Expanded coverage

Further, the SPC Circulars provide that subject to the individual HCs' local rules, basic people's courts can take on first instance IP cases as long as the monetary claim is less than Rmb5 million or is between Rmb5 million and Rmb10 million but involving parties residing in the court's jurisdiction. In practice, each HC has its own local rules setting out the threshold of claims for BCs to take on first instance cases, provided that such threshold is capped at the Rmb5 million or Rmb10 million amount.

For cases involving patent disputes, new plant varieties, integrated circuit layout design, well-known mark recognition and antitrust claims, ICs at the provincial level capital cities and other ICs designated by the SPC continue to be the only courts having first instance jurisdiction.

In essence, designated BCs will have jurisdiction to be the first instance courts for a significant portion of IP cases.

One important change signalled by the Circulars is that lower courts are going to be more accessible to litigants, making it more important than ever for foreign companies to be properly prepared for the consequently likely higher level of litigation in China. At the same time, foreign companies can also make use of the change to more effectively enforce against IP infringement.

Managing risks posed by higher levels of litigation

1. Strengthening IP portfolios

In the Schneider Electric case, the plaintiff, having obtained a utility model patent related to the circuit breaker technology that Schneider Electric had been using for more than 15 years in numerous countries, including China, sued Schneider Electric's China affiliate for infringement of the patent. The trial court found for the plaintiff and awarded Rmb334.8 million in damages and the parties eventually settled for Rmb157.5 million.

The level of piracy, patent hijacking, counterfeiting and infringement is high in China. Foreign companies must review their portfolios to ensure that they can withstand onslaughts by pirates.

For example, foreign companies not only need to file for marks that they are or will be using in China, but also need to bolster their portfolios defensively. There are professional pirates who systematically conduct research to identify marks that are not registered or renewed.

The G2000 case is typical of another type of problem faced by foreign companies. By way of background, although the Chinese Trademark Office adopts the International Classification, it further divides each of the 45 International Classes into subgroups. Goods/services which fall within different subgroups (even if they are in the same International Class) are generally considered dissimilar. Consequently, similar or even identical marks can coexist within the same International Class provided that they cover different subgroups in that Class.

When G2000 (a retail clothing store chain) filed for trade mark registration in China for G2000 in Class 25, it did not cover all of the subgroups in Class 25. In particular, the subgroups covering scarves, ties, belts, socks, and so on were not covered. A third-party company subsequently registered the mark 2000 in Class 25 covering socks, gloves, scarves, veils, shawls, ties, belts, and so on, of the missing subgroups. This company then sued G2000 and its franchisees and related companies for infringing the 2000 mark, and won at trial.

It is advisable to cover all subgroups in the Class of interest so that when a mark is registered, the protection will extend to the entire Class.

2. Localising contracts

It is important to ensure that contracts to be entered into are enforceable in all the relevant jurisdictions. For example, confidentiality agreements, non-compete agreements and non-solicit agreements entered into with local employees and companies should be localised so that they would be enforceable locally.

In a recent China International Economic and Trade Arbitration Commission (Cietac) arbitration, an Australian heavy engineering equipment manufacturer was able to rely on technology licence contracts it entered into with its Chinese licensee from back in 1980 all the way to 2004 to not only sue for contract breaches by the licensee, but also breaches by a new company set up by the principals of the licensee.

3. Preparing for response to crisis

In the Schneider Electric case, based on the books and accounts of Schneider Electric's China affiliate, the trial court awarded a sizable damages award.

In various other ongoing cases, pirates of foreign companies' marks sued the China factories of the foreign companies for infringement. The pirates also took out ex parte evidence preservation orders against the factories so that court officials were, without prior notice, able to raid the factories for evidence.

Officers and employees should be thoroughly briefed so that they respond properly if and when they are served with summons or claims, particularly when facing risks of litigation.

Other preparation work includes the following:

(i) Solid cases of defence, often including official search reports and freedom to operate analysis, should be built up as early as possible. The time for court cases in China can be quite short. Coupled with the lack of a meaningful discovery process in China, there is very little time for defendants to prepare their defences after they are served with claims or ex parte preliminary injunctions.

(ii) Non-infringement declaratory actions (after being served with a warning letter, for example) may be commenced to obtain better a forum for litigating the dispute. It should be noted that the recent SPC Circulars do not change the rules relating to forum shopping in China, allowing potential defendants to pre-empt forum shopping by potential plaintiffs.

(iii) Courts and other enforcement authorities may be informed about potential defences, which should deter the authorities from issuing ex parte orders against potential defendants.

(iv) Invalidation and cancellation of relevant patents and marks may be considered.

Taking advantage of increased access to courts to enforce IP rights

To obtain prompt relief, some foreign companies use their China affiliates to fight infringers, taking advantage of the six-month statutory time limit for first instance proceedings and the three-month time limit for second instance proceedings. The newly-increased access to lower courts provides opportunities for foreign companies to more effectively enforce their IP rights.

It is important for foreign companies to diligently enforce their IP rights. Infringers have their own networks providing information on which rights-holders are not enforcing rights, and they often switch brands when being attacked. IP enforcement actions in China are challenging, but when properly handled they can be legally and commercially rewarding for foreign companies.

In a recent case involving the copyright (applied art) of a kitchen appliance, the rights of the Italian designer were bolstered in China, resulting in a number of successful factory raids. The Chinese court also issued an evidence preservation order against the infringer even though it had registered patents in China and elsewhere covering the product. Because of the egregious nature of the infringement, the court even waived the bond required for the evidence preservation order.

In another recent batch of cases, based on a French company's trade mark registration in China, raids against three supermarkets which used and registered enterprise names incorporating the mark of the French company were successfully carried out despite of the infringers' attempt to legitimise their infringements by having obtained registration of enterprise names incorporating the mark.

For a further example, in spite of IP crimes having always been low on the priority list of the Chinese criminal enforcement authorities (the public security forces), with the support of both the Australian and Chinese governments the Chinese public security forces conducted raids against a large group of infringers which had stolen the trade secrets of an Australian heavy engineering equipment manufacturer. The forces seized products, moulds, drawings, computers, and books and accounts, and incarcerated a main culprit, resulting in factory and shop closures and sending shock-waves through the counterfeiting industry.

Foreign companies need to properly manage risks associated with the changes brought about by the SPC Circulars. In the process, foreign companies will hopefully emerge with stronger IP portfolios. This will not only help to defend foreign companies' businesses in China from bad faith attacks, but also provide much-needed ammunitions in the fight for protection of their businesses.

Chiang Ling Li and Haifeng Huang, Jones Day