Authored by Tina E. Hulse, M.D., Esther H. Lim, and Ningling Wang
China's economic growth in recent years has made it an important market for companies worldwide. One of the most frequently asked questions by our non-Chinese clients is whether it is worth protecting and enforcing their IP rights in China. Our answer is a definite "yes" to those who want to maximize their IP value for doing business in China.
In terms of scale and complexity, IP protection and enforcement in China are not yet comparable to the US, but both have experienced dramatic improvements over the past 10 years. And recently, China announced its plan to release its national intellectual property rights (IPR) strategy later this year to further improve IP protection in China. This represents the latest example in a series of trends in China that lead us to believe that IP value will play the same important role in China as it does in the US.
Increasing Applications and Challenges
The first trend we have seen is a marked increase in the number of applications filed in the State Intellectual Property Office (SIPO) in China. For example, according to the 2006 SIPO annual report, the number of patent applications filed in the SIPO reached a total of over 570,000, including invention, design, and utility model patent applications in 2006, surpassing the 410,000 utility, plant, and reissue patent applications filed in the US Patent and Trademark Office (USPTO) in the same year. Similarly, the number of trade mark applications has increased to more than 700,000 in China in 2006, surpassing the 275,790 trade mark applications filed in the USPTO in the same year.
A second trend is that the number of invalidity proceedings before the Patent Reexamination Board (PRB) of the SIPO has increased. In contrast with the US patent system, the validity of a patent cannot be challenged in court, but is challenged exclusively through invalidation proceedings before the PRB. According to the 2006 SIPO annual report, SIPO received 2,468 requests for invalidation, an increase of 18.26% from 2005.
Perhaps the most famous invalidity challenge before the PRB is the Pfizer case, where a dozen Chinese pharmaceutical companies challenged the validity of Pfizer's patent covering Viagra, which issued in 2001. In 2004, the PRB decided that Pfizer's Viagra patent was invalid for insufficient disclosure in the specification. Naturally, the PRB's decision alerted the world to the significant role that the PRB plays in the Chinese patent system.
Pfizer appealed the PRB's decision to the Beijing First Intermediate People's Court, and the court reversed it. The Chinese pharmaceutical companies then appealed to the Beijing High People's Court, which, in October 2007, affirmed the decision of the Beijing First Intermediate People's Court and upheld Pfizer's Viagra patent. Following the final decision, Pfizer's spokesman Paul Fitzhenry stated that "[w]e welcome the Court's decision. It reflects China's commitment to creating an effective patent-protection environment and boosts the confidence of the business community in China as an investment location."
More Sophisticated
The third trend we have seen is an increase in the amount of damages awarded by courts. One common complaint often heard in the past decade is that the Chinese IP enforcement system did not award monetary damages large enough to deter infringement. But in the Schneider case, the Wenzhou Intermediate People's Court issued a ruling in September 2007, ordering the defendant Leqing Branch of Star Electric Equipment Co., an authorized distributor of Schneider Electric, to stop selling infringing products and to pay Rmb 334.8 million (about $45 million) in damages to the plaintiff. Such a large damages award created a new record in IP infringement suits in China and sent shockwaves throughout the IP community.
Some viewed this decision as an indication of strong local protectionism in Wenzhou, China, because the plaintiff Chint Group Co.—the largest company in China specializing in low-voltage electrical and power transmission and distribution—is headquartered in Zhejiang province where the Wenzhou Intermediate People's Court is based, and yields great influence over the local economy. Others viewed this decision as a penalty to Schneider for its own failure to effectively protect its IP in China—Schneider patented the technology-at-issue in France, but not in China. While reasonable minds may differ on the motivation behind this ruling, the Schneider case, at the very least, shows that a Chinese court can, and will, award extensive infringement damages.
Moreover, for patentees whose primary objective is an injunction, China provides both civil and administrative relief. Like the US, Chinese courts can issue both preliminary and permanent injunctions in infringement actions. The standard for granting preliminary injunctions is very similar to the stringent standard in the US and, accordingly, preliminary injunctions are likewise rarely granted. But once infringement is found, courts typically grant permanent injunctions as a matter of right. Patentees seeking injunctions, however, may also pursue relief through administrative procedures, which are faster and less expensive than the civil system. As an added benefit, the administrative authority may conduct on-site inspections or raids to investigate the infringing acts. Accordingly, China provides several viable options for patentees seeking injunctive relief.
Not only has China shown improvement in enforcing patent protection, but recent trends indicate increasing protection of trade secrets and copyrights. In the past year, plaintiffs filed over 100 trade secret infringement lawsuits in China, and several high-profile cases are pending in the courts. In November 2007, the Xi'an Intermediate People's Court held that defendants Xi'an Jiuxian Electrical Technology Co. and Wang Xiaohui infringed General Electric Company's trade secrets and copyrights and ordered the defendants to pay Rmb 900,000 (about $125,000) in damages. The defendants have appealed this judgment. Furthermore, pending in the Schenzhen Intermediate People's Court is a trade secret action filed by Foxconn Technology Group against two former employees and battery maker BYD Battery Co. Seeking Rmb 5 billion in fines against BYD, Foxconn alleges that BYD hired the two employees to bring confidential Foxconn information and documents with them. Following the court's request for collection of evidence, the IPR Appraisal Centre reviewed the documents at issue and concluded that many contained proprietary information that was economically valuable. Accordingly, most predict Foxconn will prevail in its suit, which some have called "the nation's biggest-ever hi-tech intellectual property dispute." Thus, through this recognition of the importance of trade secret and copyright protection, China has shown an increased sophistication in enforcement of IP rights.
High Quality Needed
To fully realize IP value, the first and the most important issue for non-Chinese companies is protecting IP assets in China. During a meeting with a delegation of Chinese IP officials, an executive officer of a US company criticized the weakness of China's IP enforcement due to piracy of imported goods in China. But when an official from China Customs questioned the executive on whether that company had registered its imported goods with Chinese Customs, that company failed to do so. Without protecting your IPR in China first, enforcement of IPR is out of the question. This lesson is shared by Schneider, which protected the disputed technology in France, but not in China.
In addition, given the increased number of invalidity proceedings before the PRB, it will be necessary to secure high-quality patents to defend against invalidity challenges. In comparison with the US and Japan, the cost of obtaining patents in China is relatively low. And it takes, on average, about two years for substantive examination of a patent application in China. Invalidity proceedings in general last between one and one-and-a-half years. A relatively quick validity decision motivates an alleged infringer to challenge the validity of a patent-atissue in an infringement action at the PRB. Therefore, ownership of high-quality patents is critical.
The System
An IP owner seeking to enforce its IP in China has three available options: civil, administrative, and criminal. In the civil court system, the courts may grant damages and injunctive relief. Typically, IP cases are first heard in the Intermediate People's Courts or special IP courts throughout the country and then appealed at the Higher People's Courts. Like infringement actions in the US, these proceedings can take several years to resolve. While discovery is not permitted in Chinese courts, other limited methods of obtaining evidence are available. Under Chinese patent law, a court may demand evidence sua sponte from any person or company to investigate the claims. This, however, is fairly rare. A party may also seek an order preserving evidence, where the court may order the defendant to produce relevant documents, allow on-site inspection, or provide samples of the infringing products. Any evidence collected under such an order is probably admissible in court.
Another enforcement option for IP owners is through administrative authorities. As explained above, the administrative approach does not offer damages. Instead, it is typically limited to orders granting injunctive relief, destroying the infringing products, or imposing fines. Parties seeking relief can apply to the respective authorities that handle trade mark, copyright, and patent infringement claims, offering any evidence of infringement they may have. If granted, the authorities conduct their investigation and issue an order, which can be appealed to the civil courts. The administrative route is much faster than the civil route, taking an average of about three to six months.
Lastly, trade mark, copyright, and patent infringement may all be considered as criminal actions in China and can be enforced through the criminal justice system. An IP holder may file a complaint with the public prosecutor, who may then investigate and charge the accused infringer. In criminal actions, the process may take between three and six months. The accused infringer may be sentenced to several years in prison, or, in egregious cases, up to seven years.
In deciding which enforcement route to take, IP owners should first determine their goals. If obtaining damages is a high priority, pursuing a civil action is obviously required. But IP owners interested in swift injunctive relief should consider filing an administrative action first, and then decide whether to file a civil action later. Moreover, IP owners can submit the administrative judgment of infringement as persuasive evidence of infringement in a later civil case.
IP owners must be aware, however, of several continuing concerns regarding IP enforcement in China. First, administrative and criminal enforcement may sound appealing at first, but these procedures sometimes suffer from local protectionism and inadequate government resources. On the other hand, judges in the civil system may not be as technologically savvy as those in the administrative bodies. And some maintain suspicions of judicial corruption and local protectionism, which may be more prevalent in the lower courts. Accordingly, to the extent possible, IP owners should file civil actions in the highest court possible in areas most experienced in handling infringement cases, such as Beijing for patents or Shanghai for trade marks. Thus, regardless of which avenue is ultimately chosen, IP owners should be aware of the advantages and disadvantages of each enforcement procedure before bringing an action in China.
No Fleeting Trend
In recent years, more and more companies have expanded their IP portfolios by seeking IP protection in China. We believe this is not a fleeting trend, particularly in light of the billions of dollars companies are investing in research and development in China. Although still developing, China has shown improvement in enforcing IP, including recent cases that suggest the potential for increasing damages awards in all areas of IP. Thus, while many in the past have been sceptical about the ability to effectively protect IP in China, China has shown a commitment to improving IPR that will no doubt reward those who wish to maximize their IP value by obtaining IP protection in China now.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.