Recent Developments in China's IP Laws in Relation to TRIPS

Efforts towards reform aside, problems with the Chinese IPR system will never completely repel foreign investors.³ No industry can ignore the Chinese market and its enormous potential. Nevertheless, problems with TRIPS implementation can alter and even slow down the process of China's integration into the world economy.

RECENT CHANGES TO CHINA'S IP LAWS

True to its obligations under TRIPS, Beijing has in recent years added, rewritten and deleted a number of IP-related laws; thereby establishing a regulatory regime in compliance with the Agreement.

In 1993, the PRC Patent Law (中华人民共和国专利法)was amended to extend patent protection from 15 years to 20 years in accordance with TRIPS.⁴ The amendment also allowed the patenting of chemical and pharmaceutical products as well as food products, beverages, and flavourings.

The amendments made to the PRC Patent Law (中华人民共和国专利法) in 2001 included making an unauthorized "offering for sale" a violation of a patent holder's rights as required by TRIPS.⁵ It also addressed the compulsory license issues, clarifying how the relative value of a licence is determined for the purposes of compensation and what types of patents are subject to compulsory licensing.⁶ Article 57 of the PRC Patent Law now shifts the burden of proof of infringement to the defendant as required by TRIPS.⁷

Prior to the recent amendments, several administrative actions set by the Chinese Patent Office were immune to any legal proceedings. For example, a final decision made by the Patent Reexamination Board on the application for reexamination of a utility model or industrial design was not subject to judicial review. Same applied to the decisions by the Patent Reexamination Board to declare a patent invalid.⁸ The new amendments to the PRC Patent Law provide that final decisions on validity and ownership of utility models and industrial designs will be made by the People's Court.

China amended its Trademark Law in 2001 (PRC Trademark Law, 2nd Revision) (中华人民共和国商标法)and amended its implementing rules in late 2002 (PRC Trademark Law Implementing Regulations). Under these amendments "geographic indicators" or "indicators or origin" are now entitled to protection.⁹ Protection of prior rights has also been added to the Chinese law¹⁰ in order to implement the corresponding TRIPS requirement.¹¹ "Well-known" marks are now protected under Articles 13 and 14 of the PRC Trademark Law. These changes are especially significant since China adheres to the `first-to-file' system, meaning that a race to the registration office can often be crucial in establishing trademark rights.

Recent changes to the Implementing Regulations provide a detailed explanation of the criteria to determine whether the mark qualifies for the "well-established" category.¹² This amendment extends the right of judicial review to the final decisions of the Trademark Review and Adjudication Board.¹³ This change brings Chinese trademark law in compliance with the corresponding TRIPS requirement.

Finally, changes made to the PRC Copyright Law, including extending protection to mask work and models, have further improved the mainland's IP-protection regime.¹⁴ Owners' rights have also been extended to include the right to limit online transmissions containing copyright material.

Harsher Penalties

A major complaint in enforcing IPRs in China is that even when the culprits are brought to justice, the punishment is so lax that it does not deter any future infringers, or compensate the plaintiffs. Recent changes to IP laws should somewhat alleviate this problem. Now the persons found guilty of patent, trademark or copyright infringement are required to pay actual damages or statutory damages of up to Â¥500,000 (US$60,474) if the actual damages cannot be assessed.¹⁵ Actual damages can be calculated as lost profits, infringers' gains, or reasonable royalties.¹⁶

Recent revisions to Chinese law clarified and strengthened the use of preliminary injunctions. Preliminary injunctions were not previously available under the laws and regulations of the PRC. Now under Article 61 of the new PRC Patent Law (2nd Revision), a patentee can request the People's Court to issue a preliminary injunction, as well as a property preservation order before litigation is brought to conclusion.

Criminal liability has, in addition, been added as an available remedy to trademark infringement.¹⁷ Even though it is not clear to what extent criminal penalties can be brought, this is a positive development and a clear indication that the Chinese government is serious about IPR enforcement.

Import Registration

Before 2001, all technology import contracts in China had to be approved by respective PRC government offices.¹⁸ There were also certain mandatory terms and conditions that had to be included in every such contract. After the PRC's accession to the WTO, the situation had to change. Now import contracts only require registration, rather than approval. However, this requirement engulfs all kinds of documents, including: shrink wrap licences, assignments of patent and patent application rights, patent licences, assignment of technical secrets, computer software licences and even technical services and cooperative design contracts. However, registration does not apply to trademark licences unless they are tied to patent licences. Still, in order to be protected, patents licensed to Chinese users must be registered under the Administration of Technology Import and Export Regulations. The same applies to integrated circuit (IC) mask works and trademarks.¹⁹

Additionally, all software to be sold in China now must also be registered with the Ministry of Information Industries. Under newly enacted Protection of Computer Software Regulations, computer software companies can be certified as software enterprises and enjoy preferential government policies.²⁰

REMAINING PROBLEMS

Overwhelmingly, the entrepreneurs and managers doing business in China believe that IP protection has significantly improved in recent years.²¹ Nevertheless, a number of problem areas remain.

Some IP Standards are still not in Compliance with TRIPS

Notwithstanding major recent amendments to Chinese IP laws, there are several areas where China is not entirely compliant with the TRIPS Agreement. To name a few, Chinese law prohibits patenting of inventions which "violate the laws of China," and "are contrary to social morality".²² These provisions are considered overbroad when compared to corresponding articles of TRIPS.²³

There are also some gaps between the compulsory license regime of TRIPS and Chapter 6 of the PRC Patent Law dedicated to this subject. For instance, Chinese law does not specify that the use of a product under compulsory licence should be used "predominantly for the supply of the domestic market" as required by TRIPS.²⁴ The TRIPS Agreement also requires that "the rightholder shall be paid adequate remuneration".²⁵ The corresponding Chinese provision states that the licensor shall receive "reasonable exploitation fee, the amount of which shall be fixed by both parties in consultations. Where the parties fail to reach an agreement, the patent administrative organ under the State Council shall adjudicate".²⁶ The decision of the State Council is subject to judicial review.²⁷ These differences may prove to be significant in the future, but so far no single case of compulsory use of a patent has occurred since the establishment of the patent regime in China.²⁸

Article 22 of the Protection of Computer Software Regulations provides that "a piece of software may be copied in small quantities to serve such non-commercial purposes as education, scientific research, or government business without the consent of, or remuneration to, the copyright owner of the software or his lawful assignee."²⁹ This provision seems to be inconsistent with TRIPS which authorizes exceptions to exclusive rights of the copyright owner only "in certain special cases".³⁰

Trade Secret and Know-how Misappropriation

In a recent survey, many companies complained that they have lost valuable technologies in China through unfair means, such as theft by employees. ³¹ The cases of selling design specifications and technical data are especially rampant in the area of sophisticated technologies. The ideas of ethics and obeying the law as they relate to scientific and technical research are often not a part of Chinese mentality.³² It will take a long time to incorporate new attitudes of teamwork and moral behavior into the minds of new Chinese scientists and engineers.

In other countries, the problems of employee theft or misappropriation can usually be addressed by temporary anti-disclosure clauses in employment contracts, but it is not yet clear how these clauses can be enforced under the existing Chinese labour laws.

Inadequate Enforcement

Having a set of laws in compliance with TRIPS does not guarantee their efficient implementation. Chinese governmental bodies are well known for their bureaucratic habits.³³ The new generation of the country's leadership initiated massive restructuring of administrative organizations, as well as reducing the number of State Council ministries and downsizing the number of civil servants. Nevertheless, old habits die hard and much of the old structures are still in place.³⁴

Chinese officials recognize the shortcomings of the existing system. "China will shift from its previous focus on IPR legislation to law enforcement and supervision," said Ma Lianyuan, vice-director of the State Intellectual Property Office in his speech during an event to mark World Intellectual Property Day. ³⁵

Long delays in enforcement actions remains as the major complaint among foreign businessmen.³⁶ Enforcement actions when taken, furthermore, are often arbitrary and non-transparent. The enforcement of IPRs in China on the administrative level can be conducted by a number of government structures: Administration of Industry and Commerce; the State Intellectual Property Office; the State Quality & Technical Supervision Bureau; the Public Security Bureau; and the General Administration of Customs. Local authorities are usually the key players in enforcement efforts. Infringing enterprises are often important local sources of revenue and employment. Local officials may therefore be reluctant or even resistant to the enforcement of newly-developed IP laws through fear of antagonizing a powerful local structure, or hampering the neighborhood's source of livelihood.

The attitudes of certain players can often make or break an IP enforcement case. One of the judges presiding over a patent litigation case in Beijing said during a seminar that he was giving on the case, still pending at the time, that "Chinese IP laws exist to protect Chinese IP from foreign IP".³⁷ This kind of protectionist attitude is prevalent in many poorer counties faced with IP enforcement problems. It will take time and constant exposure to the benefits of strong IP protection to change this outlook among many in the judiciary and law enforcement.

Lack of qualified personnel can also play a role in enforcement efforts. ³⁸ Given the transformation of China's legal system in recent years, legal and technical expertise for administrative and judicial implementation of IPR enforcement remains limited, despite the special training programs that have been created. The level of this problem differs depending on geographic area. In Beijing and Shanghai, for example, the courts and administrative agencies are more familiar with IP issues. In more remote regions, however, the problem is more pronounced. It will take time for the number of qualified IP specialists to catch up to the demands of the growing Chinese economy.

2008 Olympics - Positive Spin-offs

One of the positive events for developing government structures charged with implementing anti-pirating policies in the PRC is the upcoming 2008 Beijing Olympic Games.³⁹ The Chinese government expects much of its revenue from the event to come in the form of royalties for Olympic symbol merchandizing. Given the importance of these royalties, and the possibility that the PRC government may be on the receiving end of copyright infringement losses, the State Council has issued special Protection of Olympic Symbols Regulations.

These regulations give The Administration of Industry and Commerce (AIC) and the General Administration of Customs broad authority to protect Olympic Symbols throughout China. Specific articles dealing with enforcement mechanisms under these Regulations⁴⁰ are very similar to the corresponding articles under the PRC Trademark Law. Valuable experiences gained by the AIC and other government bodies in enforcing the Regulations with respect to Olympic symbols will strengthen the enforcement of IP rights generally in China.

China has also recently adopted a number of homegrown standards in high technology, such as standards for third generation mobile phones, digital TV, and the latest 3G network mobile phone standard.⁴¹ These standards incorporate Chinese-developed patented technologies and are aimed to avoid the use of US and Japanese-owned technology.⁴² By making these standards mandatory for products sold in China, the PRC government is trying to promote domestic innovations and avoid licensing from foreign entities. These actions demonstrate that the government is very serious about creating strong IP protection in China. The experience of enforcing Chinese-developed IP in standard-setting environments, furthermore, will help strengthen the overall IPR enforcement system for all participants; foreign and domestic.

PRACTICAL STRATEGIES

Obtaining Chinese Patents and Registrations

One of the first steps in obtaining protection for your technology in China is procuring a Chinese patent. Since China is a member of the Paris Convention and World International Patent Organization (WIPO), a Chinese patent application can be filed within 12 months from the filing date of the corresponding US application and receive a priority date from the US application. The patent application can be filed either directly with the Chinese Patent Office or by designating China as one of the desired countries on the Patent Application Treaty (PCT) application. Using the PCT route can delay the upfront costs of prosecuting patent applicants in each individual country for up to 18 months.

There are important differences in the patent prosecution process in the US and China. Unlike the US system, where the first person to invent gets priority, China follows the first-to-file rule. Chinese patent law also requires absolute novelty in contrast with the US, which provides a one year grace period for filing an application.

The Chinese Patent Office requires foreigners to appoint local counsel to represent them before the State Intellectual Property Office. In addition, patentees should be aware that Chinese patents do not provide protection in Hong Kong or Macau. These territories maintain their own independent patent systems.

China, furthermore, requires registration of all technology transfer contracts and other technology-related agreements. Timely registration of these documents tends to support their enforceability.

Business Approaches

Foreign companies doing business in China are using different tactics to reduce the risks of loss on their IPRs. For example, they are now more reluctant to locate research and development facilities on the mainland. Many indicated that they transfer outdated technologies to their Chinese subsidiaries, with the expectation that these technologies will already be available through local competition.

Companies doing business in China usually prefer to form joint ventures with local enterprises, rather than license their technology outright. This way the foreign company can better control the use of its proprietary information. Another method of reducing the risk of loosing technical data by unfair means is to split various production processes among different facilities. This way no one facility has the full know-how.

Both foreign and Chinese companies take special measures to prevent the tarnishing of their product by low-quality counterfeiters. One method of dealing with this problem is to sell only to customers requiring a guarantee of quality, such as hospitals or government agencies. Establishing a complete vertical distribution chain fully monitored by the producer also permits the latter to closely monitor quality of the product. These methods are, however, quite expensive and therefore not widely available to smaller and less-established companies attempting to enter the Chinese market with a new product.

In anticipation of future enforcement problems, companies are encouraged to cultivate relationships with central and local government authorities. It is also very important to realistically evaluate your Chinese partners and their ability to resolve certain problems. Often a partner will claim that because of his connections the red tape may be cut; but when the situation changes the partner disappears and the company is left in the wind. Choosing both your mainland partners and local counsel carefully helps to avoid these problems.

IMPORTING CHINESE-DEVELOPED TECHNOLOGIES

In a global economy, technology transfer goes in both directions. At a time when many enterprises are bringing their products and know-how to China, there are also a number of companies being established in the US based on Chinese-originated innovations. This trend of commercializing foreign IP has gained recent popularity.⁴³ Since most Chinese companies do not have sufficient economic foundations for research and development programs, technologies worth importing are usually originated in the universities. The official policy of the Chinese government is to promote commercialization of university-developed inventions. However, government-owned research institutions face the usual structural difficulties in commercializing the results of their research.⁴⁴ In addition, the question of ownership of the IP developed by a government-owned facility remains ambiguous, even under the newest amendments to the PRC Patent Law.⁴⁵

CONCLUSION

China has made tremendous progress in advancing its IP legal system. Even though the day-to-day implementation of the laws on the books often does not live up to the high expectations of US businesses, the fact that the system of IP legislation has been put in place is comforting in itself. It will, however, take time to achieve the full integration of newly adopted laws into the every day life of Chinese industry.

As a developing country, China has been afforded a transitional period to fulfill its obligations under TRIPS. The WTO accession Agreement subjects China to transitional reviews annually in the first eight years following accession, and a final review in the tenth year.⁴⁶ This close monitoring of Chinese progress by international authorities brings hope that China will continue on its road to the full implementation of a modern IP legal structure.

Endnotes

1 See Keith Maskus, Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms, 2, December 16 2002.

2 Ibid.

3 See Daniel Burstein et al Big Dragon - the Future of China: What It Means for Business, the Economy, and the Global Order, Simon and Schuster, 1998.

4 See Agreement on the Trade-Related Aspects of Intellectual Property Rights, 1994, Article 33. [hereinafter TRIPS].

5 See TRIPS, Article 28.

6 See PRC Patent Law, Article 53.

7 See TRIPS Article 34.1.

8 See Cao Jianming, `WTO and the Rule of Law in China', Temple International & Comparative Law Journal, Vol 16.2, pp.379, 384, 2002.

9 See PRC Trademark Law (2nd Revision), Article 3.

10 PRC Trademark Law Implementing Regulations, Rule 25.

11 TRIPS, Article 16.

12 PRC Trademark Law Implementing Regulations, Rules 45 and 53.

13 PRC Trademark Law (2nd Revision), Article 43.

14 See Thomas T. Moga, `The TRIPS Agreement and China,' The China Business Review, November-December 2002.

15 Ibid

16 PRC Patent Law, Article 60.

17 See PRC Trademark Law (2nd Revision), Article 40.

18 See Toronto p.6.

19 Ibid, p. 7.

20 Ibid, p.10.

21 See Maskus, p.16.

22 PRC Patent Law, Article 64.

23 See TRIPS Article 27.2.

24 TRIPS Article 31(f).

25 TRIPS Article 31 (h).

26 PRC Patent Law, Article 54.

27 PRC Patent Law, Article 55

28 See The Latest Amendments to the Chinese Patent Law - A Comparative Study of the Patent Law with the TRIPS Agreement, October 17 2001, at http://www.eastip.com/news_publications/latestamendment, last reviewed April 9 2003.

29 State Council, Protection of Computer Software Regulations, Article 22.

30 TRIPS, Article 13.

31 See Maskus, p. 18.

32 See Shing-Tung Yau, `Science and Technology in China,' Harvard Asia Pacific Review, Fall 2002, pp. 2, 37, 38.

33 See Jessica Jiong Zhou, Trademark Law & Enforcement in China: A Transnational Perspective, 2002, pp.415, 433.

34 See ibid

35 `Nation pledges intellectual property boost', April 27 2004, China Daily, at http://www1.chinadaily.com.cn/chinagate/doc/2002-04/27/content_248737.htm last reviewed 9/4/2003.

36 See Maskus p.16.

37 Steve Toronto, Operating as a Technology Company in China, presentation given at seminar `Doing Business in China - Structuring Investments and Protecting Your Intellectual Property,' September 9 2003, San Francisco

38 See Maskus, p.17.

39 See Fraser Mendel et al `Protecting Olympic Intellectual Property', China Law & Practice, May 2003, 17(4), pp. 33-34.

40 See Protection of Olympic Symbols Regulations, April 2002, Article 10.

41 See Evan Ramstad, `China Is Setting the Standard,' The Wall Street Journal, 10 September 2003

42 Ibid.

43 See Seminar `Innovation Insourcing: Commercializing Global IP in the US,' SDForum, August 13, 2003, at http://www.sdforum.org/p/calEvent.asp?CID=1152&mo=8&yr=2003

44 See Maskus, pp. 22-23.

45 See Maskus, p. 23.

46 Protocol on the Accession of the People's Republic of China, Part I, Article 18.