Intellectual Property

China has continued to demonstrate its commitment to protecting   intellectual   property.   In   March   2006   the National IP Working Group, chaired by Vice Premier Wu Yi, released an action plan outlining a wide spectrum of legislative  and  enforcement  reforms  to  strengthen  IP protection  in  China.  Shortly  thereafter,  President  Hu Jintao  noted  during  his  visit  to  the  United  States  that
“China will continue to improve the legal regime for IP protection,  step  up  law  enforcement  and  crack  down hard  on  IP  infringement”.  This  section  of  the  chapter highlights  the  major  events  relevant  to  IP protection  in China over the past 12 months.

Filing statistics
The number of IP applications filed in China has grown at a phenomenal rate in recent years and there is no sign of it slowing down. During the first six months of 2006 the State Intellectual Property Office received more than
250,000 new applications, a 25 per cent increase on 2005. Most    notably,    the    number    of    invention    patent applications filed by local applicants jumped by 45 per cent.  In  contrast,  invention  patent  filings  by  foreign applicants increased by only eight per cent.
The  Chinese  Trademark  Office  has  been  the  busiest trademark registry in the world since 2004, and in 2005 the  number  of  trademark  applications  filed  in  China exceeded   660,000,   a   13   per   cent   increase   from   the previous year. The number of domain name registrations is  also  growing  at  a  staggering  rate.  There  are  now nearly 1.2 million domain name registrations, an increase of  more  than  200  per  cent  from  2005.  These  numbers clearly show that filing in China is no longer an option, but   has   instead   become   the   norm   for   protecting registrable IP assets.
Enforcement statistics
Official figures suggest that both the administrative and criminal  authorities  have  stepped  up  their  efforts  in fighting  IP  violations.  In  2005  the  Administrations  for Industry    and    Commerce    undertook    over    49,000 trademark-related   investigations.   More   than   37,000 formal cases were commenced (including 6,770 related to foreign trademarks) – a 23 per cent increase since 2005. The  Administrations  for  Industry  and  Commerce  also transferred  236  cases  to  the  Public  Security  Bureau  for criminal investigation.
In  2005  the  Public  Security  Bureau  accepted  1,799
criminal cases involving IP infringement (an increase of
52 per cent) and made 2,119 arrests (an increase of 56 per cent).  Nearly  2,700  persons  were  jailed  in  2005  for  IP- related  crimes.  During  the  first  six  months  of  2006,  the Customs Authority also prosecuted 1,076 IP-related cases and seized 39 million infringing items worth more than
$8.5  million.  Despite  these  results,  the  Office  of  the  US Trade Representative continued to identify China as one of the most serious IP offenders in its Special 301 Report, issued in April 2006.

Notable court cases
A number  of  high-profile  Chinese  IP  cases  have  made international  headlines  during  the  past  year.  Many  of them    were    resolved    in    favour    of    the    foreign complainants.   These   results   show   that   meaningful enforcement actions can now be taken to protect IP rights in China.

The closely watched Viagra appeal was decided in June
2006.  The  Beijing  No  1  Intermediate  People’s  Court reversed   the   decision   of   the   Patent   Re-examination Board, which invalidated Pfizer ’s patent on the erectile dysfunction drug sildenafil citrate. The respondent local drug companies have appealed this ruling.

Another patent case in June 2006 has made Chinese
legal   history.   The   Zhengzhou   Intermediate   People’s Court   awarded   Rmb29.8   million   ($3.7   million)   in damages  in  an  infringement  action  –  the  largest  IP- related  court  order  ever  made  in  China.  The  patent  in question was one of the few Chinese patents bestowed with the prestigious Golden Patent Award.

On  the  trademark  front,  Starbucks  has  prevailed  in  its disputes  with  local  cafés  using  the  Chinese  company name  ‘Xingbake’,  which  is  identical  to  the  Mandarin transliteration    of    Starbucks’s    English    name    and registered Chinese trademark. The local cafés in question were ordered to change their names and pay damages in late   2005   by   the   Intermediate   People’s   Courts   in Shanghai  and  Qingdao  respectively,  even  though  they had  both  registered  the  disputed  mark  as  a  company name with the respective local authorities. The Shanghai café  has  filed  an  appeal,  but  at  the  time  of  writing  no decision had yet been rendered.
Another widely reported case relates to the Silk Street Market, a popular Beijing shopping area for those seeking fake brand name goods. In December 2005 several luxury brand owners (Prada, Chanel, Louis Vuitton, Gucci and Burberry)  successfully  sued  the  landlord  of  the  market and  several  of  its  tenant-vendors  in  the  Beijing  No  2
Intermediate   People's   Court.   The   defendants   were ordered to pay Rmb20,000 ($2,500) in damages and legal costs to each plaintiff. The landlord was also found liable for “providing conditions facilitating infringement” and failing to stop vendors from knowingly selling counterfeit goods after receiving notices from the brand owners. This ruling was upheld by the Beijing High People’s Court in April 2006. Although China is not a common law country, this  precedent-setting  decision  is  expected  to  open  up more  options  to  IP owners  for  the  enforcement  of  their rights,   and   may   deter   landlords   from   leasing   their premises to vendors of counterfeit goods. Soon after this decision,    the    Xiangyang    Market    –    the    Shanghai counterpart  of  the  Silk  Street  Market  –  was  ordered  to close by the local government.

Online  copyright  violations  continue  to  plague  both foreign  and  domestic  IP  owners  in  China.  Respect  for copyright  remains  relatively  low  among  businesses,  as illustrated by a series of recent lawsuits brought against two NASDAQ-listed Chinese companies., the most popular search engine in China, was successfully sued by Sony BMG, Warner Music, EMI and  Universal  Music  for  allowing  free  downloads  of
their  music. A local  music  company  was  also  awarded
Rmb68,000 ($8,400) damages after Baidu’s search engine was   found   to   violate   its   copyright.   In   June   2006   was   ordered   by   a   Beijing   court   to   pay Rmb50,000  ($6,250)  in  damages  and  costs  for  allowing the  unauthorised  download  of  ringtones  recorded  by  a Chinese rapper.

New legislation and directives
China  has  continued  to  strengthen  its  legal  framework for IP protection. Several important new tools have been introduced to facilitate the investigation of IP violations and   the   enforcement   of   IP  rights,   including   a   few industry-specific  measures.  Major  improvements  have also been made to the procedures for securing IP rights.

Trade shows
China now has a new framework for handling suspected IP   violations   at   trade   shows   and   exhibitions.   The Measures on Protection of IP Rights at Exhibitions, which came into force in March 2006, require organisers of all events longer than three days to set up a complaint unit at  the  exhibition  venue.  A  complaint  may  be  made directly to the complaint unit, which is staffed by local IP  officials,  and  the  alleged  infringers  may  be  ordered to  remove  any  infringing  items  and  destroy  or  change any  materials  used.  In  addition,  trade  show  organisers must  not  allow  a  repeat  IP  infringer  to  participate  in their exhibitions.

Online piracy
China has the second largest internet population in the world and online IP violation is a widespread problem. A new  tool  to  combat  online  copyright  piracy  is  now available.   From   July   1   2006   the   Regulation   on   the Protection   of   the   Right   of   Communication   through Information Networks has mandated that everyone must obtain permission and pay royalties before disseminating the copyrighted works or performances of another   online.   More   importantly,   network   service providers must remove or disconnect links to infringing works   upon   receiving   demands   and   evidence   of infringement  from  IP  owners.  They  must  also  provide authorities with information regarding operators of the websites that distribute pirated materials. The regulation provides for a fine of up to Rmb100,000 ($12,500) and the confiscation of computer equipment.

Lobbyists for the commercial software industry scored a huge   success   when   the   State   Council,   the   highest executive organ of the Chinese government, proclaimed

in March 2006 that only legitimate software may be used
on  computers  in  government  offices  and  state-owned and  other  enterprises.  Soon  afterwards  the  National Copyright  Administration   mandated   that   legitimate operating   systems   must   be   preloaded   on   personal computers   made   and   sold   in   China.   These   political directives are expected to help to foster a culture of legal software use and respect for copyright generally.

Criminal investigation
The  lack  of  coordination  and  cooperation  between  the authorities  responsible  for  criminal  and  administrative investigation  of  IP  violations  has  often  been  cited  as  a reason for ineffective IP protection in China. Several new measures were put in place in early 2006 to address this issue.  For  instance,  local  Administrations  for  Industry and  Commerce  are  now  required  to  notify  the  Public Security    Bureau    when    they    discover    serious    IP infringement  and  to  transfer  all  suspected  cases  that meet  the  criminal  prosecution  threshold  promptly.  In March 2006 similar rules were put in place between the Public Security Bureau and Chinese Customs Authority. Whether these procedures will translate into an increase in criminal prosecutions remains to be seen.

Patent examination
The  New  Patent  Examination  Guidelines,  which  came into effect on July 1 2006, set out important clarifications regarding the standard of examination and the disclosure and  claim  requirements,  as  well  as  the  patentability  of certain subject matter (eg, genetic materials, medical use claims  and  computer  programs).  They  also  introduced changes that materially alter patent prosecution practice in China; most notably, a divisional application based on another divisional filing is no longer possible.

Trademark appeals
Decisions   of   the   Chinese   Trademark   Office   can   be reviewed  by  the  Trademark  Review  and  Adjudication Board. A new set of rules came into force in October 2005, making board proceedings more user friendly to foreign brand owners. For example, evidence obtained overseas need  no  longer  be  notarized  and  legalised  unless  its authenticity  is  challenged.  Moreover,  the  parties  may now ask the board to mediate a dispute.

Domain name disputes
Recovery of ‘.cn’ domain names from cybersquatters has become more difficult since the China Internet Network Information Centre (CNNIC) revised the Domain Name Dispute   Resolution   Policy   (CNDRP)   in   March   2006. Under  the  new  policy,  a  domain  name  registered  for
more  than  two  years  will  no  longer  be  subject  to  a
CNDRP complaint. This means that a trademark owner must  challenge  such  registration  through  other  legal actions  (eg,  a  civil  lawsuit).  Mere  registration  for  the purpose  of  selling,  renting  or  otherwise  transferring  a CNNIC  domain  name  by  itself  (other  than  in  order  to obtain  unjustified  benefits  from  the  complainant  or  its competitors)  is  no  longer  sufficient  proof  of  bad  faith. Furthermore,   a   registrant   is   presumed   to   enjoy   a legitimate right if, prior to receiving a complaint:

•    it  has  made  good-faith  use  of  the  disputed  domain name  in  connection  with  the  offering  of  goods  or services;
•    it has made fair or legitimate non-commercial use of the    domain    name    without    intent    to    obtain commercial gain; or
•    the disputed domain name has become well known even though the registrant has acquired no relevant trademark.

From  a  different  angle,  these  changes  have  levelled the playing field and brought the CNDRP closer to the Internet Corporation for Assigned Names and Numbers Uniform   Domain   Name   Dispute   Resolution   Policy, which is more familiar to foreign IP owners.

Looking forward
December  2006  marks  the  fifth  anniversary  of  China’s accession   to   the   World   Trade   Organisation   (WTO). Therefore,    its    compliance    with    the    WTO    treaty obligations, particularly the WTO Agreement on Trade- Related  Aspects   of   Intellectual   Property   Rights,   will again be subject to close scrutiny. Recent developments indicate that meaningful legal redress is now available to protect IP value in China, and there is also a clear trend that  the  IP  regime  is  becoming  more  transparent.  The most important developments to watch for in 2007 will be  the  proposed  amendments  to  the  Patent  Law  and Trademark   Law,   which   were   released   for   public consultation in mid-2006.

Hong Kong
Hong   Kong   has   continued   to   show   leadership   in combating IP infringement on both the enforcement and legislative fronts. However, this stellar track record has been marred by an apparent inability and unwillingness to   clamp   down   on   abuse   of   the   company   names registration system.

Successes in IP enforcement
Online piracy cases have kept the civil and criminal courts
busy.    In    November    2005    the    accused    in    the
world’s   first   prosecution   for   file   sharing   using   the BitTorrent  technology  was  sentenced  to  three  months’ imprisonment.  In  May  2006  the  owner  of  a  company selling  pirated  Japanese  cartoon  discs  over  the  Internet was jailed for six months, the heaviest sentence to date for selling  pirated  copyright  goods  online.  In  January  2006 four  internet  service  providers  (ISPs)  were  ordered  to disclose  the  identities  of  22  customers  who  illegally uploaded a large number of Canto pop songs. This is the first time that ISPs have been required to provide personal data to support the civil actions of third-party IP owners. Four months later, more ISPs were ordered to disclose the identities of 49 illegal movie downloaders. These widely publicised cases have effectively curbed illegal uploading and downloading activities in Hong Kong.

Copyright amendment bill
A copyright amendment bill was introduced before the Legislative Council in March 2006. Among other things, it proposes a number of criminal offences, including that:

•    directors   and   partners   responsible   for   internal management   be   criminally   liable   for   copyright infringement committed by their organisations;
•    the  scope  of  business  end-user  criminal  liability  be extended to printed works; and
•    commercial   dealing   in   circumvention   tools   or provision   of   services   to   circumvent   technical measures for protecting a copyright work constitute
a crime.

The  bill  is  currently  under  examination  by  a  bills committee,   and   major   amendments   and   debates   are expected in the coming legislative session.
Chinese ‘.hk’ domain names
Chinese ‘.hk’ domain names are to be introduced in the third   quarter   of   2006.   Certain   proprietors,   such   as trademark  owners  and  holders  of  ‘.hk’  domain  names, will have priority to register the corresponding Chinese
‘.hk’ domain names. The general launch is scheduled for the end of 2006. Brand owners should take advantage of the  sunrise  period  to  avoid  the  cybersquatting  of  their Chinese names or trademarks.

Squatting of trade names
Trade  name  squatting  has  become  a  serious  problem in Hong Kong. The number of companies formed using English or Chinese company names that are identical or confusingly similar to trademarks or business names of well-known companies is increasing at an alarming rate. These  companies  are  often  used  as  legitimate  fronts for  conducting  illicit  activities  in  China,  such  as  the manufacture  of  counterfeit  products  bearing  the  well- known   trademarks   in   question.   Despite   repeated complaints and lobbying, in most cases the Hong Kong Companies  Registry  refuses  to  order  a  name  change based  on  a  narrow  yet  arguably  correct  view  of  its statutory power – that is, to direct a company to change its name only if it is “too like” a name already registered. However,  this  power  cannot  be  invoked  on  trademark grounds.  In  most  cases,  court  actions  do  not  provide sufficient  redress  because  these  companies  are  empty shells with no operations or assets in Hong Kong, and the orders  obtained  are  not  binding  upon  the  Companies Registry. Therefore, stakeholders are calling for a review of    the    existing    laws.    Formal    complaints    have also  been  lodged  by  a  number  of  foreign  governments and chambers of commerce. This will certainly be one of the most closely monitored IP issues in the coming year.


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