By Peter Zhang
Toronto–As a licensed Foreign Legal Consultant practicing Chinese Law in Ontario, many approach me with questions about intellectual property rights (“IPR”). The long and short of it is: “How to ensure that IP license agreements or confidentiality agreements are enforceable in the People’s Republic of China (“China”)?”
Below are my answers to some of these questions I receive:
Are most foreign IPR protected by law in China?
Yes. China has entered into over 40 treaties, either bilateral or multi-lateral, with other countries on IPR protection in addition to its own legislations on patent, trademark and copyrights. Therefore, most foreign owned IPR are properly covered by specific provisions, either within the Chinese statutes or international treaties signed and ratified by China.
How is IPR enforced in China? What are the most effective means?
- Administrative Actions
China’s IP protection follows essentially a two-track system. The first and most commonly used is the administrative track, where the claimant files a complaint at the local administrative office.[1] The main value of going through the administrative route is to obtain evidence.[2] To begin an administrative action, the plaintiff will need to file evidence about the existence and ownership of the IPR, and file evidence of the infringement.[3]
The major enforcement offices are the Intellectual Property Offices (“IPOs”), and the Administrations for Industry and Commerce (“AICs”). AIC are responsible for acts of monopoly, unfair competition and trademark infringement. The third office, the Quality and Technical Supervision Bureaus (“QTSBs”) is responsible for product quality and consumer protection, and collectively, with the AICs have power to raid, impose injunctions, and levy fines on the infringing party.
- Civil Litigation
China’s Law of Civil Procedure provides that a lawsuit brought against an infringing act shall be within the jurisdiction where the infringement occurred (“Place of Infringement”) or where the defendant is domiciled.[4]
The ultimate goal of litigation is to obtain an asset preservation order (“APO”). Typical infringing causes under Chinese patent law are sale, offer for sale, use, manufacture and export of products manufactured by using infringed IPs. The usual remedies are damages, injunction, confiscation and destruction of infringing products and means of manufacturing.
The first step is to obtain an evidence preservation order (“EPO”). EPO is often used to seize evidence of manufacturing but a bond to the court may be required. With an EPO, the local authorities are empowered to obtain all commercial documents, seal and take photographs of the acts of infringement at the defendant’s premises. Once the claimant obtains sufficient evidence, the civil proceedings may commence. An effective way of selecting a reputable IP court is to ensure that the location where infringement or purchase takes place is within the municipalities of Beijing, Shanghai, Shenzhen or Guangzhou.
The second step is to obtain an APO. APOs are effective tools to obtain leverage over offenders.[5] This is because sometimes it is difficult to enforce judgments and arbitration awards in China. If a claimant manages to freeze the assets of the offender, this will put the latter under pressure to reach a settlement.[6]
- Using Customs to halt exports and gather evidence
China’s Customs (“Customs”) are responsible for the enforcement of trademark rights, patent rights, and copyrights in connection to the import/export of commodities. The Customs typically follow a four-stage procedure: recordation, detention, investigation and disposition.
With Customs enforcement, the right holder should register its IPR with the General Administration of Customs (“GAC”), and apply for a customs recordal, which allows the Customs to check and intercept imported or exported cargo for infringement. This checking is triggered typically by the IPR holder or at the discretion of the Customs. When the suspect cargo is intercepted, one of three things will occur:
- ownership and infringement claims would be submitted to the appropriate IPR administrative department;
- the cargo will be investigated by the Customs authority; or
- the IPR holder will bring a lawsuit before the people’s court.
If the cargo in question is determined to be infringing, the Customs must confiscate and destroy it or simply remove the infringing mark and may impose a fine below the value of the cargo involved.
Chinese or foreign governing law?
When Canadian industries (“Licensor”) transfer or license technology (the “Agreement”) to Chinese counterparts (“Licensee”), both sides typically agree to foreign governing laws outside of China. Given so, the Licensor often mistakenly assumes that Chinese law no longer applies to the Agreement. This is wrong because all such Agreements are governed by the Contract Law of the People’s Republic of China (“Contract Law”) and Regulations on Technology Import and Export Administration of the People’s Republic of China (“Technology Regulations”) which prevent excessive restrictive covenants to IPR.[7]
Article 329 of the Contract Law states that “Any technology contract that illegally monopolies technologies, impedes technological progress or infringe upon technological results of others is null and void.”[8] Therefore, the Agreement must not include clauses that prohibit the Licensee from obtaining technology from competitors, nor restrict the import/export of any technology improvements. An ultra vires Agreement is partially or completely void.
Are Licensors legally entitled to receive all rights to modifications/improvements developed by licensees?
A key focus of negotiations in technology licensing is the ownership of any enhanced, modified or otherwise improved technology. Typically, most Licensors would like to receive exclusive ownership of such enhancement, however, this is an infringement of Article 27 of the Technology Regulations, which states that “within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.” Rights may be received, so long as the Licensor gives reasonable consideration. An ultra vires Agreement is partially or completely void.
What is the most convenient forum for dispute resolution?
Most Licensors are uncomfortable with the Chinese legal system because of unfamiliarity with its transparency, procedure, costs, and even the language. Licensors typically opt for local Canadian courts where they are domiciled. However, there is no judicial assistance treaty signed and ratified between Canada and China and this makes it practically impossible for a Canadian court ruling to be enforced in China for reasons of judicial sovereignty.
Arbitration should be chosen over litigation as foreign arbitral awards are enforceable in China as long as it is consistent with Chinese laws. Together with over 140 countries, since 1986 China has been a signing party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention“). Indeed, many international arbitral awards have been enforced by Chinese courts. Therefore, under the Agreement, all disputes should be submitted to an internationally-respected arbitration tribunal located in any member country to the New York Convention.
How to define properly the scope of nondisclosure consistent with Chinese law?
Nondisclosure agreements (“NDA”) are widely accepted in Chinese Courts. NDA should be carefully drafted to cover all management personals (if possible) and be signed with all third parties before revealing any confidential information.[9] Sometimes an NDA is insufficient to protect IPR and a ‘non-disclosure/non-use/non-circumvention agreement’ (“NNNA”) should be signed.
The nondisclosure will protect confidential information, the non-use provision will ensure that the Domestic Industry cannot produce the technology for anyone else without the Foreign Industry’s permission, and the non-circumvention clause will prevent any Chinese manufacturer from by-passing any anti-counterfeiting measures.
How do local courts enforce damages?
If the plaintiff obtained an APO earlier in the proceedings, the damages award will most likely be paid out of the preserved assets. If no APO was obtained, the plaintiff must do its own investigation and inform the court of the approximate value in assets of the offender. It is common for courts to seize the offender’s bank account or commence a fire sale of its assets. There is no guarantee that the plaintiff will receive the full damages amount, more often than not, the claimant will need to negotiate a practical settlement with the offender based on the value of its assets.
Conclusion
To avoid unnecessary trouble, Licensors should work with only reputable Licensees. Any such cross border licensing agreements should be carefully planned before any royalty fees are discussed. IPR agreements should properly address the governing law provisions so as not to infringe relevant Chinese legislation. Forum selection and dispute resolution clauses should be carefully drafted to suit the appropriate international arbitration tribunal. Where necessary, NNNAs should be used in place of NDAs as the former provides greater protection. Finally, while it is important to retain competent Chinese counsel, familiarity with China’s registration and enforcement proceedings is necessary to successfully combat any IPR infringement.
With special thanks to Joshua Zhang for his assistance.