is transparency. As of January 1 2014, all judicial judgments made by Chinese courts (intermediate level or above) must be published online. The Supreme Court is directly in charge of the online system and apparently special funding and technical supports were mandated by the government. A few high stake trials, including one antitrust case involving two big local firms, were telecasted live online. The State Council also issued an order to require all enforcement authorities to publish valid administrative enforcement opinions related to IP infringements. The greatly-improved access to the case data will help industries and practitioners to have a clear understanding of the trends and identify potential problems.

Specialised IP court

The possibility of establishing specialised IP courts in China has been a hot topic ever since the idea was officially announced in the Third Plenum resolution in October 2013. It is hoped that the specialised IP courts may improve the consistency and predictability in dealing with those highly complicated technical issues as seen in patent or trade secret cases. Various proposals have been made, including setting up a CAFC-type court (Federal Circuit Appeals Court) in Beijing or various IP courts in major cities across the country. Policy makers, scholars and industries have been debating the different options vigorously. But the debate is set to end soon, as in August 2014 the NPC standing committee started reviewing the proposal of setting up IP courts in Beijing, Guangzhou and Shanghai. It will be interesting to see how such IP courts impact on IP enforcement.

Criminal enforcement

Over the last few years, China has launched impressive enforcement campaigns, particularly by the police, against counterfeit drugs and in other sectors where consumer interests are endangered most. However, many of the same old issues with criminal law enforcement remain unresolved, especially when smaller companies or firms with fewer resources try to figure out solutions to protect against counterfeits and pirates.

The Criminal Code frames IP crime as a threat to the socialist market order. This formulation inevitably requires a for-profit motivation as the basis for criminal liability. The police have to resort to complex formulas and numerical thresholds to decide if a case is worth pursuing. This lets many offenders off the hook for the wrong reasons. The true nature of IP crime is a crime against property. IP rights must be recognised as more than just some form of bonus or incentive granted by the government for industry policy reasons. Honouring IP as legally protected property (for example, by the Criminal Code), will lay a cornerstone to promoting the national policy to protect and encourage innovation.

Other key proposals for criminal enforcement reform include China vigorously prosecuting serious IP crimes against repeated offenders, masterminds of large scale counterfeiting groups, and cross border crimes. Without the use of the state powers in investigation and prosecution, IP owners do not have a chance to win against such sophisticated IP crimes. Further, a specialised, dedicated criminal IP enforcement team, plus professional involvement of prosecutors in the early stages of a criminal case, are critical. China has already set up special police teams in response to drug and food safety and prosecutors specialised in IP matters are already stationed at district prosecutor offices in Beijing and Shanghai. These are are good examples to follow.

Online counterfeiting

The State Administration for Industry and Commerce (SAIC) issued various updated rules in 2010 and 2014 to provide a general framework in handling online counterfeiting issues. But it does require more. The local administrative authorities such as the Administration for Industry and Commerce (AIC) often lack the technical means to fight online counterfeiting and these officials are unable to handle repeat offenders and cases in other remote locations. SAIC has been planning to develop a nationwide electronic database to track the real identities of online vendors and to find ways to secure electronic evidence for enforcement purposes. Whether this system will succeed is a significant test of the online enforcement. China has established a national-level internet office to coordinate a variety of ministries in regulating activities online. If this office can direct SAIC and other agencies to effectively tackle counterfeiting problems, it may tremendously improve the situation.

A longer term solution may be holding online trading platforms fully accountable for implementing effective self-policing mechanisms. A pre-IPO and Alibaba have been trying hard to demonstrate their efforts in fighting counterfeits. While all brand owners are keen to find out if all their efforts are really useful, from a policy perspective, online trading platforms must take on more responsibility to police unlawful activities committed by online vendors. The failure of exercising duty of care by the platform should result in a penalty and legal liabilities.

At the same time, right holders must be allowed to use evidence and property preservation measures to seek remedies against online vendors. Online payment providers such as Alipay, which is becoming the fastest growing financial force in China, must be held to fully comply with court orders to freeze the funds in infringers' accounts. Right holders need to be fully compensated for their losses and expenses in going after infringers.

Online piracy

Content business (such as film-making) is growing rapidly in China. As more and more domestic firms are increasingly entering the field to offer content online, whether for sports, movies, music or other creations, they have inevitably seen their profitability eaten away by piracy. The National Copyright Administration of China (NCAC) and its local authorities have acted in a timely manner by issuing public warnings and even fines against large internet firms including Baidu. Further, the infamous pirate company Qvod was imposed with a heavy fine up to Rmb260 million by the Shenzhen authority in 2014 and the founder has now been arrested for criminal prosecution.

In the longer term, the most important clashes may be seen in the courts, as more tech firms are inventing new business models through mobile internet apps to exploit others' copyrighted content. The Supreme People's Court issued very detailed standards on direct and secondary liability standards for handling online copyright litigations back in 2012. The effective implementation of these standards partly depends on the way Chinese courts grant preliminary injunctions, conduct evidence and property preservation to discover evidence and increase the chances of enforcing decisions.

The recent amendment to the Civil Procedure Law would expressly give judges the power to send parties who fail to comply with evidence preservation orders to jail for contempt. The question then is whether judges will shed their reluctance and begin issuing preservation orders. This is an area of judicial policy in which the higher level of the judiciary ought to take the lead. One positive example is the recent copyright infringement case between PPTV and Funshion in 2014. Beijing Haidian People's Court issued the temporary injunction against Funshion, ordering Funshion to immediately stop playing the accused infringing programme. If the courts continue doing this, it will give more confidence to the content owners.

Patent enforcement

Today, the issue of patent enforcement in China has at least three layers of complexity. First, companies, especially those with a strong patent portfolio and solid business reason to enforce the patents, are complaining that the damages are low and so the court actions are not fully justified. This applies to both international and domestic companies. Second, industries still remember vividly the misery that Schneider suffered from losing the utility model patent litigation to its China competitor Chint and paid Rmb15 million. Although there is no prevailing evidence, people are worried about being stuck in frivolous lawsuits in China. Third, the interference of the anti-monopoly law with IP licensing activities (such as the investigation into Qualcomm's licensing practice and the extremely low award of royalty fees in Huawei v InterDigital), caused dismay to people who have any business interest in profiting from patent licensing activities.

The resolution of these complexities must be transparent and accessible. The lower rate of injunctive relief as reported in the official statistics shows strong reservations by the judiciary bodies, although there were a few surprising victories by Eli Lilly and Novartis in early 2014. Again, courts must reform the ways of handling cases in order to develop credibility and confidence among patent owners and professionals. The undue delays in expert appraisal of evidence regarding infringement of manufacturing processes or method claims have made patent owners, especially those in high tech sectors, very hesitant in litigating before the Chinese courts.

As for damages, the hope is that patent judges may follow what judges have been doing in trade mark or copyright cases. While the new amendment to the Patent Law is pending, the new Trademark Law increases the amount of statutory damages to Rmb3 million – almost six times the previous limit. Over the past few years, some cases show that IP judges are becoming much more sophisticated in calculating damages and increasing damages to a level that is approaching the statutory cap, and in some cases are even finding ways to exceed it. In a leading example case for trade mark damages published by the Supreme Court (Foshan Haitian Seasoning Food v Foshan Gaoming Weiji Seasoning Food 2013, Guangdong Court), the court relied on an audit report of the right holder among other relevant evidence, and awarded the damages of Rmb3.5 million, which was believed to approach the actual loss suffered by the right holder due to the infringement. Similarly, in an end user liability case (Microsoft v Dazhong Insurance 2009, Shanghai Court), Microsoft was awarded damages of Rmb2.1 million; in Siemens PLM Software v Jiangsu Kunshan Changteng Communication Technology (2014, Suzhou Court), Siemens was awarded for Rmb800,000 for software copyright infringement. There is no reason that the patent judges will not follow suit. Of course, the ultimate question may be less about the amount than the clarity and consistency in how the court calculates damages.

Trade secrets

Trade secrets misappropriation, perhaps more so than any other form of IP infringement, harms business value and destroys trust, which may never be recoverable. During the sixth round of the Sino-US Strategic and Economic Dialogue in July 2014, China and the US mutually agreed on protecting business secrets through criminal and other enforcement and will publish the relevant cases. China confirmed that trade secret protection will continuously to be a focus in the government's work.

From a policy perspective, among all the problems in this area, law enforcement authorities must clearly demonstrate that the theft of trade secrets (for example, stealing encryption codes, or engineering documentation) whether the victims are foreign or domestic entities, is not tolerable.

Some top Chinese legal experts continue to believe the existing legal system affords effective protection. China recently published a leading case as proof of trade secret protection (China v Jiangxi Yibo Electronic Technology, Yu Zhihong, Luo Shihe, Xiao Wenjuan and Li Yinghong, 2013, Guangdong Court). The individuals involved in stealing trade secrets were sentenced into imprisonment of up to six years. The total amount of the fine in this case was Rmb37 million.

The true problem is perhaps not about the law. The typical challenges that IP owners have experienced in copyright and patent cases, such as difficulties in evidence discovery, damage determination, use of experts, and execution of injunctions, are present in trade secret cases, and probably in a worse form. The situation will not change until the government sees the real impact.

Bad faith trade mark

Trade mark application in bad faith is a serious problem for brand owners in China. Foreign brand owners often find it frustrating to lose out to pirated marks that were obviously registered in bad faith.

The biggest controversy in the field is the doctrine of mutually tolerated development that was openly endorsed by the courts. This doctrine allows the legitimate brand to co-exist with controversial marks allegedly registered by pirates. The Supreme People's Court repeatedly emphasises that the doctrine must be narrowed and only applied to some exceptional factual scenarios. In practice, some judges misuse their judgment by concluding that some of the pirated marks are distinctive enough through their use and will not mislead the public.

Another frustration is how foreign brands can prove they were famous in China before the filing date of the pirated mark, which is often required to block the earlier filed pirated mark. The strict application of the first to file system will inevitably yield injustice in a world of globalisation and in a system where bad faith trade mark applications are not penalised.

What is somewhat comforting is that the authorities seem to be clearly against bad faith trade mark applications. SAIC indicated recently that it will set up a blacklist for repeated bad faith applicants, who will receive severer punishment. It is reported that during the first nine months of 2013, SAIC denied, disapproved or revoked more than 800 bad faith applications (or registrations).

A very recent high profile case relates to Tesla Motors. Tesla ended up settling with the individual who sued Tesla for Rmb200 million for unknown consideration in July 2014, which did not leave us with any positive signs.

The real test will undoubtedly come from the case between Michael Jordan and Qiaodan Sports for the infringement of Jordan's right of personal name. Qiaodan Sports, pending for IPO in Shanghai, registered the trade mark of Qiaodan (a transliteration of Jordan) and has tried to fight off Michael Jordan's challenges. The case has been going on for two years and the court is finally close to making a decision. Whether the court supports Jordan or Qiaodan will have an important impact on bad faith cases.

Inventor remuneration

The issue of service invention relates to the fundamental property rights of companies and individuals. The arrangement of service invention significantly impacts on the ownership and the way companies manage their IP rights.

In December 2013, the State Intellectual Property Office (SIPO) issued the third draft of the Regulations on Service Inventions (Draft Regulation) for public consultation. The Draft Regulation has seen significant resistance among domestic and international business committees. A major reason is that it interferes with the contractual freedom of the companies. Article 18 dictates that any contractual terms that "cancel" or imposes "unreasonable conditions" on employees are invalid, opening the floodgates for litigations and legal disputes over agreements that employers and employees are going to sign. It is unclear whether SIPO will be pushing for this legislation as many local firms have also voiced objections.

IP misuse and Frand

IP-related anti-monopoly has been a hot topic. China's anti-monopoly authorities are becoming very active in investigating IP misuse in the context of anti-monopoly laws. Qualcomm, Microsoft, and InterDigital have all been implicated.

SAIC issued its draft IP Abuse Rules in June 2014 for public comments. The IP Abuse Rules was initially drafted as Antitrust IP Guidelines by SAIC. The authority is now trying to issue administrative rules, under which SAIC has powers to impose fines against any violations.

The current version still retains the concept of essential facility, which may be used to hold liable those companies with a strong patent portfolio. The IP Abuse Rules also imposes a significant burden on dominant market players in standards-setting processes.

One related area in anti-monopoly related IP issues is SEP (standard essential patent) licensing. Whether SEP patent licensing royalty rates will be considered as excessive pricing under the Chinese anti-monopoly law is a big issue. In the case of Huawei v IDC, a local court calculated excessive pricing by comparing both the licence fee rate and the lump sum payment imposed on Huawei with IDC's licence with Apple. The court concluded that the licence fee rate imposed on Huawei was 100 times more than that on Apple. However, the legal community is in disagreement as to whether such licences are really comparable.

Chinese courts and regulators are expected to handle more cases related to Frand (fair, reasonable and non-discriminatory) royalty rates and examine foreign patent owners' licensing activities under the grounds of excessive pricing. The lisensing community keenly awaits answers as to which approaches will be adopted by Chinese courts and regulators.

Jing He

Jing He is a founder of AnJie Law Firm. His practice covers a wide range of IP and regulatory matters, including patent litigations, IP enforcement, antitrust and policy consultation.

Jing has worked on several cases which have created case precedents recognised by the Supreme People's Court and provincial higher people's court. He contributes to leading international publications on latest developments in Chinese IP law and regulatory matters. Jing was nominated as a Managing Intellectual Property IP Star 2014.

Jing is a member of the George Washington University Law School IP Advisory Board, a member of the legal committee of the International University Sports Federation and a fellow at Renmin University School of Law IP Institute. He is named as an expert member of the Mofcom Overseas IP Enforcement Assistance Center.

Jing has been admitted to the State Bar of California and the Chinese Patent Bar. He obtained an LLB and BSc from Peking University and Juris Doctor from the University of Notre Dame.

Jing started his legal career as a patent attorney in the Silicon Valley office of a top US law firm and later spent almost nine years in an international law firm in China before establishing Beijing-based AnJie Law Firm.

Bing Cheng

Bing Cheng has extensive experience in a broad range of practice areas on an international basis including intellectual property, international arbitration and litigation, and general corporate affairs. She regularly represents multinational clients in multi-jurisdictional cases before courts and arbitration institutions, including the United States International Trade Commission, and the American Arbitration Association. She provides legal services on various types of cases, including 337 investigations, patent and trade mark infringement, misappropriation of trade secrets, commercial defamation, securities litigation, and product liability claims.

Before joining AnJie, Bing worked at leading Chinese and international law firms, both in their Beijing and overseas offices including Japan, Britain and the US, as well as a Japanese multinational corporation with extensive business in China. She is admitted to the Chinese Patent Bar and the State Bar of New York. She is also an arbitrator for the China International Economic and Trade Arbitration Commission. Bing is a Chinese native speaker and is fluent in English and Japanese.



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