Practitioner’s Section

IP strategies in business operations with China

Andreas Bieberbach

This article deals with the question how to ensure that for new or existing business activities in China, all legal aspects relating to technology commercialization and knowledge transfer are taken into consideration.
For a valid IP strategy, an international company needs not only to analyze its own IP position, but has also to look  on the current Chinese patent legislation, i.e. the way how Chinese companies act in this field and the specific regulations on technology transfer from and into China.

 

1 Introduction

“The competition of world’s future is the competition of IP.”(Li and Jiang, 2012)
This statement made by Prime Minister Wen Jiabao in 2010 indicates what China aims to represent: An innovative country and no longer just the “workbench of the world”. To make this happen, China issued a “National IP Strategy” on June 10, 2008 with the aim to “greatly promote China’s capacity in creation, utilization, protection, and administration of intellectual property (IP)” (State Council of the People’s Republic of China, 2008).
One important section within this National IP Strategy is chapter V, 4, “Improving IP Law Enforcement”, which is directed also towards Chinese companies to enforce their rights against third parties (State Council of the People’s Republic of China, 2008).
In addition to this and to improve the IP system further, China has issued  a “National Patent Development Strategy (2011 – 2020)”. In view of China’s short history of establishing the modern patent system, the government took the position that some problems are remaining and “the patent system has not become fully integrated with the development of socialist market economy” (citation from this Strategy).
Hence, for an international company, it is not sufficient to develop an IP strategy for China solely from its own perspective, but it rather needs to take in consideration the ongoing changes in China’s IP landscape, which have an impact on a valid IP strategy.
The first aspect - as far as ongoing changes are concerned - refers to the amendments of laws, regulations, guidelines, and case law of the courts. This sets the legal framework for all business operations in China, i.e. R&D work, technology transfer into a joint venture, marketing new products, or any mergers & acquisitions.
The other aspect relevant for a valid IP strategy relates to the IP activities of Chinese companies.
Therefore, it is highly advisable to understand, first, the position of Chinese authorities and, in consequence, Chinese companies or other entities before developing the own IP strategy.
Concerning the first aspect (amendments of  laws etc.), the third  revision of the Chinese Patent Law, effective on Oct. 1, 2009, is one essential example. It clearly shows that since 1984, when the Chinese Patent Law has been established, this law is constantly adjusted to the actual needs and, in so doing, primarily of the Chinese companies.
As to the IP activities of Chinese companies, it is helpful to have a look on the Chinese patent statistics. Following the above mentioned “National IP Strategy”, Chinese companies are very active in filing all kinds of IP applications in China and abroad.
However, beyond of pure statistics, one can also see a change in the Chinese “mind-set”. One example is the statement by Nan Cunhui, Chairman of Chint Group, a Chinese electronic company, which sued Schneider, a French electronic company, over IP infringement:
“I don’t mind how much Schneider pays us. What I care about is winning the case. It will help change the stereotype that it is Chinese companies that are always accused in IPR cases.” (Lu 2008)

2 What can we learn from Chinese IP statistics?

The total number of patent applications with the Chinese Patent Office (SIPO) in 2011 was       1,633,347 (including 526,412 inventions, 521,468 designs and 585,467 utility models) (total number in 2010: 1,222,286). Only 21% of the 526,468 inventions in 2011 came from foreign companies (This term “inventions” corresponds to patent applications e.g. in Europe).  The shares of foreign companies in the fields of Chinese design- and utility model-applications are even below 5% (according to SIPO statistics).
On the other hand, the numbers of patent application with the European Patent Office (EPO) submitted by Chinese companies soared from 6,490 in 2009 to 12,698 in 2011. For comparison: German companies filed 33,139 patent applications with EPO in 2011 (according to EPO statistics).
In other words, this means:

  • Chinese companies are using their domestic IP system to a greater extend than foreign entities.
  • Before entering the Chinese market, a company has to develop a freedom-to-operate opinion, meaning an analysis of possible IP rights in China which might block or at least hinder its market activity in China. The result of such an opinion has an increasing impact on any own product or project related IP strategy.
  • Even in Europe, patents owned by Chinese companies might become relevant as a market barrier. However, in the fields of organic chemistry and pharmaceuticals, no Chinese company can be found so far in the list of the top 25 applicants with the EPO in 2011. For the time being, Chinese companies focus on digital communications and similar technical fields
  • In case a Chinese company will be the target for an acquisition by a non-Chinese company, the innovative potential, i.e. the IP position of the Chinese company needs to be analyzed in detail.

 

3 IP strategy for a product covered by a patent and designated for the Chinese market

3.1 Working on the specifics

“Chinese companies are extremely efficient at creating new versions of technologies and products, often simpler, cheaper and more effective, shortly after they are invented and marketed elsewhere in the world.” (Comment in China IP Report, June 20, 2012).
Although this sometimes might be a wishful thinking, it nevertheless shows the approach Chinese companies in principle follow. One famous example is the above mentioned “fight” between the electronic companies Chint and Schneider over an infringement of Chint’s utility model by Schneider, which resulted 2009 after a “court mediated decision” in a payment of 157.5 million RMB (20.1 million Euro) by Schneider (as a global settlement). Chint’s utility model was only a small modification of the existing technology, but has been held valid by the courts.
For chemical and pharmaceutical companies, it is important to make sure that the above mentioned “new versions”, which are usually small modifications of the original invention, must be covered by own patent applications or utility models. At least they should be published as a “defensive publication”, e.g. via internet services, in order to make them prior art and to avoid that Chinese companies are able to file own IP rights on such modifications.
This means: Already during the internal discussions with the inventor and before filing the priority application, e.g. with the EPO, the patent attorney has to think about possible implications, if a future product covered by such a priority application should be launched in China, maybe years later.
And it is not only about the small modifications which need to be included, it is also important from the very beginning to have a good “coverage” for the patent claims in such a priority application in terms of experiments and working examples. To meet the requirement of enablement (or “sufficiency of disclosure”) in China (and to some extent also in Japan), it is necessary that the original description already discloses enough experimental evidence and specific data to support the claims.
This is especially true for second medical use inventions. It is not sufficient to provide a mere written description of the use as claimed, but it requires convincing efficacy data for such a use in the initial application to prove that the claimed invention can solve the targeted problem. Clinical data, however, are not necessary.
So, as always, professional and detailed work in the very beginning sets the basis for a good strategy.

3.2 Considering amended Chinese IP regulations

As already said, the Chinese patent law has been revised  in 2010. Although this patent law in general is in many aspects in line with, for instance, the European patent law, there are some amendments which might have an impact on a product related IP strategy.
Even if a company has filed a perfect patent application covering an important e.g. pharmaceutical product, one has to keep in mind that the patent law now includes a Bolar exemption (Art. 69, no patent infringement by using e.g. a patented medication for gathering data for administrative approval) without the usual compensation by a patent term extension (as it is the case in the US or Europe). And on top of this, the compulsory license system is rather favourable to generic companies: In case a company does not “sufficiently” exploit its patented product, a compulsory license might be granted (Art. 48). So far, no specific examples are known, but the “tool” exists anyway.
For biotech companies it is important to know that for inventions which depend on genetic resources the original and the direct source of said genetic resources shall be indicated in the application. The applicant shall state reasons, if he is unable to indicate the original source (Art. 26).
So, before entering the Chinese market with a specific product, it needs to be analyzed whether or not there is a reasonable balance between the possible IP protection for this product and, on the other hand, the burden, e.g. costs, for such a market launch in China.

4 R & D activities in China

Another category of business operations is the establishment of a R&D center in China. There are a lot of reasons which make it meaningful to start an R&D center in China. Some of them should be mentioned:

a)    Tax incentives for high tech companies: One essential point to achieve this high tech status is the number of inventions made in China (besides the number of employees in R&D and other topics).

b)    The “Hai Gui program” intended for high-skilled returnees: In 2009, 63,300 young professionals went back to China from abroad, caused by the benefits of this program.

c)    Biotechnology represents one of eight technology fields of main interest defined by state authorities. As a consequence, companies filed 12,081 inventions patents in this field in 2011 (40% more than 2010), 77.7% of them owned by Chinese companies.

d)    In November 2008, China initiated the Mega New Drug Development Program, funded with more than 17 billion US-Dollars.

 

Irrespective of the importance of China as market, it might be very interesting for a foreign company to profit from this framework by establishing an R&D center in China, either as wholly owned Chinese affiliate or jointly with a Chinese partner.
If a Chinese partner is involved, either within a Joint Venture or as a co-operation partner, its IP position should be clarified in advance: Do the expected results stemming from such an R&D activity depend on already existing patents owned by the Chinese Partner? If so, it needs a respective licensing contract from the early beginning of such a co-operation as part of the strategy.
Especially in the biotech field, there are several interesting Chinese partners within the Chinese Academy of Science for co-operations. Just to name one of them: Shanghai Institute for Biological Sciences (SIBS) has signed nine patent licensing deals in 2011 worth more than 300 million RMB (ca. $46 million) according to China Daily.
In any case, part of the organizational set up for such an R&D activity and, consequently, of an appropriate strategy, are IP contracts which reflect the Chinese legal situation in a suitable way. Mainly, three regulations need to be taken into account in the first place:

1.    Chinese universities as possible R&D partners usually do not have a business license and, therefore, are not allowed to sign a contract with a foreign company. In such a situation, the Chinese affiliate will be the right contractual partner instead of the foreign parent company.

2.     All inventions “made in China” within such an R&D operation have to be filed with SIPO first (Art. 20 of the Chinese Patent Law).

3.    All contracts covering regulations on the worldwide utilization of results stemming from such R&D operation in China fall under the Regulations of the People’s Republic of China on Administration of the Import and Export of Technology, effective from January 1, 2002 (“TIER”)

This shows that the necessary contractual framework is complex and, therefore, should be structured by an experienced attorney only.

5 Other important IP issues in China

In addition to the selected topics above, it is necessary to consider a lot of other IP issues for enterprises being active in China. Some of them are mentioned below.

5.1 Trademarks and designs

Part of the “IP package” for a product in China must be the right trademark and, if applicable, a design patent. The own trademark, especially in Chinese characters, is important, to make sure that Chinese competitors may not entry as copycats, not using the original trademark in latin letters alphabet, but using  Chinese characters as a trademark  which, pronounced in Chinese, sounds like the known “western” trademark. One example is the “Rehau case”, recently decided by the Shanghai No. 1 Intermediate Court. Rehau prevailed in a four years trademark litigation and stopped Chinese competitor Shanghai RUIHAO (!).

5.2 Enforcement of IP rights in China

It is a “common understanding” (maybe “misunderstanding”) that western companies cannot enforce their IP rights in China because of the weak legal system in China. According to the “2012 China Business Climate Survey Report” published by the American Chamber of Commerce in China (AmCham China), 24% of the respondents in the survey mentioned IP rights infringement as a challenge (this seems rather moderate in comparison to other problems as management-level human resources constraints with 43% and inconsistent regulatory interpretation/unclear laws with 37%). Nevertheless, only 34% of the respondents found China’s IP right enforcement has improved.
However, one has to distinguish between infringements of copyrights and designs, which are still a big problem, but do not effect the chemical industry so much as the consumer industry, and patents, which are more important in the field of chemistry and usually can be enforced more effectively.
To be successful in enforcing patents, it is essential to follow some “basic” rules:

a)    Set up the right team of internal and external experts and make sure that the communication within the team is more than just o.k.

b)    Select the right venue. To avoid local protectionism and have the case handled by an IP experienced court, the choice of the right court is important (Beijing or Shanghai are recommended).

c)    Select the right way of enforcement: In principle, there are two ways of enforcement: Administrative enforcement via the local Administration for Industry and Commerce (AIC), which is a Chinese speciality, and enforcement via the court system (as it is known from Europe). For complicated cases in the field of chemistry, the court system maybe the preferred way.

d)    Prepare the case very carefully and detailed. The evidence presented before the court from the very beginning is decisive!

e)    Do not focus on the payment of possible (but limited) damages, but try to stop competitors in the first place.

In general, the proceeding before the Chinese courts is all in all not longer than similar litigations before German courts (one to two years for one instance). In case, all evidence (which means all necessary documents) is presented to the court in the beginning of the litigation, a Chinese court may decide within 6 months.

5.3 Know How protection

From a Chinese point of view, the access to high tech know how is one crucial point in the process of making China an innovative country.
For an international company two  points need to be considered: Legal and illegal transfer of know how.
The legal “embodiment” is also known under “forced technology transfer”, which means the requirement of providing know how for market access.
According to the above mentioned survey by AmCham China, 67% of the respondents found that such practices have a negative impact on the assessment of the business environment in China. However, if a company decides that the Chinese market is important, it has to find a way to deal with it. In practice, this entails a detailed analysis of the situation, but there are no simple answers to this problem.
The other point is the illegal “transfer” of know how. There are a lot of measures to tackle the problem, including “simple” protection of the own premises or the own IT systems. Avoiding an unreasonable fluctuation of the personnel by an appropriate HR policy is another issue. One important point, however, is again the protection of the know how by effective and enforceable (see above) IP rights.
In addition to this, there is a completely different way for Chinese companies to get access to relevant know how: Acquiring a western company! One recent example is the acquisition of the Italian luxury-yacht manufacturer Ferretti by Shanghai Heavy Industry Group, a 350 million Euro deal. “We now own some hundreds of patents and rights to use eight brands of Ferretti, which is very helpful for improving our capacity in making general-purpose motors.” said an official according to China IP Report of February 1, 2012 (Zhao, 2012).
If such an acquisition is a share deal (that means the whole company will be bought), the question of know how protection seems to be obsolete. However, the IP professionals within the targeted company should be very careful during the due diligence process: In case the deal fails (and nobody knows this in advance), it is important that only those parts of the know how are discovered during the due diligence which are inevitably necessary for an assessment of the value of the targeted company. In addition, the disclosed parts should be clearly documented.
If such a deal is an asset deal (that means only parts of the business are transferred), it is, in addition to the point made above, crucial that there is a clear distinction between transferred rights and rights which remain with the selling company. If there are rights which are used by both parties in the future, respective licensing deals are necessary, covering also know how.

5.4 Lobbying

Last but not least, it is very important for European companies to be present in the Chinese legal community. “Lobbying” in this context does not mean trying to directly influence, for instance, Chinese politicians, but working in detail together with Chinese authorities in order to improve the legal system. China’s IP laws are still very “young” in comparison to the western IP system and, therefore, are still in an ongoing process of improving and adopting the system to actual needs.
Although this procedure is sometimes a little bit frustrating, Chinese authorities are usually open to accept comments and proposals and discuss future amendments of the IP system with all participants. Therefore, it is necessary that western companies have established a system of representation (e.g. chambers of commerce in China, associations of multinationals in China as the Quality Brand Protection Committee, “QBPC”) which is able to communicate with Chinese authorities. Such a system, however, heavily depends on the commitment of all the companies active in China, including also the SME, not only the big ones!

 

6 Conclusion

In general, the development of an IP strategy, especially for China, has to follow a holistic approach.
In a changing environment, such as the Chinese IP system, it is not helpful to “rely” on a perpetual prejudice and to ignore opportunities, provided by such a changing system. During the last years, it becomes very clear that more and more Chinese companies use the Chinese patent system, not only by filing patent applications as can be seen from the statistics above, but also by starting IP litigations against other Chinese (and foreign!) companies. This will certainly lead to a further development of the Chinese IP system. So far the visible development is rather similar to what we know from the European IP system.
Therefore, it is crucial to keep two things in mind:

a)    Setting up an internal IP structure and network appropriate to the needs of a company, which can serve as the basic for all IP work in China.

b)    Developing a product- and/or project-specific IP strategy, which includes all aspects of possible IP protection.

Of course, this approach is not for free, but as always, sustainable operations need a permanent commitment.

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References

 

AmCham (2012): AmCham Survey, available at www.amchamchina.org/businessclimate2012, accessed 20 August 2012

 

China Daily (2011): SIBS's patent licensing deals, available at http://ipr.chinadaily.com.cn/2011-06/22/content_12754572.htm, accessed 20 August 2012

 

European Patent Office (2012): Statistics on European patent applications, available at http://www.epo.org/index_de.html, accessed 20 August 2012 

 

Li Y., Jiang T. (2012): Protecting IP, Protectiong Innovation, available at http://english.cnipr.com/426zt/zhuanti.html accessed 31 August 2012 

 

Lu H. (2008): Chint flavored, available at http://www.chinadaily.com.cn/bw/2008-06/16/content_6761772.html, accessed 31 August 2012

 

State Council of the People's Republic of China (2008): Outline of the National Intellectual Property Strategy, available at http://english.sipo.gov.cn/laws/developing/200906/t20090616_465239.html, accessed 31 August 2012

 

State Intellectual Property Office of the P.R.C (2012):News on Chinese IP cases, available at http://english.sipo.gov.cn/news/chinaIPnews/2012/ , accessed 20 August 2012

 

State Intellectual Property Office of the P.R.C (2012): Statistics on Chinese patent applications, available at http://english.sipo.gov.cn/statistics/ , accessed 20 August 2012

 



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