Challenges Related to Intellectual Property Rights in China
Tags: Doing Business in China, IP protection, IPRs, Patent Law, SMBs and SMEs
Due to a combination of cultural, institutional, and technological factors, IPR infringement remains an issue in China. While the regulatory environment in China is improving, the protection of intellectual property rights (IPR) in China is still a cause of concern for many foreign companies.
As a result, foreign businesses must find ways to protect their business from IPR infringement. Below we’ll explore some of the major IPR challenges facing international companies while doing business in China.
Major IPR Challenges for International Businesses in China
In the past decade, China has made substantial progress in the improvement of intellectual property rights practices and standards. However, these standards are not always up to par with those of Western nations. International businesses still face major IP challenges in China, though the particular challenges, implications, and parties affected vary.
Breakdown by Country
Based on a survey conducted by the Asia Pacific Foundation of Canada, here are the major IP challenges foreign firms are experiencing in China.
Major Challenges Encountered by Foreign Firms in China in 2012
|1||Management-level human resources constraints||Global economic slowdown||Unequal implementation of the law and the laws themselves||Intellectual property rules and practices in China|
|2||Inconsistent regulatory interpretation/unclear laws||Increased Chinese competition||Over-reliance on fixed asset investment and exports||Inconsistent interpretation of regulations/laws in China|
|3||Non-management-level human resource constraints||Labour costs||Failing to move up the value chain||Weak dispute settlement mechanisms|
|4||Difficulty obtaining required licenses||Inconsistent regulatory interpretation||The slow development of the service industry risk stifling economic development||Lengthy/complicated certification|
|5||Corruption||Increased bureaucracy||Decline in labour supply||Chinese tariffs and other border barriers|
Types of IPR Infringement in China
There are four potential types of IPR infringement in China: patent, trademark, copyright, and trade secret. Varying Chinese government agencies are responsible for IPR regulation and enforcement, depending on the type of infringement.
China’s National Intellectual Property Administration (CNIPA) is the governing agency responsible for administering patents. Patent infringement is when an individual uses a patented invention, product, or process for their own business use. There are three types of patents in China:
- Invention patent
- Utility model patent
- Design patent
An example of a patent infringement case in China involves Japanese-based company, MTG, against a number of Chinese beauty companies. MTG, a beauty and health company, brought up a total of 20 patent infringement cases against these Chinese companies. The Japanese company based its case on the infringement of its design patents related to its facial beauty rollers.
MTG ended up winning 19 out of the 20 cases. However, compensations awarded by the courts were typically much less than what MTG was initially seeking.
Trademark infringement in China involves the unauthorized use of another party’s registered trademark. A trademark can be a symbol, word, letters, shapes, or any combination of them. It is used to distinguish your company or brand from other companies.
In December 2013, Bridgestone Corporation won a lawsuit against Chinese company Shenzhen Momentum Star Tyre Co. for trademark infringement. Tires sold by Shenzhen Momentum used a similar logo to Bridgestone’s logo. The courts ruled in favor of Bridgestone ordering Shenzhen Momentum to halt production and pay in damages.
As with most jurisdictions, registration of copyright is not a prerequisite for copyright protection in China. However, copyright registration has its benefits – the primary benefit being easier enforcement.
Copyright infringement is a widespread issue in China. The illicit reproduction of copyright material (i.e. movies, music, drawings, art, etc.) along with mass production methods make it easy for infringers to distribute and make a profit. Additionally, the decentralized nature of the Internet, mobile phones, and other hand-held devices make it difficult to prevent the replication and distribution of copyright material.
A Shanghai court awarded Disney a total of USD 190,000 for copyright infringement when a Chinese producer debuted a film entitled “The Autobots.” The Chinese film had remarkably similar characters and poster designs to the Disney film “Cars.” “The Autobots” grossed approximately USD 863,000 after its release in July 2015.
Because of the relatively weak legal framework regulating trade secrets in China, trade secret infringement is a major concern for foreign businesses. The infringement of business trade secrets involves the disclosure of confidential technical or business information to another party. This most commonly occurs when employees resign and then go work for another company, revealing company secrets to the new employer.
Trade secret infringement is challenging to contain due primarily to its volatile nature. Once there is a misappropriation of trade secrets, it is no longer a secret. It is irreversible and can have significant consequences for the company.
In 2007, American company General Electric (GE) lodged a complaint against one of their former employees, Wang Xiaohui. Wang was an engineer with GE and played a key role in providing maintenance services for GE’s CT scan machines. When Wang resigned in 2002, he opened his own business, Jiuxiang, offering maintenance services for the same GE CT scans at prices 40-70% lower than GE. GE won the proceedings, and the Chinese courts awarded GE RMB 900,000 in damages.
Industries Most Affected by IPR Infringement
Industries most affected by IP infringement in China will depend on the type of IPR in question.
- Patent: Research and developmental-oriented industries will be the most affected by patent infringements in China. Sectors like pharmaceuticals, digital communication, computer technology, and industrial chemicals are all examples of industries that place heavy emphasis on new inventions.
- Trademark: Trademark infringement impacts all companies in any sector. Essentially any business aiming to distinguish itself as a brand can be impacted by this type of IPR infringement.
- Copyright: Industries that profit from copyrighted material, such as those in the film, music, and software industries, will be most vulnerable to infringement.
- Trade Secret: Since trade secrets can cover a multitude of confidential information, this type of infringement can also impact a wide spectrum of industries. Trade secrets can include technical information (i.e. designs, blueprints, etc.) to managerial techniques to customer lists – anything that is generally not known to the public.
Challenges for intellectual property rights in China
China’s landscape of intellectual property rights has seen much development in recent years. Significant improvements in protecting and enforcing IP rights offer incentive for foreign companies to do business in China. However, challenges still exist as the nation seeks to tighten up their regulatory IPR framework.
China has had a reputation for favouring imitation over innovation. Imitation (particularly in technology) has short-term benefits for a nation like China, as it promotes production and consumption of goods within its society. The emphasis on imitation is often favoured because protecting IPR is costly, which limits the government’s economic benefits generated by revenues and taxes. As a result, the government has historically had no incentive to offer rigorous protection of IP rights.
However, the IP landscape is changing in China. There is a shift in emphasis from imitation to innovation as China now leads the world in the number of international patents filed each year. While this shift is a positive sign moving forward, challenges such as local judicial protectionism, difficulty in obtaining evidence, and foreign biases still make it difficult to protect IP rights.
Enforcement of IPRs in China is often soft and irregular. One cultural contributor to this could come from the Confucist belief that knowledge is not generally considered a form of private property. Today, China has various levels of IP enforcement, including:
In the lowest levels of enforcement (i.e. administrative and civil), the sanctions and penalties are generally too nominal to have a major effect on deterring IPR infringements. That said, foreign companies often use this procedure in practice because the relevant government agencies respond fast through administrative procedure, which can help to stop infringement.
In criminal cases, evidentiary standards are extremely high. Criteria for criminal infringements can be unclear, and the lack of expertise in the judicial system can make it challenging to enforce intellectual property infringements in China.
The regulatory framework protecting IP rights in China has improved substantially in recent years. This is in part due to the government’s recognition of the long-term economic benefits of having robust policies protecting the IP rights of businesses. However, there is much work left to be done in terms of the protection and enforcement of IP rights.
To protect your IPRs while conducting business in China, it’s essential that you work with a legal professional with knowledge of the space. Lawyers who have specific experience with IP protection in China can help ensure your business interests are safe. For more information, sign-up to watch the recording of our IP protection webinar or sign-up for a free Trustiics account to connect with some of the top IP protection lawyers in China.