IPR Protection for the Mechanical Engineering Sector

China’s demand for machinery, tools and related technologies is still robust, and looks to remain that way. In the European Chamber’s Business Confidence Survey 2016, 56 per cent of respondents in the machinery industry indicated that they were optimistic about growth in China over the next two years, the highest of any industry sector. China therefore remains an important marketplace for Europe’s high quality products and innovative technologies – particularly in light of its shift in emphasis towards high-end manufacturing (read China Manufacturing 2025). In the following article the China IPR SME Helpdesk outlines the proactive measures that companies in the mechanical engineering sector will need to take to protect their IP.

China’s economic success has been built on manufacturing on a massive scale and, despite the economic slow-down, manufacturing is still growing. For example, in the five years up to 2015, electrical equipment and machinery manufacturing revenue has been increasing 10.1 per cent annually to EUR 7.8 billion.[1]

The mechanical engineering sector is expected to see increased growth and opportunities for European SMEs in the coming years following the unveiling by the Ministry of Industry and Information Technology of its China Manufacturing 2025 plan, which aims to lift China from the ‘big industrial country’ to the ‘powerful industrial country’. China Manufacturing 2025 sets an agenda for upgrading China’s manufacturing industry by making greater use of technologies like cloud computing. It will be particularly beneficial for the mechanical engineering sector: through the plan the government has prioritised many related industries like automated machine tools and robotics, aerospace and aeronautical equipment, new-energy and power equipment and agricultural equipment. These are the areas where European SMEs can expect most opportunities.

Unfortunately, IP infringements are still a major problem in China. However, as China’s market develops, legislators and enforcement authorities have made progress in updating IPR practices and educating Chinese manufacturers. As a result, patent applications have rocketed and new IP registration procedures and IPR courts have made application and enforcement of IP rights more accessible for foreign players. Furthermore, the China Manufacturing 2025 plan is expected to lead to improvements of the IPR environment.

IP Challenges

The mechanical engineering sector presents some unique challenges when it comes to IPR protection in China, and requires a proactive approach and an ongoing IPR strategy, well after registration has taken place.

Along with the usual issues of brand infringement and unauthorised use of trademarks, manufacturers also have to consider the infringement of their patents, whether they apply to an entire machine or individual parts. Counterfeiting of components and whole pieces of machinery has been a common complaint of companies operating in this sector in China, and is made possible due to reverse engineering.

As in the EU, reverse engineering is a perfectly legitimate means of obtaining business secrets through lawful research. This makes registration of patents and utility models for parts and mechanisms essential for proper IPR protection.

Trademarks: Brand protection

First on any company’s list of priorities before entering the Chinese market, should be the protection of their core brand. This is achieved through registration of the company name and/or logo and any other distinguishing visual marks which are associated with the brand and its’ products as trademarks.

China operates a ‘first to file’ system which makes early application essential before entering the Chinese market in order to avoid potential issues of trademark hijacking by domestic companies seeking to take advantage of the target brand’s reputation or make a profit selling the mark back to the EU SME that has the registered trademark for the EU at a profit.

Registration of trademarks in China can be done through the China Trade Mark Office (CTMO) with the aid of a local trademark agent, or through an international registration under the Madrid protocol. However, there are some issues to bear in mind when seeking registration in China which can make or break a brand in the Chinese marketplace:

• China has a narrower specification of classes of products and services than required by the Nice Agreement used in the EU to designate the use of trademarks. In essence, China has divided the classes of the Nice classification further into subclasses.
• Foreign language names are rarely used in China, and if you do not designate your product a Chinese name, consumers will likely come up with their own. Once this has been done there is nothing stopping competitors from registering the Chinese name as a trademark.

Trade secrets: loose lips sink ships

A trade secret is any commercially-exploitable information which is not public knowledge and is protected by confidentiality measures. To receive trade secret protection in China, EU SMEs need to take physical protection measures, technological protection measures and contractual measures.

Trade secrets are especially important to bear in mind when negotiating with potential partners in China and when hiring staff to work with sensitive material. Successful protection can be achieved through control of information and by requiring employees and manufacturing and distribution partners to sign comprehensive non-disclosure agreements (NDAs) before transferring any information.

Non-disclosure agreements are extremely important and SMEs should always insist on signing one. There have been reports of domestic companies claiming that NDAs run against ‘local business practice’ and act as a sign of distrust, but if a Chinese counterpart is sincere, experience shows that they will sign the NDA.

Patents: protect your portfolio

Any SME seeking to operate in China’s mechanical engineering sector must secure its domestically registered patent portfolio in order to succeed.  It is important to remember that patents registered in the EU do not provide automatic protection in China; instead a Chinese patent is needed. A patent needs to be new, inventive and industrially applicable. The requirement with regard to novelty means that the invention cannot be disclosed anywhere in the world before the patent application in China is filed. If you do not meet this requirement, your patent can be invalidated at any time.

There should be no hesitation amongst EU SMEs entering the Chinese market when it comes to registering patent protection for their core technologies, either via invention patents (maximum 20 years) or as utility models (maximum 10 years).

Design patents are also a key area of IPR protection for EU SMEs, especially in component manufacture. Components which are unsuitable for trademarking such as handles and fittings, or small machinery components can be protected by design patents, which cover the visual characteristics of products. The novelty requirement also applies to design patents.

Copyright

Whilst copyright may not seem immediately applicable in the mechanical engineering sector it is an important tool for protecting your marketing material, manuals and packaging.

Most common copyright infringements in this sector consist of copied product images featured on the infringer’s website to advertise their products. However, other examples include copies of sections and occasionally entire brochures, product descriptions, packaging and also manuals and instruction materials.

Whilst copyright is an automatic right in China and does not require registration, any evidence of copyright ownership brought to courts in China must be notarised, or registered with the China Copyright Protection Centre (CCPC).

As such, it is often easier to make a voluntary registration of copyright with the CCPC, which will provide the owner with a certificate of copyright usable as evidence in enforcement actions.

Enforcement

In China, IP actions can be enforced both before a civil court and through specialised administrative bodies. Where certain thresholds are met as to the extent and value of the infringement, criminal proceedings may also be actioned. Additionally, where IP is registered with Chinese customs authorities, exports of infringing goods may be prevented from leaving the country.

Take away messages

• Before you take any action, make sure you have notarised proof of the infringement.
• Civil courts are the only forum through which IPR owners can claim economic damages.
• Judicial decisions in civil courts take longer to reach but act as a stronger deterrent to future infringement.
• Civil court action can be expensive and time consuming, requiring well documented evidence which has been legalised, notarised and translated.
• Customs authorities can provide an effective bar to the export of counterfeits.
• Enforcement is an ongoing practice, SMEs must be proactive in monitoring their IP.

[1] Electrical Equipment and Machinery Manufacturing in China: Market Research Report, IBISWorld, December 2015, viewed 8^th July, 2016, <http://www.ibisworld.com/industry/china/electrical-equipment-and-machinery-manufacturing.html>

The China IPR SME Helpdesk supports small and medium sized enterprises (SMEs) from European Union (EU) member states to protect and enforce their Intellectual Property Rights (IPR) in or relating to China, Hong Kong, Macao and Taiwan, through the provision of free information and services. The Helpdesk provides jargon-free, first-line, confidential advice on intellectual property and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IPR queries via email (question@china-iprhelpdesk.eu) and gain access to a panel of experts, in order to receive free and confidential first-line advice within 3 working days. The China IPR SME Helpdesk is co-funded by the European Union. To learn more about the China IPR SME Helpdesk and any aspect of intellectual property rights in China, please visit our online portal at http://www.ipr-hub.eu/.