CHINA ESQUIRE

I have been hammering the fact that Chinese IPR enforcement–the protection of various sorts of intellectual property like patents and trademarks–has been getting better and better.  Statistics are powerful, and I don’t think these are any different.  The Economist recently did an article called “850,000 lawsuits in the Making” ( h/t Rich Brubaker at All Roads), which reads:

Since 2003 the number of trademark applications has grown by 60%; the number of patents has nearly doubled (850,000 are now active) and the number of lawsuits about intellectual property has more than doubled (see chart). The government is encouraging the trend in many ways, including signalling to the press to cheer it on.

This enthusiasm marks a dramatic change. During the Maoist era, private property of any kind was seen as theft from the masses, and so subject to just expropriation. Only in 1985 did China begin to enact laws to protect patents. It did not enforce them much until 2001, when the authorities promised to crack down in order to win admission to the World Trade Organisation.

China has since opened more than 50 courts that deal solely with intellectual-property cases, and Chinese firms are using them. Prominent litigants include a pram manufacturer protecting designs, a soya-milk producer defending an industrial process and a maker of Chinese medicines shielding a name that, roughly translated, means “mind and blood purge”.

Again, very encouraging numbers.  50 specialty courts that deal with IP?  That’s fantastic.  Sure, they are not all up to par with the Federal Circuit Court of Appeals, but I cannot complain.  Chinese judiciary specializing in IP and learning how to deal with these sorts of cases is a good thing.

As companies in China establish brands and develop products, the incentive to sue will grow, particularly because the cost of bringing a case is minimal. “If you can afford a car, you can afford a lawsuit,” says Tony Chen, who works in the Shanghai office of Jones Day, an international law firm.

In America, firms often settle intellectual-property cases out of court for fear of enormous awards by juries. That is not true in China, Mr Chen says, where a judge rules in the majority of cases and damages tend to be small. They normally cover legal costs, however, turning lawsuits into a self-funding method to battle piracy.

Well, perhaps there is an argument to be made for the British system…  that being a tangent, the British winner-takes-all approach will only allow the rule of law to grow in the early stages of IPR enforcement.  Maybe later it can hurt, but for now, including damages into legal costs will encourage more and more companies to turn to the courts for IP remedies.  That is a good thing.  Few things encourage the rule of law such as the general citizenship of a country embracing lawsuits.  And if Chinese companies can embrace them wholeheartedly, then perhaps the Chinese people will finally be able to as well.

Unsurprisingly, the main beneficiaries of the sudden interest in intellectual property are Chinese lawyers. Some reportedly earn more than $5m a year. Non-Chinese law firms sometimes provide advice on thorny cases. But they are not allowed to file patents or appear in court on behalf of a client—a proprietary process that Chinese lawyers are keen to defend.

Yes, there is a silver lining in the advancement of the rule of law: it’s that the lawyers profit most.  I guess I can’t complain.  But yes, someone will have to profit off of this sort of growth.  For most people, that’s an unfortunate fact.  But it’s a fact of life.  The more that law becomes integral to Chinese society, the more lawyers will become more important.  That’s an already established fact in America–much as lawyers are hated, they are also necessary to the functioning of everyday business.  Expect the same in China.

So onward rule of law!  Just make sure your coattails are long enough for the lawyers…

While I am still talking about intellectual property and IPR enforcement, I thought I would highlight an article I read recently. The Associated Press recently published an article entitled “While upset about piracy, EU is more serene about China than US”. The article reads:

Compared to Washington, the European Union has been serene about piracy in China of its trademarks, copyright and patents. Can that last?

The EU estimates pirated goods cost EU businesses €21 billion (US$33.3 billion) in lost trade annually — about a third of current EU exports to China. But unlike the United States, it has to date not pursued any Chinese piracy cases in the World Trade Organization.

Still, the EU has put China in the category of worst violators of intellectual property. It is the only country in that category because its anti-piracy efforts are so weak that 80 percent of counterfeit goods imported into the 27-nation bloc are Chinese-made.

Again, I would like to know how that figure of 21 billion euros is calculated. As I mentioned before: if it wasn’t for piracy, I really doubt the figures many times.

I also think it can last. Why do all the dirty work of calling China out when America is already more than willing to do that? I think its the best policy.

Mandelson has repeatedly criticized blatant sales of fake goods throughout China that cost European and U.S. businesses dearly. To counter this he has nudged China into a 2007-2011 venture designed to boost enforcement of Chinese piracy laws by providing expertise and training.

“It is important to offer the Chinese all possibilities to put their house in order,” says Luc Devigne, head of intellectual property issues at the European Commission’s trade directorate. “We are not always convinced there is a willingness to stamp out piracy.”

That’s as tough as the piracy language gets at the EU.

I disagree. I think China has done a pretty good of trying to stamp out piracy. It’s true: China has not taken a zero tolerance policy, as evidenced by street vendors continuing to sell pirated products and fly-by-night stores that sell counterfeit goods. But I think the numbers are pretty good: 10% drop in software piracy in years; 76 million discs and other goods confiscated, 13,000 businesses shut down in 1 year (see here); 1.3 billion illegal publications over 20 years (though not all piracy related) (see here). Court cases being won regarding trademark, copyright, and patent. Realistically, there isn’t all that much that China has not already done in my book.

“In America, there are strong feelings of protectionism in the Congress. And the U.S.-China relationship is much more complex, more interdependent. There is America’s huge trade deficit with China. China has leverage over the U.S. because it holds significant amounts of U.S. Treasury debt. And there are security issues like Taiwan and North Korea.”

By comparison, says Innis, Europe “is much more in an appeasement mode with China.”

That is “a bad thing,” says Stuart Newman, head of the Brussels-based Foreign Trade Association whose 100 members include Europe’s biggest supermarket groups and textile importers. “We should be going after China in a tough way on intellectual property rights violations.”

While he favors legal action through the WTO, Newman does not underestimate the job of eradicating piracy in China.

I also disagree. I think the appeasement mode works better. Here’s why: (1) America will be the bad cop, while the EU can be the good cop. Good cop/bad cop works pretty well actually. And I think the EU will end up having a better image for it. Piracy will go down. America is hated. The EU is loved. That’s a win-win if I ever saw one. (2) That is how the Chinese prefer to negotiate. The government knows that IP is a problem. And the government knows that IP enforcement will be important to China’s economy in the future. China is not naive. But to throw that into their face like America does makes China defensive. And it makes China amp up the rhetoric as well. It’s just unproductive. But if the EU can dialog with China and do things in a less-blatant fashion, I think it will encourage the Chinese government to want to work with the EU. I know it sounds so offensive and ridiculous to westerners, but let the Chinese save face where you can. Really, it works.

My take: the EU should stay the course. The EU will benefit from America’s aggressiveness and still get what it wants, while maintaining the favor of the Chinese government and people.

Matthew DeFlorio published an article with the ABA International Law Section’s International Law News. It doesn’t directly relate to China, but I think its tips are very applicable. A number of his suggestions are based not only in common sense, but quite a bit of experience as well. However, a number of them are not cheap… and so it’s up to you to decide whether its worth it to protect your IPR. I am going to get the answer will be “yes” in a number of cases.

The article, entitled “Supply Chain Security and Its Impact on IPR” reads in part:

Protecting IPR through supply chain security can occur in a number of ways, either through tangible investments or as intangible process changes. . . . Developing new or improving existing processes for business partner selection and internal communications and data flow represent typical intangible enhancements that can provide additional security. Owners have improved their IPR protections by emplying some or all of the following options.

Visibility. Making assets and products more visible throughout the supply chain can protect against cargo theft and damage and prevent products from becoming instruments of illegal trade. Companies achieve this by investing in satellite tracking systems such as GPS, product protection technology such as EPC, or RFID. These systems provide real-time location status and tamper evidence that enables their use greater control over a shipment’s chain of custody from production to point of purchase.

No argument here. However, I just want to note that these sort of systems will cost more. Not a big revelation. But when profit margins are getting thinner by the day, a number of businesses–likely SMEs–won’t want to pay for these costs. At that point, you need to think about just how valuable your IP is and make a proper business decision.

Physical protection. Businesses protect building structures and cargo handling areas by installing fences and video surveillance equipment, and by controlling access to sensitive areas by employees and visits. These measures benefit IPR by protecting product and shipment integrity while discouraging access by unauthorized personnel.

Again, no argument. However, this needs to be strictly done at all levels. Including, your Chinese manufacturers/suppliers. Sourcing from China is likely a weak link in your chain. How many factories are going to protect in this way? Not many. So be careful and make sure you trust your suppliers. I really expect most companies, even SMEs, to be doing some of these things… but only in the US and not overseas.

Standards. Many companies will benchmark processes and activities, thereby establishing minimum performance requirements . . . . Specific methods for reporting fraud and illegal pursuits have become commonplace and are required for public companies under Sarbanes-Oxley. Such process discipline leads to quicker, more assured compliance while reducing confusion and inefficiency in the movement of goods through the supply chain.

Note that this is true for companies under SOX. In other words, U.S. publicly traded companies. Not your Chinese manufacturers. Reporting requirements and processes are not easily implemented in China. It’s not the same as doing it in the U.S. or even Japan. Chinese work culture is very different. Trying to convince your satellite office employees in China to do so… that’s going to be directly related to the effectiveness of your local manager.

Business Partners. Increased scrutiny of current and potential business partners leads companies to investigate beyond financial soundness and into the previous business conduct and security measures undertaken by the potential partner. Due diligence with this investigation will ensure a secure supply of materials, prevention of unauthorized characters tainting your supply chain, and enable early detection of security breaches due to enriched communication and collaboration. . . . IPR owners benefit through cost avoidance; smoother transit means quicker time to market, allowing for decreased inventory levels and the redirecting of funds previously earmarked to compensate for potential criminal activity.

I cannot reiterate this point enough. First, due diligence–thoroughly done–is your friend, even if it costs time and resources. Do it. And of course, do it regularly… check up on your suppliers on a routine basis. Quality fade isn’t the only problem if you are trying to protect your IP. Really, intellectual property is as valuable as your weakest link. So make sure your partners are doing a good job. Drop in unannounced regularly. Second, it also means that you can’t just go onto Alibaba and expect that this is good enough. It isn’t. Don’t think you can just find someone off a directory listing or at some trade even… it’s never that simple. Whoever you go to, do your due diligence.

And of course, as many people have reiterated time and again… Register your IP in China. (Thanks Dan!)

The International Law News, which is the American Bar Association’s (ABA) publication for the International Law Section, published an article by Richard Gruner entitled “Intellectual Property in the Four Chinas”. You might be wondering if there are four Chinas in the first place since most people think there is one China… unless you are a firm supporter of Taiwan, which is technically the Republic of China. That would give you two.

On that note, Professor Gruner argues astutely:

The analysis of IP laws and their enforcement in China has been hobbled by oversimplifying China itself. A number of astute observers of the developing business environments . . . in China have recognized that there are at least four distinct regional situations–that is, the “four Chinas” within the [PRC]–that are developing as the country emerges into a period of greatly heightened commercial activity.

The regional characteristics . . . of the four regions fo the PRC discussed here create four very different sets of opportunities and problems for IPR holders. The impactof IP varies in different regions of the country because a combination of local differences in types of dominant businesses in local areas, variations of the local political clout of businesses that infringe IPR, and the ability of local officials to grant or withhold strong IP enforcement due to the regional nature of IP enforcement mechanisms in China.

I cannot agree more. China, while it is trying to unify its laws and enforcement of IP law (and other laws, for that matter), is a huge nation. I keep reminding people that China has a landmass that is far more comparable to the entire EU than to America. (yes, there are many geographically challenged Americans) Inevitably, there are bound to be differences. If people forum shop in the U.S. because courts are different, imagine forum shopping in a landmass that encompasses more than three times the population. I think you get the picture.

Gruner identities the Four Chinas as:

1. The municipalities of Beijing, Shanghai, and Hong Kong, and the surrounding areas under the direct control and influence of these cities, which are both commercial centers and heavily industrialized.
2. Coastal China, the areas near China’s coastline other than the major urban centers of the First China, which are often mixed economies with many large scale manufacturing activities conducted at low product cost.
3. Inner China, regions immediately inland from the coastal sections of China, which are heavily dominated by agriculture.
4. Outer China, the western provinces of China and desert areas, which consist mostly of economies of mineral and oil extraction.

Again, this should be no surprise to China watchers. The differences between the “tiered” cities mirrors some of these observations.

Gruner observes that in the First China, “local authorities have strong motivations to pursue IPR enforcement as a means to both reward and enhance local innovators and to entice outsiders . . . to inject new technologies into the local economy through IP licensing.” He approximates the level of IP interest as being similar to those of highly technical western counties like the U.S.

Coastal China’s manufacturing “involves technologies originating in other parts of China or copied (often without proper IP licenses) from foreign sources. The interests of this region are thus largely tied to the . . . profitability of local manufacturing without any reciprocal concern over the lack of IP-based rewards for local innovators.” Gruner concludes about this area:

This region represents the greatest challenges for IP enforcement in China due to both its present economic interests in weak IP enforcement and the breathtaking scope of its infringement capacity in large-scale, low-cost manufacturing of unlicensed goods covered by IPR.

Inner China, on the other hand, will find IP enforcement largely irrelevant except “IP-protected products or services used in agriculture.” On the whole, inner China is more like “unindustrialized portions of Africa.”

Finally, outer China also finds IPR enforcement irrelevant except where mining and oil extraction take place, because businesses “may have significant opportunities to use advanced technologies. While there may be some local innovation in these technologies . . . , these are probably outweighed by the commercial advantages of tolerating infringement.”

Given all of these facts, Gruner argues that a multi-regional view of IP in China is necessary. I agree.

Xinhua is reporting that China destroyed some 47 million copies of illegal publications this past Sunday. And it gives even more numbers from the past 20 years. The article reads:

Chinese authorities destroyed 47.18 million pornographic and illegal publications on Sunday as part of an ongoing campaign to strengthen intellectual property rights (IPR) protection.

More than 17 provinces eliminated more than 1 million pieces each, with Guangdong topping the list, destroying 12 million, or a quarter of the total.

China has attached great importance to IPR protection, which has been considered as a national strategy to help build an innovative country, said Liu Binjie, director of the National Copyright Administration.

According to official statistics, China has in the past 20 years closed down 238 pirate disc production lines, solved more than 400,000 cases of IPR infringement and confiscated more than 1.3 billion illegal publications.

Official statistics show that last year, 2,967 people were arrested for suspected violations of IPR. Public security departments investigated 2,283 cases of IPR infringement and made arrests in 2,008 cases, involving 1.49 billion yuan (about 213 million U.S. dollars).

These are nothing to laugh at. Sure, it’s still the tip of the iceberg, but it isn’t true that China is doing nothing and looking the other way at intellectual property infringement. At least, let’s look at the cold hard facts and not the BSA and MPAA propaganda.

Stan Abrams at China Hearsay commented on my last post about this matter, which noted that China’s IPR enforcement is actually quite laudable:

welcome to my world. Misery loves company, and trying to explain why IP enforcement is now much better in China compared to the state things were in several years ago is a thankless task. Furthermore, explaining how some of the statements made by the trade associations can actually set back the political debate can be dangerous for us practicing lawyers.

I can’t tell you how many times I run into people who think that China is an IP black hole without laws in copyright, trademark, or patent. That is completely wrong. While China isn’t quite at par with the United States in terms of its enforcement, we all know that intellectual property protection has been increasing in China: there have been cases where foreign companies win trademark lawsuits (Starbucks v. Shanghai Xingbake Cafe Corp, here) and even patent suits (Motorola, here). Courts are enforcing IPRs, thank you very much. There is already one case where damages were out the roof: G2000. (See China Business Law Blog) The government has been conducting a lot of raids. Sure, you can walk through the streets of Beijing or Shanghai and see pirated DVD vendors. But really, the numbers are encouraging: 1.3 billion publications and 400,000 cases in 20 years.

I think its time for the west to recognize that China is cleaning up its act and there are IP laws in place and being enforced. The next time a business person comes up to you and says “China doesn’t have an IP laws”, give them the facts. Or point them here.

China has been trying to crack down on intellectual property violations for some time now. (a friend of mine used to do this sort of stuff for a living and he has some exciting stories) That being said, it seems that to the west (and not just America), China can never win. It’s IP enforcement is never good enough. And so we constantly hear “China’s IPR violations blah blah blah…” Let’s just think about this for a moment in light of articles like these.

The AP recently published an article entitled “China defends anti-piracy efforts” ( h/t to China Digital Times):

Officials defended China’s efforts to stop rampant copying of movies and other goods, saying Thursday that 4,322 people were convicted of product piracy last year and promising special efforts to protect Olympics-related trademarks.

China is the world’s biggest source of illegally copied goods and trade groups say violations are growing despite increased penalties and repeated crackdowns. The illicit trade is fueling tensions with Washington, which has filed a World Trade Organization case over Beijing’s failure to stamp it out.

In an annual report, the agency said authorities seized nearly 76 million pirated movies, software discs and other goods last year and shut down 13,170 piracy-oriented businesses.

Yi said courts convicted 4,322 people of product piracy, though he said he did not know what penalties they received.

Officials said they are making special efforts to prevent unlicensed use of Olympics-related logos and other property ahead of the Beijing Summer Games in August.

Yes, it may be the largest source of the world’s IP violations–copyright, trademark, and probably even patent too–but we’re talking about numbers here. China has over 1 billion people. Let’s multiply the rampant amount of Kazaa and Torrent downloading the United States by over 3 times and see how much the numbers look as scary. Or think about other nations which are much smaller. I am sorry to say this, but IP violations are a fact of life in many cases. And to continue to say that China isn’t trying can only be frustrating to the Chinese government and borders on being a falsehood. Sure, the government could always do more. But it’s doing something. 76 million discs and 4,000+ convictions is nothing to sneeze at. Especially where the West has accused China of being a lawless society–well, you try to convict 4,000+ people of IP law violations in a lawless society and see how you do.

So who is fueling a lot of this? Let’s continue with the article:

Chinese markets are awash in illegally copied goods ranging from software and Hollywood movies to designer clothes, sports equipment and medications. Industry groups say Chinese and foreign companies lose tens of billions of dollars a year in potential sales to piracy.

Washington filed a WTO complaint in April 2007 accusing Beijing of violating its trade commitments by failing to stop product piracy.

Film studios have won lawsuits against pirate DVD vendors and have begun filing cases against Web sites accused of allowing downloads of unlicensed movies.

But some 93 percent of DVDs sold in China are unlicensed, according to the Motion Picture Association, which represents Hollywood studios. Many are sold openly on sidewalks in Beijing and other major cities.

In a report last year, the Business Software Alliance said 82 percent of software used in China is pirated, thought it said that rate was down from more than 90 percent in earlier years.

So we have the MPAA and the BSA involved. These are clearly special interest groups. And trust me, they are good at embellishing the truth with alleged facts and figures. The BSA claims that software publishers have lost billions and billions of dollars due to software piracy worldwide. Really? I don’t think so. Because if people couldn’t pirate your product, they wouldn’t buy it at all. It’s too expensive for most people outside of certain industrialized nations. In fact, I am willing to believe that software companies in places like China benefit because they have a virtual monopoly through piracy. And in the end, businesses will begin to pay for the software as the US retains its role as a sock puppet for the BSA.

The MPAA too. Only the MPAA would have the audacity to sue ordinary citizens for downloading movies. Well, they did. Yes, it got the message across. Did it stop the decline in movie attendance? No. You have DVDs to thank for that. (which people actually purchase… and many times, people purchase after seeing a pirated version and they like the movie enough to own it)

I am not anti-IP law. I am anti-MPAA and anti-BSA though. These are 2 organizations that I wish would just go away.

Software piracy has dropped by about ten percent in recent years. 10 percent… in a nation of 1 billion plus people? That’s amazing. And especially with the Chinese view of the law (China Law Blog did a beautiful post on this comparing the Chinese v. American view of the law), that is really amazing. Let’s give credit where it is due: the Chinese government is doing an excellent job in starting to enforce IPRs. Yes, there is always much more to do. But we are talking about stemming a flood. (or drinking from a fire hydrant) It will take a LONG time before IP is as highly regarded as it is in America. (though we in America actually despite IP wonks) But for now, can we just applaud the government’s efforts?

The AFP recently ran an article about the growth of e-commerce in China, arguing that it is “gaining a foothold” in China. Well, I suppose that could be a true statement if you compare it to the fact that there really wasn’t much going on before. But that being said, the first thing I thought was that e-commerce still had a very long way to go before it becomes as accepted as in the U.S. (though it was not that long ago… maybe 10 years ago that many of my friends remarked, “I will never buy anything online because it’s just not secure enough.” How things have changed.) The second is that this will present lawyers/businesses with many new opportunities in the future.

The article states ( h/t to China Digital Times… and yes, I know China Venture News ran it yesterday, I actually scheduled this post before they ran it):

With more Internet users than any other nation on the planet, China’s e-commerce is booming, but obstacles remain before the full business potential can be unleashed, analysts said.

China’s online population is now at 220 million, Beijing-based research firm BDA China said late last week, overtaking the United States as the world’s number one, highlighting the growth opportunities in the huge Asian market.

Fifty-five million of China’s Internet users shopped online last year for a total turnover of 59.4 billion yuan (8.25 billion dollars), according to the China Internet Research Centre in Beijing.

That is up from 43 million online shoppers in 2006, when the value of transactions stood at 4.3 billion dollars, the centre said — and an even larger jump from the 62 million dollars spent online in 2000.

By 2011, the centre projected that online spending will hit 406 billion yuan as more of China’s Internet users turn to online shopping.

Yet the level of online spending remains modest: about 1,000 yuan last year per consumer, or 0.64 percent of total retail spending in China.

Growth in its e-commerce has lagged due to consumer concerns about reliable online payment methods and counterfeit goods.

“I’m still shopping in town more than on the Internet. I just don’t completely trust Internet shops,” said Lin Yue, 24, a businesswoman in Shanghai.

According to the centre Lin’s concerns are well founded. “The purchasing of fake goods, credit card theft and other related problems emerge in an endless stream,” it said.

Another challenge that Internet companies in China face is the small number of credit card users, with 75 million credit cards in circulation by the end of 2007, according to state media reports.

Although credit cards are becoming more popular, Liu said their still low penetration rate along with quality controls and infrastructure issues explain why online sales in China last year made up little more than six percent of that in the United States.

First off, I make the observation that within the last year, despite the rather low level of online spending, the growth of spending did double. I don’t think this will be a fluke either. In fact, once e-commerce actually becomes reliable in China, I would expect the people in major cities like Beijing and Shanghai coming to rely more heavily on it. So expect even heavier growth than this.

Second, the law in this area needs a lot of development, which is where lawyers can come in. (though I think more for policy folks than for the transactional folks) But the article already hints at the problems with e-commerce: IP infringement/counterfeiting, credit card theft, and lack of payment methods. Let me add some: privacy of information and internet security (yes, that’s a business issue).

Before e-commerce can take off, IPR enforcement will have to grow. It’s just a matter of fact: intellectual property needs protection before consumers can trust products. I don’t need to preach on this issue at length, I am sure its been done time and time again. But if people cannot trust e-tailers, it will slow the growth of internet sales drastically. Which means growth opportunities for lawyers doing IPR work in China. (and from what a colleague has told me, a good chunk of IP enforcement is not just lawyer work… it’s also doing factory raids and such)

Credit card theft/financial privacy is an obvious area. Chinese lawyers will need to take the lead to write good and enforceable laws that govern the area of internet transactions. (which strengthens the idea that more lawyers in the Chinese Parliament is a good thing) The U.S. has so many privacy laws. For financial institutions there is the Graham-Leach-Bliley Act (not to mention California’s even more stringent version), and a lot more. (there is even a consumer protection law that makes it illegal to show more than 4 digits of a credit card number on a receipt!) Which means that Chinese lawyers, congressional folks, and law professors will have an opportunity to weigh in on these issues. Not to mention Chinese business lawyers having to write lengthy “Terms and Conditions” pages for internet businesses.

And for credit cards, that is yet another area where Chinese business lawyers can have a field day. Drafting long contracts for credit card agreements, writing disclosures as needed, working on banking laws… I know that China has begun to allow foreign banks like HSBC to incorporate locally and issue credit cards. It will be a boon to foreign banks, and therefore, business lawyers.

I think you get the point. This is a good thing for business lawyers, policy lawyers, etc.

I just received word from the USPTO that they are hosting another one of their “China Road Show” events, which promises to be very interesting and informative. It takes place at the Houston Hobby Airport Marriott on April 2-3 this year. Here is the promotional language:

The USPTO is holding a 2-day, free, program to help U.S. businesses protect and enforce their intellectual property rights (IPR) in China. The program is for companies of any size, from those contemplating entering the China market to those with an established presence in China, and including those who simply want to know more about protecting their products from counterfeiting and piracy.

This program is part of the USPTO’s continuing commitment to increase public awareness of the importance of intellectual property rights and the need to protect and enforce these rights in the global marketplace.

WHO SHOULD ATTEND: Companies of any size, from those contemplating entering the China market to those with an established presence in China, and including those who simply want to know more about better protecting themselves against IP theft from abroad.

TOPICS: China’s laws and regulations that may affect how a business protects and enforces its intellectual property, how best to protect business assets to avoid intellectual property problems in the first place, how to recognize when an intellectual property asset has been infringed, what to do if infringement occurs, and what the U.S. government is doing to improve the intellectual property protection and enforcement environment
in China.

Registration link is here. If only this were in the Bay Area, CA again.

Yet another China IP case where the company suing to enforce IPR’s has won. Everyone “knows” China is weak on IP enforcement, but the reality is that the Chinese courts have been getting better and better. (See e.g., G2000 case covered here) Score another one for the continued development of Chinese IP enforcement: a patent suit from Motorola.

From a press release by the company ( h/t to China Tech News) dated today:

Motorola, Inc. (NYSE: MOT), today announced that in 2007 it filed a lawsuit against a Chinese company known as Guangzhou Weierwei Electronic Science and Technology Co. Ltd. (Weirwei). The lawsuit related to the Chinese Company’s two-way radio model number VEV3188 that was claimed to fall within the scope of a Motorola Chinese Design Patent.

In a ruling last December, the First Intermediate People’s Court of Beijing (the court in the first instance) determined that the VEV 3188 two-way radio infringed Motorola’s Design Patent. Weierwei was therefore ordered to cease the manufacture and sales of VEV 3188 two-way radios and to financially compensate Motorola.

“We are very pleased that the First Intermediate People’s Court of Beijing recognizes the importance of intellectual property protection and has ruled in Motorola’s favor,” said Jonathan P. Meyer, Motorola senior vice president for Intellectual Property Law. “Motorola invests extensive human and financial resources to bring compelling designs to market, and the company will remain vigilant in protecting the value of this investment”.

We now have trademark cases and a patent case within the span of a month coming out of various Chinese courts. This is good for businesses wanting to go into China. Wonderful.

So maybe you’re asking yourself the next question: what’s the catch? The catch is that while Motorola is trumping this decision, we have no idea how much the damages were. We know there was an injunction, which is standard fare. (though I guess the defendant could always go and start another company doing the same thing fairly quickly) There was also monetary damages. And we are all dying to know what they are. I have a feeling they were within the 500,000 yuan cap or Motorola would be trumpeting the damages as well.

While we don’t know the results (and I hope Brad Luo or Danny Friedman post about this soon), I suspect its this way: low IPR damages 2, high IPR damages 1. We’ll see how the game develops though.

UPDATE: Stan Abrams has also done a post on this with a more hopeful tone than I. Here are some of his thoughts:

For those of you who care about these things, take note of three details: first, although the defendant is a Guangzhou company, the case was heard by Beijing’s 1st Intermediate Court (the IP department, one would assume). Good reason for coming up here to litigate instead of trying it in Guangzhou, including the threat of local protectionism.

Second, notice the underlying IP at issue here, a design patent. For all of you who deride these things as “junk patents,” remember that a design is just as good as any other kind of IP as long as it isn’t invalidated. I assume this one was robust and did not have any pesky novelty problems or other skeletons in its proverbial closet.

Third, and unless there was a typo somewhere, the case was filed in 2007 and adjudicated the same year! Yes, this is possible if the case was simple and there was no appeal, although I’m still quite impressed. The article does not mention if an appeal is likely, so we’ll have to wait and see.

UPDATE II: Dan Harris has also just weighed in (emphasis added) on topic,

At the conference, one of the speakers (not a lawyer) mentioned that the most important thing one must do to protect IP in China is to hire “a really good lawyer.” I then said that it is even more important to actually register one’s IP and then I talked very about briefly on how companies sometimes make the mistake of thinking that registering their IP in the United States or in the EU covers them in China as well.

So register your IP in China. That’s solid advice for all businesses.

Right when I had taken my stance with the Seattle Trademark Lawyer and Dan Harris of China Law Blog that IP damages for lost profits just don’t work, I have to eat my words. Brad Luo recently did some very interesting posts about a trademark case in the Hangzhou Intermediate People’s Court ( here and here), where the court awarded 20 million yuan in damages… in what appears to be lost profits. So I take back what I said, that you can never expect lost profits in Chinese courts. I still believe they are rare. But when you deal with a case this litigious, and with a Defendant who defies a court order, then expect a court to exercise its power–whether in China or America.

I will take straight from China Business Law Blog at this point because Brad does a good job covering it:

The Parties:

Plaintiff is an individual, Mr. Zhao Hua, in the business of manufacturing and selling socks, ties, and scarves. He acquired by assignment and still owns the trademark “2000” . . . , which was first registered by the original owner in 1997. And it was registered for Class 25 Goods, including the following categories: socks, gloves, scarves, ties, belts, sashes, and veils.

Defendant is G2000, a Hong Kong company, in the fashion/clothing business with corporate and franchised units scattered in many Asian countries/regions. It manufactures and sells its full lines of products including casual, formal and informal clothing and accessories for men and women. In addition, it also franchises its business concepts internationally.

In 1992, Defendant registered the “G2000” mark in China for use covering clothing, shoes and headwear.

In 1997, Defendant registered the same G2000 mark for handbags, shopping bags, and straps.

In 2002, Defendant registered the G2 mark for clothing, neckties, socks, scarves, belts, etc.

[Procedural Background:]

In May 2002, Defendant filed an action in the China Trademark Office to cancel plaintiff’s trademark (2000), then it unsuccessfully appealed to the China Trademark Review and Adjudication Board (the “TRAB”). Finally, it brought an administrative action pursuant to Article 33 of Chinese Trademark Law 2001 in the Beijing First Intermediate People’s Court, challenging the TRAB’s decision, but to no avail. On final appeal in 2005, the Beijing Higher People’s Court affirmed the administrative decision, holding that Plaintiff’s mark is valid for the types of goods so registered under Nice 25 Class.

Brief Facts:

Facts of this legal saga lasting more than eight years are complicated. Back in 2000, Plaintiff sent a demand letter (cease & desist letter) to Defendant and co-defendant Shanghai Heyuan Clothing, Ltd., alleging trademark infringement with respect to the use of G2000 in connection with their sale of socks, gloves, ties and scarves. Between 2000 and 2006, Plaintiff also sought redress by filing multiple complaints with local Administration Industry and Commerce (“AIC”) in Beijing, Guangzhou, and other cities, but apparently achieved little (Doesn’t this make you think twice about the efficacy of AICs?). And to gather evidence, in the span of 10 months from May 2005 to March 2006, Plaintiff purchased allegedly infringing goods at various stores and locations sold by Defendant’s/co-defendants’ G2000 specialty units in Beijing, Shanghai, Hangzhou, Ningbo, and other places.

My Thoughts & Reactions:

The court’s award of damages in this case is intriguing. Plaintiff pleaded for damages totaling 20,000,000 Yuan (that is right, 20 million). And the Court ordered the Defendants to turn over the figures for total sales, profits, etc. for the goods complained of in the relevant period of time, but the Defendant failed to do so. Generally, Chinese courts award damages to a plaintiff in an IP infringement case to the extent of a defendant’s illegal profits as proven, rather than losses sustained by the plaintiff. See Kate C. Hunter, Here There Be Pirates: How China is Meeting Its IP Enforcement Obligations Under TRIPS, 8 San Diego Int’l L. J. 523, 547. In addition, if the illegal profits or plaintiff’s losses cannot be accurately ascertained, the statutory maximum award of damages is 500,000 Yuan. See Chinese Trademark Law, Art. 56. Therefore, in an act rarely seen in Chinese courts, the Court awarded a whopping 20 million Yuan to the Plaintiff. Further, given the intertwined relationships among the Defendants, the Court held them jointly and severally liable.

On appeal, the bone of contention, as I expect, would be that award of 20 million in damages to plaintiff. Of course, Defendants will try to set aside that amount, citing that it exceeds the statutory maximum; whereas, the plaintiff might argue that the 20 million award is appropriate given the scope and extent of violations, in addition to their failure to turn over documents within their control to ascertain the exact amount of damages.

A very interesting case indeed. Did the court go against Chinese statutory law? It appears it does. So did the court royally screw up this one? I don’t think so… at least, from a U.S. practitioner’s viewpoint. It means that courts can grant larger damages, which will make it worthwhile for American companies to pursue IP lawsuits in China. It also makes sense to me because of G2000’s wilfulness in not turning over documents.

Here is my read on why something like this could happen. (though it is speculation) Imagine the scene: the parties have been fighting for 8 years. AIC complaints. Trying to invalidate a trademark and appealing that decision. Probably some nasty letters between the two sides throughout this entire ordeal. I surmise there is a lot of fighting over everything. And then after losing, the Defendant refuses to turn over financial information…

I don’t pretend to know how a Chinese judge would look at something like this, but I think a federal judge here in the U.S. would look at this as a zoo. And knowing federal judges here, who hate dealing with messes this big, and then to have your order defied on judgment–that is a big NO-NO. If you don’t believe me, see this article from the Denver post where some prominent American attorneys ignored the court’s order regarding claims construction ( h/t to ATL):

A federal judge recently got so infuriated by the conduct of two highly regarded trial attorneys that he overturned a jury’s $51 million verdict, then ordered the lawyers to pay the fees and costs of the opposing lawyers, a sum that could total several million dollars.

U.S. District Senior Judge Richard P. Matsch sanctioned attorneys Terrance McMahon and Vera Elson of the firm McDermott, Will and Emery, of Chicago and San Francisco, for “cavalier and abusive” misconduct and for having a “what can I get away with?” attitude during a 13-day patent infringement trial in Denver.

Terry McMahon among IP litigators is quite a big name. But even when he crossed a federal judge the wrong way, things go bad.

Frankly, I am not all that surprised by G2000’s conduct. Chinese companies often think they can flaunt Chinese or American law and court orders. (And discovery too… I have a post coming this weekend about that, so stay tuned) No, I am not being racist. This has been the case for actual clients that I have had. And if you play with fire long enough, you are going to get burned. I believe G2000 got burned because they wouldn’t cooperate. Yes, there are probably other factors too. But I see this as the straw that broke the camel’s back.

Will this be overturned on appeal? Probably a good chance to it due to the statute, but IP Dragon had a post about the Supreme People’s Court ordering full compensation in IP cases:

“Courts should fully apply logical reasoning and everyday life experiences, and comprehensively and objectively examine the evidence for calculating the amount of compensation,” SPC vice-president Cao Jianming told a national work conference on IPR trials in Jinan on February 20, 2008, according to the China Daily.

Perhaps the 500,000 yuan statutory cap on damages will fall by the wayside as courts begin to apply principles of equity to determine damages. Maybe the Hangzhou court actually got it right then.

Bottom line: cooperate with the legal process, even when you don’t want to. Trust me, the law is the law and you may well get burned if you don’t.

Brad Luo at Chinese Business Law Blog recently did a translation from Chinese of a decision from the PRC Supreme People’s Court. The decision, dated 2/18/2008, sets forth basic provisions regarding trademark law and damages. It takes effect on 3/1/2008.

Here is his translation:

Article One Provided that requirements under Article 108 of the PRC Civil Procedure Law are met, People’s Court should accept cases filed by plaintiffs on the basis that defendants’ use of letters, graphics in defendants’ registered mark violated Plaintiffs’ existing copyright, patent right in packaging design, rights in business names, etc.

Where Plaintiff brings a lawsuit on the ground that another’s registered mark used in approved categories goods/services are similar or identical to her mark, People’s court should refer plaintiff to relevant administrative bodies for resolution, in accordance with Article 111 (3). However, where plaintiff bring a lawsuit on the grounds that another’s use of its registered mark is beyond the categories of goods/services registered for, or where another uses a registered mark by transforming its distinctive features, disassembling it or re-configuring it, the people’s court shall accept such cases.

Article Two Where Plaintiff brings lawsuits, pursuant to PRC Anti Unfair Competition Law Article 5 (3), on the ground that another’s use of a business name is same or similar to her prior existing business name, which use is sufficient to cause consumer confusion as to the source of the goods/service, the people’s courts should accept such cases.

Article Three The people’s court shall, in accordance with the plaintiff’s claim and the nature of controversial legal relationship under civil law, and in accordance with the Civil Causes of Action (Provisional), ascertain the cause of the conflict in civil disputes between registered trademarks or enterprises and prior existing civil rights, and apply appropriate law accordingly.

Article Four Where the use enterprise name complained of infringe on the exclusive right of registered marks, or constitute unfair competition, the people’s court, in accordance with the plaintiff’s petition and specific circumstances of the case, may assign civil liabilities, such as enjoining defendant from using such name, correcting such use, etc.

So in more plain English, here is what is actually set forth.

Art I. There are different standards for trademark infringment depending on whether the infringing mark is within the scope of the goods and services that the registered mark covers. In other words, there is a difference between infringing on mark X if: (1) mark X is registered only for international class 29 (wine) and the counterfeit is also wine, and (2) mark X is wine and the counterfeit is frozen tuna. My thoughts: frankly, this does not tell me much that is revolutionary. I figured such things were discernable with a good head on your shoulders.

Art II. Courts should accept cases where an potentially infringing business name is confusing.

Art III. Courts should determine the applicable law depending on plaintif’f’s claim and the nature of the controversy. Honestly, I am not sure why either of these was an issue either. It seems common-sensical to me that this should be the case. However, note that Article 3 appears to expand the Chinese court’s power in equity to fashion a remedy and determine applicable law. This will prove interesting, as good lawyers should be able to exploit this.

Art IV. In the case of infringement, courts can grant injunctive relief. Again, this is not a surprise. In fact, its probably the only reliable source of damages you will get as Chinese courts will not grant lost profits. (see this post)

So what does this do for you ultimate? Not much, sadly. I don’t think the Supreme Court did much for anyone with this pronoucement. (except if you are trying to learn Chinese or English legal translation, it is good to look at Brad’s full post)

Normally, I try not to post anything without some sort of critique, commentary, or analysis. But here, I really have nothing to say. Dan Harris’ posting at China Law Blog, and more particularly, the cited article from Seattle Trademark Lawyer is that good. Anyone dealing with Chinese litigation should read this:

[D]amages in Chinese tort and IP cases are far far lower than in such cases in the United States and go ahead and try to get lost profits in a Chinese breach of contract case.

So it was with great interest that I read a post over at the Seattle Trademark Lawyer Blog laying out how damages were calculated in favor of Starbucks in a trademark infringement case it recently won. The post is entitled, “Chinese Official Explains How His Court Calculated Infringement Damages”, and I will let Michael Atkins of Seattle Trademark Lawyer explain:

The December 2007 issue of China Intellectual Property magazine had a nice write-up about the Starbucks Corp. v. Shanghai Xingbake Cafe Corp. Ltd. trademark infringement case that Shanghai’s No. 2 Intermediate People’s Court decided last year. The case (which STL discussed here) was important because it was the first time China’s new Trademark Law had been applied to a famous trademark.

Besides the detailed summary of the case, what I found most interesting was its explanation as to how the court calculated its RMB 500,000 ($64,000) damages award. Here’s an excerpt:

“The compensation claimed by the plaintiffs totaled RMB 1,060,000 including RMB 500,000 for economic losses and RMB 560,000 for reasonable expenses and legal fees. The defendants argued that the calculation of the plaintiffs’ profits was groundless, and thus should not be admitted. The defendants had no objection to the manner of collecting the notarization fee and legal fees, but held that the defendants’ lawyers spent too much time in collecting evidence proving the trademarks were well-known.

“The court held that it was on the basis of the profits made by the defendants from the infringement that the plaintiffs claimed compensation for economic losses. The amount of profits was calculated on the basis of the notarized statistics of the defendants’ customer volume. Although some factors on the formation of the defendants’ profits were taken into account at the time of calculation, the said amount is not completely objective and reasonable. Therefore, the court did not adopt this calculation for determining the amount of profits. The claim of the plaintiffs should be upheld for the retainer, notarization fee and translation fee as well as other fees. In the present case, the defendants committed trademark infringement and unfair competition. The overlapping parts should not be calculated repeatedly in the determination of compensation. Since it was hard to determine the profits made by the two defendants from the infringement and the losses suffered by the two plaintiffs from the infringement, the compensation should be lawfully determined as RMB 500,000 in view of the specific circumstances.”

The article’s author, Lu Guoqiang, should know what he is talking about. He is vice president of the Shanghai No. 2 Intermediate People’s Court.

Not very often one gets such an explanation and such an explanation should be quite helpful for future cases. I take the explanation to reinforce the difficulty in collecting lost profits from a Chinese court.

Well said. I printed a copy of the Seattle Trademark Lawyer blog post so I can have it for future reference in dealing with clients. So should you.