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Bringing intellectual property rights to China

The view from Beijing: Intellectual property is a new idea in China but it’s spreading fast

Many western business leaders have long regarded China with trepidation when it comes to intellectual property rights. Rumours abounded of western companies outsourcing their manufacturing to Chinese factories, only to see the goods go out the back door to be sold as counterfeits.  Quick-off-the-mark Chinese opportunists have been known to hijack well-known brands—including those belonging to Apple, Inc.—by registering them as trademarks. The situation is rapidly changing, however.

“The idea of any form of private property ownership was not part of the original philosophy for communist China,” says Catherine Wolfe, President of the Institute of Trade Mark Attorneys. “So to introduce an intellectual property registration system to over a billion people has been a monumental challenge. But attitudes and understanding are changing at an astonishing rate.”

“A few decades ago, if someone wanted to set up a business in China, a government official would offer him a list of approved names to choose from, often containing ‘fortune’ or ‘country’ or ‘success’ … If a business was seen to be successful, its name would become popular, and others might also choose that same name or a similar name because it still remained on the list as an approved name. When foreign businesses started opening up in China, under their own successful brand names, some entrepreneurs regarded these new names as fair game. The idea that this could be intellectual property theft never crossed their minds.”

According to recent media reports, nine companies in China have applications or registrations for iWatch, to the dismay of Apple, Inc., who only recently had to pay a large sum (thought to be around $60m) to be able to use the iPad mark in Taiwan.

The Chinese government is now investing heavily in bringing its approach to international patents more in line with international norms. It is also cracking down hard on corruption and counterfeiting. Chinese customs officials check not only incoming goods but also outgoing products. If they find something that looks as if it’s counterfeit, they can impound it. Counterfeiters can face stiff penalties, and the authorities now broadcast just how many infractions they are picking up to discourage others. For example, a district court in Xinjiang recently sentenced a counterfeit distributor of Scotch Whisky to four years in prison and a fine of RMB500,000 (£50,000). This follows several other successful criminal investigations for counterfeiting branded whisky in recent years. In another trial in Suzhou, the defendant was sentenced to one year in prison and a RMB70,000 fine for counterfeiting Louis Vuitton and Gucci trademarks.

The crackdown on counterfeiters is happening not just in Beijing and Shanghai but across the country. The State Council Leading Group Office announced there were 366,200 cases of enforcement against “fake and shoddy goods” in 2012. Products seized were valued at RMB20bn.

As well as cracking down on counterfeiters, the Chinese government is focusing its efforts on using the international patent system to stimulate innovation. Chinese companies are offered a cash incentive to file patents overseas. China is now top of the international league table, with a total of 2,051,000 patent applications filed in 2012, up 26 per cent on 2011. In the same year, 1,255,000 patents were granted, up 31 per cent on the previous year.

But according to Gwilym Roberts, a member of the Council of the Chartered Institute of Patent Attorneys, the figures do not tell the whole story. “Predictably, offering a cash incentive has dramatically boosted the number of patents filed. But many of the patents don’t really reflect any real innovation. The European Patent Office recently analysed the quality of Chinese patents and found many of them to be lacking in any real ‘inventive step.’ The Chinese government has recognised this and is tightening up the criteria. It is now becoming more difficult to get a Chinese patent granted, which is a vital step towards the Chinese government goal of stimulating innovation.”

Harmonising the Chinese IP system towards those of Europe and America involves a huge investment. Some 10,000 new patent examiners are being trained—more than double the number employed at the European Patent Office. Patent and trademark attorneys are also being recruited and trained, as their professional advice is increasingly needed to improve the quality of international patent applications in China.

The court system, too, is modernising, slowly but surely. Wolfe, who has visited China regularly for over 20 years, says that the court system can still appear opaque to foreign businesspeople. “There are many levels of jurisdiction. Although there are a number of excellent courts with good IP knowledge in major cities, such as Beijing and Shanghai, some IP cases may be heard in a very local court. Judges in some courts are not specialists in IP and are often very young—certainly by British expectations. This means that the court experience for the defendant or the plaintiff can be rather different from a European or American experience.”

Western companies who sue Chinese counterfeiters or patent infringers are finding it ever easier to have an injunction granted. This can result in an offending factory being quickly closed down. But it may not stay closed for long. Even if a court awards damages, actually collecting the money owed may prove impossible.

China’s biggest companies have realised the value of using the IP system. Telecoms equipment company ZTE was ranked first in international patent applications by the World Intellectual Property Organisation (WIPO) in 2012. Roberts claims this sends out a strong signal to smaller Chinese companies: “ZTE’s focus on research and development and its rapid rise up the patenting league tables suggests to other technology-based firms that there are benefits in observing international norms for IP. This leadership by example is more likely to change behaviour than easily-manipulated incentives from the Chinese government.”

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