Companies can use several official channels to deal with intellectual property rights violations

Companies face a challenging, rapidly evolving intellectual property rights (IPR) landscape in China. PRC officials are increasingly cognizant of the importance of IPR protection to an innovative economy and, as evidenced by revisions to core IPR laws and the 2008 National IPR Strategy, seek to improve the legal frameworks and channels through which companies can protect their IPR. Companies still battle regular infringement of their patents, trademarks, copyrights, and trade secrets, however, and face not only administrative hurdles—significant procedural barriers and uneven enforcement—but also commercial challenges from increasingly sophisticated counterfeiters. Companies must carefully plot their corporate strategies to navigate the terrain of China’s IPR landscape successfully.

Companies can take several main steps to protect their IPR in China. First, they should establish internal controls to identify and protect IPR, factor IPR issues into their exchanges with suppliers and customers, register IPR to take advantage of PRC legal protections, and conduct surveillance and due diligence to uncover infringement. If IPR infringement occurs, however, a company faces a few critical choices. It can take external action to battle IPR infringement, using either administrative or judicial channels. These channels exist for patent, trademark, copyright, and trade secret infringement, but the processes and advantages each provides differ greatly.

Administrative channels

Administrative channels are widely viewed as the quickest and least expensive way to combat IPR infringement and remain the most popular option for dealing with violations. Administrative officials can handle cases quickly, and the filing and adjudication procedures are straightforward. In addition, companies avoid the significant expenses associated with court cases. The administrative route is a good option for companies dealing with infringement cases that do not involve complex networks.

Investigating IPR violations

To begin an administrative investigation, a company must first file a complaint indicating infringement of its IPR-protected products to a local administrative agency—generally at the district or county level. Depending on the type of IPR, location of the alleged infringement, and type of product, the company may choose among several administrative agencies. Though local administrations for industry and commerce (AIC) are the most common choice, other agencies—including local branches of the Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ); Customs; State Food and Drug Administration; National Copyright Administration of China; State Intellectual Property Office; and Ministry of Culture—may also play a critical role.

In addition, the local public security bureau (PSB) carries out administrative investigations for possible criminal cases. PSBs can receive cases that are transferred from administrative agencies or, if the infringement amount meets certain thresholds, the rights holder may contact the PSB directly to raise a case. If the PSB finds enough evidence to warrant a criminal case, the case is transferred to a people’s prosecutor in the court system.

In some cases, local agencies may contact rights holders when they uncover instances of infringement. For example, through the recordation process, companies can register their intellectual property with national-level Customs in Beijing and train local Customs officials to spot infringing products. Private investigative firms may also contact companies when they encounter infringing goods, though companies should verify the accuracy of these notifications and check the legitimacy of these firms before contracting with them.

In most cases, however, companies must conduct their own due diligence to find infringing products. They must also gather a substantial body of evidence and present a case to local officials to convince them to carry out an official investigation.

Administrative rulings and outcomes

After a formal administrative investigation, the local agency issues a ruling. If infringement is found, the local agency can order the infringer to stop producing and selling the infringing goods, seize infringing goods and equipment used in their manufacture, and levy an administrative fine, the amount of which varies depending on the type of IPR. The rights holder or the infringer can bring an administrative suit to the Supreme People’s Court (SPC) if either is unsatisfied with the local agency ruling.

In jurisdictions where agency officials have more experience working with foreign companies and better understand the importance of IPR protection, such as the developed areas of eastern China, agency officials may be more willing to pursue infringers. In recent conversations, several USCBC member companies cited cases in which local enforcement agencies were eager to pursue infringers and willing to consider a variety of punitive options.

Drawbacks of the administrative approach

Administrative channels have drawbacks, however. Administrative agencies often issue small fines that infringers view as the cost of doing business rather than as an effective deterrent. For example, fines for trademark infringement are capped at either three times the illegal revenue or ¥100,000 ($14,622), whichever is less, and most judgments issue fines of far less than the maximum amount. In some cases, goods and equipment seized during raids are not destroyed, as PRC law requires, but instead re-enter the market via auction or back channels.

Limited administrative resources also restrict local agencies’ capacity to carry out investigations. Administrators must juggle various local and national priorities and may be unable or unwilling to devote staff and resources to investigate a case fully. This shortage of resources is a particular problem when a rights holder uncovers counterfeit products sold at multiple locations—for example, at multiple stalls in a wholesale market—requiring multiple investigators to conduct raids simultaneously. Local protectionism can be a factor, especially in jurisdictions that have limited experience working with foreign companies.

Other procedural hurdles may also present challenges. Local enforcement agencies often rely heavily on evidence presented in a company’s initial petition, but companies and private investigators are limited in their ability to procure evidence from infringers. Some local agencies are resistant to hearing cases that are based solely on notarized purchases of infringing goods (a basic investigative technique), making it more difficult for companies to collect evidence. Companies have also experienced new difficulties regarding authorization for powers of attorney, with some local AICs demanding that “power of attorney” letters be officially notarized and legalized in China, and others requiring that each power of attorney letter be specific to a given infringement case (including explicit mention of the infringer). Meeting these requirements can cause delays.

In addition, administrative officials are often reluctant to take on cases involving counterfeiting networks that are complex in scope, structure, or geography, because these cases have a higher chance of being appealed or overturned in court. Local administrative agencies are poorly equipped to tackle such cases, especially when they involve multiple jurisdictions—for example, sales in Shanghai and Jiangsu of counterfeit goods made in Zhejiang.

Judicial channels

Companies may also look to China’s courts to protect their IPR. For judicial cases, companies have two options: civil or criminal cases.

Civil cases are heard by specialized IPR tribunals, with an Intermediate People’s Court typically serving as the “court of first instance” (the first court to hear a civil case). IPR tribunals exist in both Intermediate People’s Courts (at the sub-provincial level) and Higher People’s Courts (at the provincial level). If infringement is found, judges in civil cases can award monetary damages or injunctive relief for rights holders. Rights holders can also apply for a preliminary injunction to halt infringement prior to the final decision. After a ruling is made, either party may appeal court rulings to the civil courts at the next level.

IPR criminal cases are heard first by Criminal Tribunals in the People’s Court with jurisdiction over the location of criminal activity; courts at the sub-provincial level typically serve as the court of first instance. Cases are generally initiated by the people’s prosecutors after an initial PSB investigation. Rights holders may also initiate private prosecution proceedings in court, though the process is rarely used. A finding of criminal liability can result in fines as well as sentences of up to seven years, depending on the value of the infringed products. Subsequent appeals are heard by criminal courts at the next level.

Advantages and risks of the judicial approach

The main advantage of judicial channels is that they offer stronger penalties, and thus a stronger deterrent, than administrative cases. Though only civil cases provide rights holders with the opportunity to claim monetary damages for the loss of market share and for lost revenue caused by infringement, criminal cases provide opportunities for criminal sentences, in addition to larger fines. The court system’s procedures for collecting, presenting, discussing, and weighing evidence also make it better suited for complex cases. Rights holders have a chance to present evidence to the presiding judge and respond to questions, a process that allows them to better explain and illustrate complex areas of IPR.

Despite court cases’ advantages, however, they are far more costly and time-consuming than administrative cases. Whereas administrative cases can reach resolution in just a few weeks, court cases can easily take a year or longer and often involve the time and expense of using committed outside counsel. Local protectionism and low transparency remain a concern in court cases, especially in jurisdictions outside China’s major cities. A September 2007 decision in Wenzhou, Zhejiang, provides a cautionary tale. In July 2006, Chint Group Corp. filed suit in its home courts in Wenzhou against French company Schneider Electric SA’s joint venture, Schneider Electric Low Voltage (Tianjin) Co., Ltd., claiming that five Schneider circuit breaker products infringed upon Chint’s patents. The presiding judge ruled that Schneider had infringed Chint’s patents, ordered Schneider to halt sales of five products, and awarded unprecedented damages to Chint: ¥334.8 million ($49 million). This amount far exceeds the typical award in such patent cases; when a Chinese company is the defendant, damages rarely exceed a few million renminbi.

China’s relatively small number of IPR-related judicial cases means that many judges have limited experience in IPR cases, especially complex cases. The Beijing Number One Intermediate People’s Court is widely viewed as the best in China in terms of experience and expertise, and other courts in major cities—including Beijing, Shanghai, and Guangzhou and Shenzhen, Guangdong—are also quite experienced. Courts in other jurisdictions have much less experience, though these courts are improving because of more cases and an influx of trained judges. Inexperience also tends to make judges more uncertain and conservative in their judgments, meaning they are less likely to rule that IPR infringement has occurred. The SPC is working to give more guidance to lower courts—for example, by sharing model rulings and judicial interpretations on key issues—but this process is slow. Many companies try to avoid inexperienced courts by seeking to place cases in courts in “safer” cities.

A number of procedural challenges also remain. As in other court cases, the burden of proof in a patent infringement suit lies with the plaintiff, in this case the rights holder. Yet there is no formal discovery process, making it difficult for plaintiffs to obtain evidence from the infringer. In addition, evidence must be notarized and admitted to the court, a time-consuming process that can take even longer if the evidence was produced overseas or is in the category of “company literature,” which includes advertisements and pamphlets. Judges also often rely on the opinions of outside experts or panels to understand the IPR and products in question. It remains unclear how these experts are chosen and how applicable their expertise is to the cases they address. Finally, monetary damages are difficult to collect, and non-monetary punishments, including injunctions and limits on business activity, are even tougher to impose.

On the criminal side, simply getting a criminal case on the docket is a major challenge. To be eligible for a criminal case, an act of IPR infringement must meet a minimum value threshold for infringing goods. Although the SPC lowered the value thresholds in a December 2004 judicial interpretation, the values still remain high. The threshold for trademark counterfeiting cases is ¥50,000 ($7,311) for the value of the infringing products or ¥30,000 ($4,387) in illegal income; for patents, the amounts are ¥200,000 ($29,243) and ¥100,000 ($14,622), respectively. High thresholds prevent many criminal cases from making it to court.

What to consider when choosing a strategy

For a company facing IPR infringement, deciding which channel or combination of channels to pursue can be complicated. Though administrative enforcement is preferred for its speed and low cost, foreign companies are beginning to recognize that judicial channels are a viable alternative. Before planning an enforcement strategy, an IPR holder should consider several factors:

  • Company resources  Companies should be realistic from the outset about the resources they are willing and able to devote to IPR enforcement. Judicial cases require greater funding and attention because the process is longer and more complex, and requires more documents and input from the company.
  • Company enforcement goals  Executives should be clear what the goal of their enforcement action is—stopping infringement as quickly as possible or deterring future infringement. Companies may prefer to deal with infringers via administrative channels as they pop up, a strategy that requires fewer resources but continued diligence—and may ultimately fail to deter infringers. Alternatively, companies could use judicial channels to set an example and deter infringers or to attack a counterfeiting network.
  • Type of IPR involved  China’s administrative agencies and courts have varying levels of experience with patents, trademarks, copyrights, and trade secrets. Trademark and copyright infringement tend to be simpler, and local officials have more experience working with these forms of IPR. Patents are well-protected under PRC law but often involve a level of technical complexity that requires time and expertise to understand. Trade secrets are still a developing area of PRC law in which both administrative officials and judges have little experience.
  • Nature of infringement  If a company discovers infringement by one or a small group of infringers, an administrative action may be sufficient to tackle the problem. If the company confronts a larger, more sophisticated counterfeiter or a counterfeiting network, however, small-scale raids and low-level fines may be ineffective. In these more complex cases, judicial channels, which offer the possibility of damages or criminal sentences, may be more effective.
  • Government actors  Companies should carefully weigh the resources, staffing, and level of expertise of the actors who would handle their cases. This includes considering not only administrative actors versus their judicial counterparts but the range of possible administrative actors that could tackle a case. For example, a company that learns of large numbers of counterfeit goods being sold under its trademark could go through the local AIC or PSB; alternatively, if it suspects that the counterfeit products are below quality standards, it can approach the local branch of AQSIQ.
  • Location of infringement  As noted earlier, administrative and judicial authorities in larger cities and more developed areas tend to have greater expertise and a better reputation for dealing with IPR issues than their counterparts in less-developed areas. The gap in experience is especially large on the judicial side. For IPR infringement in less-developed areas, administrative channels are usually more effective. Depending on the nature of infringement and how evidence is collected, companies may be able to select an appropriate jurisdiction in which to file a case. For example, many companies that face widespread counterfeiting make notarized purchases in Beijing and Shanghai to establish standing before IPR courts in those locations.

A collaborative, organized effort

Though the above list is not exhaustive, companies that consider these factors should be better positioned to tackle IPR infringement in China. Pushing for a civil case while allocating limited resources to the effort will only result in frustration when more money is needed; using administrative enforcement to battle a large counterfeiting network may prove ineffective. A well-developed plan of attack against IPR infringement, combined with strong internal controls, should provide companies with a multi-faceted strategy to help them navigate China’s challenging IPR landscape.

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China’s IPR Enforcement Agencies

Various PRC government agencies are responsible for administrative enforcement of intellectual property rights (IPR). Companies that want to file complaints can take one of several administrative avenues.

The PRC government maintains a website with links to many helpful IPR-related agencies at http://english.ipr.gov.cn/en/organizations.shtml.

Administration for Quality Supervision, Inspection, and Quarantine (AQSIQ)
Through its local representatives, China inspection and quarantine bureaus (CIQs) and technology supervision bureaus (TSBs), AQSIQ is a possible avenue for trademark infringement cases when counterfeit products are of poor quality.

Director: Wang Yong
9 Madian Donglu, Haidian Qu
Beijing 100088
86-10-8226-0001
www.aqsiq.gov.cn

State Administration for Industry and Commerce (SAIC)
SAIC regulates domestic commercial activity, giving it a broad mandate that touches on many areas of company operations. On intellectual property issues, SAIC oversees the China Trademark Office and, through its own provincial and local offices, investigates and determines cases of trademark infringement. SAIC’s Antimonopoly and Anti-Unfair Competition Bureau (formerly the Fair Trade Bureau) oversees trade secrets disputes under the Anti-Unfair Competition Law.

Director: Zhou Bohua
8 Sanlihe Donglu, Xicheng Qu
Beijing 100820
86-10-8865-0000
www.saic.gov.cn

Antimonopoly and Anti-Unfair Competition Bureau
Director General: Ning Wanglu
www.saic.gov.cn/zwxxq/zzjg/zgsz/t20060112_2946.htm

China Trademark Office
Director: Li Jianchang
86-10-6802-7820
www.ctmo.gov.cn

State Intellectual Property Office (SIPO)
SIPO examines and issues patents at the national level and oversees reviews and invalidation proceedings. SIPO’s provincial offices handle administrative reviews and enforcement of patent infringement cases.

Commissioner: Tian Lipu
6 Xitucheng Lu, Jimenqiao, Haidian Qu
Beijing 100088
86-10-6208-3114
www.sipo.gov.cn

National Copyright Administration of China (NCAC)
NCAC is broadly responsible for copyright policy, registration, administration, and enforcement. It also handles national copyright activities, including investigations and campaigns to fight copyright infringement. NCAC offers administrative remedies for copyright infringement, but because it has a small number of Beijing staff, NCAC encourages companies to seek redress through the court system.

Director: Liu Binjie
40 Xuanwumenwai Dajie, Xuanwu Qu
Beijing 100052
86-10-8313-8735
www.ncac.gov.cn

General Administration of Customs
Customs is responsible for monitoring and investigating counterfeit goods that cross China’s borders. Companies must record their intellectural property through the Customs recordation process—registering with national-level Customs and training local level inspectors—to ensure that Customs searches for infringing goods during its normal border inspections.

Director: Sheng Guangzu
6 Jianguomennei Dajie
Beijing 100730
86-10-6519-4114
www.customs.gov.cn

Key Customs branches:

Beijing
http://beijing.customs.gov.cn
Dalian, Liaoning
http://dalian.customs.gov.cn
Guangzhou, Guangdong
http://guangzhou.customs.gov.cn
Nanjing, Jiangsu
http://nanjing.customs.gov.cn
Ningbo, Zhejiang
http://ningbo.customs.gov.cn
Qingdao, Shandong
http://qingdao.customs.gov.cn
Shanghai
http://shanghai.customs.gov.cn
Shenzhen, Guangdong
http://shenzhen.customs.gov.cn
Tianjin
http://tianjin.customs.gov.cn

State Food and Drug Administration (SFDA)
SFDA drafts and implements regulations for drugs and medical-related products, as well as a small selection of food products. Its regulation of the drug and medical device industry includes IPR protection, and some firms in these industries have successfully addressed patent and trademark infringement through SFDA.

Commissioner: Shao Mingli
38A Beilishi Lu, Xicheng Qu
Beijing 100810
86-10-6831-3344
www.sfda.gov.cn

China Internet Network Information Center (CNNIC)
CNNIC manages the registration and oversight of China’s domain names and consequently deals with cases of domain name infringement and, to a lesser extent, Internet sites that sell counterfeit products. Companies may petition CNNIC to remove websites of companies with infringing domain names.

Director General: Mao Wei
4 Zhongguancun Nansijie
Zhongguo Kexuyuan Ruanjianyuan
Building 1
Beijing 100190
86-10-5881-3000
www.cnnic.net.cn

General Administration of Press and Publication (GAPP)
GAPP is responsible for managing China’s traditional print and other news media, including books, magazines, newspapers, and some forms of new media, such as online news publications. GAPP’s duties include protecting the IPR of these publications and investigating related cases of piracy and infringement.

Director: Liu Binjie
40 Xuanwumen Dajie, Xuanwu Qu
Beijing 100052
86-10-8313-8629
www.gapp.gov.cn

State Administration of Radio, Film, and Television (SARFT)
SARFT regulates and oversees China’s radio, film, and television industries, including content approval and rules governing programming of domestic and foreign content, and protects IPR in these industries.

Director: Wang Taihua
2 Fuxingmenwai Dajie, Xicheng Qu
Beijing 100866
86-10-8609-2707
www.sarft.gov.cn

Ministry of Culture (MOC)
MOC promotes and regulates a variety of cultural products and activities, including those in the performing arts, music, film, literature, and television programming. On IPR issues, MOC works to prevent the dissemination of pirated or smuggled music and movies and frequently works with SAIC and the Ministry of Public Security on campaigns and crackdowns against pirated content.

Minister: Cai Wu
10 Chaoyangmen Beidajie
Beijing 100020
86-10-5988-1114
www.ccnt.gov.cn

Ministry of Public Security (MPS)
MPS and its local-level public security bureaus (PSBs) serve as China’s main law enforcement authority. At the national level, MPS coordinates regional and national-level raids or campaigns against IPR infringement. Local PSBs investigate suspected cases of IPR infringement that may result in criminal cases or sanctions and can carry out raids, seize goods, and make arrests.

Minister: Meng Jianzhu
14 Dong Chang’anjie
Beijing 100741
86-10-6520-2114
www.mps.gov.cn

Ryan Ong[/box]

[author]Ryan Ong is manager, Business Advisory Services, at the US-China Business Council in Washington, DC.[/author]

Posted by Ryan Ong