Just came across an interesting post with a not so interesting title on the China IPR Blog: IP Developments in Beijing.  The post starts out discussing how “due to the rapid increase in IP cases in the Beijing Number 1 Intermediate Court, particularly IP cases involving patent and trademark validity, the Beijing Intermediate Court will split its Intellectual Property Tribunal in two” with the number one IP Tribunal hearing mostly trademark and unfair competition cases and the number two IP tribunal hearing mostly patent and copyright cases.

The post then notes that the Beijing court (which hears about 10% of all China IP cases) has seen its case load increase from “4,748 cases in 2008 to 11,305 in 2012, an increase of nearly 150%,” with copyright cases representing about half the total.

This is important for foreign companies doing business in China and here’s why.

  1. Rational human beings do not generally spend money on something that is not going to bring them any benefit.
  2. Bringing a lawsuit in China always costs money (China court filing fees tend to be fairly high), oftentimes a relatively large amount of money.
  3. Chinese businesses tend to be made up of rational human beings who understand the value of an RMB.
  4. Chinese businesses must believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not pursue the lawsuits.
  5. Chinese businesses must, in increasingly large numbers, believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not be increasing the number of IP lawsuits they are pursuing.
  6. Chinese businesses are almost certainly correct in their belief that suing before the Beijing IP court will give them redress.
  7. If Chinese businesses are correct in their belief (and they almost certainly are, see number 6 above), that means that IP enforcement, at least through China’s courts is improving.

Independently of the above, you would have a tough time finding a China lawyer who does not also believe that IP enforcement in China is improving, particularly with respect to trademarks.

IP enforcement/IP protection is improving in China for two main reasons.  First, Chinese companies and foreign companies alike are now realizing that it makes sense for them to register their trademarks, copyrights and patents in China so that they have an opportunity at being able to protect them (in the courts, among other places).  And two, China’s courts are increasingly realizing the importance of protecting IP in China, largely because Chinese companies increasingly want them to grant IP protections.

What this all means for those of you doing business in China is that you too should be jumping on the IP registration bandwagon.  For more on protecting your IP in China, check out the following:

  • How To Protect Your IP From China. Part 2. What we, as China lawyers, look at in trying to protect our clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

What are you seeing out there?

This is part two of a three part series on media piracy in China by Joe Karaganis, arising out of a report on Media Piracy in Emerging Economies.  Part I is here.

Although we initially approached piracy an intellectual property issue, we ended up spending a lot of time on the determinants of price and availability in legal markets, and so on questions of media ownership and market structure.  And when we looked at these, it was clear that the structural issue that mattered most was the extent to which legal and cultural barriers sheltered domestic studios and distributors from Hollywood.  Outside India and China, there were few successful domestic film industries.  Once vibrant examples—in Europe of course, but also Mexico, Russia, and Japan—had become marginal in their home markets and inconsequential abroad.  There are many reasons for this decline.  Hollywood’s mastery of widely-accessible spectacle is a big part of it, of course.  But so too is the advantage of operating from a rich home market, with stronger investment infrastructure and the ability to amortize production costs.  So too is its much more effective control of the rest of the system, from saturation advertising, to the control or manipulation of distribution networks, to the capture of legislation, trade negotiations and state subsidy programs, to an ability to capitalize on the economic volatility of developing-world economies, which has periodically decimated local film industries.  They do all of this better than anyone else.  Whether Transformers 4 is any good won’t be the deciding factor.

What is the role of piracy in this context?  It depends.  Where the international studios control domestic markets, piracy represents a marginal loss to the studios (and to their local partners) and, conversely, a net welfare gain to consumers.  We would argue that the studio losses are small as there is no real effort to serve these markets at affordable prices.  And that the welfare gains are significant as seeing Hollywood movies becomes an important form of symbolic participation in global culture.

In India and especially in China, with its quotas and censorship barriers, the situation is more complicated.  There, piracy has a secondary function as a channel for brand development, educating Indians and Chinese in the norms and values of Hollywood.  Enforcement in this context is double-edged.  Would Hollywood have benefitted in the past decade from stronger enforcement and diminished exposure of its films outside the few legal theatrical venues?  We think probably not, but it’s hard to say.  And that’s the point.

Aggressive enforcement should also, in theory, be a dilemma for the US government, which has an interest in cultivating channels of communication that bypass government censorship. Jinying Li has also written extensively about the role of the pirate market as a distribution channel for independent Chinese films, which are routinely denied exhibition.  The relationship between illegal copying and freedom of expression in these contexts is a close one because both depend on uncontrolled communication.  This overlap has made US policy hopelessly contradictory (or maybe just cynical) on enforcement, with the State Department calling for a free and open Internet while the USTR advocates Internet monitoring and filtering.  Chinese policy is at least more coherent, with paranoid control of Internet communication balanced by tolerance of the piracy-friendly growth models of many Chinese Internet companies.

As interest shifts to Internet piracy and enforcement, DVD piracy has become a legacy concern, useful mostly in setting fantasy baselines for profits against which loss claims can be made.  In this spirit, the USTR’s 2013 Special 301 report reproduces MPAA complaints that the Chinese home video market underperforms compared to the US.  The commercial interest in reinventing the DVD cash cow is clear, and will probably be advanced, increasingly, by Chinese monopolies looking to raise prices.  But as a matter of either Chinese or American public policy, why care?

Even as the DVD bubble pops, Hollywood theatrical revenues climb, at home and abroad.  The Chinese theatrical market leads the list, growing roughly 30% annually in recent years.  Production, in theory, is robust: China made over 600 feature films last year, comparable in numerical terms to Hollywood.  So taking seriously copyright’s main purpose as an incentive for creators, one might ask: where is the problem in need of an enforcement solution?  Where is the evidence that piracy is undercutting production?

On the contrary, the bigger problem for studios in both China and the US is probably overproduction.  The new Hollywood-blockbuster-dominated global exhibition market just doesn’t need that many films.  Single blockbusters can occupy 60-80% of Chinese screens, or 10-15% of more plentiful US screens.  For all the investment in production, only around a third of Chinese films saw domestic release in 2012. For Hollywood, the new 34-film quota may be an optimal solution that keeps attention focused on its big bets.

Everyone understands the Hollywood solution to these new market conditions.  On the production side: fewer, larger blockbusters, supported by ad campaigns that can dominate global media attention. (For what it’s worth, I think the studios have barely started to understand what this means for US overproduction.)  On the consumption side: a push for stronger IP enforcement at all levels to squeeze out some extra profits at the margin.  In 2012, Hollywood took 50% of Chinese ticket sales for the first time, based on only 20 releases.

There are, of course, bumps along this road.  In early 2013, unexpectedly poor returns for a few American action films triggered a round of anxious speculation about what Chinese audiences want, driven by fear that at some point the formula will stop working.  But genre fatigue, unexpected fads, and breakout local hits are part of the blockbuster engine. If it was a closed loop, it would fail, like the didactic state cinema it often competes with.  In the long run (which may be measured in months rather than decades), I expect that the question of what Chinese audiences want to matter about as much as what Brazilian, Russian, or South African audiences want.  Which is to say, not very much.  A hypothetical 80-20 US-China ticket sale split would put China in the middle of the international pack, well ahead of most developing countries.  Chinese audiences may not get what they want, exactly, but they’ll probably give a passing imitation of wanting what they get.

Two excellent quotes from Bill Russo in one article. Bill formerly headed up Chrysler Asia and he is now based in Beijing with Booz & Co. He knows China’s auto industry as well as anyone.
Both of these quotes come from a Detroit News article, entitled “Ford-Geely deal spells out tech sharing” [link no longer exists]. The article highlights Detroit’s skepticism about China Auto’s willingness to abide by tech sharing agreements.
Russo’s first quote is on intellectual property protection in China and it nails it by pointing out how the laws are fine, it’s enforcement that is the issue:

“There’s a well-articulated set of intellectual property guidelines and laws, but there hasn’t been consistent enforcement of those laws,” said Bill Russo, a Beijing-based consultant with Booz & Co.

We often counsel our clients who license their technology to Chinese companies that they should front-load as much of the license payments as possible and that they should only enter into the licensing arrangement if it makes sense even if they are only paid for the first year or two under a longer term deal. We tell them this because our experience has been that Chinese companies do fairly often (though less than in the past) stop paying licensing fees after they no longer need further assistance from the foreign company licensing the technology.
But my favorite quote from Russo is on how China’s auto manufacturers are not “there yet” when it comes to making a world class car and is explanation for this shortcoming:

Auto analysts say the Volvo acquisition will help Geely gain expertise in vehicle development — an area where China’s fledgling carmakers are all weak. Geely has only been making cars since 1998, while expertise in vehicle development is built over five-year product cycles.
“It’s like you can go to medical school and be a straight-A student, but until you’ve been a doctor for 10 years, you’re not going to be that good at it,” Russo said.

But give China time:

But it won’t take long for the Chinese to catch up.
“We probably had this discussion about Japan 40 or 50 years ago, and we probably had this discussion about Korea 10 to 20 years ago,” Booth said.
“The world is accelerating, and China is accelerating very fast.”

Do you agree?

The United States Commerce Department, Office of China Economic Area, will be putting on two webinars this month on intellectual property in China. I have listened in on a few of these webinars and they tend to be very good.

The first will be on May 10, from 2:00 p.m. through 3:30 p.m. EST and will be the United States Trade Representative (USTR) “Reports on Local Enforcement of Intellectual Property in China: Special Provincial Review and Special 301 Report.”  This report examines the “adequacy and effectiveness of IPR protection and enforcement at the provincial level in China.”  These reports are based on “numerous teams of U.S. government officials [having gone] to many provinces across China meeting with local Chinese government officials, conducting site visits to hot spots of pirating and counterfeiting activity and solicited two rounds of public comments.” USTR Chief Negotiator for IP Enforcement Stanford McCoy, and Senior Director for China Amy Celico will be leading this webinar, which will provide “an in-depth discussion of this year-long fact finding mission and the results of this year’s Special 301 Report on China.” A copy of the Special 301 report can be found here [pdf].

The second webinar will be on May 17, also from 2:00 p.m. through 3:30 p.m. This one will be on China’s 2007 IPR Action Plan and will be led by China’s Counselor for IP Dr. Yang Guohua. Dr. Guohua will discuss China’s “2007 IPR Action plan which documents initiatives planned in 2007 by a number of China’s IP related agencies. This year’s plan has over 276 measures.” Dr. Guohua’s talk “will focus on “the major projects to be completed in this plan and points out areas of interest to foreign right-holders.” An English language version of China’s IPR plan can be found here.

Both events are free. To register, you must send your contact information to ChinaIPR@mail.doc.gov and registration confirmation and dial-in/log-in instructions will follow. Only a phone line and a computer with internet are required to participate.

If you are a China lawyer or you are doing business in China we urge you to attend.

Today’s Wall Street Journal has an article on how China’s desire to “climb out of low-end manufacturing” is driving a rapid improvement in intellectual property protection there. Entitled, “As China Reins in Piracy, Some Seek Faster Results,” this article coincides with exactly what we have been saying since we started this blog: China’s IP protection will continue to improve as protecting IP becomes more important for China.

In just the last month or so, China has seen a slew of high profile crackdowns on piracy, with Viagra and DVD counterfeiting kingpins getting very long and very public sentences. According to the Wall Street Journal, foreign companies doing business in China are noticing:

Foreign-company executives, surveys and government officials all note improvements. The biggest change has been at the top: Senior leaders including Premier Wen Jiabao now declare that improving the protection of intellectual property is a “strategic policy” for the nation. That is because they want Chinese companies to climb out of low-end manufacturing and develop their own technologies and brands — which will need protecting. Software producers like Microsoft Corp. have seen some of the clearest early benefits.

The article then notes that companies consider this increasing IP protection as “clear enough to allow them to invest for the future in the confidence that improvements will continue. AstraZeneca PLC and Novartis AG this year each committed to spending $100 million on research and development in China. Drug companies depend on selling patented products, and both companies cited China’s strengthening protection of such rights in support of their decision to invest.” Other foreign businesses see the same positive momentum:

“The positive momentum leads us to believe that things can only get better,” said Keith Feldman, general manager of the international home-entertainment unit of News Corp.’s Twentieth Century Fox studio. He said the improving enforcement of intellectual-property rights is one reason Fox decided to try to start selling DVDs in China, even though it must still compete with illegal copies that can sell for less than a dollar.

“There’s no question they have made progress,” Secretary of Commerce Carlos Gutierrez said in an interview this month during a visit to Beijing.

This article tracks the advice CLB co-blogger/China lawyer, Steve Dickinson, gave at the recently completed China Law Forum on the need for foreign companies to act proactively to protect their IP in China. IP enforcement in China is far from perfect, but it is (at least in some areas) already effective and it is improving. This means foreign companies must examine their intellectual property options in China and this means in most cases it will make sense for these companies to register their trademarks, patents and copyrights in China. Registering your IP in China (or anywhere else for that matter) does not provide iron-clad protection, but failing to register your IP in China does all but assure you of no protection at all.

China Law Blog’s own China Lawyer, Steve Dickinson, was the third featured speaker at the recently completed Doing Business in China seminar in Chicago. Steve’s talk was entitled, “China: The New Paradigm for Market Entry” and focused on the idea that China today is not the China of ten years ago.

Steve discussed the following five paradigms:

  1. Company Formation. Going into China as a wholly foreign owned entity (WFOE) is almost always preferable to going in as part of a joint venture (JV).
  2. Management. Foreign companies doing business in China should use international best practices. This means responsible, ethical leadership and, above all else, this means following both China law and US law (for example, the FCPA).
  3. Sound Business Practices. Steve told of a client who set up his business in a particular city in China only because that was where the son of a purported Chinese general with whom the company was connected lived. Steve emphasized that businesses going into China must make their China decisions based on their “own business economics, internationally accepted business practices, and the law.” Steve described Guanxi as overrated and no substitute for good business.
  4. Branding/Trademarking. Do not to wait until you are successful in China to establish your brand in China. Due to China’s first to file trademark laws, you must be first to trademark your brand in China and if you are not, someone else will get it. Steve told of our law firm receiving calls from companies seeking our help in prosecuting trademark cases in China even though they own no Chinese trademark because they never registered anything there. Steve also emphasized the need for foreign companies to create and trademark a Mandarin brand name because that is the name by which virtually all companies in China (including such biggies as Coca Cola and Dell Computer) are known.
  5. Intellectual Property. IP enforcement in China is improving and how if a foreign company is going to take advantage of this, it must register its intellectual property (i.e., its trademarks and patents) in China.  Foreign companies also must protect their IP (including their copyrights which need not be registered, but which often should be) by prosecuting IP violators.

The overall theme of Steve’s talk was that China’s legal systems have advanced to the point where it now makes sense to conduct business in China pursuant to international best practices.

By Glenna Stewart

Last month, the US-China Business Council (USCBC) published the results of its annual member survey, highlighting the gains US businesses have made in China, along with the obstacles they still face.

The results of the survey de-bunked several common myths about US companies operating in China, including the following:

  • Most US investment in China are 100 percent US-owned (WFOE). They are not joint ventures with Chinese partners.  Nearly 75 percent of new business enterprises are entirely foreign-owned.
  • Fifty-seven percent of USCBC member companies said their principal objective was to serve Chinese consumers.
  • Eighty-one percent of companies say their operations in China are lucrative.

The survey emphasized the considerable importance an increasingly large number of US companies place on their China operations.  Eighty-seven percent of companies reported China is at or near the top of their priorities, a sixteen percent increase from last year.  Respondents also stated that company resources for China, such as investment, staffing and executive time, would increase over the next year:

The priority that US companies place on China and the resources they plan to dedicate to growing their businesses there indicate not only the extent of US companies’ stake in the continued development of China’s economy, but also the depth and importance of the bilateral trade and economic relationship.

The report also highlighted the operating issues still plaguing US companies in China.  Respondents were asked to rank the top five issues of most importance and evaluate the progress China has made in handling them.

  1. Human Resources:  China’s swiftly growing economy mean the demand for capable workers outpaces supply.  Recruiting and retaining employees, especially mid-level managers, is becoming increasingly difficult.  Competition for good talent has driven wages up.
  2. Administrative Licensing and Business Approvals:  Problems with securing administrative licenses, business approvals, product safety licenses, automatic import licenses, certifications and registrations are pervasive in China and have existed for many years.  More than half the survey’s respondents said there has been no progress made in alleviating these issues.
  3. Intellectual Property Rights Enforcement:  A growing legal framework exists to protect Intellectual Property Rights (IPR) in China, however, implementation of those laws has seriously lagged, especially at the provincial and local levels.  This issue has consistently been ranked as one of the top ten concerns over the last four years and fifty-seven percent of USCBC members report no improvement in the enforcement and prosecution of IP violators.  Thirty-three percent, however, reported some progress.  For more on how China is slowly but surely improving its IP enforcement, go here, and here.
  4. Competition and Overcapacity:  Chinese reinvestment of retained earnings in new production facilities, regardless of market forecasts, has resulted in plummeting prices for certain products, due to oversupply:  “US companies are increasingly concerned that they will face domestic competitors’ financing expansion on non-market-based terms.  This is one reason why China’s unfinished financial reforms are critical to sustainable economic growth and to ensuring a competitive ‘level playing field.'”
  5. Transparency:  Nearly 60 percent of survey respondents said there has been no progress in improving availability of necessary information is struggling to develop an open regulatory system where rules are circulated for comment before implementation.  For more on transparency in China, go here, here, and here [link no longer exists].

The full report on Business Council’s website describes five additional issues impacting foreign companies that do business in China: standards setting, distribution rights, US visas, national treatment and market access in services, and it also summarizes the respondents’ China operations and assesses the impact of China’s entrance into the WTO.

What do you think?

I am frequently posting on how China IPR protection (though far from perfect) is both not as bad as widely believed and is rapidly and substantially improving.  An Article in Today’s People’s Daily, IPR cases handled by Chinese courts on rise in 2005, empirically confirms the improvement.

The article states that in 2005, 5,336 people were punished for intellectual property rights (IPR) violations, up 30.66 percent from 2004 and 2,963 were imprisoned, up 23.9 percent from the previous year.  It is not clear whether the 5,336 figure includes the 2,963.

The article also notes that those who sell more than 5,000 pirated “discs” [which I assume to mean DVDs and CDs] can be imprisoned for three to seven years.

What are you seeing out there by way of IP enforcement in China?

The Wall Street Journal Law Blog ran a post today, entitled, “Is China Getting Serious About Patent Enforcement?”  The post highlights a Fortune Magazine article that, entitled, “China Goes A-Courtin.”  The Fortune article refers to the patent infringement lawsuit brought by Shenzhen’s Netac Technology in the United States against U.S. company, PNY Technologies.  We previously blogged on that case in “Man Bites Dog — Chinese Company Sues in U.S. for Patent Protection.”

Fortune Magazine sees this lawsuit as a potential turning point in intellectual property enforcement in China, because, “only when Chinese companies begin protecting their own patents, copyrights, and trademarks will the notoriously unreliable Chinese courts and enforcement authorities become vigilant in protecting foreign companies’ IP.”

The article goes on to talk about how American companies have been “less vigilant about protecting their rights in China than they could — and probably should — have been. Under applicable treaties, U.S. companies have about 30 months from the time they file a patent application in the U.S. to seek corresponding patent protection under Chinese law.”  Many American companies, however, wrongly decided the Chinese market was either not big enough or so unlikely to enforce patent rights as not to warrant registering them.

Patent attorney, Anthony Chen, talks about a “major American IT company” which unsuccessfully tried to collect patent royalties from a Chinese company on U.S. telecom patents it had never protected under Chinese law.  “You don’t have patents in China,” the Chinese company responded. “It’s not that we don’t respect your IP. You do not respect your IP.”

Bottom Line: Once again, if you expect to protect your intellectual property in China, register it in China.

IP enforcement in China is obviously not as good as in places like the United States, Japan, or the EU, but it is much better than widely believed. And it is certainly much better than the Western media presents it.  On top of that, we are seeing constant improvement and we have noted some of that here, here, and here.  We also contend that much of what the Western press describes as China’s IP problems (particularly in the area of trademarks) frequently stem from IP mistakes made by foreign companies, rather than from unfair or lax enforcement by Chinese courts.

A reader from New York City alerted us to an interesting press release [link no longer exists] from NERA Economic Consulting.  NERA has twenty offices worldwide and is a leading international economist firm.  It is a part of Marsh & McLennon, a financial conglomerate which, at one time, had its Seattle office in my building.

Nera’s press release touts a recently published article by NERA economists on intellectual property rights in China that concurs with our view that Chinese IP enforcement is rapidly improving:

Dr. Alan Cox and Kristina Sepetys cite the growing Chinese economy, more sophisticated laws, and greater attention to enforcement as reasons for the increase in Chinese intellectual property rights infringement cases. Their article, “Intellectual Property Rights Protection in China: Litigation, Economic Damages, and Case Strategies,” appears in the new book, Economic Approaches to Intellectual Property: Policy, Litigation, and Management, edited by NERA economists Gregory K. Leonard and Lauren J. Stiroh.

The number of IP rights infringement cases being brought before Chinese authorities is still relatively small, and the fines and damages awarded are low compared to those in the US and other industrialized countries. But Cox and Sepetys write that these conditions are steadily changing. “In addition to the international concerns, there is more intellectual property being generated in China and with it a greater domestic interest in the protection of intellectual property rights and enforcement of IP laws. The combined effect is to increase the number of people being arrested and fined for IP violations,” Alan Cox said.

As part of this trend, Chinese and foreign companies are increasingly using the Chinese IP laws to their advantage. For example, in July 2004, the State Intellectual Property Office of the People’s Republic of China (SIPO) invalidated Pfizer’s Chinese patent for Viagra — the first time Chinese companies pursued legal remedies challenging a Chinese patent owned by a foreign company. A Chinese peripheral maker, Netac Technology Co., also recently sued Sony Electronics for USB flash memory disk patent infringement.

There is a very real basis for believing Chinese courts will protect your IP rights, but to secure even that protection, you must properly register your IP with the appropriate Chinese authorities. If you are doing business with China, registering your IP there is absolutely essential.