Doing Business in China:

Protecting Your Intellectual Property Rights[1]

 

By Jian Hang[2]

 

© 2005 Epstein Becker & Green, P.C.

 

I.         Understanding China’s Intellectual Property Laws

 

A.        Patent Law

 

            a.         Patentable Subject Matter

 

Under U.S. patent law, there are three types of patents: utility patents, design patents, and plant patents.  Under China’s current patent law,[3] there are also three types of patents: invention patents, utility model patents, and design patents.  China’s invention patents and utility model patents correspond to the U.S. utility patent.  Although both countries’ design patents are nearly the same, what U.S. patent laws calls “plant patents” are not similarly protected under China’s patent law.[4] 

 

Furthermore, as in most countries, there are statutory limits to the patentability of subject matter in China.  No patent right shall be granted in China for any of the following subject matters: (1) scientific discoveries; (2) rules and methods for mental activities; (3) methods for the diagnosis or for the treatment of diseases; (4) animals and plant varieties; and (5) substances obtained by means of nuclear transformation.[5]  Patent right, however, may be granted for processes used in producing animals and plant varieties products.[6]  Computer software is not patentable, but may be protected under China’s Copyright Law (see more below).

 

            b.         First to File v. First to Invent

 

            The United States has a “first to invent” patent system.  Furthermore, after the first public disclosure or description of an invention, or the initial offer for sale or sale of that invention, the inventor still has one more year to file a patent application.   

 

            China adopts a “first to file,” rather than a “first to invent” rule.  If two or more applicants file applications for a patent for the identical invention, the first filed patent shall be granted.[7]   Further, China’s patent law indicates that any invention, utility model, or design for which a patent right may be granted must possess novelty.[8]  Novelty means that, prior to the date of filing, no identical invention, utility model, or design has been publicly disclosed in China or abroad, nor has it been publicly used or made known to the public by any other means in China, nor has any other person filed previously an application that describes the identical invention or utility model and was published after said filing date.[9]  There is an exception to the novelty rule, which allows a limited conditional grace period of six-months if an invention was first exhibited at an international exhibition sponsored or recognized by the Chinese Government or first made public at a prescribed academic or technological meetings, or was disclosed by another person without the applicant’s consent.[10]   

 

                        c.         Compulsory Licensing

 

            U.S. patent law, with certain narrow exceptions, grants a patentee an absolute right to refuse to license or otherwise to permit others to practice the patented invention.  Conversely, China’s patent law allows for compulsory licensing for exploitation of a patent.  If a qualified entity has requested for authorization from the patentee of an invention or utility model to exploit the patentee’s patent and has not been successful within a reasonable period of time, a compulsory license may be granted to such entity to exploit the patent for the invention or utility model.[11]  A compulsory license may also be granted in case of a national emergency or any extraordinary state of affairs.[12]

            

            An applicant for a compulsory license has the burden to prove that it has not been able to conclude a license with the patentee for exploitation of the subject patent on reasonable terms and conditions.[13]  An applicant that is granted a compulsory license for exploitation does not have an exclusive right to exploit the patent nor does such applicant have the right to authorize exploitation by any others.[14]  As a practical matter, U.S. patentees in China cannot avoid compulsory licenses.  With proper legal assistance from a legal counsel, however, an U.S. patentee may seek to terminate a compulsory license if the circumstances justifying the compulsory license cease to exist and are unlikely to recur.[15]

 

            B.        Trademark law

 

            a.         Registrable Marks

 

China’s current Trademark Law[16] protects registrable marks, referred to as any visually perceptible signs capable of distinguishing goods or services.[17]  Registrable marks include words, devices, letters, numerals, three-dimensional signs, combination of colors, and the combination of such signs.[18]  Registrable marks shall have distinctive character and shall not conflict with the legal rights acquired earlier by other persons.[19] 

 

Some signs are not registrable marks and their registration is prohibited by China’s Trademark law.  These signs include: (1) signs that consist exclusively of the generic names, designs, or model numbers of the goods with respect to which the trademark is used; (2) signs that consist exclusively of direct indications of the quality, primary raw material, functions, intended purposes, weight, quantity or other characteristics of goods; and (3) signs that are devoid of any distinctive character.[20]

 

            b.         First to Register v. First to Use

 

China’s Trademark Law adopts a “first to file” rule for trademark registrations, rather than a “first to use” rule generally employed in the United States.  If two or more applicants apply for registration of identical or similar trademarks with respect to identical or similar goods, the application filed the earliest shall be approved.[21]  If the applications are filed on the same day, the first used trademark shall be approved, and applications of other persons shall be refused and not be published.[22] 

 

China recognizes two important international trademark treaties that are closely connected with China’s trademark registration system.  The first treaty is the Paris Convention to which both the United States and China are members.  According to this treaty, a United States company that has applied for registration of a trademark outside China can claim the earlier outside filing date for the same mark in China, as long as an application in China is filed within six months from the date of filing outside China. 

 

The United States and China are also member countries of the Madrid Protocol, a centralized international trademark filing system.  Under the Madrid Protocol, a U.S. company may apply for registration of a trademark in the United States and extend its protection to China by notifying the Madrid Union Office of the particular trademark application.  A U.S. company, however, should also realize that a Chinese company may use the same procedure to apply for trademark protection in the U.S.

 

            c.         Registration of Chinese Version of Foreign Language Trademark

 

            Homonyms are very common in the Chinese language; therefore, a foreign language trademark could be translated into many different Chinese versions.  For example, Starbucks can be translated as Xingbake because Xing means “star” in Chinese and “bake” phonetically sounds like “bucks.”

 

A U.S. company had better register a Chinese version of its non-Chinese language trademark if such Chinese version of the trademark is to be used in its business.  Even if such Chinese version of the trademark is not used in China, a US company is still strongly encouraged to register it in the Chinese language if it is well acknowledged and accepted by Chinese customers.  Furthermore, a U.S. company should ensure that its Chinese version of a trademark will communicate the intended meaning of its non-Chinese language trademark across the many dialects and regions of Greater China.

 

            d.         Well-known Trademarks

 

A well-known trademark means a trademark that is widely known to the relevant sectors of the public and enjoys a relatively high reputation in China.[23]  Coca-Cola, McDonalds, Disney, and Wal-Mart are typical examples of well-known trademarks in China that are entitled to a higher level of protection.  An entity can acquire a certificate of well-known trademark from the trademark office in China.  The certificate is good for three years and can be renewed after the end of the three years.  In proving a certificate of well-known trademark, the trademark office shall consider the following factors: (1) the degree of knowledge or recognition of the trademark in the relevant sector of the public; (2) the duration of the use of the trademark; (3) the duration, extent and geographical area of any promotion of the trademark; (4) the record of successful enforcement of rights in the trademark; and (5) other evidence certifying that the trademark is well known.[24]

 

            As mentioned above, a well-known trademark enjoys certain special protections and privileges.  For example, China’s trademark law prohibits registration of a trademark if such trademark is identical with or similar to an interested party’s well-known trademark that is not registered in China on identical or similar goods and is likely to create confusion.  China’s trademark law also prohibits registration of a trademark if such trademark is identical with or similar to an interested party’s well-known trademark that is not registered in China on identical or similar goods and is likely to mislead the public and damage the interests of owner of the well-known registered trademark.[25] 

 

            Furthermore, China’s trademark law seems to employ a first to use rule, rather than a fist to register rule for registration of well-known trademarks.   When an application to register a trademark has been refused due to the similarities to a previously registered trademark, evidence of prior use will be helpful for the purpose of challenging the registration if such trademark provided to be “well-known” under the law.

 

            C.        Copyright law

 

            a.         Copyrighted Works

 

U.S. copyright law protects all published and unpublished works of all nationals no matter where they are domiciled, within or outside the United States.  In contrast, China’s current copyright law[26] does not protect unpublished works of foreign authors.  Works of Chinese citizens, whether published or not, enjoy the full protection of the Chinese Copyright Law.[27]  Works of a foreigner, however, are protected by China’s copyright law only if such works are first published in the territory of China, or if such works are first published outside China, the foreign authors are nationals of a country belonging to a copyright agreement or treaty of which China is a member, or such works are published in an country that is a party to a treaty with China.[28]

 

Categories of works protected by China’s copyright law are similar to their counterparts under U.S. copyright law.  China’s copyright law, however, is not applicable to the following: (1) government-issued laws, regulations, resolutions, decisions and orders; (2) news on current affairs; and (3) calendars, numerical tables and forms of general use, and formulas.[29] 

 

For copyright protection, foreign copyright owners do not have to apply for registration of their works with China’s National Copyright Administrative (“NCA”) office.  However, it is suggested that foreign copyright owners register their works voluntarily with NCA to establish evidence of ownership against copyright infringement.  

            b.         Computer Software

 

Computer software is protected by both China’s copyright law and the Regulations on Computer Software Protection.[30]  Computer software is defined as computer programs and relevant documents.[31]  Consistent with the copyright law, the Computer Software Protection Regulations state that only Chinese citizens enjoy the full benefits of copyright in the computer software they have developed, whether published or not.[32]  Foreigners enjoy benefits of copyright in the computer software, however, only if they their software is first published in China or they are nationals of a country that was a party to a copyright agreement or a treaty with China.[33] 

 

China’s computer software protection does not extend to the ideas, processing, operating methods, mathematical concepts or the like used in software development.[34]  Computer software copyright comes to existence as soon as its development has been completed.[35]  Registration of computer software is not required by law in order to obtain copyright protection, but is recommended for the reasons stated above.

 

II.        Enforcement and Protection of Intellectual Property Rights in China

 

            A.        Double-track System: Administrative Track and Judicial Track

 

China has a double-track enforcement system, also called a two-track system, to protect intellectual property rights.   According to this double-track system, a party may bring an action against an infringer in a court or, alternatively, file a complaint to solve the dispute in the competent administrative office.  Administrative resolution is not mandatory prior to a judicial resolution.

 

A list of major administrative authorities for intellectual property rights enforcement are as follows: (1) State Intellectual Property Office (“SIPO”), responsible for patent affairs administration and handling patent disputes; (2) State Administration on Industry and Commerce (“SAIC”), in charge of enforcement of trademarks and cracking down on trademark infringement; (3) National Copyright Administration Office (“NCA”), in charge of local copyright affairs administration including copyright enforcement. (4) Quality & Technology Supervision Bureau (“QTSB”), responsible for handling infringement of registered trademarks; (5) General Administration of Customs (“GAC”), in charge of banning the import/export of goods that infringe on intellectual property rights.  In addition, those major administrative authorities may transfer serious intellectual property infringement cases to the Public Security Bureau (“PSB”) and People’s Procuratorates (“Procuratorates”) to initiate criminal investigation.

 

            The Chinese judicial system consists of four levels of People’s courts: (1) the Supreme People’s Court at the national level; (2) the higher people’s court at the provincial level; (3) the intermediate people’s court at the municipal level; and (4) the basic people’s courts at the county level.  Generally, the intermediate people’s courts hear the first trial of intellectual property case. 

 

            B.        Administrative and Judicial Remedies

 

            a          Damages

 

Damages for intellectual property rights infringement may be calculated based on the losses suffered by the owner of the intellectual right or unlawful profits gained by the infringer through the infringement.  When it is difficult to determine either the losses suffered by the owner or unlawful profits gained by the infringer, the damages should usually be assed within the range of Chinese Yuan 5,000 to 500,000 (about US$600 to US$60,000).[36]

 

            b.         Preliminary Injunctions

 

Where the owner of an intellectual property right or an interested party has evidence showing that another person is infringing or will soon infringe on the owner or interested party’s intellectual property right and that if such an infringing act is not stopped in a timely manner, irreparable injury will be caused to the owner’s legitimate rights and interests, the owner or interested party may, before instituting legal proceedings, apply to the people’s court for relief prohibiting the act and preserving the intellectual property.[37]

 

            c.         Criminal Remedies

 

If an intellectual property infringement constitutes a criminal offense, the infringing party could be punished with imprisonment or criminal detention of no more than three years, with a fine, or simply be assessed a fine. If the infringement is of a more serious nature, the infringing party could be punished with imprisonment of at least three years but no more than seven years, and with fine[38]

           

III.      Trade Secrets and Non-competition Clauses

 

            A.        Trade Secrets/Business Secrets

 

            Trade secrets, also known as “business secrets,” are protected by China’s Anti-unfair Competition Law,[39] and some rules and provisions of contract law, civil law, and criminal law.  Business secrets are defined as nonpublic technical information and operational information, which can bring economic benefits to the owner of the rights, and for which the owner has adopted measures to keep the information secret.[40]  Business secrets infringement includes: (1) obtaining the owner’s business secrets by stealing, promising gain, resorting to coercion or other improper means; (2) disclosing, using, or allowing others to use the owner’s business secrets obtained by the means mentioned in (1); and (3) disclosing, using or allowing others to use business secrets obtained by breaching an engagement or disregarding confidentiality requirements of the owner.[41]  It is a business secret infringement for a third party to obtain, use or disclose the others’ business secret if such third party knew or should have known the acts were illegal as mentioned above.[42]

 

            Under the Anti-unfair Competition Law, when any party infringes the business secrets of another, the violator may be ordered to stop the illegal act and may have a fine of at least Chinese Yuan 10,000 Yuan (about US $1,250) and no more than Chinese Yuan 200,000 Yuan (about US $25,000) imposed.[43]  There are also other sanctions under the law including civil remedies such as damages, and criminal penalties for serious violations.

 

            To protect its business secrets in China, a U.S. company should implement affirmative measures to keep the trade secrets by ensuring that the business secret is not published, but kept secret.  Such affirmative measures include: (1)  maintaining and marking documents as “confidential” and “trade secret”; (2) limiting or restricting access to trade secret subject matter; and (3) executing Confidential Agreements or Non-disclosure agreements with employees and business partners.

 

            B.        Non-competition Agreements

 

            A non-competition agreement can restrict employees who possess trade secrets from leaving and taking a position with a competitor of the employer or setting up a competitive business themselves.  A non-competition agreement is generally enforceable as long as it is reasonable in nature and employees are paid a certain amount of compensation.  However, based on different local rules and practice, two local people’s courts may reach two completely different decisions on whether a compensation clause is needed or what constitutes a sufficient amount of compensation.[44]  Therefore, when a U.S. employer wishes to include a non-competition agreement or clause in it employment contract, it is critical for a legal counsel to check the relevant local rules and regulations.

 

IV.      Conclusion

 

            For the purpose of protecting intellectual property rights in China, it is suggested that  U.S. companies do the following: (1) register their trademarks, patents, and copyrights quickly and as appropriate with the assistance of legal counsel and local Chinese intellectual property agencies licensed by the Chinese government;  (2) obtain proper employment contracts to protect inventions and trade secrets; (3) establish and keep good relationships with major administrative authorities; (4) promptly report intellectual property right infringements to the administrative authorities and actively collaborate with those authorities in their investigations; (5) if necessary, file a law suit before the court and ask for preliminary injunction against infringement from the court, or file a complaint with an administrative authority with a request for relief through Chinese prosecutors for criminal action.