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1 May 2013Trademarks

Driving brands mad? Copying in the Chinese auto industry

The compass, gunpowder, papermaking and printing are the ‘four great inventions’ that China lays claim to. In Chinese culture, these creations are celebrated as fine examples of the country’s advances in science and technology. None of these was patented of course—they originate from long before the time of IP—but they serve as great symbols of China’s ability to innovate.

Despite this impressive heritage, in recent times China has come to be seen as less of a creator and more of a copier. As the country opened up to the West in the 1980s, manufacturing boomed and there was money to be made. In particular, cars were seen as attractive targets, and there are vast numbers of images online showing everything from a mocked up Mini to a cloned Cadillac.

Today, IP and business interests in China are increasingly overlapping. China’s car market is booming: in 2009 it overtook its US rival as the biggest in the world and by 2015, some estimates suggest, it will surpass the combined markets of the US, Japan and Germany. More than ever, protecting IP in China is imperative for car makers eyeing up this lucrative market.

“To understand the problem, we need to understand it in an economic context,” says Deanna Wong, partner at Hogan Lovells LLP in Beijing. She says the copying culture is a “growing pain” that is typical of any developing country, as well as one that can be broken down into basic economics.

“Everyone knows that there is a problem but if there is a demand then there will be a supply. Part of the reason people in China can do this is because people overseas are buying the products,” she says.

IP infringement has been rampant for 20 years, says Chiang Ling Li, partner at law firm Jones Day in Hong Kong, ranging from the theft of manufacturing drawings to the clear copying of cars.

Since the early days, IP legislation and enforcement have both improved greatly. There are many signs that the problem is being taken seriously and that China is serious about reforming and improving its IP and legal enforcement systems, according to Xuefang Huang, trademark attorney at Marks & Clerk LLP.

In December 2012, the latest amendments to the Trade Mark Law were submitted to the Committee of the National People’s Congress for discussion and ratification. If passed, the changes would widen the scope of trademark infringement, increase the maximum statutory damages for infringement to RMB 1 million ($160,000) and switch the burden of proof from the victim to the infringers (under some circumstances).

Huang adds: “China has introduced four amended IP regulations since January 2013, which are all aimed at seriously addressing IP infringement.”

Alongside this legislation, progress in China is reflected by some notable victories for non-Chinese auto manufacturers in the courts. In 2009, German bus maker Neoplan Bus won a record RMB 21.16 million ($3.4 million) damages in a design patent case against three Chinese bus companies.

There have been obvious signs of improvement with China’s response to tackling infringement compared with 10 years ago, says Wong, but “although the laws are there, China is a huge country and it is not easy to enforce them consistently. The judgments have not been such that their deterrent effects are applied across the board”.

Huang adds that there are still problems with litigating in China, and that it can be especially difficult to recover reasonable damages unless significant evidence can be put forward (such as in the Neoplan case).

“As there is no common law-style ‘discovery’ process in China and the infringer’s profits will not normally be ascertained by a party claiming infringement, those seeking significant damages in an infringement case must collect evidence about the infringement before filing the litigation,” she says.

“THERE ARE STILL PROBLEMS WITH LITIGATING IN CHINA, AND IT CAN BE ESPECIALLY DIFFICULT TO RECOVER REASONABLE DAMAGES UNLESS SIGNIFICANT EVIDENCE CAN BE PUT FORWARD.”

Huang adds: “Because of this limitation and the steps some infringers take to hide these figures, as a fallback alternative to ‘real’ damages, China has a system of statutory damages: a maximum of RMB 1 million ($160,000) for patent infringement and RMB 500,000 (US $80,000) for trademark infringement. These amounts may be tiny compared with the potential profit made from copying.”

Most importantly, statistical evidence says the copying culture has not faded. The most recent official figures back this up, showing that China has been unwilling to innovate in the car industry.

Statistics from the State Intellectual Property Office show that from 1985 to 2005, Chinese car companies filed 15,685 patent applications for automobiles, of which only 7.27 percent were for ‘invention’ patents, which are more difficult to obtain than the design and utility equivalents. In the same period, foreign companies filed marginally more applications, but about 81 percent were for ‘invention’ patents.

“The general view is that utility and design patents require a lower level of innovation than an invention patent,” says Huang. “As such, the ratio of invention applications to the total of patent applications is viewed as an indicator of the level of innovation in an industry. That explains why Chinese companies invest less in the auto industry than their foreign counterparts.”

The infringers, adds Li, have become smarter. This all means that China is at a juncture: there is still a long way to go in the fight against fake cars.

So what should IP owners do? They should take advantage of China’s first-to-file system (which covers trademarks, patents and designs) and register their ideas and brands as early as possible, before their cars have attracted the attention of Chinese infringers, Huang says.

She adds: “Once they have registered their IP, brand owners should promptly record it with the Chinese customs. Customs will then watch the flow of imports and exports and seize any suspicious goods. This has proved an effective way of preventing infringing goods from being exported. When the goods are detected on the Chinese market, IP owners should request administrative raids against the infringers after securing evidence. This has been a swift, effective and cost-effective way to deal with manufacturing and domestic sales-related infringement.”

Li says IP owners should employ a range of strategies for beating infringement, including working with embassies and industry organisations, maintaining good working relationships with law enforcement, investing good intelligence on infringers and, interestingly, forming alliances with other brand owners to fight the infringers with more resources.

More radically, there have been suggestions that trade secrets could replace patents and designs as a way of beating infringement. But all lawyers agree that these are not the secret to success in the car industry. Trade secrets may more easily protect inventions that are difficult to reverse-engineer, for example, a complex pharmaceutical formulation, but once a car model has been made and is visible on the market, infringers can simply copy the design by using their eyes.

Even if the look of a car can be protected, there are further complications when bringing trade secret infringement cases: these can only be brought in China when the theft of that secret can be shown. This makes for tough work, with Huang saying that relying solely on trade secret protection is risky business.

There are a range of strategies for dealing with IP infringement, but brand owners clearly want to see more done about the problem. If China is at a juncture, then how does it push on and, in the eyes of Westerners at least, really clean up its act?

Wong says: “It requires economic progression. As China changes from a manufacturing to a knowledge-based economy and moves forward as a developed country, things will improve. However, the country is large and to have the improvements spread across the entire spectrum will be the difficult part.”

The economic argument may go some way to explaining China’s struggles with infringement, even if the authorities’ combative response has helped to mitigate the problem. But it seems reductive to say that supply and demand along with economic development can solely explain the problem. Cars have been slavishly copied for 20 to 30 years, and it can appear that attitudes towards copying are different from those in countries where IP systems are more developed.

Then again, maybe the economic argument is a sturdy one. As China develops and its population becomes more wealthy, they may not necessarily crave copied cars so greatly, and there is certainly anecdotal evidence to suggest there is a rising demand for luxury cars. Despite a recent slowdown, the Chinese economy has been progressing rapidly in the last few years. And with the Chinese auto industry booming, there’s never been a better time to convince consumers that buying legitimate goods is the right thing to do.

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