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IP IN DEPTH: Protecting Intellectual Property Rights in China

February 1, 2004
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What corrective steps are being taken to help companies protect their intellectual property rights in China?

When China began to reform its trade policies in 1979, the outside world gained access to one of the largest consumer markets and one of the most economical areas to have goods manufactured for export. Today, 70-80% of all counterfeit consumer goods, along with an increasing number of industrial products, come from China.

How did China get off on the wrong foot? What corrective steps have been and are still being taken, and what can companies do to protect their intellectual property rights (IPR) in China?

A New Concept

Laws defining and governing IPR typically evolve from real property law principles. In China, modern laws permitting ownership of real property were not adopted until the 1980s; prior to such laws, private property was nonexistent. The state owned all property, and most people developed the attitude that no one's rights were violated when someone took or used any available state-owned property.

Shortly after the people of China were getting accustomed to the concept that real property rights could be owned and therefore violated, the government of China was faced with the task of creating and enforcing rights on intangible property-ideas, concepts, inventions, creative works, etc. China's current patent law, the "Law of the People's Republic of China," took effect in April 1985.

From 1985 until its entry in the World Trade Organization (WTO) in 2001, China aggressively adopted regulations and laws, instituted administrational and judicial procedures, and promoted campaigns-all to foster IPR and curtail piracy and counterfeiting activities. At the same time, as Taiwanese labor costs rose and the Taiwanese government began enforcing IPR in 1992, well established counterfeiting operations moved from Taiwan to mainland China. Ten years ago, 70-80% of all counterfeits goods were made in Taiwan and only 20-25% in China. Today, these percentages are reversed. The transplanted Taiwanese counterfeiting operations quickly took root and flourished because of the prevailing lack of appreciation of IPR that the Chinese government was trying to correct.

Awareness of and appreciation for IPR remains a problem in Chinese society at large. However, legal protection and enforcement of IPR is rapidly developing and improving.

Protective Measures

Doing business in China dramatically increases a company's exposure and risk of having products counterfeited. Any company doing business in China needs to run background checks on any Chinese business partner(s), key employees and important suppliers to determine their past business associations and practices. Technology theft by internal personnel is one of the primary roots of counterfeiting.

Legal rights have to be established before a company can take advantage of administrative actions and legal proceedings that are available. Accordingly, an important first step for doing business in China is to secure enforceable IPR by filing patents, trademarks and/or copyrights in China. Likewise, it is advisable to obtain confidentiality agreements, employment agreements and other business-related agreements that can be enforced in China's legal system.

It is also important to understand that courts in China have vastly different levels of expertise in handling IP matters. Smaller provincial courts may have very limited experience and are often concerned about the stability of the local economy. Since jobs associated with counterfeiting activities often contribute to a region's economic stability, such activities are less likely to be prosecuted in these courts.

Courts in Beijing and Shanghai are much more experienced in handling IP matters and are less likely to be influenced by local economic concerns. In Beijing, a special IPR division of China's high and intermediate courts was established in 1993. Since then, the People's Courts of Beijing have accepted more than 4700 cases involving IPR disputes and have resolved more than 95% of these cases.

Establishing jurisdiction in Beijing (or Shanghai) by having a place of business located in the city is important to any company doing business in China (at least until provincial courts mature). At the very least, all written agreements should include consent of all parties to jurisdiction in Beijing (or Shanghai).

It is now also possible to obtain injunctive relief, provided that a bond for the estimated damages is posted. A request for injunctive relief can be filed in a court having jurisdiction. If granted, a separate request to have the injunction enforced must be filed. Injunctive relief has only become available since November 2002, but it is another sign that protection of IPR is rapidly developing and improving. C

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