Legal developments and enforcement challenges

There were a number of important legal developments that took place in the world of intellectual property rights (IPR) last year. In order to operate effectively in China, understanding the IPR system is more important than ever before. Ai-Leen Lim, chief executive officer and principal counsel of the intellectual property (IP) section of AWA Asia, and Lars-Åke Severin, founder of PSU China, highlights China’s IPR advances in 2017 and the remaining enforcement challenges that exist for IP holders.

In 2017, China launched a nationwide campaign to protect foreign companies’ IPR and specialised IP courts expanded to second-tier cities. Past experience shows that courts have a more positive attitude towards evidence preservation and awarding significant damages to foreign companies when it comes to IPR.

Nationwide campaign
In August 2017, the State Council of the People’s Republic of China published the notice titled, State Council on Several Measures for Promoting Foreign Investment (State Council Document No. 39). This notice announced several measures China will undertake to ensure foreign investment growth. This entails creating an economic environment that is more law-based, internationalised and convenient for foreign investors. Additionally, this notice includes the improvement of IPR protection, with the Chinese Government recognising this as an effective incentive for encouraging foreign direct investment in China.

As of September 2017, 12 national departments including the State Intellectual Property Office of the People’s Republic of China (SIPO) and the Ministry of Commerce of the People’s Republic of China (MOFCOM) jointly formulated and launched the Action Plan for the Protection of Intellectual Property Rights Owned by Foreign-invested Enterprises (Action Plan). This announcement marked the government’s first nationwide campaign to protect foreign companies’ IPR in China.

The Action Plan states that the government will, “severely crack down on violations and offenses such as the infringement of intellectual property rights owned by foreign-invested enterprises”. The Action Plan called on 12 departments to lead the crack down on infringements in trade secrets, trademarks, patent rights and copyright from September to December 2017. It also tasked these departments with reducing the number of counterfeiting offences. Each department has been assigned tasks under the Action Plan, with MOFCOM being asked to actively publicise the Action Plan’s achievements and showcase the strides being made by China in protecting IPR.

These recent governmental actions send a clear signal that China wants to improve its position on IPR protection in the eyes of foreign investors, and it will be interesting to see how the desired outcomes of the Action Plan are realised.

IP tribunals
Following the establishment of three specialised IP courts in Beijing, Shanghai and Guangzhou in 2014, China formed 10 IP tribunals in second-tier cities in 2017. These IP courts were designed to try cases involving patents, technical secrets, computer software and cases regarding recognition of well-known trademarks and antitrust issues. These courts have seen the successful increase of damages awarded to plaintiffs by lowering the burden of proof in court and promoting a positive attitude towards provisional measures like preliminary injunctions and evidence preservation.

The tribunals have a similar function to IP courts, but operate within the local-intermediate court system and are comprised of 12 to 15 judges with extensive IP litigation experience.

This recent expansion of the IP legal system shows that China wants to strengthen their jurisdiction over patent cases and improve the quality, efficiency and consistency of IP adjudications.

Under Armour victory
In August 2017, Under Armour, Inc won a major victory against the Chinese sportswear company Fujian Ting Fei Long Sports Products Co Ltd, which had used a similar logo to one used by Under Armour, Inc for its ‘Uncle Martian’ athletic footwear. The Higher People’s Court of Fujian Province ruled in favour of Under Armour, Inc, finding that Fujian Ting Fei Long Sports Products Co Ltd’s use of the logo constituted trademark infringement and awarded the plaintiff approximately renminbi-yuan (CNY) 2 million (United States dollar (USD) 300,000). This case was important because the preliminary injunction was awarded before the matter was tried in full.

The act of trademark squatting with sporting apparel and footwear has become a serious problem in China. Under Armour, Inc’s victory shows the Chinese courts’ determination in curbing this type of behaviour and preventing people from being able to imitate well-known international brands. A court issuing a preliminary injunction in an IP infringement case can be an effective method for IPR owners to prevent further irreparable harm by an infringer.

In this case, the higher court, before the case was decided, approved Under Armour, Inc’s application for a preliminary injunction and ordered the defendant to immediately stop the manufacturing, selling or advertising of shoes and clothing using the contested logo. This case was yet another victory for brand owners that are concerned about protecting their brand value when they venture or expand further into the Chinese market.

Enforcement challenges
The IP community considers all of the above moves big, bold strides in the right direction, and is looking forward to continued progress in 2018. China has shown it recognises the importance foreign investors place on strong IPR protection. However, it is important to remember that despite recent legal developments, enforcement still remains challenging for IP holders, especially with the increasingly crowded trademarking space.

China’s trademark applications exceeded 5.7 million in 2017, a 55.7 per cent year-on-year increase. At the end of 2017, China had 14.92 million qualified registered trademarks, more than any other country. These numbers pose practical issues for IP owners trying to secure registrations and successfully enforce their IPR. It also creates challenges for the courts and administrative authorities trying to keep pace with the resulting actions and cases. It is now more important than ever before for brand owners to acknowledge that China’s trademark regime operates on a first to file basis, which usually requires strong IPR (IP registrations in particular).

Across many industries, the number of IPR infringements in China are breathtaking in scale. Enforcing IP can appear daunting, even if legal predictability starts emerging in the Chinese court system.

The stereotype of China as being primarily a source of low-quality, cheap knock-offs like ‘KFG Chicken’ and ‘HiPhones’ may persist, however Chinese infringers are increasingly becoming more sophisticated in their operations.

Enforcement strategy
Enforcement strategies should reflect the increasingly organised and professional business-like operations of Chinese infringers. It is important to use all available means of enforcement including civil, administrative and criminal measures.

A business’s initial steps should be similar to the process for gathering business or competitive intelligence. These businesses should attempt to identify infringement and the key players involved, while making an effort to map the supply chain. This will help businesses develop a strategy that is appropriate to the cost and time involved in IP enforcement.

Evidence collection
While business intelligence informs strategy, evidence collection underlies enforcement. Provisions governing evidence are scattered throughout China’s different laws. It is vital that enforcement efforts are in step with legal counsel. Chinese courts largely focus on written or physical evidence, thus following the correct investigative processes is central in building a case.

In many trademark and design patent litigation cases, evidence collection typically breaks down into the following components:

1. evidence supporting an infringer offering products for sale;
2. supporting evidence for an infringer selling products; and
3. supporting evidence that an infringer is manufacturing the products.

Online product listings, catalogues or materials sourced at trade fairs can be used as evidence to show offers for sale. Evidence that proves the sale of infringing products is commonly obtained via a carefully constructed ‘test purchase process’.

Outsourcing investigations
If a third party is used to help with evidence gathering, due diligence is a necessity. China’s IP investigators have faced concerns with how they conduct onsite investigations at infringers’ factories. One should aim to use investigators with a proven track record and prioritise those that come with references. The investigation process is overseen by the court and should be well planned and executed by experienced investigators.

Notarisation of evidence
To get evidence in front of the courts, notarisation remains key. For foreign companies with brand protection teams stationed in China, forging working relationships with local public notaries can be a huge bonus.

China’s public notaries remain overburdened, inefficient and operate with archaic filing systems. Patience is required, but IP holders should also keep a close eye on the evidence transcription process.

Support from the courts
Courts also have the power to compel infringers to surrender evidence that is largely inaccessible to most foreign IP holders, which can include an infringer’s financial and inventory records. This power has been exercised more frequently, with courts taking a more positive attitude towards evidence preservation.

Significant damages awarded to foreign companies in a number of recent high-profile cases is a welcome development. Noteworthy too is the possibility that IP holders cover the legal fees and investigation costs if damages are awarded.

A changing IPR landscape
There is no doubt that the IPR landscape in China is going through a series of encouraging legal developments. However, it remains a market where IP holders need to be vigilant. IP strategy and enforcement remains key to safeguarding a company’s IPR.

Ai-Leen Lim is the chief executive officer and principal counsel of AWA Asia. She heads up the firm’s Asia offices and runs AWA Asia’s wholly-owned Chinese IP consultancy in Beijing. This consultancy is also a licensed trademarking agency that allows AWA Asia to file trademarks directly in China on behalf of its clients.

Lars-Åke Severin founded PSU China in 2006 and is one of the leading foreign experts on security management and internal investigations in China. PSU China has the experience, insight and resources to help companies and organisations deal with security related issues. Mr Severin served in the Swedish armed forces and has a police background where he also founded the close protection team for Her Royal Highness the Crown Princess of Sweden.