China & Hong Kong
Recent developments in intellectual property
Dorsey & Whitney LLP
This chapter looks at IP developments in China and Hong Kong over the past year.
China’s record in IP enforcement continues to be a heavily scrutinised topic. The general perception of the international business community is that China fails to protect IP value because its enforcement is weak and ineffective – at least, that is the view shared by the US trade representative and the European Chamber of Commerce. While the level of counterfeiting and piracy remains high, the significant effort that China has expended in trying to improve IP protection and enforcement and the progress made in some areas should not be discounted. This chapter looks at the major IP developments over the last 18 months.
China has two routes for enforcing IP rights: judicial proceedings and administrative actions. In 2004 the Chinese courts heard 8,332 civil cases involving intellectual property and tried 385 criminal infringement cases, which led to the punishment of 528 infringers.
Lodging a complaint with the local administrative body remains the most popular route of IP enforcement in China. In 2004 administrative bodies at all levels handled 51,851 trademark infringement complaints (including 5,494 that involved foreign-owned trademarks). These administrative enforcement actions resulted in the seizure and destruction of nearly 40 million infringing items. However, only 96 cases were referred to the criminal authorities for prosecution. The copyright administrative bodies at all levels also accepted 9,691 copyright infringement complaints in 2004, resolving 9,479 of them and imposing sanctions upon the infringers in 7,986 cases.
Criminal sanction for IP violations
IP owners have long complained that administrative actions and civil lawsuits in China lack a deterrent effect and few IP infringers are punished under the criminal law. To address this issue, the Supreme People’s Court released an interpretation on the IP sections of the Criminal Law in December 2004. This widely welcomed interpretation significantly lowered (by approximately half) the minimum thresholds required for criminal prosecution for various IP violations and set out guidelines for punishment in relation to such offences. In particular, the judicial interpretation provides as follows.
Individual counterfeiters having an illegal turnover exceeding US$6,200 (or US$3,700 if two or more registered trademarks are involved), or manufacturers and vendors dealing with more than 20,000 copies of counterfeit trademark representations (or 10,000 copies if two or more registered trademarks are involved), can face criminal sanctions and may receive a maximum punishment of three years’ imprisonment and/or a fine. The maximum punishment will increase to seven years’ imprisonment and a fine if the illegal turnover exceeds US$31,000 (or US$18,500 if two or more registered trademarks are involved), or where more than 100,000 copies of counterfeit trademark representations (or 50,000 copies if two or more registered trademarks) are involved.
Individual counterfeiters who engage in copyright infringement for the purposes of gain and have an illegal turnover exceeding US$6,200, have an illegal income exceeding US$3,700 or reproduce more than 1,000 unauthorised copies of copyrighted works can face criminal sanctions and may receive a maximum punishment of three years’ imprisonment and/or a fine. The maximum punishment will increase to seven years’ imprisonment and a fine where the illegal turnover exceeds US$31,000, the illegal income exceeds US$18,500 or where more than 5,000 unauthorised copies of copyrighted works are involved. Individual resellers who engage in copyright infringement for the purposes of gain and have an illegal income exceeding US$12,400 may face a maximum punishment of three years’ imprisonment and/or a fine.
Passing off patents
Patent infringement is not a criminal offence in China. However, passing off the patent of another (eg, by reproducing a patent number without the authorisation of the patent owner) can incur criminal sanctions and carries a maximum punishment of three years’ imprisonment and/or a fine where the illegal turnover exceeds US$24,800 (or US$12,400 if two or more patents are involved), the illegal income exceeds US$12,400 (or US$6,200 if two or more patents are involved) or the losses caused to the patent owner exceed US$62,000.
However, the distinction between individual and corporate IP wrongdoers that is made under the original law remains. Nonetheless, the judicial interpretation makes it easier to hold corporate counterfeiters criminally responsible. The thresholds for corporate counterfeiters have now been reduced from five times to three times those applicable to an individual. Notably, the former rule that made it easier to bring criminal prosecution against repeat offenders has been removed.
The judicial interpretation clarifies the meaning of certain terms (eg, ‘knowingly’) that are used in defining the IP crimes above. Furthermore, it stipulates that persons who knowingly assist counterfeiters (eg, by providing funding, premises or transportation) can be criminally charged as accomplices.
The new interpretation appears very promising. However, it is still too early to tell whether it has resulted in a greater number of convictions or convictions with higher sentences, or whether it has affected the overall infringement and piracy rates.
Another significant and welcome new tool for IP enforcement is the Administrative Measure for the Protection of Online Copyright (May 2005). The measure specifically provides that internet content providers and internet service providers in China can be held responsible for infringing the rights in literary, audio and video content posted by their clients, and may be fined (up to three times the illegal income or up to US$12,360 where the exact income is unclear) if they do not remove or block access to the infringing content upon receiving notice from the copyright owner. However, the effectiveness of this new law remains to be seen. Nonetheless, this is a proactive step to combat online copyright piracy taken by China more than a year before its accession to the World Intellectual Property Organisation (WIPO) Copyright and Performances and Phonograms Treaties, which is scheduled for June 2005.
Other efforts to strengthen IP enforcement
China has made further commitments to step up IP enforcement. In July 2005 the People’s Procuratorate issued a draft regulation directing administrative bodies to refer IP violations promptly to criminal authorities for prosecution when a case meets the prescribed standards for criminal prosecution. The Ministry of Public Security has also established a working group to coordinate efforts in the criminal enforcement of IP rights nationwide.
According to the latest US trade representative report, China has become a leading global exporter of counterfeit and pirated goods. Since 2000 the number of IP cases uncovered by the Chinese customs authorities has been increasing by 30 per cent annually. Perhaps in response to this, in 2004 local customs offices were once again empowered to impose fines for IP violations. The fine levied can be up to 30 per cent of the value of the goods concerned. A consignor or consignee who provides incomplete or false information regarding the IP content of a shipment may also be fined up to US$6,200. As with other IP legislation, however, the real test is how these new provisions will work in practice.
IP filing statistics
China has also progressed on the IP protection front, and a number of recent developments deserve the attention of foreign inventors. The Trademark Office is now the busiest trademark office in the world, receiving more than 588,000 applications in 2004. At the end of 2004 China had 2.24 million registered trademarks, including 403,000 owned by foreign entities. Patent applications are also increasing at an average rate of 18.9 per cent each year, and by the end of 2004 1.25 million patents had been granted since China promulgated the Patent Law 1985. Less than 13 per cent of these patents have been issued to foreign entities. These numbers strongly suggest that filing for patent and trademark protection in China is now the norm rather than the exception.
Latest on the Viagra decision
The Viagra patent, which is owned by Pfizer in China and which covers the use of sildenafil in the treatment of erectile dysfunction, was invalidated in a much publicised decision of the Patent Re-examination Board (July 2004) for insufficient disclosure. An appeal was heard by the Intermediate People’s Court in Beijing in March 2005 but at the time of writing no decision has yet been rendered. A further appeal to the High People’s Court in Beijing is possible. This case, said to be a great leap backwards for IP protection in China by some, is being closely followed by the international business community.
Foreign well-known trademarks
The increased recognition and protection of well-known trademarks is another encouraging sign for foreign investors. At the end of August 2005 30 foreign-owned trademarks from nine different countries had been accorded well-known trademark status in China pursuant to the Regulations for Recognition and Protection of Well-Known Trademarks, which came into force in June 2003. Under these regulations, only the registrant of a trademark involved in a dispute may apply for recognition of the mark’s well-known status. In addition, if the application is unsuccessful another application for recognition of the same mark cannot be made until a year after the refusal.
Many international brands (eg, Guess, Fox, Starbucks, Chopard) have successfully reclaimed their relevant ‘.cn’ domain names that were wrongfully registered by entities in China based on their prior trademark rights pursuant to the China Internet Network Information Centre Domain Name Dispute Resolution Policy. This policy was last amended in March 2005 to streamline further the domain name dispute resolution process in China.
However, not everything has been perfect for foreign trademark owners in China over the past year. In December 2004 the Intermediate People’s Court in Beijing ruled against Pfizer and held that ‘Envacar’ had, according to a Chinese dictionary, become the generic term for a type of anti-hypertensive drug and, therefore, was not eligible for registration. The same court also rejected an application filed by Bluetooth SIG. It held that the term ‘Bluetooth’, when used for computer and communications apparatus, serves to indicate only that the apparatus complies with certain technical standards, but not its source. Therefore, it was held to be incapable of functioning as a trademark.
In June 2005 the Trademark Office rejected Yahoo’s application to invalidate the FAYHOO trademark registration as it was found to be visually different. Similarly, Volvo was unsuccessful in its opposition to an application for the registration of a word and device mark that has similar elements to the VOLVO design but which the applicant proposed to use on goods having different functions and trading in different channels.
Chinese companies engaged in printing materials bearing trademarks (eg, packaging) for others must comply with the Regulations on Trademark Printing. The latest revision to this regulation, which came into effect in September 2004, requires printing companies to verify the identity of their customers as well as those customers’ rights in the subject trademarks. Likewise, customers are required to furnish the printing companies with copies of their business registration certificates, certificates of trademark registration or other relevant documents (eg, licence agreements) to prove their rights in the subject trademarks. Printing companies that fail to comply may, in serious cases, attract criminal sanctions.
The Regulations on the Collective Administration of Copyright came into force in March 2005. This legislation allows the formation of copyright collectives to:
• collect royalties from users;
• take enforcement action on behalf of their member companies; and
• assist foreign copyright collectives in exercising their rights in China.
However, at present only Chinese citizens and entities are allowed to take advantage of this regulation.
The Chinese government is constantly working on improvements to IP protection legislation. For example, a new regulation regarding the right of communication through information networks is in the pipeline. The Patent Law, last revised in 2000, is currently under review. Further regulations are expected when China accedes to the WIPO Copyright and Performances and Phonograms Treaties in 2005.
The recent developments clearly show that the Chinese government intends to increase the criminal enforcement of IP rights. However, it remains to be seen how effective these new measures will be. To take full advantage of these new enforcement tools, IP owners must be prepared to devote sufficient resources to support the enforcement actions of the Chinese authorities.
Hong Kong has continued to make headlines in the realm of IP enforcement over the last year. However, it has been relatively quiet on the legislation front.
Successes in IP enforcement
In July 2005 the Hong Kong customs authority obtained a freezing order under the Organised and Serious Crimes Ordinance against the assets of a counterfeit syndicate dealing with brand name clothing in July 2005. Over US$8 million worth of infringing items (produced in China) were seized during their shipment to Japan. This is the first time such a measure has been used in a trademark case. Previously, this procedure has been applied only in optical disc piracy cases.
In early 2005 a person in Hong Kong was charged with illegal uploading and distribution of movies on the Internet using BitTorrent technology. It was a world-first for copyright piracy charges to be brought against a BitTorrent user sharing copyrighted material with others on a peer-to-peer network. The accused was convicted by the Magistrates Court in October 2005 but, at the time of writing, the sentence hearing had not yet taken place.
Criminalisation of end-user piracy
Following a controversial debate that began in 2001, the Hong Kong government announced in June 2005 that it will not criminalise all acts of end-user copyright piracy. The existing scope of business end-user criminal liability under the Copyright Ordinance (which covers only computer programs, films, television dramas and musical recordings) will be maintained. However, business end users that engage in significant infringement activities involving the copying and/or distributing of printed works (ie, books, newspapers, magazines and periodicals) will face criminal sanctions following amendments to the law.
Chinese ‘.hk’ domain names
Chinese-character ‘.hk’ domain names will soon be available. A trial registration exercise is currently underway to collect comments and feedback. A registration obtained during this trial period, which ended in December 2005, does not confer priority to register the subject domain name. The official launch of these domain names is planned for 2005.
The Hong Kong IP Department has been accepting electronically filed trademark applications since October 2004. There are plans to extend this service to the filing of patent and design applications. New practice directives have also been issued in relation to requests for extensions of time and requirements relating to the filing of foreign registration documents in opposition proceedings. These changes will have time and cost implications for the conduct of trademark proceedings in Hong Kong. Care should be taken by foreign IP owners when providing the service address for trademark applications, as in December 2004 the Court of Final Appeal held that this address could be used for serving court proceedings.
Geographical names in trademarks
The Trade Description Ordinance was amended in June 2005. The amendment made it clear that misleading references to place names (eg, cities) also constitute false trade descriptions. Prior to the amendment, the relevant provisions targeted misleading references to country names only. It is not clear to what extent this new law will be applied by the Trademark Registry in its examination of trademark applications that contain potentially misleading place names or how it will affect trademark filing practice. This issue will certainly be worth monitoring.