How Foreigners can Navigate China’s Intellectual Property System

By: Jason Wejnert and Laura Shapiro

Introduction

Sophisticated investors and business owners recognize the benefits of patent licenses and patent protection on an international level. The more intricate and global a business becomes, the more protection is required in order to maintain exclusivity over products and privacy against competitors. One of the major markets patent holders are seeking intellectual property (“IP”) protection in is the People’s Republic of China. There are many benefits to having patent protection in China as it is the world’s second largest economy1, but there are many differences between the United States patent system and China’s patent system. Although complex, the differences are important for patent-holders to understand in order to maximize the benefits Chinese patent courts can offer regarding patent protection. This article will discuss China’s IP court system and its advances over the last few years, as well as the China courts’ growing friendliness towards foreigners. Despite the upheaval in China, Asia and the world in general due to the recent COVID-19 pandemic, China and its IP system will play a paramount role in a client’s decision to exploit IP globally.

Patent applications have accelerated in China in recent years, with the State Intellectual Property Office, or SIPO, receiving a record total of 1.54 million in 2018, accounting for nearly half of global patent filings2. As with many countries, when patents are issued in China, patent holders often assert them in litigation: 16,010 civil patent suits were filed in 2017, up 30 percent from the year before and dwarfing the 4,060 patent complaints filed last year in U.S. courts3.

To begin, China’s courts, in general, are separated into four basic courts: the Supreme People’s Court, the High People’s Court, the Intermediate People’s Court and the Basic People’s Court. The Chinese courts all follow the civil law approach, meaning the judge leads in fact-finding and is active in determining the applicable laws. Further, while China’s courts consider caselaw, caselaw is not controlling as it would be in the United States4. The Supreme People’s Court is the highest level of court in China and is regarded as the superior appellate forum that handles national matters and the court of last resort. The High People’s Court is the highest local court that is responsible for issues at the provincial level. The Intermediate People’s Court is the court that handles relevant, important local cases in the first instance as well as appeal cases from the Basic People’s Court. The Basic People’s Court handles first instance cases at the local level as well as those cases that are deemed too ‘trivial’ to require a trial5. The Intermediate People’s Court used to be the court which handled IP disputes, but specialized IP courts have taken over a majority of that area of law6.

Specialized IP Courts

The specialized IP courts are a relatively new feature within China’s court systems. The new IP courts were established on August 31, 2014 by the Standing Committee of the National People’s Congress and were placed in Beijing, Shanghai and Guangzhou7. These three courts are independent judicial bodies and operate as Intermediate People’s Courts. In 2017, four new IP courts opened in Wuhan, Nanjing, Suzhou and Chengdu due to the overwhelming amount of IP disputes brought in those regions8. As of 2019, there were over twenty specialized intellectual property courts9, though these courts outside of Beijing, Shanghai and Guangzhou are subordinate to local Intermediate People’s Courts. Since the establishment of the court, the Beijing Intellectual Property Court, alone, has accepted 13,736 IP cases involving foreigners. During the same period, a total of 10,755 foreigner-related cases in the Beijing IP court were concluded10. Further, the judges in the IP courts are specialized and have the reputation of being amongst the best educated judges in China11. For appeal from the IP courts, there is a specialized IP tribunal sitting in the Supreme People’s Court, which acts as the exclusive appellate venue for technology-related IP lawsuits. Notably, the Beijing, Shanghai and Guangzhou courts as well as the IP tribunal of the Supreme People’s Court only adjudicate civil and administrative IP cases. The specialized regional IP tribunals adjudicate civil, administrative and criminal IP cases12.

To take advantage of these new IP courts, an IP owner can sue in locations only where the defendant resides or where the infringing act occurs. An infringing act can occur where an act of infringement is performed, a place where the result of the infringement occurs13 or where the infringing act has some effect14. If the defendant neither resides nor the infringing act occurs in one of the locations of the specialized IP courts, then the plaintiff will need to use the current system in order to litigate (i.e. the Intermediate People’s Courts). The cases that the IP courts can hear are divided into three types: (1) civil and administrative cases involving patents, new plant varieties, layout designs of integrated circuits, technical secrets, computer software and other technology cases; (2) administrative cases involving copyright, trademark and unfair competition against the administrative action of the State Council department or above the county level departments; and (3) civil cases involving the affirmation of famous or well-known trademarks15. The difference between a famous trademark and a well-known trademark for a foreigner’s purposes is that a foreigner’s brand can gain the status in China of being a well-known trademark, though a famous trademark is reserved exclusively for national, Chinese companies16.

The IP courts have exclusive, original jurisdiction over Type 1 and Type 3 cases, meaning that other Intermediate People’s Courts may not accept Type 1 or Type 3 cases once the IP court accepts them. Type 2 cases can be heard by IP courts but if they are already within existing courts, it is unclear whether IP courts have concurrent jurisdiction over Type 2 cases. Both ‘run-of-the-mill’ trademark infringement cases where requests for recognizing well-known trademarks are not included, as well as ‘plain-vanilla’ copyright cases that do not involve computer software are excluded by the specialized IP courts, as these courts are only meant to focus on complex IP cases17.

Alternative Patent Protection Systems

Alternative routes from litigating within the specialized IP courts or from litigating within the existing systems include filing a complaint with the local Administrative Authorities for Patent Affairs (“AAPA”) or filing a complaint with Customs IP. The AAPA can both issue injunctions as well as provide tools for mediation among the parties but cannot provide monetary damages for patent infringement18. Customs IP, on the other hand, has two types of protection: ex-officio customs actions or passive protection. Ex-officio customs action requires the customs’ officers at the border to suspend the goods in question during their routine checks if they find the goods suspected of infringing on recorded IP rights. This can lead to detainment of goods as well as a fine imposed on the infringer. Passive protection under Customs IP is where an IP holder suspects infringement and then provides a guarantee equivalent to the value of the goods they subsequently request to be detained. A court will then get involved in determining whether to stop the infringement19. An alternative route to litigating for trademark infringement specifically would be to request a hearing from the Administration for Industry and Commerce (“AIC”). Foreign complainants may petition equally to Chinese companies, though their documents must be notarized and legalized with a Chinese translation. AIC can directly stop trademark infringement, impose fines, confiscate or destroy infringing goods and destroy tools mainly for manufacturing infringing goods or labels20.

Remedies and Case Law Under the IP Court System

If a foreigner were to go forward and use the specialized IP court system in China to litigate IP claims, there are remedies available. However, the monetary relief provided is not nearly as substantial as it would be litigating within the United States. The relief in China that is available includes injunctions and monetary and compensatory damages21.

Punitive damages, a major source of relief in the United States, have still not made their way into the Chinese IP system. This will not be the case for long. As of 2019, the Chinese government launched a public comment advocating for a proposed legislative amendment that would mandate an infringed patent holder’s right to claim corresponding punitive damages. Some have called the public comment on punitive damages a “war” against IP infringers and counterfeiters22. This is a telltale sign that not only are punitive damages a future source of relief for patent holders, but also that there are stricter and harsher remedies to come for infringing upon patents in China. This is shown by the award increase over the last two years. While the average award in cases dealing with foreign parties was 770,000 RMB in 2015 ($108,717.13 USD), as of 2018, the average award was 2 million RMB ($282,382.16 USD), and as of 2019, the average award was 2.86 million RMB ($395,335.02 USD)23.

While China is becoming an increasingly attractive venue to litigate IP issues within; considering plaintiffs who engage in patent litigation on average win 80% of infringement cases24; foreigners still fear discrimination and automatic loss when attempting to use Chinese courts. While this fear may have held some truth in the past, presently, China has become more friendly towards foreign plaintiffs litigating in the China IP courts. In fact, as of 2019, foreign firms have achieved higher win rates and average damages than Chinese firms25. Further, as of October, in administrative cases, foreign parties had a 49% winning rate against Chinese entities. In civil cases between Chinese and foreign entities, the foreign party had a 68% winning rate26.

There are several cases that also indicate foreigner’s ability to win within the Chinese IP court system. These include Double Robotics, and Bayer A.G.. In Double Robotics, the foreign plaintiff was able to persuade a China IP court to invalidate patents claimed by a Shanghai-based rival27. In Bayer A.G., the foreign plaintiff not only received a 1.31 million RMB ($184,960.31 USD) award in damages, but also, the China IP court ordered the native defendant to stop manufacturing of the alleged infringing products and to destroy drawing and molds for the manufacture of those products28. Although there are still some cases in which the United States’ courts concluded for the United States’ party and China IP courts concluded for the Chinese party in two concurrent suits, including Samsung v. Huawei29 and Qualcomm v. Apple30, the trend, in general, is pro-foreign plaintiff.

2020 Economic and Trade Agreement

China continues to develop its IP court system. This is shown through their most current agreement with the United States: the 2020 Economic and Trade Agreement (the “Agreement”). Within the agreement, there have been stipulations made to foreign companies in that they no longer need to transfer or license proprietary information or IP to Chinese entities as a predicate to doing business. Further, trade secret protection has been expanded to include protection for information that has commercial value that may cause great harm to the competitive position of the information holder after disclosure. The Agreement also expands protection of IP rights to pharmaceutical-related IP rights and extends validity of patents in two ways: to compensate for unreasonable delays in the patent grant process and to compensate for unreasonable delays in the approval process of the drug market.

Beyond expansion of protection, the Agreement further enlists China to fight against piracy and counterfeiting on e-commerce platforms. The Agreement both requires the establishment of an effective notification and delisting system as well as a penalization against e-commerce platforms that condone infringement. Finally, amongst another notable achievements the Agreement hopes to accomplish, the Agreement highlights the importance to striking down bad-faith trademarks. This means that any trademark registration not filed for the purpose of use shall be rejected31. All sections within the Agreement will strengthen bilateral cooperation on the protection of IP rights between the United States Patent and Trademark Office and the China National Intellectual Property Administration32.

Future Outlook

As China’s IP system continues to develop in its courts, there have been notable trends with respect to how foreigners are interacting with China. Firstly, there is an influx of U.S. drug manufacturers securing Chinese patent protection so that they are able to market their drugs in China33. This is because of the newfound ability to patent pharmaceuticals under the Agreement between China and the United States. Secondly, as the odds continue to be stacked for foreign companies in China IP Courts, foreigners are litigating in China at a rate never before seen34. This is likely due not only to China’s apparent unbiased IP court system, but also, the fact that there are higher damages at stake for companies who can prove infringement35. Finally, the more Chinese IP courts develop, the more navigable they are becoming. This is a positive for foreigners and United States citizens because they will be able to better predict litigation outcomes in China as well as prepare their cases to the standards that are easily accessible and understandable.

Despite recent trends, there is still great uncertainty as to whether China will finish achieving its potential regarding its IP Court system. Factors that might stunt China and its IP system include the ever-increasing tension mainland China has with Hong Kong36 and the coronavirus epidemic37. As this article is published, U.S. citizens are currently being evacuated from both China and Hong Kong38. The coronavirus has exploded worldwide, shutting down courts and business in every country affected. This is not a positive sign for business development, and therefore, is not a positive sign for legal development. Whether the damage to China is permanent has yet to be determined. If you have any questions about this paper, please feel free to contact us at SpencePC. Further, if you are considering protecting your patent or litigating a patent claim in China, we at SpencePC are happy to discuss both current and future options with you.


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2 Nebehay, Stephanie. “’Driving Force’ China Accounts for Nearly Half Global Patent Filings: U.N.” Thomson Reuters, 16 Oct. 2019, www.reuters.com/article/us-global-economy-innovations/driving-force-china-accounts-for-nearly-half-global-patent-filings-u-n-idUSKBN1WU2XR.
3 “What You Need To Know About Patent Litigation In China.” Law360, 9 Aug. 2018, www.law360.com/articles/1072015/what-you-need-to-know-about-patent-litigation-in-china.
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7 Id.
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11 Wejnert, Jason. China’s New IP Courts. PowerPoint Presentation.
12 “Updates on China’s Specialized IP Courts and Tribunals.” Lexology, AFD China Intellectual Property Law Office, 27 Jan. 2019, www.lexology.com/library/detail.aspx?g=365fea3e-d682-4b63-822d-d7c9f0959b5d.
13 “China Patents: Supreme Court Frustrates Forum-Shopping Tactics.” Managing Intellectual Property, 18 Sept. 2017, www.managingip.com/article/b1kbpm5ybcp0qv/china-patents-supreme-court-frustrates-forum-shopping-tactics.
14 Wejnert, Jason. China’s New IP Courts. PowerPoint Presentation.
15 Id.
16 “China: The Problem with Defining ‘Famous’: World Trademark Review.” The World Trademark Review, Kangxin Partners PC, 1 Nov. 2016, www.worldtrademarkreview.com/portfolio-management/china-problem-defining-famous.
17 Wejnert, Jason. China’s New IP Courts. PowerPoint Presentation.
18 Zhao, Meisheng. “China’s Patent Infringement Remedies” Tsinghua China Law Review, 7 Sept. 2013, www.tsinghuachinalawreview.org/articles/PDF/TCLR_0502_ZHAOMeisheng.pdf.
19 “China Customs Provides IP Protection.” Managing Intellectual Property, 22 Mar. 2019, www.managingip.com/article/b1kblzh6b86cjj/china-customs-provides-ip-protection.
20 “China Trademarks: A Brief Introduction to Trademark Enforcement by AIC.” Managing Intellectual Property, 11 Dec. 2017, www.managingip.com/article/b1kbpmzy96jg3k/china-trademarks-a-brief-introduction-to-trade-mark-enforcement-by-aic.
21 Spence, William Cory. “Prepare for Litigation and Avoid It Where Possible.” SpencePC, IAM Media, www.spencepc.com/wp-content/uploads/sites/2736/2019/10/STO-5567-IAM-Yearbook-2020_SpencePC.pdf.
22 “A Look at China’s Proposed Introduction of Punitive Damages Against Intellectual Property Infringement.” INTA Bulletin, 15 Feb. 2019, www.inta.org/INTABulletin/Pages/china_update_7403.aspx.
23 Zhao, Bing. “Latest Statistics Show Foreign Firms Win in High Numbers at Beijing IP Court.” IAM Media, 24 Oct. 2019, www.iam-media.com/copyright/latest-statistics-show-foreign-firms-win-high-numbers-beijing-ip-court.
24 Papageorgiadis, Nikolaos. “China Is Being Hyped as New Haven for Enforcing IP Rights, but Let’s Not Get Carried Away.” The Conversation, 4 June 2019, theconversation.com/china-is-being-hyped-as-new-haven-for-enforcing-ip-rights-but-lets-not-get-carried-away-115948.
25 Id.
26 Zhao, Bing. “Latest Statistics Show Foreign Firms Win in High Numbers at Beijing IP Court.” IAM Media, 24 Oct. 2019, www.iam-media.com/copyright/latest-statistics-show-foreign-firms-win-high-numbers-beijing-ip-court.
27 Nicas, Jack, and Josh Chin. “Stronger Chinese Patent Laws Also Help U.S. Companies.” The Wall Street Journal, Dow Jones & Company, 20 July 2016, www.wsj.com/articles/stronger-chinese-patent-laws-also-help-u-s-companies-1468994404.
28 “Bayer Awarded Injunction, RMB1.31 Million in Syringe Patent Case.” Mondaq, AFD China, 30 Sept. 2019, www.mondaq.com/china/Intellectual-Property/849624/Bayer-Awarded-Injunction-RMB131-Million-In-Syringe-Patent-Case.
29 A case in which Huawei prevailed in alleging Samsung had not behaved reasonably when asked for a royalty. (https://www.twobirds.com/en/news/articles/2018/global/shenzhen-court-issues-written-judgment-in-huawei-v-samsung-case)
30 A case in which Qualcomm was sued over its patent licensing activities. Qualcomm was ordered to follow a rectification plan which governed how it could negotiate licenses with Chinese firms and how much it could obtain in royalties. (https://www.ipwatchdog.com/2016/11/10/china-increasingly-preferred-venue-patent-litigation/id=74585/)
31 Xiaoxia, Zhang, et al. “浅析第一阶段中美经贸协议中与知识产权相关的规定.” Lexology, King & Wood Mallesons, 20 Jan. 2020.
32 Jiao, Hongbin, and Yuxin Liu. “An IP Roadmap for Phase-One Sino-US Economic and Trade Agreement.” China Law Insight, King & Wood Mallesons, 22 Jan. 2020, www.chinalawinsight.com/2020/01/articles/intellectual-property/an-ip-roadmap-for-phase-one-sino-us-economic-and-trade-agreement/.
33 Xiaoxia, Zhang, et al. “浅析第一阶段中美经贸协议中与知识产权相关的规定.” Lexology, King & Wood Mallesons, 20 Jan. 2020.
34 Yin, Cao. “Foreign IP Disputes on the Increase.” China Daily, 26 Apr. 2016, www.chinadaily.com.cn/china/2016-04/26/content_24839329.htm.
35 Zhao, Bing. “Latest Statistics Show Foreign Firms Win in High Numbers at Beijing IP Court.” IAM Media, 24 Oct. 2019, www.iam-media.com/copyright/latest-statistics-show-foreign-firms-win-high-numbers-beijing-ip-court.
36 Lee, Yen Nee. “5 Charts Show How Protests in Hong Kong Have Affected the City’s Economy and Stock Market.” CNBC, 25 Dec. 2019, www.cnbc.com/2019/12/26/hong-kong-protests-impact-on-economy-stock-market-in-five-charts.html.
37 Huang, Eustance. “Ping An Says the Coronavirus Will Impact China’s Economy but Has Also Been ‘Helpful’ for Its Business.” CNBC, 21 Feb. 2020, www.cnbc.com/2020/02/21/ping-an-on-coronavirus-impact-on-china-economy-and-business.html.
38 Areddy, James T., and Liza Lin. “U.S. Sets Second Evacuation of Americans From China.” The Wall Street Journal, Dow Jones & Company, 5 Feb. 2020, www.wsj.com/articles/u-s-sets-second-evacuation-of-americans-from-china-11580837124.


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