Updating IP: Shanghai Addresses its own Intellectual Property Concerns

On May 20 2003, the Shanghai Municipal Government made its own contribution to the ongoing clarification of intellectual property legislation and court decisions with the promulgation of its Strengthening Protection of Intellectual Property Rights in Foreign Trade and Economic Cooperation Opinion (关于加强对外经济贸易中知识产权保护的意见)(the Opinion). The Opinion focuses on intellectual property issues in the conduct of foreign business, and particularly addresses domestic company concerns that arise in their dealings with foreign entities. Some experts say this area has been overlooked for too long. The Opinion suggests several methods that Shanghai companies should adopt to protect their intellectual property. Non-disclosure agreements in dealing with foreign companies along with expert technical assessment and valuation of each side's intellectual property are mentioned in the Opinion. Differences in common, sole and exclusive patent licences are spelled out. As for Chinese intellectual property going overseas, the Opinion encourages registration of patents and trademarks in foreign registries and protection of business secrets when these are disclosed to foreign parties.

The Shanghai Copyright Bureau, the Shanghai AIC, the Shanghai Intellectual Property Office, Shanghai Customs and the Shanghai Foreign Economic Relation & Trade Commission all endorsed the Opinion. According to authorities, the Opinion will be sent to all levels of city, district and county governments for dissemination to local companies (state and private) for use in programmes to further educate these companies of the importance of protecting their intellectual property by way of proper registration and smarter commercialization.

Most of the provisions in the Opinion are already set out in law. Still, the number of intellectual property civil suits in Shanghai has increased 134% in the last two years and Shanghai Customs has seen a 321% increase in intellectual property cases it handled during the same period. While the rules may already exist, it is clear that Chinese companies are either not following or are not aware of them. The fact that the Shanghai government issued the Opinion jointly with the Shanghai Copyright Bureau, the Shanghai AIC, the Shanghai Intellectual Property Office, Shanghai Customs and Shanghai Foreign Economic Relation & Trade Commission suggests that the government is making an effort to show local companies that it is not just foreign intellectual property that will be protected by city authorities.

A few of the more interesting provisions are set out below.

OEM is Now "Use" of a Trademark

Article 6 of the Opinion states that OEM manufacturers must now hold a licence in order to produce items with another's trademark. Such products, their packaging and/or their promotional materials must have an indication that the Chinese factory was authorized to manufacture the product. If such actions are not taken, the foreign trademark holder is deemed liable for any loss.

OEM is big business in China, but China has no explicit laws and regulations in respect of OEM and OEM-related IP issues. In practice, the prevailing view in China is that an OEM supplier need not enter into a trademark licence agreement or that such a licence need not be recorded because there is no real "use" of the trademark in China.

Article 3 of the Trademark Law Implementing Regulations (中华人民共和国商标法实施条例) clarifies that "use" of a trademark is associated with commodities, and implies that "use" attaches more to products in commercial circulation than to products in an abstract sense. As confusion occurs only in the marketplace and given that the purpose of a trademark is to distinguish one's goods and services from the competition, it may seem meaningless to discuss the "use" of a trademark in manufacturing. Nevertheless, previous cases have established that products bearing another's trademark for sale in China is regarded as trademark infringement because it is deemed to be an integral "first step" towards commercial circulation. If it can be shown that there will be commercial circulation of the products, then unauthorized application of the marks at the point of manufacture will be deemed to be infringing "use".

Whether or not OEM manufacture amounts to "use" of another's trademark was recently decided in Nike International Ltd v Cidesport & Zhejiang Livestock Products Import & Export Company & Jiaxing Yinxing Apparel Factory. In that case, Nike Inc. sued a Spanish company and two Chinese companies for infringement of the NIKE^® trademark. The Shenzhen Intermediate People's Court decided in favour of Nike Inc. The plaintiff alleged that a clothing manufacturer in Zhejiang province, under the authorization of a Spanish company, manufactured sportswear bearing the NIKE^® mark. It then entrusted an import and export company to report to the Shenzhen Customs for the export. The plaintiff therefore sued the three companies involved and petitioned the court to order the defendants to cease the infringement, eliminate the adverse effects, make a public apology and pay compensation.

The court held that the plaintiff, as the rights holder of the Chinese registered trademark NIKE^®, should be protected to use their trademark in the commodities designated and approved by the State Intellectual Property Office. Although the involved Spanish company enjoyed legal rights to use the NIKE^® mark in Spain, the plaintiff's rights should be protected within the jurisdiction of China. The defendants, without the plaintiff's permission, could not in any form infringe its trademark right.

Per stipulations in theTrademark Law(商标法), the court ordered the three defendants to cease their infringement and destroy the trademark representations and the infringing products. The defendants were also ordered to pay compensation in the amount of Rmb300,000 and litigation expenses.

This case is unique because, based on the facts, the manufacturing step and the commercial circulation were within two different jurisdictions. As the court did respect the Spanish company's right to use the NIKE^® mark in Spain and also understood that all the commercial circulation of the products was intended to take place in Spain, the decision that manufacturing amounted to infringement in China is surprising. Irrespective of the reasoning for the decision, OEM manufacturers in China are now requesting trademark licence agreements from the foreign companies placing orders with them. The defendants have lodged an appeal.

Restrictions on Patent Improvement

Article 7 of the Opinion addresses anti-improvement clauses that foreign companies have traditionally included in their technology transfer contracts with Chinese partners. This is a carry on from Article 29 of the Administration of Registration of Technology Import and Export Contracts Procedures. Generally, technology import contracts may not include such contractual provisions as tying, anti-improvement clauses or terms that prevent the transferor from acquiring similar or competing technology. Onerous indemnification clauses are required. However, there are ways to draft around such prohibited issues without raising the spectre of official non-approval of the contract. For example, anti-improvement can be dealt with by way of a royalty-free exclusive licence-back to the transferor. What might be considered tying by some could be better drafted into a technical services component of the contract, which would more likely be approved by the regulators. Creative thinking and effective drafting can solve most of these concerns.

Chinese Manufacturers Registering Trademarks

Article 13 holds that if a Shanghai company authorized to conduct foreign trade has registered a trademark in the country to which it exports products and if its Shanghai manufacturer registers the same trademark in China, then the two entities must settle any conflicts arising from this situation amicably.

Article 13 intends to settle a historical dispute between many Chinese manufacturers and authorized foreign trading companies. Before WTO accession, this situation of separate registrations was prevalent. However, sometimes the Chinese manufacturer would register the trademark in China without the foreign trading company's permission. Such a situation usually led to civil actions for cancellation based on bad faith registration. With WTO amendments to the Trademark Law, bad faith registration cancellation actions may now be brought to the State Intellectual Property Office for a decision. Now, manufacturers are allowed to conduct foreign trade themselves (upon authorization) and the role of the foreign trade company has been reduced. Because of this, and possibly to decrease the number of cancellation actions brought before the State Intellectual Property Office or civil suits before Shanghai courts, the Municipal Government encourages fair settlement between the parties.

Protection of Chinese Brands

Article 18 serves to protect Chinese brands from being stricken from the national trademark register due to non-use or dilution because they have been sidelined by an associated stronger brand. Article 18 encourages the Chinese partner in a joint venture deal to contribute more than just the word "Shanghai" to the joint venture's products and suggests that a new mark be filed and used that incorporates both the domestic mark and the foreign mark. By this, the Government opines that the Chinese company will be able to market its products under its own mark at the end of the joint venture, given that its own products will have become more prominent in the market during the course of the commingled branding with the foreign mark.

Chinese state-owned enterprises have been in dire financial straits for a number of years. One fast and encouraged way to generate life-saving cash has been to enter into cooperative relationships with foreign companies. Often however, these enterprises still went bankrupt; several famous Chinese brands were either cancelled for non-use or defaulted to the joint ventures enterprises.

Famous examples include MAXAM for toothpaste, WS for electric appliances, PEACOCK for televisions, ACTIVE-28 for detergents, SILVER for toothpaste and TIAN-FU COLA for soft drinks. MAXAM is the only mark that was bought back from the joint venture by its previous Chinese owner and also the only well-known mark to have disappeared and re-emerged later. Recently, the Power 28 Group, a Chinese chemical company famous for its detergent products, regained the exclusive right to use the trademark POWER 28, which they filed for in the 1990s but then exclusively licensed to a joint venture company invested by the Power 28 Group and the German company Benckiser. In October 2002, the Power 28 Group began to negotiate with Benckiser on issues concerning the trademark. The Power 28 Group alleged that the joint venture had engaged in behaviour inconsistent with the agreement established between the two parties and therefore had caused substantial loss to the worth of the trademark. The Chinese company rescinded the joint venture's use right ahead of schedule and was awarded its trademark exclusively by the court. The parties have since reached an agreement, but the case shows that Chinese companies are now understanding more fully their rights and how not to fall foul of foreign companies driving the Chinese brand under in order to strengthen their own brands.

It appears that Shanghai understands this now too.