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2. An Overview of the Chinese Legal and Enforcement System Relating to Intellectual Property and How Businesses Can Gain the Upper Hand Aaron D. Hurvitz Of Foreign Counsel Kangxin Partners, PC Beijing, China

3. A Quick Overview China was a latecomer to intellectual property. Its first patent law came into effect in 1985, followed by a copyright law in 1990 However, since then, the pace of progress has been rapid; it has now joined all major international IP treaties Its patenting activity is increasing rapidly, too, with domestic firms nearly doubling the number of patents they received in the past four years China’s Patent Office now leads the world, reviewing 800,000 applications in 2008, and in 2009, domestic firms are poised to receive more patents than foreigners for the first time ever Chinese firms are also receiving more patents abroad: in 1999 they only won 90 patents in America, but by last year they had increased that number to 1,225, demonstrating a desire to use their inventions globally

4. Well Developed IP System China has a well developed IP system which allows IP rights owners to protect their IP as physical property Problems arise when the owner fails to make use of the system at the beginning, and will then inevitably have to deal with enforcement issues at a later date Important to note that some IP rights must be officially applied for and officially acknowledged

5. China’s IP Law Even companies that have no current business in China should consider obtaining IP rights in China as a defensive measure Without IP rights in China, a business has no grounds to ask the Chinese legal system for help in stopping infringing activities The Chinese legal system does not currently recognize foreign IP rights Therefore, it is important to include China in a company’s IP strategy from the outset

6. Schneider Electric The Schneider Electric court decision was and is seen as a wake up call for anyone doing business in China. Shows the importance of adhering to China’s IP laws when doing business in china, showing that a failure to do so can lead to disastrous consequences, which could have been easily avoidable Schneider (Defendant, France) settled a patent dispute for RMB 157 million ($23 million USD). The original damages of RMB 334 million, awarded to Chint, (plaintiff, China) were and still are the highest amount of damages ever awarded for a patent infringement suit This settlement will certainly encourage more patent rights holders to aggressively enforce their rights in China. Being knowledgeable about how to protect your rights prior to entering the China market will eliminate the risks of a having to pay damages for infringement of IPR

7. Registered Rights & Unregistered Rights Patent –Invention –Utility Model –Design Trademark Domain name Company name Layout of integrated circuits Plant variety right Well-known unregistered trademark Copyright Anti-Unfair Competition –Trade secret –Trade dress (famous) –Goods name (famous) –Trade name (famous) Other Prior Rights –Book name, etc.

8. Differences between Registered & Unregistered Rights Registered Rights –Acquired by first to file –Proved by registration certificate –Assumed valid –Recognized by more administrative authorities KEY ISSUE: –Filing earlier Unregistered Rights –Acquired by ‘first to use’ or ‘originally created.’ –Proved by evidence of use –Must be PROVED –Recognized by less administrative authorities –KEY ISSUE: Keeping evidence

9. Five Different Ways to Protect Your IP Civil Judicial Administrative Avenues Criminal Judicial Customs Measures Other protective approaches

10. Civil Judicial Supreme Court (1) – National Level High Courts (31) Provincial Level Intermediate Courts (400 +) City Level –All can handle trademark cases, 71 can handle patent cases District Courts (3000 +) District Level –40 can handle trademark and copyright cases Statistics: In 2008 - 24406 IP Civil Cases (the first instance), Patent 4074, Trademark 6233, Copyright 10951

11. Neoplan case 2004, Neoplan (German) applied for and received a design patent for its Starliner bus, manufactured and sold in China A Chinese Company, Zhongwei built buses with same design Litigation initiated by Neoplan in 2009, resulted in a Chinese Intermediate court holding for Neoplan and awarded 21.2 million RMB ($3 million) in damages Court are increasingly awarding damages against infringers in China. Foreign Plaintiffs have had much greater success over recent years

12. Positive Rulings 2009, TWO consecutive Supreme People’s Court decisions regarding the recognition of ‘famous’ trademarks, sending a strong signal to the Chinese public that the highest court understands the importance of establishing a uniform standard for judicial recognition of ‘famous’ trademarks in China. This trickle down effect, directly speaks to FOREIGN trademark owners demonstrating the ability to protect their mark in China.

13. Administrative Avenues Local Administration of Industry and Commerce (AIC) Local Intellectual Property Office (IPO) Local Copyright Administration Bureau (CAB) Local Technology Supervision Bureau (TSB) Local Food and Drug Administration (FDA) Statistics – in recent years, more than 50,000 trademark administrative cases, more than 30,000 copyright cases, more than 1000 patent cases are heard every year

14. AIC The AIC has the power to investigate trademark infringements. There are AICs on State, Provincial, County and City levels There are more than 3000 AIC offices in China with a staff of over 500,000 people AIC can issue an injunction, confiscate and destroy the infringing goods and tools used to make the goods The AIC CANNOT award damages though Can file a complaint or AIC will take own initiative

15. Motorola in China ( MOTO) In 2007, MOTO conducted an investigation on the origin of the counterfeiting of MOTO’s mobile phones as well as its manufacturers Joint cooperation with the government, media, local AIC, allowing for an administrative action against those infringing MOTO’s phones in certain districts. During the administrative action, more than one thousand counterfeiting phone with total value of about RMB 800,000 This was really the true beginning of mobile phone companies enforcing their IP rights in China. At present most mobile phone companies are actively enforcing their IP rights in China

16. State Intellectual Property Office SIPO is responsible for dealing with patent issues throughout China, including infringement and enforcement When an infringement case is established, the IPO may issue an injunction and upon request by the parties, attempt to mediate the amount of compensation caused by the infringement If mediation fails, the parties may institute legal proceedings in The People’s Court in accordance with Chinese Civil Procedure Law

17. SIPO When infringement is discovered, IPO can confiscate the illegal earnings and may impose a fine of not more than THREE TIMES the illegal earnings If absent illegal earnings, a fine of NOT MORE than 50,000 RMB may be imposed If the infringement constitutes a crime (to be discussed later), IPO can transfer the case to the People’s Security Bureau (PSB) Important to note – SIPO has limited enforcement resources

18. Patent Reexamination Board Re-examination against decision of rejection or maintenance of patent right made by the patent office Examination on the invalidation request Appearing before the court as the DEFENDANT in cases relating to patent litigation Participating in the research of patent right discretion and infringement determination Provides advice to the settlement of patent infringement entrusted by the Court and patent administrative authorities

19. Trademark Office (TMO) Registering trademarks Dealing with oppositions to registered trademarks and other matters concerning modification, assignment, renewal, cancellation of registered trademarks and reissue of trademark certificates Providing guidance to local AICs for trademark infringement and counterfeiting cases Creating regulations and concrete measures with respect to TM registration and administration

20. Trademark Reexamination and Adjudication Board Handles reexamination applications against decisions made by the TMO upon the rejection of applications for trademark registration Handles cases of application for reexamination against opposition adjudication made by the TMO Handles cases of request for adjudication on cancellation of registered trademarks Handles cases of application for reexamination against cancellation decisions made by the TMO

21. Criminal Judicial Avenues How to get there – Plaintiff’s complaint or case transfer from administrative agency Most cases end up as: – Acceptance and investigation by the local PSB office – Prosecution by public prosecutor – 1st instance by District Court – 2nd instance by Intermediate Court Statistics – 2009: Over 3500 IP related criminal cases were decided and over 5500 people were found to have committed a criminal offense Businesses are frequently using Criminal Prosecution as an effective enforcement tool.

22. Criminal Judicial, cont. The Public Security Bureau (PSB) is China’s equivalent of the police. The PSB has the power to approve formal arrests of suspects and file prosecutions with the Court PSB base their criminal investigations of IPR infringements on Criminal Law –Difficulties due to local protectionism!

23. Customs Measure Customs’ monitoring –IP right recording with General Customs –Bond requirements –Confiscation or destroying of the infringing goods Seizing on Parties petition –Bond equivalent to the value of the infringing goods –Court proceeding required –Confiscating or destroying of the infringing goods Statistics: In recent years, there have been over 8000 Customs actions initiated every year

24. K2 Customs Measure From a routine check, Qingdao customs discovered 2,721 pieces of T-shirts bearing a mark similar to K2 Corporation’s registered trademark “K2” Upon request from K2, Qingdao customs seized all t-shirts bearing the K2 marks from Qingdao Shengdi. K2 filed against Qingdao Shengdi in Court for trademark infringement The judgment was in favor of K2, finding blatant trademark infringement. Effective tool

25. Enforcement methods – What’s the best choice? You now know all the players, and what they do – but which avenue is best for your client or company? Which will yield the best results, and essentially get the job done? How can your company benefit and gain an advantage in the market.

26. IPR Infringement Occurs… Your company or firm faces a few critical choices – you can take external action to battle IPR infringement using either: Administrative, or Judicial channels –BOTH channels exist for patent, trademark, copyright, and trade secret infringement There are advantages and disadvantages to both however…

27. Using Administrative Channels Quickest and least expensive way to combat IPR infringement and remains most popular way to deal with infringement Officials deal with infringement in quickly, and the filing and adjudication and straightforward Avoid significant expenses associated with court cases Good option for infringement cases that do not involve complex networks

28. Continued.. After a formal investigation, the local agency issues a ruling. If infringement is found, the local agency can order the infringer to stop producing and selling the infringing goods, seize equipment, or levy a fine If the RIGHTSHOLDER or the INFRINGER is unsatisfied with the local agency ruling, they can bring an administrative suit directly to Court

29. Administrative Drawbacks.. Issue small fines – infringers view as a cost of doing business (Three times illegal revenue or 100,000 RMB – roughly 15,000 USD – whichever is less) Often goods that are seized during raids are not destroyed, as PRC law requires, rather re-enter the market via auction or back channels Administrators must juggle local and national priorities Lack of resources and staff Local protectionism, especially in jurisdictions that have limited experience working with foreign companies

30. Continued… Evidence collecting is a problem, due to local protectionism Local AICs are hesitant to take on cases involving complex cases, in scope, structure or geography – have a higher chance of being overturned in court Poorly equipped to tackle cases involving multiple jurisdictions – example: Sales in Beijing and Shanghai involving infringing goods made in Chengdu

31. Judicial Channels Two options – civil or criminal Civil –Can apply for an injunction or monetary damages Criminal –Initiated after PSB investigation –Private prosecution is possible but very rare. –May result in fines and sentences up to seven years in prison depending on the value of the infringing products ADVANTAGE – offer stronger penalties and stronger deterrent –Are able to handle very complex cases

32. Disadvantages.. Very costly and very time consuming Often takes years for a decision Local protectionism and low transparency remain a concern in court cases, especially in jurisdictions outside China’s major cities Judges have little experience outside of major cities, and are less likely to hold infringement has occurred Seek to place cases in courts in “safer” cities Many procedural challenges are prevalent such as NO formal discovery process, and no exchange of information Finally monetary damages are difficult to collect, and injunctions and limits on business activity are even tougher to impose

33. Disadvantages on the criminal side… Getting a case on the docket is difficult To be eligible, must meet a minimum value threshold for infringing goods Other potential issues

34. What to consider when choosing a strategy? Company resources Company enforcement goals Type of IPR involved Nature of infringement Government actors Location of infringement

35. Other Alternatives private enforcement is a great option –PSB does not have the resources for information gathering and does not have the manpower to enforce and monitor all court orders –Private enforcement can gather evidence that the local PSB is unable or UNWILLING to acquire Technically illegal, as is considered a form of police work – but tolerated by the PRC Questionable nature of the practice – know who you are hiring. Many are in collaboration with local infringers, and will do only so much to make a slight impact.

36. Things are Changing… Legal disputes between Chinese companies and foreign companies with regard to IPR laws, usually get jurisdiction in a more centralized, higher level court to encourage continued FDI by ensuring fairness and diminishing the chances for domestic judicial biases favoring Chinese national companies Chinese central government will continue to strengthen its intellectual property protection through legislation and education in the future, implementing training sessions nationwide.

37. Business Advantage China is one of the largest markets in the world, with vast potential. Most companies who are interested in doing business in China, are worried that their IP will be infringed. By knowing and understanding the appropriate methods of enforcement a company doing business in China will be able to protect their intellectual property The laws and the Courts favor IPR and the Rights holder. Effective knowledge of the IP system will help to prevent any potential problems.

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