China: the will to win

China's transformation from a developing country to a so-called superpower over the last 30 or so years has been remarkable.

Still a manufacturing powerhouse, China is now a major trading partner of the US and the EU and, as its population enjoys increasing affluence, it is becoming an attractive market for consumer goods.

China started its march towards the establishment of a sound IP system in 1980, when it joined the World Intellectual Property Organization. It confirmed its status as a serious global player when it became a member of the World Trade Organization in 2001.

However, the IP system is still catching up with China’s rapidly expanding industry. With widespread counterfeiting and piracy remaining a problem, China has a reputation for being a difficult place to enforce IP rights and, in 2013, the Office of the US Trade Representative (USTR) again placed China on its priority watch list, making it subject to investigation.

Even so, since the government launched an IP strategy in 2008, things have begun to turn round. As the International Trademark Association’s annual meeting sets up in Hong Kong this year, its first time in Asia, China has been burnishing its image.

Trademarks

Dubbed by the United Nations as ‘the world’s workshop’, China produces a significant share of the world’s consumer goods, although its factories also churn out a vast number of counterfeit goods on a yearly basis.

Quoting figures from the World Customs Organization, the UN’s Office on Drugs and Crime report on Transnational Organized Crime in East Asia and the Pacific said that at least two-thirds of the world’s counterfeits come directly from China.

"It will be especially important for foreign brand owners to communicate with their Chinese entities, affiliates and business partners on a regular basis."

Stacy Yuan, a counsel at DLA Piper in Beijing, says that many brand owners have complained about the difficulty of enforcing IP rights in China. “However, we have seen positive trends and signs of improvement,” she says.

The USTR’s report said that right holders have seen a “significant increase” in administrative and criminal enforcement against trademark counterfeiting, and that the number of criminal convictions appears to have doubled.

In addition, revisions to Chinese trademark law, due to come into effect on May 1, seek to address the problem of counterfeiting head on.

The law will introduce a sixfold increase in statutory damages for trademark infringement, from RMB500,000 ($80,000), to RMB3 million ($480,000).

The trademark opposition procedure will be also be simplified. Whereas existing law allows unsuccessful trademark opponents to appeal against the decision to the Trademark Review and Adjudication Board (TRAB), after May 1 this option will not be available and opponents must instead file a cancellation action at the TRAB. Furthermore, only “interested parties” may oppose the registration of a trademark.

Meanwhile, the trademark applicant will still have the right to appeal against a China Trademark Office decision to the TRAB.

“The new law requests that brand owners establish good practice by keeping good evidence in relation to their trademarks,” Yuan says.

“It will be especially important for foreign brand owners to communicate with their Chinese entities, affiliates and business partners on a regular basis in terms of collecting evidence on the use of their trademarks in China.”

After the law comes into effect, Yuan recommends brand owners review their trademark portfolios, file defensive trademark applications to block any hijackings and deal with any hijacking trademarks promptly.

Patents

The rise in patent applications filed in China has been nothing short of dramatic. Between 2002 and 2012, the number of patent filings increased 13-fold from just under 40,000 to 535,313, and the rate of filing continues to rise. In 2013, China underwent a bigger leap in Patent Cooperation Treaty filings than any other country: 15 percent.

In 2012, the country held top positions for both destination and source of patent filings for the first time. Not bad considering the country’s patent system was established only in 1985.

Avi Freeman, a partner at Beck Greener in London, says the increase in patent filings is largely due to the world beginning to recognise China as not just a manufacturing powerhouse but as a real consumer base, especially in the technology industry.

“I’m sure that plays in the minds of companies forming strategies to work out whether they’re going to file in China,” he says.

In its yearly Special 301 Report, which reviews the state of IP rights protection in countries around the world, the USTR accuses Chinese government measures, policies and practices of “systematically disadvantaging” foreign right holders.

However, it adds, talks with the US, via the US-China Joint Commission on Commerce and Trade (JCCT) and the US-China Strategic and Economic Dialogue partnerships have led to China agreeing to commit to treat and protect IP rights owned or developed in other countries in the same way as those rights held domestically.

There are three different types of patent available in China. For years, most of the patent applications filed in the country are for utility model and design patents, which have fewer innovative features than invention patents, and do not undergo substantive examination by the State Intellectual Property Office (SIPO).

Sometimes called ‘junk’ patents, utility model and design patents have been accused of being bartering tools for Chinese companies that can be used in abusive litigation.

As far back as 2005, Tian Lipu, then commissioner of the SIPO, was given the task of tackling the problem of junk patents, but the USTR says the problem hasn’t gone away. Low-quality patents “fuel abusive litigation, and burden legitimate applicants seeking to make patentability or freedom to operate determinations,” it said in the 301 Report.

Freeman says that while these patents may sometimes be “of dubious validity”, their issue is not a problem limited to China. “Plenty of ‘junk’ patents are issued by the US Patent and Trademark Office and the European Patent Office (EPO) as well,” he says.

The quality of examination at the SIPO is high, he adds, “virtually on a par with the EPO’s”.

“There’s always value in having a patent in China, especially if you’re planning to challenge a competitor’s product.”

The tide does appear to be turning, as in March this year the patent office announced that the number of invention patents filed in 2013 increased by 26 percent to 825,000—the first time the share of invention patents has exceeded a third of all patents filed in total.

When it comes to defending patents in China, Freeman says the courts have had a reputation for being “a bit of a lottery” for foreign right holders, as they have been accused of favouring domestic companies in IP disputes. Moreover, the court’s judges are not IP specialists.

It’s worth remembering that the IP system is relatively young, and is still developing. “I don’t view it as more than growing pains,” says Freeman.

“I’ve seen a fair number of decisions coming out of China, and they don’t seem to be massively skewed one way or another.”

While larger overseas companies may have once viewed China as a Wild West when it comes to IP, things are moving in the right direction and, as increasing patent applications from outside the country demonstrate, China is becoming a more attractive place to do business.

“China wants to be taken seriously and if it had a cavalier court system where people didn’t have respect for IP, then they’d be shooting themselves in the foot,” says Freeman.

Copyright

China remains a hotbed for the distribution of pirated material, whether through physical media or online. It’s an issue that affects the music, film, video game and software industries.

The country has more than 500 million internet users, however, according to figures quoted in the USTR’s 301 Report, its music industry was worth just $48.8 million in 2010. By contrast, although its population is five percent of China’s, Thailand’s music industry was worth $68.9 million.

The 301 Report also pointed to the rise of ‘media box piracy’ in China. Media boxes are devices that have been filled with pirated works, including films and TV shows, and can be plugged into televisions.

As its population has grown used to accessing copyrighted works freely via file-sharing services, the country’s legitimate online music industry is virtually non-existent, although last year it was reported that a payments model would be introduced to the Chinese online music market.

On April 14, the Chinese government announced it would be clamping down on online infringement by shutting down websites that host pirated content, and by enforcing tighter measures on internet service providers.

A dedicated IP court

Since it was briefly mentioned in the Chinese government’s Decision on Major Issues Concerning Comprehensively Deepening Reforms last November, there have been whispers of a new court dedicated to handling IP matters. Is the establishment of such a court feasible and, more importantly, is it needed?

According to Yuan, some cities have been looking into the possibility of setting up a dedicated IP court to handle the increasing number of IP-related cases, but there are no concrete plans yet.

She says that setting up a new court might create conflicts with existing courts. “It would be more realistic to train more judges and develop the IP rights division under the civil division of the People’s Court, rather than establishing a whole new court just for IP right cases,” says Yuan.

She adds that the court’s civil divisions in the larger cities, Beijing and Shanghai, are “very well developed”, and that the judges are sufficiently experienced to handle IP right cases, particularly those concerning trademarks.

China certainly has the resources to bring its IP enforcement more into line with Western jurisdictions. For the biggest challenges it faces, particularly in copyright, all that’s needed is a determination to advance further.