How IPR issues are dealt with in the EU and China

In December 2005, the Sino-European study on intellectual property rights titled “The Legislation Protecting Intellectual Property Rights in the European Union and in China and its Enforcement” was released. It is called the Comparative study for short, and looks at how IPR issues are dealt with in the EU and China.

With China increasingly becoming a favored manufacturing and export hub, IPR have become a vital issue. The Comparative Study, focuses on the analysis of common IPR practices, identifies and compares, from the point of view of an IP holder, what specific procedures are available for handling IPR-related cases – which include patents, designs, trademarks and copyrights. How they are applied and what is their overall effectiveness?

Where systems diverge, the study seeks to highlight the differences in a descriptive and factual manner. It is the largest and most in-depth EU-China comparative study on IP rights that has ever been conducted and is a good example of the positive agenda that the EU is trying to develop with China to tackle this essential issue.

The study is intended to help Chinese and European officials to gain a better understanding of the specific conditions under which respective IP systems are implemented with a view to improve their efficiency and better target future European IP-related technical assistance programs in China. Additionally, it will also be useful to Chinese and European industries looking to protect their rights more effectively both in Europe and China. The report was conducted by Paul Ranjard, Huang Hui and Benoit Misonne with assistance from the European Union.

The Comparative Study looks at how ‘private actions’ – which are those taken by the IP holders individually – are dealt with. In China, for example, the rules dealing with pretrial evidence preservation, injunctions and remedies, are comparable to the EU’s. However, if the IP holder is a foreigner and does not have a permanent establishment in China, lawyers have get a general power of attorney and all written evidence has to be notarized. Plus, Chinese procedure does not provide the same guarantees of complete and timely disclosure of all arguments and documents prior to the hearing between litigants as the EU does.

In relation to the customs department, they are pretty much the same in the EU and China. Except that in China, a bond is required on all goods – this was banned in the EU because of counterfeiting. Plus, in China, the customs gives IP holders 3 days to decide on withholding goods that infringe IPR whereas in the EU, the time given is up to 10 days.

Another major discrepancy in how the 25 EU member states deal with IPR infringements is that while criminal liability can be proven in the EU by showing intention and commercial exploitation, in China, the criminal liability comes into effect only when the crime reaches a certain threshold. Usually, this threshold is fixed at a value of 50,000 RMB or 150,000 RMB for a work unit. So a person who infringes intellectual property rights and manufactures goods worth 145,000 RMB, will not face criminal prosecution in China but would do so in the EU.

So in China, even repeat offenders of IPR are not penalized if the worth of the goods they are manufacturing is less than 150,000 RMB. In the EU, a tab is kept on repeat offenders. In the EU, a judge dealing with IPR infringement has to decide whether the defendant broke the law knowingly. In China, it is the magnitude of the crime – or, how much money was made through the infringements – that the judge decides on. The Comparative Study advises that the threshold factor in China should be done away with.

In China, administrative offices are responsible for IPR infringements cases that are below the threshold of 150,000 RMB. However, they do not have the means to deter future infringements; unlike agencies dealing with criminal prosecution agencies that can not only investigate faster and more cost-effectively, but can also ensure deterrence. The most glaring discrepancy between how IP-related cases are handled in the EU and China is that an IP-holder, cannot file as a party during a Public Action in China and thereby has no right to information about proceedings and the results of the action.

The Comparative Study, advises that too many agencies dealing with IP-related issues, can slow down action against those breaking IPR laws. Plugging these loop-holes, will be a challenge for China. However, the study is optimistic that the Chinese government will be open to change.

The study has been distributed to various Chinese departments and agencies including the Ministry of Public Security, the Ministry of Commerce, the Customs General Administration, the General Administration of Quality Supervision, Inspection and Quarantine, the National Copyright Administration, the State Administration of Food and Drugs, the State Intellectual Property Office, the Trade Mark Office, the Legislative Affairs of State Council, the Supreme People’s Court and the Supreme People’s Procuratorate.

Automotive Industries asked Thorsten Vormann and Ling Ho, partners at Clifford Chance LLM, about what impact the study has had.

AI: What has the reaction been to the Comparative Study by companies based in the EU wishing to do business in China?

TV & LH: Our internationally active clients unanimously view China as one of the most important markets with an enormous potential for growth. They welcomed the “bilateral” work of the EU-China Trade Project and the Comparative Study about IPR protection as significant steps forward in a process that should ultimately make them feel more comfortable about their investments in China. In a respectful and reciprocal way, the Comparative Study educates not only authorities but also private parties about the respective legal systems in place. The Study, providing probably the most comprehensive overview of IPR protection in China, has been appreciated by European in-house counsels as an excellent reference guide serving as a basis for legal strategic decisions. US based counsels or legal practitioners should also find the European part of the Study to be extremely useful, highlighting several peculiarities still existing in different jurisdictions.
AI: How protected are intellectual property rights in China? Are you comfortable with the systems in place in the country?

TV & LH: Chinese legislators have come a long way and made a great effort in conforming Chinese IP laws with international standards. Today, China has a comprehensive framework of laws in place to protect various forms of IPRs. Thus, the protection of IPRs is not a major issue in China, and the public discussion is more about the application of laws by local courts and administrative agencies. Concerns are raised about procedural issues and inconsistencies in the enforcement system.

As an example, right holders frequently face difficulties if they try to enforce their non-examined rights, such as registered designs or utility models. Since these rights did not pass an examination process by the patent office, local courts and administrative agencies are often reluctant to provide speedy relief and are inclined to stay infringement proceedings if the defendant challenges the validity of the right in question. Moreover, although preliminary injunctions and interlocutory relief are available, the delay caused by formal requirements and an apparent lack of coordination between administrative agencies and enforcement bodies often defeat the purpose of preliminary measures. In particular, the formal requirements of a general power of attorney and of submitting all evidence in notarized form are identified in the Comparative Study as some of the major weaknesses of the current Chinese instruments of interlocutory relief.

In general, the bewildering variety of enforcement agencies and options available, the lack of resources and unfamiliarity of some officials in dealing with less straight-forward cases that can make enforcement efforts difficult and inefficient.

AI: What do you think is the biggest challenge facing companies wishing to use their patented technology in China to manufacture goods?

TV & LH: Europeans manufacturing in China usually fear the flow of know-how to local entities difficult to control and the consequences of an enforcement system that is perceived to be time consuming and sometimes inefficient, feeling like local protectionism to foreigners. Add to this the ease with which manufacturing sites and distribution channels can be relocated or changed and there seems to be little deterrence for infringers. Sometimes it seems almost impossible to get to the source of infringing goods. However, this obviously depends on the business you are in. For the automotive industry, the OEM or OPM Business seems to be less vulnerable. Usually the flow of infringing goods to Europe or the US can easily be stopped by going after importers or distributors. When combined with some press activities, these legal battles are usually sufficient to keep counterfeit products off the market for a certain period of time. The goods in question are complex and the rather limited number of potential customers are all active globally and alert to these issues, therefore, these customers will not buy products known to infringe third party rights. Nevertheless, this is quite different for the aftermarket, where automotive players face the same difficulties as everybody else to get to the source of an infringement and might have to join the “rat-race” to keep their major markets clean.

AI: The automotive industry has seen a number of IPR-rip offs in China – how can it protect itself? And again – are there enough safeguards, in your opinion, in China for the automotive sector to use the country as a manufacturing hub?

TV & LH: From an IP-perspective the best strategy is still to apply for local patent protection as soon as possible. Moreover, European companies should have some kind of a local entity – being a subsidiary or in the form of a joint venture – defending its interest in the local market. This helps in avoiding procedural formalities to which non-residents are subjected.

Nevertheless, we advise our clients not to rely exclusively on IP protection. Instead of trying to build up a scenario of deterrence, it might, in some cases, be more effective to avoid problems by the use of commercial and contractual means. For example, it is certainly important to choose the right Chinese partner. Awareness of inventions and IP rights can then be made an integral part of corporate governance. Moreover, there are several ways of closely monitoring the manufacturing activities, such as frequent audits and quality control procedures – preferably conducted by trusted representatives at the premises.

Additionally, it is definitely worthwhile to enter into direct discussions with the Chinese authorities. Experience shows that it helps tremendously if European companies put some effort into educating members of the administrative and enforcement agencies about their products and their IP portfolio.

AI: Do you feel the Chinese government is keen to amend existing IPR-related laws to plug loop-holes? Can you give us examples of any such move?

TV & LH: Actually, one can observe extensive communication by government officials with their overseas counter-parts and other legal practitioners, aiming at a deeper understanding of the practical difficulties experienced by foreigners and of the international standards of protection. And not only that, over the years there has been an continuous effort to address IP-related issues arising from new technologies, resulting in amended laws or regulations and several groundbreaking supreme court decisions.
AI: What in your opinion is the experience of Chinese companies setting up base in Europe as far as IP-related issues go?

TV & LH: Usually the cultural gap the Chinese management of a European entity faces is not so much about IP-related issues but rather topics such as environmental protection, employment law and EU regulatory issues.

The full report can be downloaded from the following websites:

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http://www.euchinawto.org/en/cmpt03.asp and http://www.euchinawto.org/en/cmpt03.asp

Please find below weblinks to related articles:

Relevant Changes for the Automotive Industry:
http://www.cliffordchance.com/expertise/publications/details.aspx?FilterName=@URL&contentitemid=9683

Key IP Issues relating to Franchising in China:
http://www.cliffordchance.com/expertise/publications/details.aspx?FilterName=@URL&contentitemid=9681

Litigation and Dispute Resolution in Asia:
http://www.cliffordchance.com/expertise/publications/details.aspx?FilterName=@URL&contentitemid=9682