This year China, for the first time, conferred expansive intellectual property rights (IPR) protection on integrated circuit (IC) designs. By granting exclusive rights to IC design owners, this timely legislation will help promote the development of China's domestic semiconductor and telecommunications industries and thus encourage foreign investment in these fields. The Regulations for the Protection of the Design of Integrated Circuits (IC Design Regulations) and the Implementation Rules for IC Design Regulations (Implementation Rules), both of which took effect on October 1, 2001, will also move China a step closer to honoring its World Trade Organization (WTO) commitments.

The need for separate legislation

Semiconductor integrated circuits are the foundation of the computer and telecommunications industries throughout the world. Yet China's traditional IPR legal regimes offered inadequate protection for the layout designs of integrated circuits (IC designs). For example, IC designs rarely met the strict standards of patent law, which only protects inventions and ideas that are innovative, inventive (non-obvious), and useful. Drafting proper patent claims in concise language for complex IC designs is difficult, if not impossible. In addition, lengthy patent prosecution procedures clashed with the rapid technological development in the field.

Copyright law is also inadequate because it primarily protects works that express ideas and thus is not well suited to the designs of three-dimensional electronic circuitry. Moreover, once IC products are sold, their IC designs are publicly available and not eligible to be protected as trade secrets.

For these reasons, most countries and regions have chosen sui generis, or separate and independent, legislation to protect the IPR of IC designs. For example, the United States adopted the Semiconductor Chip Protection Act in 1984 to protect IC design as a new type of IPR. Japan, most European countries, Russia, South Korea, and the Hong Kong Special Administrative Region all adopted similar legislation. Two major multinational agreements later conferred similar protections on IC designs: the 1989 World Intellectual Property Organization Treaty on Intellectual Property in Respect to Integrated Circuits, also referred to as the Washington Treaty (though it has never come into force), and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1994. China's IC Design Regulations and Implementation Rules comply with the Washington Treaty and TRIPS. Nevertheless, it is useful to view the new PRC regulations in the context of China's own IPR protection system and its legal and business environment.

Designs eligible for protection

According to the IC Design Regulations, any inventors that are Chinese natural persons, legal entities, or other organizations have exclusive rights to their IC designs. Foreign natural persons or legal entities that commercially exploit an IC design first within China also have exclusive rights to their designs. Foreign inventors of IC designs that have commercially exploited the design first in another country have exclusive rights to the design only if China has signed bilateral agreements with the respective foreign country or if China and the respective country are members of an international IC design treaty. China currently has not entered into any bilateral IC design treaties with other countries. However, when China joins the WTO it will be bound by TRIPS, which will protect IC designs of all WTO members in China if they also satisfy the requirements in China's IC Design Regulations.

The definition of IC design

The IC Design Regulations define an integrated circuit as a semiconductor integrated circuit, namely a product, in an intermediate form or its final form, in which the elements — at least one of which is an active element — and two or more of the interconnections of which are integrally formed in or on a piece of material, and which is intended to perform an electric function. This definition conforms to the language in the Washington Treaty and TRIPS. However, the US Semiconductor Chip Protection Act appears to provide broader protections than do the IC Design Regulations, as the former does not require an active element (see Glossary).

To qualify for protection under the IC Design Regulations, all IC designs must possess originality that is, they must be the product of the intellectual labor of the inventor and not a standard design generally accepted by IC design inventors and IC manufacturers. If the IC design is a combination of standard designs, the combination as a whole must meet the originality requirement. The scope and definition of "a standard design generally accepted by IC design inventors and integrated circuit manufacturers" remains unclear. Further administrative regulations and rules are expected to shed some light on this issue. Notably, the regulations do not protect ideas, procedures, processes, or mathematical concepts.

Exclusive rights and ownership

IC design inventors have the exclusive right to reproduce the whole or any part of their protected IC design. They can also commercially exploit — import, sell, or otherwise distribute for commercial purposes — their protected IC design itself, or an integrated circuit or article incorporating their protected IC design. Holders of IC designs may also assign their exclusive rights or licenses to other persons.

The exclusive rights to an IC design belong to the IC design inventor except in certain circumstances. If a natural person invents an IC design while under the direction, arrangement, or responsibility of a legal entity or any other organization, the legal entity or organization is the inventor.

If two or more natural persons, legal entities, or other organizations jointly invent an IC design, previous agreements between the cooperating persons or parties determine the ownership of exclusive rights. If no previous agreement was reached, or the agreement was not clear, the exclusive rights are shared by the cooperating persons or parties. If two parties form an entrusted development agreement to develop new IC designs, the exclusive rights of the IC designs are awarded according to the agreement. If no agreement was reached or if the stipulation in the agreement is not clear, then the exclusive rights belong to the entrusted party.

Obtaining exclusive rights

The exclusive rights to an IC design must be registered with China's State Intellectual Property Office (SIPO). Unregistered IC designs are not protected in China. The IC Design Regulations and Implementation Rules do not provide a timeframe for the registration process. According to the Implementation Rules, foreign applicants without residence in China must submit materials through designated patent agencies. Applicants must submit four physical models of the IC design to SIPO if they have already exploited the design commercially. If the design is not yet on the market, applicants may include confidential information in the application and SIPO will protect such information except as required in infringement litigation or administrative proceedings. Confidential information should constitute no more than 50 percent of the entire design.

If the exclusive rights holder transfers exclusive rights to another party, the transferee must also submit IC design assignment contracts to SIPO, which will then publish the recorded assignment. The Implementation Rules require transferors to obtain the approval of relevant departments under the State Council, possibly the Ministry of Science and Technology or the Ministry of Information Industry, if the transferees are foreign persons or entities. The exclusive rights and assignments of the IC design take effect on the date of registration. Applicants must file registration applications for IC designs within two years of the date they first commercially exploit the design anywhere in the world. This is a strict standard, and foreign companies seeking IC design protection in China should be sure to file registration applications with SIPO promptly.

According to the IC Design Regulations, SIPO must register, issue, and publish the registration certificate unless it finds reasonable grounds for rejection upon preliminary examination. If SIPO rejects the application, the applicant has three months to file a reexamination request to the SIPO Board of Patent Reexamination. If the board then rejects the application's argument, the applicant may appeal the decision to an Intermediate People's Court in Beijing.

Limitations on exclusive rights

The exclusive rights to IC designs are not absolute, and in certain circumstances the holders of these rights cannot prevent other persons or organizations from exploiting their designs. These restrictions are generally similar to those found in US law and TRIPS.

• Reverse engineering and prior rights
  The IC Design Regulations do not deem the following actions infringements of exclusive rights: reproducing protected IC designs for individual purposes or for the sole purposes of evaluation, analysis, research, and teaching; creating an original IC design on the basis of the foregoing evaluation of the protected IC design (also known as reverse engineering); and reproducing or exploiting commercially one's own independently created IC design that is identical with the IC design of another person. The last scenario may cause controversy in practice, as it would be hard to prove that a person created his or her own IC design without reference to the IC design(s) of others.
  
  
• First sale
  A person who purchases a protected IC design or an integrated circuit or article that incorporates a protected IC design may exploit it commercially without a license from the exclusive rights holder as long as the exclusive rights holder, or someone with the exclusive rights holder's authorization, has already put it on the market for sale. The exclusive rights are "exhausted" after the first sale. However, it is not clear under Chinese law whether such exhaustion is applicable to first sale abroad. If so, the import of previously exported IC design products will not constitute infringement.
  
  
• Innocent infringement
  A person is not guilty of infringement if he or she commercially exploits an integrated circuit or an article without knowing, or having any reasonable grounds to know, that it incorporates an illegally reproduced IC design. After the dealer or user is notified that the product incorporates an illegally reproduced IC design, he or she may continue to sell goods that remain in stock or were previously ordered. The IC Design Regulations do not specify whether a government agency or the exclusive rights holder should deliver the notice. The dealer or user must, however, pay reasonable royalties to the exclusive rights holder, the amount of which may need to be decided by the courts.
  
  
• Compulsory license
  The IC Design Regulations provide the basis, procedures, and remedies for compulsory licenses, which are of major concern to foreign investors. SIPO may grant a nonvoluntary license to exploit an IC design to a third-party applicant under three circumstances: a national emergency or any extraordinary state of affairs; if it is in the public interest to do so; or if the People's Court or the supervising and inspecting department monitoring unfair competition (the State Administration for Industry and Commerce [SAIC]) decides that the exclusive rights holder of the IC design is competing unfairly. It remains to be seen how effectively SAIC and SIPO will work together in this process, or if subsequent rulings will clarify the relationship between the two bodies.
  
  According to the IC Regulations, SIPO must notify the exclusive rights holder in a timely manner of any decision concerning a compulsory license and must specify the scope and time of the IC design's exploitation. Such exploitation must be noncommercial and for public purposes, unless the People's Court or SAIC determines that the exclusive rights holder was involved in an act of unfair competition. SIPO will terminate, upon examination, the compulsory license decision at the request of the exclusive rights holder when the conditions for the compulsory license cease to exist.
  
  The natural person, legal entity, or other organization that receives a compulsory license does not enjoy the exclusive right to use the IC design and does not have the right to authorize exploitation by another person. The compulsory licensee must pay reasonable royalties to the exclusive rights holder, the amount of which is determined by consultation between both parties. SIPO will adjudicate if the parties fail to reach an agreement. If the exclusive rights holder is unsatisfied with SIPO's decision in granting the non-voluntary license, or if the exclusive rights holder or licensee is unsatisfied with the adjudication of royalties, the party may institute legal proceedings in the People's Court within three months of receipt of notification.

Remedies for infringement

The IC Design Regulations outline the legal steps available to parties on either side of an IC design dispute. The regulations designate SIPO as the administrative arbiter in such disputes, though parties may take their cases to the People's Court if necessary. The outlined procedures generally comply with those found in the Washington Treaty and TRIPS, according to which any administrative remedy decisions are subject to judicial review.

• Preliminary and permanent injunction
  If the exclusive rights holder of an IC design or an interested party has evidence showing that another person is infringing and will inflict irreplaceable damage if not stopped, they may request the People's Court to order the relevant party to stop all infringement and preserve the infringing materials before the exclusive rights holder institutes legal proceedings. Of course, the infringer must permanently stop all related activities if infringement is proven during the trial.
  
  
• Compensation for damages
  Compensation for the infringement of exclusive rights should include any interests sought by the infringer, such as sales income, or losses incurred by the exclusive rights holder, including the expenses of stopping the infringement (which, though not mentioned specifically, likely includes attorney fees).
  
  
• Seeking remedies
  Interested parties may settle infringement disputes that result from the unauthorized commercial exploitation of an IC design. If the parties are unwilling to consult with each other, or if the consultations fail, interested parties may either institute legal proceedings in the People's Court or request that SIPO handle the matter. SIPO may order the infringer to stop infringing immediately or may confiscate or destroy the infringing products or materials. According to the PRC Administrative Procedure Law, interested parties, if unsatisfied, may institute legal proceedings in the People's Court within 15 days of the receipt of SIPO's notification. If the infringer neither institutes legal proceedings nor stops infringing, SIPO may request compulsory enforcement from the People's Court. SIPO may also, upon request from both interested parties, mediate the amount of compensation. If mediation fails, interested parties may institute legal proceedings against each other in the People's Court according to the PRC Civil Procedure Law.
  
  
• Post-grant revocation
  If SIPO, after granting the registration of an IC design, discovers that the registration does not conform to the provisions of the IC Design Regulations, it will revoke the registration, notify the exclusive rights holder, and publish the revocation. The exclusive rights holder, if unsatisfied with SIPO's decision, may institute legal proceedings in the People's Court against SIPO within three months of receipt of the notification. Notably, the IC Regulations and Implementation Rules do not recognize the rights of third parties, or the public, to participate in the application review process or to challenge the award of exclusive rights during the process. Unless future regulations correct this omission, the People's Court, which lacks the necessary expertise and resources, will need to address any careless examination work done by SIPO.

Gaps remain

Though the IC Design Regulations, as China's first administrative legislation to protect IC designs, will undoubtedly benefit the country's high-technology industry, they are not perfect. The regulations lack detailed provisions on standards and timing in the examination of IC design registration applications. As mentioned, the regulations also do not adequately define what constitutes a "generally accepted standard design" — which is ineligible for protection. In addition, the law seems to compromise the exclusive nature of an IC design holder's rights by stating that an independently invented IC design that is the same as a previously registered IC design is not an infringement. The regulations include no requirement for labeling IC designs with markings to notify the public that this IC design is exclusively owned by the registered owner. Finally, the regulations fail to state whether customs protections are available for IC designs and products. SIPO is expected to clarify these outstanding uncertainties in future practice with future implementation rules.

Foreign companies that are contemplating an investment in China's semiconductor industry should draft a comprehensive contract to address issues left unresolved in the IC Design Regulations and its Implementing Rules. For example, in foundry contracts, well-drafted disclaimers and indemnification clauses are necessary to avoid infringement liabilities.

Investors will also find it necessary to keep in mind the protections provided by other Chinese intellectual property laws for IC design and related products. The common wisdom that calls for developing a comprehensive multilayered IPR protection strategy remains the best way to protect IC design products in the Chinese market effectively. For example, different aspects of semiconductor IC products are protected by IC design, trademark, copyright, and even patent laws. Perhaps more important, the enforcement of these intellectual property rights is still subject to the broader legal and business environment in China. Continued communication and engagement with enforcement agencies and local governments are still the keys to IPR protection in China.