Intellectual Property Protection in China: How to protect your IPR when entering the market?

Management Institute of Finland welcomes You to this series of articles dedicated to the Intellectual Property Protection in China. This series has been prepared by Fintrade-Mercer, a prominent player and a trusted partner for European Commission in the area of IP Protection in China. The expert behind these articles is Mr Jari Vepsäläinen, the Chairman of Fintrade-Mercer Group. Mr Vepsäläinen is a China-trained attorney that has been actively involved as a strategic investment advisor and corporate lawyer in the People’s Republic of China for more than 37 years.

Our first article introduces you to the European Commission Approach, IP Challenge Reports and Expert Engagement, Chinese Intellectual Property Protection Legal Framework and practical ways to protect your IP when entering the Chinese market, as well as betterment of the Chinese IP Protection Regime.

In December 2021, Mr Vepsäläinen was chosen to join European Commission’s China IP SME Helpdesk (Belgium) as an IP Expert and has since contributed to the 7th IP Challenge Report in January 2022. The IP Challenge Reports are made by the European Commission’s China IP SME Helpdesk with the help of its experts twice a year to provide an overview to the European Commission of the main IP-related challenges European SMEs face in Mainland China, Hong Kong, Macao, and Taiwan, as well as a comprehensive overview of recent policy developments, legal and enforcement developments, and recent changes in Chinese IP system.

According to the European Commission Report, there are several serious concerns about the Chinese IP Protection system. The biggest cited concerns are:

• inconsistency of the court decisions among different provinces;
• governance and the independence of courts;
• tendency of court rulings to favor Chinese stakeholders when strategic sectors or companies, in particular state-owned enterprises, are concerned;
• discrimination of foreign right holders in comparison with local right holders, both in court proceedings and by other enforcement authorities;
• bad faith registrations of trademarks, despite the recently updated Trademark Law in 2019 to offer countermeasures for trademark pirating.

In addition, there is a separate issue with Hong Kong. According to the 2018 EUIPO-OECD study on “Why do countries export fakes?” and the 2019 OECD-EUIPO study on “Illicit Trade-Trends in Trade in Counterfeit and Pirated Goods”, Hong Kong is amongst the top transit countries of counterfeits globally, especially in the following product categories: watches and jewelry, toys, games and sport equipment, foodstuff, clothing, articles of leather and footwear, perfumery and cosmetics, pharmaceuticals, electronic and electrical equipment. More than 80% of the seizures of counterfeit and pirated goods by EU customs authorities originate from China and Hong Kong!

So, registering your IP in Hong Kong as well is also truly of imperative nature to not only protect your IP in Hong Kong, but also to protect yourself from the fakes of your product being exported out of China and Hong Kong to the Global market.

European Commission Countermeasures, Reports and China Expert Engagement

European Commission has undertaken serious actions towards the betterment of the IP climate between EU and China, including the planned signing the EU-China Comprehensive Agreement on Investment (CAI) and establishing and making better use of the existing EU IPR institutions like:

• EU-China IP Challenge Expert Reports, Dialogues and EU-China IP Working Group;
• Expert Engagement and Technical co-operation program IP Key China;
• EU-China Joint Customs Cooperation Committee; and, of course
• China IPR SME Helpdesk and employment of China IPR Experts

However, the EU-China Comprehensive Agreement on Investment has since been suspended following the European Parliament’s vote to suspend ratification of an investment deal with China. The decision was made in response of the sanctions by China on the members of the European Parliament’s Subcommittee on Human Rights and its Political and Security Committee, as well as other European scholars, that further deteriorated of the relationship between EU and China amongst the human rights violation allegations in the country and growing political disputes with the EU and its allies.

Therefore, the importance of a good corporate strategy for Your IPR Protection and exercising proper Due Diligence in this matter is still undeniable. We hope this series of expert articles will prepare you well for your IP journey in China and make  you better prepared to face the challenges at potentially the World Largest Market.

I. European Commission IP Challenge Reports, Expertise and Policy Development

The European Commission uses China IP Challenge Reports as the basis for policy development and dialogue with the Chinese government on the IP matters. At the end of this article, we are covering Fintrade-Mercer policy development suggestions and EU-China IPR protection space propositions to European Commission that will aid to success of European firms in China and Hong Kong.

In addition to the Challenge Reports, China oldhand experts are used to make the situation known at the corporate level. For instance, our Mr Vepsäläinen delivered several IP-related training sessions for various governmental institutions:

• February 2022: China and Hong Kong IPR Protection Environment, Problem Areas and Key Issues – Webinar for European Union Member States and EU Trade Commissioners;
• April 2022: IP Protection for R&D Activities in China – Webinar for Brussels Flanders-China Chamber of Commerce and the EU-China Business Association.

The Chinese IP Protection Framework has recently undergone changes that has brought the Chinese legal protection of IP more on par with the Western standards. All the relevant laws have been amended to better match the demands for IP protection in the modern day and age of fast technological advancement and globalization of information.

• November 1st, 2019: Amendment of Trademark Law
• June 1st, 2021: Amendment of Patent Law
• June 1st, 2021: Amendment of Copyright Law
• September 1st, 2021: Guidelines for Building a Powerful Intellectual Property Nation
• January 1st, 2022: China National Intellectual Property Administration Standard for the Determination of General Violations.

We are going to tell you more how exactly the legislation was changed and how it will affect the European and Chinese companies in the Second Article of this series. Stay tuned!uned!

II. China is a Member of the Key International IP Conventions

China is member of all the major international IP conventions, including:

• The World Intellectual Property Organization
• Patent Cooperation Treaty
• Agreement on Trade-Related Aspects of Intellectual Property Rights
• Universal Copyright Convention; Paris Convention for the Protection of Industrial Property (patent and trademark)
• Berne Convention for Protection of Literary and Artistic Works (copyright)
• Madrid Agreement for the International Registration of Trademarks

Therefore, a minimum protection of European IP rights does exist in China. However, we would like to emphasize two extremely important points that are often overlooked by European firms, which consequently often gets the companies in trouble over IP infringement:

• China practices the first-to-file principle. Therefore, registration of trademarks and patents in China is a must to be protected under international conventions and Chinese legal regime; and
• Computer Software Copyright and related intellectual properties are automatically existing under the Chinese copyright law. However, the registration of copyright is a prerequisite for legal protection at courts or arbitration.

For instance, by the first half of 2021, the total number of software registrations in China had reached nearly 1 million, with a year-on-year growth of nearly 40% and an average growth rate of about 20% in two years (by June 2021- 170,000 software copyrights, accounting for 20% of the total; by December 2021 – 280,000 software copyrights).

The general concern is that much of this high number of software copyrights are first-to-file by Chinese companies to take advantage of European companies who are not aware of the existing IPR legislation in China.

III. What IP is protected by the Chinese Law?

We would like to start with telling you what IP will be protected by the Chinese Law. In principle, there are 3 main types of the IP that are protected by the Chinese law, similarly to the Western IP Protection Frameworks:

• Patent – governed by China National Intellectual Property Administration. The Chinese Law offers protection for patents for 20 years
• Copyright – governed by National Copyright Administration with the protection of 50 years
  • A special copyright IP registration issue is the IP Protection of Software, which is protected for the duration of 10 years
• Trademark – China National Intellectual Property Administration with the protection of 10 years

Furthermore, there are 3 types of Patent Models offered by the Chinese IP Protection Legal Framework.

Here are the core specifics and differences of these 3 types:

Invention Patent Model

• • Subject matter: Technical solution relating to a product, a method, or an improvement thereof
  • Requirements on inventiveness: Possesses prominent substantive features and indicates remarkable advancements
  • Period of prosecution: 3 ~ 5 yr
  • Terms of protection: 20 years

 Utility Patent Model

• • Subject matter: Technical solution relating to a product’s shape, structure, or a combination thereof
  • Requirements on inventiveness: Possesses substantive features and indicates advancements
  • Period of prosecution: 3 ~ 9 months
  • Terms of protection: 10 years

Design Patent Model

• • Subject matter: Design of a product’s shape, pattern, or a combination thereof, as well as its combination with the color
  • Requirements on inventiveness: Distinctly different from the existing designs or the combinations of the features of existing designs
  • Period of prosecution: 3 ~ 9 months
  • Terms of protection: 15 years

IV. My IP has been infringed. What are my options?

In case of infringements, there are several ways to resolve an IP infringement dispute in China. The period of limitation for legal action is 2 years for domestic cases and 4 years for foreign-related cases from the date when the plaintiff knows or should have known of the infringement.

However, the most advised route is Negotiation and Mediation due to the simplicity and speed of the resolution, as the court cases could take several years to resolve, especially in the case with foreign companies being involved.

The other viable option is to apply for an early injunction to prevent the IP Infringement to expand in volume and give time to gather the needed evidence for further legal action. Further, if the case could not be resolved, the judicial action will take place, which entails higher penalties and stronger deterrent and will give the rights holders opportunities to claim monetary damages.

V. Hong Kong Advantages of IPR protection in Greater Bay Area

Innovation and technology are one of the developmental focuses and policy areas of the Central government strategic development area Greater Bay Area. Under this premise, resolving intellectual property right disputes through non-litigation dispute resolution (including arbitration, mediation, and consultation, etc.) is promoted while special IPR Courts are established.

The following development focuses outlined for Greater Bay Area for the International Legal, and Dispute Resolution Services Policy Area are:

• To establish Hong Kong as a leading center for international legal and dispute resolution services in the Asia-Pacific region
• To support Hong Kong in becoming a service center for deal making and resolving investment and commercial disputes relating to Belt and Road projects.

The intention for the Greater Bay Area development is to fully leverage the advantages of Hong Kong in intellectual property protection and related professional services.

A variety of patent options is available in Hong Kong as well:

• Longer patent protection term of up to 20 years
  • the “original grant patent” route directly in the Hong Kong SAR for a standard patent (“standard patent (O)”) – launched in 2019; or
  • the “re-registration” route for a standard patent (“standard patent (R)”) on the basis of a corresponding patent application for the same invention previously filed with a designated patent office outside the Hong Kong HKSAR.
• Short-term patent with a protection term of up to 8 years.

VI. Our Proposal for EU and the Road Ahead

As we said in the beginning, our Jari Vepsäläinen was invited to contribute to the EU IP Challenge Report by the European Commission. We have proposed a variety of issues for discussion and consideration to the EU, and we are inviting you to join us in this journey towards the fair playing field for European IP in China!

As the European Commission Report on the Protection and Enforcement of Intellectual Property Rights in Third Countries states, China continues to be a Priority 1 country in the areas of IP protection and enforcement as well as origin of counterfeit and pirated goods arriving in the EU from China and Hong Kong. It is important for all European companies doing or planning to do business in or with China to take that into consideration. However, it begs the question of whether the Chinese IP situation is as bad as it is thought to be.

We would like to stress that remarkable improvements have been made in the Chinese IP rights protection regime, with more tools given to the enforcement sector, such as increased punitive and statutory damages. Though, as stated earlier, China is known for its preferential treatment of the local companies versus the foreign companies, so the effect of the application and enactment of the new policies is still to be seen. The best advice to European companies will also be to Register-Register-Register the IP rights both in China and Hong Kong and establish a stable IPR protection internal framework. Proper China IP Protection Strategy and IP Protection Planning should be created by every European SME before even thinking of entering the Chinese market, since IP protection cases may be very costly when Chinese companies generally have much more resources at their disposal to participate in possible litigation

On the macro-level, it is very important to continue dialogue with China for the betterment of IP protection in the country as a whole and to provide transparency towards the entire IP rights landscape in China. Regarding software-related IP, European companies possessing, for instance, 5G technologies, have reported dual standards where Chinese courts are favoring Chinese-owned technologies and overstating their value compared to the value of foreign technologies that are often undervalued.

This creates a systematic problem for European software companies, where formalized market rates for licenses and royalties are needed in order to continue the European push for current global 5G and future 6G standards. Future sustainability ecosystem requires the ability to continue constant R&D in Europe and, therefore, the need for market rates is of utmost importance for all EU companies operating in China or intending to enter the Chinese market.

China continues to be the world largest market for many industries, technologies, and companies. The costliest mistake might not be to enter the China market but to leave it alone – register your IP before coming to China, not react when infringement happens.

CASE: Computer Software NX Copyright Infringement (Siemens PLM Software, 2020)

Finally, we would like to present to you a case that has occurred quite recently and became a staple case in the China IP-related education.

Siemens PLM Software, the copyright owner of NX software, filed a lawsuit with the Guangzhou Intellectual Property Court on the grounds that Wolfer’s unauthorized use of the involved software in product design and manufacturing constituted an infringement.

In response to the application of Siemens PLM Software, the Guangzhou Intellectual Property Court visited Wolfer for evidence preservation. Prior to that, the Guangzhou Intellectual Property Court issued a preservation ruling, detailing the preservation measures to be taken and the legal consequences of refusing to cooperate with respect to the preservation.

According to the on-site inventory, there were 26 computers in Wolfer’s design office. After the Guangzhou Intellectual Property Court preserved 17 computers, 9 of which were founded to be installed with the software involved, Wolfer’s representatives suddenly refused to turn on some of the computers, cut off the power, in an attempt to obstruct the preservation of evidence. The preservation work was thus forced to be suspended.

In this case, the court equally protected the lawful rights and interests of the foreign-related entity in accordance with the law, clarified the consequences of litigation participants obstructing evidence preservation, and took the alleged infringer’s behavior during the litigation into consideration when determining damages. The ruling in this case to impose heavier penalties on the parties who interfered with evidence preservation has important significance in guiding litigants to behave with integrity in litigation.

FINAL REMARKS: What should I consider before registering my IP in China and Hong Kong?

• China and Hong Kong are two separate legal jurisdictions – therefore, you need to register IP rights also in Hong Kong, not only in China.
• Chinese firms are willing now to undertake legal actions against Foreign Companies in China, which this might lead to a worrying trend of revenue seeking via patent infringement litigation.
• It is very important to continue dialogue with China for the betterment of IP protection in the country as a whole and to provide a level playing field and transparency towards the entire IP rights landscape in China.

In the next article, we will expand on the changes that took place in the China IP Protection Legal Framework and how that will affect the European companies’ IP and their business processes and partnerships.

Jari E. Vepsäläinen

Chairman, Fintrade-Mercer Group

The People´s University Of China, Beijing

Fintrade-Mercer expertise is sought after especially at Technology Transfer, R&D and Technology-to-Equity transactions in Mainland China and Hong Kong, where our company enjoys more than 37 years’ experience and expertise on filing for different IP protection models, in addition to:

• Chinese Branding and Trademarks
• Software Copyright, Source Codes, User-Manuals and Trademark
• Petty-Patent, Utility Models and Design Protection
• Invention Patents