The dragon has left its lair — Exporter Magazine

China is marking its stamp on the world as an intellectual property (IP) creator, putting new pressure on New Zealand and the rest of the world to have watertight protection in place before entering the Chinese market. For too long, foreign companies operating in China have been hit by local copycats who blatantly copy products, trademarks or designs, hoping to pocket quick profits.

The dragon has, however, left the comfort of its lair. China has taken the path other developed East Asian nations have taken, by moving up the IP value chain.

In 2011, China filed the largest number of patents in the world, exceeding the US.

“The number of trademarks filed by Chinese companies has been phenomenal,” says Anton Blijlevens, partner at AJ Park. In 2013, the State Intellectual Property Office (SIPO) of China received 2.377 million applications, up 16 percent from 2012 and nearly twice the number filed in 2010. Domestic applications outweighed foreign applications, the latter making up only 142,501.

The highest number of applications for IP protection were received in the utility model category (885,226) followed by invention (704,936) and design applications (644,398). “For Kiwi companies operating in China, they have to be aware of the risks of infringements in China, either in the area of patents or trademarks,”

Blijlevens adds.

What this means is that it is no longer enough to just enter the Chinese market with a product or service without a proper search. Yet to search a patent or trademark in China in entirety presents many challenges given the sheer size of the market.

China, under pressure from the United States to comply with international IP protection standards, introduced trademark laws and patent laws in 1982 and 1984 respectively.

However, although the legislations have been in place, enforcement continues to be an issue. China’s national strategy for IP creation is bold and ambitious. The

Chinese Government is not only actively encouraging Chinese companies to invest in IP protection but providing funding to Chinese companies to do so, according to intellectual property lawyers familiar with the Chinese operating environment.

Johnathan Chen, head of division (Asia) at James & Wells, says Kiwi companies need to understand how to approach the changes developing in China, and have an appropriate IP strategy in place.

“While there have been rumblings by overseas observers that a lot of ‘rubbish patents’ have been filed by domestic Chinese companies and that the Chinese are probably still a couple of years away from ‘breakthrough technology’, they are being encouraged and incentivised to innovate,” Chen says. Many are – consider this: Huawei, a telecommunications company, is one of the top patent owners in the world, holding 36,500 patents at the end of 2013, according to the company’s newsletter. The company is already ahead of the world in developing 5G mobile communication technologies while others are just dipping their toes in.

China’s commitment to moving up the technology ladder presents risks but also great opportunities for foreign companies. Kiwi companies should take this opportunity to team up with Chinese companies to create, develop and acquire intellectual property rights for new technology. But they should also ensure they have ownership and control of their own IP prior to entering these relationships, Chen says.

The Chinese are traditionally efficient at execution while the Kiwis are superb at innovation, making the duo a great combination, he says. 

“The Chinese IP system is still young – it is time to use this to our advantage, to present Kiwi companies as the preferred innovation partners. If we miss the boat 

now we won’t be able to catch up.”

Paul Adams, CEO of EverEdge IP notes that while Kiwis come up with innovative product ideas, they are less successful with developing disruptive technologies that are built around deep research, this leaves them more vulnerable to Chinese copycat strategies which tend to imitate easierto-copy products.

Kiwis, with a DIY approach to business, also sometimes run into difficulty offshore as they wait too late before seeking advice and in China, more than many places, good advice before entering the market is a must, Adams adds.

Handling Chinese IP

When you enter the dragon’s lair, it pays to know how to tread. Kiwi companies looking to get IP protection in China should always get help from market insiders.

Although China’s legislative revamp in IP protection is an improvement from the legacy system, it is still an imperfect environment. 

“The overriding message still is, Kiwi companies need to understand the (new) Chinese system. It is still a young market (in IP terms), and there is lot for the country to catch up on,” says Chen.

Ten years ago, a Kiwi company might consider it futile trying to file for IP protection in China given how the enforcement environment lagged other economies. Even if a copycat was identified, it is often hard to take the culprit to task. “If someone located a product being infringed upon, the infringer would close up shop and head for the next hill. It would be like chasing a ghost. It is easy for an infringer to retool and set up shop in another city, another province,” says Blijlevens.

Not anymore. Chinese legislators are now more proactive in snuffing out copycats and IP infringers. SIPO statistics show that in 2013, 16,227 cases of IP infringement were handled, up 79.8 percent from the year before. In a widely reported case, China’s court in 2006 fined a landlord operating the Silk Market in Beijing’s famous tourist attraction in a suit initiated by Prada, Chanel, Louis Vuitton, Gucci and Burberry.

Clearing misconceptions

Paul Davies, director-IP of EverEdge IP, says there is the misconception that foreign companies cannot protect themselves against infringements by Chinese operators. “There are still issues with enforcement but the volume of civil litigations has doubled in recent years and the quantum of damages awarded has also increased. “If there is a problem with enforcement, often it is because of the discovery process related to the difficulty in getting evidence on the amount of infringement,” Davies adds.

Compensation awarded for those seeking legal recourse is limited by China’s practice of Statute of Limitations, which has a twoyear backdate limit for claims) of

infringement.

Brand preservation and trademark trolls

If you are thinking about selling a product or service in China, be sure to get your trademark registered early.

China practices what is known as the first-to-file system for trademark protection. This has given rise to the mushrooming of “trademark squatters” – those who deliberately file a trademark with the intention of making money from it, quite like the domain name trading found for websites.

So, it doesn’t matter if you have been using your trademark for ages in other places – if someone else in China decides to register your trademark first, the party legally owns it, not you. Facebook, for instance, found there are as many as 60 versions of its Chinese name already registered in China. This can be challenged in China under what is known as “bad faith” filing, but in the past the legislation on this was not well defined, according to Chen from James and Wells.

The law has since improved with the updated Trademark Act (May 2014) such that proof of a prior relationship can be used as admissible evidence in litigation.

But the broad strategy to adopt is to be the first to file, says Chen, so that trademark trawlers and squatters can’t profit from your brand.

A client of James and Wells was in talks with a potential distributor in China to decide on pricing and product distribution. The distributor, a Chinese company operating out of Sydney and Auckland, proceeded to register the trademark of the Kiwi company. 

In seeking legal recourse, the Kiwi company was able to supply proof it owned the trademark based on email conversations held with the distributor, Chen says.

What is also important in terms of brand preservation, especially in a market such as China, is maintaining the integrity of emotions your brand is looking to project, says Davies of EverEdge IP.

“Make sure you look at the Chinese (translation) character; if you don’t have a Chinese name, make sure you get (a proper) one. You don’t want just a transliteration of your company name. You want the same emotion reflected. Even in a different territory, the name (you use in the translation) should convey the same feeling,” says Davies.

One example is Mitsubishi’s “Pajero” brand which had to be revised (to Montero) as it was a Spanish slang for “wanker”. In another example, Toyota’s Fiera didn’t quite succeed in Puerto Rico as it meant “ugly old woman” when translated into the local lingo. Chen adds that the Chinese language is highly complex with hundreds of characters delivering the same phonetic sound but varied meanings. The approach to adopt, where possible, is to achieve both the phonetic accuracy as well as the meaning the brand is trying to convey, he says.

Chen also points to the importance of ensuring the language used in translation of patents reflects the technology and is accurate. “I have seen first-hand an example, during my time in Beijing, of a foreign company not being able to enforce their patent portfolios due to a slightly deviated term used in the patent specification.” 

Protecting your design in China

Cutting through the maze in China in terms of protecting a Kiwi design, need not be too complicated, although there are some challenges, says Britta Fromow, partner at Catalyst Intellectual Property, based in Wellington. Although registered designs are typically considered to be a lesser form of protection than patents, Fromow says it is worthwhile seeking protection for the design of a product if its appearance is an important selling point. This is often the case in relation to consumer goods, such as furniture, packaging containers (particularly bottles), smart phones, and so on.

Fromow says Chinese companies are particularly adept at producing lookalike copies of someone else’s product. Consequently, if China is a key market for your product, it makes sense to protect the product’s design there. If the look of the product is not protected by a registered design, there is little recourse available if a copy of the product enters the market.

Linking relationship building and IP strategy

What’s guanxi (refers to the relationship or familiar ties in China) got to do with protecting your IP? A lot, according to those working for companies in China.

Everedge IP’s Davies say it is not uncommon to find infringements happen usually close to home, normally by someone with inside knowledge of a foreign company’s business in China.

“You would be naïve if you are not keeping a close eye – your distributor might be your greatest risk, so you always need an independent party you trust, to keep an eye for you,” Davies says. It also pays to build strong relationships in China as a preventive measure against IP theft.

Blijlevens from AJ Park advises Kiwis to travel to China, be on the ground and know the staff well. “Often, the infringements are from people in your factory, making runs overnight, selling them through the back door.”

Don’t apply the same level of trust you might do in New Zealand. Blijlevens says the Chinese will need time to adapt to modern licensing and contract laws and are still coming to terms with it. “In New Zealand, business can be done on a handshake, rather than a prior long-term relationship. We rely on manufacturing contracts and licensing agreements. Not so in China.”

Understand that when you conduct business in China, there are subtle nuances in the culture, advises Chen. “Don’t expect to work with the first person you meet in China. Spend time there, to realise who you can trust, then spend time understanding what your business partner’s thinking is.” 

Despite the current challenges, in about 15 years’ time the Chinese legislative regime for protecting IP will improve, and there will be a strong and enforceable environment, says Fromow of Catalyst IP.

Meanwhile Chen reckons that the transformation of China’s IP development and enforcement regime might be shorter than 15 years given the amount of financial commitment made by the Chinese government. While China may now be the world’s largest copycat nation, its quest to move up the value chain has already produced results. It is currently ranked the top nation among the developing world on the Global Innovation Index.

Yoke Har Lee is an Auckland-based freelance writer.

Email: yokeharlee@yahoo.co.nz Publishing Information

Magazine Issue 

Exporter Magazine September/October 2014 issue 35