Staying on top of IP law changes and challenges

This chapter looks at the major IP developments in China and Hong Kong over the past year.

China

All types of IP filing and enforcement activity in China are flourishing, even though the Chinese economy is experiencing its slowest growth in 25 years.

Filing statistics

Trademarks: The Chinese Trademark Office continued to be the world’s busiest trademark registry in 2013, receiving almost 1.9 million trademark applications – 14% more than the previous year.

Patents: The number of patent applications also soared. In 2013 the State Intellectual Property Office (SIPO) received close to 2.4 million applications – 16% higher than last year. More than 1.3 million patents were granted during the same period – 5% more than the year before.

The increasing importance of Chinese patents is evident from the number of filings through the Patent Cooperation Treaty (PCT). In 2013 SIPO received more than 21,000 PCT applications – 16% higher than the year before. According to the World Intellectual Property Organisation, PCT applications filed by Chinese applicants also reached a new high in 2013. Chinese telecoms equipment giants ZTE and Huawei were among the top three PCT applicants. The number of PCT filings continued to grow in the first half of 2014 – more than 11,000 applications were received by SIPO, 20% higher than the same period last year.

Domain names: The number of internet users in China surged to 618 million at the end of 2013; 500 million of those were mobile internet users. There are now more than 10.8 million ‘.cn’ domain name registrations – a huge increase of 3.3 million from 2012.

New laws and guidelines

Amended Trademark Law and Regulations: The amended Trademark Law came into force in May 2014. The major changes were summarised in the China and Hong Kong chapter of IP Value 2014. New implementing regulations on interpreting and implementing the amended Trademark Law also took effect at the same time. The regulations:

• explain how a specimen of a sound mark is to be submitted;
• set out the materials required to prove standing to oppose an application;
• clarify issues relating to electronic filing – an option not yet available to foreign applicants;
• elaborate on how new timelines in the amended law work;
• give examples of acts that amount to the facilitation of infringement;
• provide for the division of multi-class applications in some circumstances;
• specify a timeframe for responding to the examiner; and
• identify factors for calculating illegal turnover.

An interpretation of the Supreme People’s Court regarding jurisdiction and application of law in trademark cases took effect at the same time as the amended Trademark Law. The Trademark Review and Adjudication Board also updated its rules in June 2014.

Well-known marks: According to the Chinese Trademark Office, 1,300 trademarks were recognised as well-known trademarks in 2012 and 2013. Fewer than two dozen of them were foreign brands, including RITZ-CARLTON, HEINZ, ADIDAS, JOHNSON & JOHNSON, ZIPPO and BOSCH. A revised set of rules for recognising and protecting well-known marks took effect in August 2014. The most notable change is a higher threshold for qualifying as a well-known mark – only a trademark with which “the relevant public in China is very familiar” will make the cut.

Protection of new goods and services: Since January 2014, marks used on many goods and services in the new digital economy – such as mobile apps, tablet computers, cloud computing and online social network services – are eligible for trademark protection in China. Since registered trademark rights are generally allocated on a first-to-file basis and trademark squatting remains rampant in China, brand owners should take advantage of this expanded scope of protection by filing trademark applications in China.

Design protection for graphic user interfaces: As of May 2014 graphic user interfaces can be protected by patents in China, with certain exceptions (eg, game interfaces and electronic wallpaper). This major change in patent examination practice has generally been welcomed by the IT industry, but it remains to be seen how it will be implemented in practice.

Patents and standards: A new set of provisional regulations relating to the formulation, revision and implementation of national standards involving patents and patent applications entered into force in January 2014. Among other things, they stipulate that a patent involved in a national standard should be an essential patent and generally a mandatory national standard should not involve any patent.

Patent disputes: In July 2014 the Supreme People’s Court sought public comments on proposed revisions to an opinion relating to the adjudication of patent cases. One of the key changes is the requirement to submit a search or appraisal report in suits involving utility model or design patents.

Copyright: China ratified the Beijing Treaty on Audiovisual Performances in April 2014. This international treaty affords performers in the contracting states various exclusive rights over their performances in audiovisual recordings, including a rental right. Draft amendments to the Copyright Law were published for public comment in June 2014. They propose to expand the types of work eligible for copyright protection and extend the term of protection for some works. This is expected to be the final round of consultation before the revisions are finalised and submitted to the National People’s Congress for consideration.

Online enforcement: The fight against online infringement received a boost in May 2014 when SIPO issued a work plan for special action on enforcement and protection of patent rights in e-commerce. This has been welcomed by rights holders, as the previous measures primarily targeted the violation of copyright and trademark rights.

Border protection: Under the new IP rights protection system launched in March 2014, paper filing is no longer required to record such rights with Customs. Customs also announced in August 2014 that escalated actions would be taken to intercept infringing goods imported and exported via courier and postal channels.

IP licensing and financing: The patent licensing business in China is booming – royalties amounted to nearly $11 billion in 2013. A consortium led by the China Development Bank reportedly lent Rmb7.9 billion ($1.3 billion) to Quanlin, a Chinese paper company, secured by an IP portfolio with 110 patents and 34 trademarks.

Antitrust: In June 2014 draft regulations prohibiting abuses of IP rights that eliminate or restrict competition were released for public comment. They:

• define abuses of IP rights that eliminate or restrict competition and clarify that the possession of intellectual property is not per se a violation of the Anti-monopoly Law;
• identify acts of exercising IP rights that can amount to abuse of a dominant market position (eg, refusal to license, tie-in sales and imposition of unreasonable conditions);
• describe circumstances under which the exercise of IP rights will not be regarded as monopolistic agreements; and
• address other acts of exploiting IP rights that may contravene the Anti-monopoly Law, including patent pools, patent standards, collective management of copyright and the arbitrary issuance of cease and desist letters against alleged infringement.

Compensation for employee-inventors: Protecting the rights and interests of employee-inventors is a hot topic in China. Multiple judicial and government authorities have issued draft regulations, opinions and guidelines on this subject (summarised in the China and Hong Kong chapter of IP Value 2014). In March 2014 the municipal government in Beijing promulgated a regulation that applies to both local and foreign companies stipulating a minimum 20% reward and remuneration payable to employee-inventors. In April 2014 SIPO issued further draft regulations that:

• provide a more restrictive definition of ‘service invention’;
• remove the right of first refusal for employee-inventors to acquire their inventions from the employer on the same terms; and
• invalidate any agreements or company policies that cancel or impose unreasonable conditions on the entitlement to or exercise of the rights of employee-inventors to receive reasonable reward and remuneration.

Like the earlier version in 2012, this latest draft regulation is expected to generate much discussion, particularly among foreign companies with active R&D operations in China.

Reports: China remained on the Priority Watch List in the Special 301 Report published by the Office of the US Trade Representative (USTR) in May 2014. Further, according to the annual report of the World Customs Organisation published in June 2014, China remains the biggest source of counterfeits, with more than 9,000 cases reported in 2013.

Anti-counterfeiting initiatives: Likely as a response to the USTR, in June 2014 a major online enforcement campaign was launched by a State Council working group. In particular, the campaign seeks to:

• crack down on online sales of fake and inferior goods;
• combat online infringement and piracy;
• heighten supervision of e-commerce portals; and
• target cross-border IP infringement.

According to the Ministry of Commerce, 50,000 IP cases were investigated and more than 8,300 suspected infringers were taken into custody during the first five months of 2014.

Enforcement statistics: Both the judiciary and the criminal and administrative authorities have been busy adjudicating IP disputes and prosecuting IP violations. IP-related crimes are on the rise in China: according to the Supreme People’s Procuratorate, more than 3,800 individuals were prosecuted for IP-related crimes in the first six months of 2013 – 26% higher than the half-year average for the past five years. More than 80% of those cases were trademark related. Further, the Administration for Industry and Commerce accepted 260,000 cases involving counterfeit or inferior goods in 2013.

Court statistics: The number of IP cases in China has continued to soar. The courts issued more than 114,000 IP-related decisions in 2013. More than 9,300 new criminal IP cases commenced and nearly 9,200 cases were concluded by the People’s Court in 2013. More than 88,000 new civil IP cases were commenced and around the same number – including 1,697 foreign-related cases – were concluded in 2013. Around 58% were copyright related; trademark and patent cases accounted for 26% and 10% respectively. The rest concerned know-how, unfair competition and other IP rights.

The number of IP cases that reached and were concluded by the Supreme People’s Court, the highest court in China, stood at 457 and 417, respectively.

Specialised IP courts: For some years the Chinese government has mooted the establishment of specialist IP courts. In July 2014 the Supreme People’s Court confirmed that it will set up such specialised tribunals as part of a plan to promote judicial independence over the next five years.

Notable cases

Many foreign companies have been embroiled in IP disputes in China over the past year, especially in the trademark arena.

Patents: Apple’s latest attempt to fend off the patent suit brought by Shanghai Zhizhen Network Technology was unsuccessful. The Patent Re-examination Board declined to invalidate the patent said to have been infringed by Siri, the artificial intelligence assistant installed on many Apple products, and its decision was upheld by the Beijing Intermediate People’s Court in July 2014. Hence, the infringement action will continue and will be watched closely by rights holders worldwide.

Copyright: The principal of Siluhd.com, the largest film downloading website in China until it was shut down in April 2014, was sent to jail for five years and fined Rmb1 million ($160,000) for large-scale copyright infringement involving nearly 22,300 films, television shows and other works.

Further, the Supreme People’s Court ordered Tudou, the world’s largest video-sharing website, to compensate the international arm of state-owned broadcaster CCTV for offering an on-demand video streaming service found to have infringed CCTV’s right of dissemination through information networks.

Trademarks: Tesla, the successful electric car maker from California, had a rocky start in China. It was unable to use its own name because this had already been registered as a trademark and domain name by a Chinese businessman, Zhan, in 2006. Zhan brought a trademark infringement suit seeking nearly $4 million in damages. The case settled for an undisclosed sum soon after it was set down for hearing by the Beijing People’s Court in August 2014.

In January 2014 the owner of the John Deere brand successfully enforced its two-colour trademark against a Chinese company that applied its registered green and yellow colour combination to competing harvesting machines.

In early 2014 French wine company Castel, which had been ordered to pay a record Rmb33 million ($5.3 million) to a Chinese trademark owner, successfully obtained a stay of the damages award from the Supreme People’s Court.

In June 2014 two major multinationals were targeted in trademark lawsuits in Shanghai. Semiconductor giant Qualcomm was sued by Shanghai Gotop Semiconductor for Rmb100 million ($16 million) on the basis that ‘Gao Tong’, the Chinese name adopted by Qualcomm, was identical to its Chinese name and registered trademarks. Apple was sued by Shanghai Yishijia Network Technology, also for Rmb100 million, for failing to remove from its App Store the Homevv app, a mark that Yishijia claimed to have owned since 2010.

Trade secrets: Another highly publicised dispute involved a series of proceedings brought by AMSC against former customer Sinovel in both China and the United States. The US energy technologies company received a break when the Supreme People’s Court ruled in February 2014 confirming that two of its copyright infringement actions could be dealt with through court proceedings rather than arbitration.

Licensing dispute: In October 2013 the Guangzhou High Court affirmed a lower-court finding that the fair, reasonable and non-discriminatory (FRAND) principle applied in determining the royalty rates for licensing standards-essential patents in China. The dispute between Huawei, the world’s largest telecoms equipment maker, and InterDigital, one of the most active licensors of wireless technologies, will continue, as in April 2014 the latter requested a retrial by the Supreme People’s Court.

Outlook

The Chinese IP legal landscape is becoming more robust and transparent. However, it is also becoming more litigious. This trend is expected to continue, so foreign rights holders which are used to enforcing their rights in China should be prepared to face challenges.

Hong Kong

Over the past year Hong Kong continued to refine its IP legislation and infrastructure, but its stellar track record in protecting IP rights has been marred by some recent events.

Copyright bill

The Copyright (Amendment) Bill was re-introduced in June 2014 following multiple rounds of heated public debate and withdrawal of its predecessor in 2011. The main proposals include:

• a new right of communication to the public independent of the means of communication;
• criminal penalties for unauthorised communication that prejudices the copyright owner, with different thresholds;
• new fair dealing exceptions for parody work; and
• a safe harbour for internet service providers.

It is hoped that this bill will strike a better balance that is acceptable to all stakeholders.

Shadow companies

The shadow company problem that has plagued brand owners for more than a decade lingers on as a record number of companies are being set up in Hong Kong. Such companies are incorporated using names that are identical or confusingly similar to the famous marks or names of others. In two recent decisions Justice Zervos of the High Court expressed concern that the Companies Registry has continued to allow the incorporation of shadow companies. To make his point, he directed that a copy of his judgment be sent to the Companies Registry.

Hub for both IP trading and counterfeit trade

In late 2013 an IP exchange was launched in Hong Kong. The platform has more than 20 foreign partners and lists more than 20,000 tradable IP assets. It seeks to leverage on the growth of IP business in China and to promote Hong Kong as the regional IP trading hub in Asia.

However, in May 2014 the World Customs Organisation reported that Hong Kong has turned into China’s exit for counterfeit exports, given its efficient port and proximity to China. No doubt measures will be taken by the government to tackle such unwanted notoriety.

Dorsey & Whitney LLP

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Cedric Lam

Partner

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Cedric Lam leads the IP team in Dorsey’s offices in Greater China and co-heads the firm’s operations in Hong Kong. He has more than 18 years’ experience in counselling IP transactions and implementing IP protection strategies. Mr Lam is also experienced in anti-counterfeiting and other enforcement matters, and has served as Asia-Pacific regional counsel of an international IP collective.