IP Tax Management in China – Navigating the Thicket in Light of Global Tax Reforms

This guest posting from KPMG looks at the evolving Chinese tax environment for multinational enterprise (MNE) management of IP tax issues.   KPMG China has prepared a detailed overview of these issues, alongside setting out how KPMG China tax service lines may assist.  Read more here.  KPMG also actively participated in the recent programs PTO conducted on licensing IP issues in China by providing a background to the changing tax environment.  The first such program is described here.

A radically changed China tax environment for IP management by MNEs

Recent years have seen far-reaching changes to the Chinese tax law and administrative treatment of foreign MNEs operating in China. Most notably in the field of transfer pricing (TP) but also in other areas of tax law, the Chinese tax authorities have progressively taken a far more assertive approach to taxing MNEs.  Underlying this is a perception amongst the tax authorities that insufficient Chinese tax is being imposed, as the authorities consider that underappreciated value is being generated by MNEs’ Chinese operations, driven by special attributes of the Chinese business environment.  This has occurred against a backdrop of the G20/OECD Base Erosion and Profit Shifting (BEPS) global tax reform initiative, which commenced in summer 2013, and which is directed, in broadly the same manner as the Chinese tax authorities’ initiatives, at ensuring the alignment of taxation with the locations of economic activity and value creation.  The BEPS project is being leveraged by the Chinese tax authorities to bolster and support their own efforts.  In tandem with the planned finalization of the two-year BEPS project work in October 2015, the Chinese tax authorities are set to release their own guidance in the near future, which will have significant implications for MNEs.

These trends and developments are having, and will continue to have, an outsized impact on the arrangements under which MNEs manage how their Intellectual Property (IP) is used in relation to their Chinese operations.  IP taxation has long constituted one of the most challenging areas of China tax management and planning, with a plethora of tax issues arising in relation to the conduct of IP development in China, the licensing of technology cross-border into China, and the co-ordination of MNE global IP portfolios through IP management hubs.  The rapid development of the Chinese economy and its relationship to the global economy has, by changing the ways in which MNEs deploy their IP in China, been adding to this tax complexity.

In this regard, the steady increase in the sophistication of China’s economy has been matched by a move away from low cost production in China. There has been a move towards the seizing, by China, of the higher value-added, innovative stages of activity within MNE global value chains for production of high technology products.  In parallel, the rapid expansion of the Chinese market has led to a substantial ramp up, by MNEs, of their marketing and promotion activities in China, alongside the customization of products and brands to meet the needs of the Chinese customer base. These fundamental business conduct changes have led the Chinese tax authorities to take the position that historic approaches to taxing MNE activity in China are now invalidated, and this is compounding the already significant pre-existing challenges of China IP tax management.

China TP challenges and likely greater future reliance on innovation tax incentives

  • China has reacted to the shift in MNE China activity towards penetration of the China market and towards the conduct of higher value-added activity in China by using novel TP concepts (differing from those used in many developed countries) to require that more profit from MNE global value chains be booked and taxed in MNE Chinese subsidiaries.  These concepts include the notions of ‘market premium’ and ‘cost savings’ (so-called ‘Location Specific Advantages’), as well as the notion that, separate of any consideration of the legal ownership of IP, Chinese subsidiaries of a foreign MNE may have developed and possess (in an economic sense) ‘Local Market Intangibles’
  • The emerging OECD BEPS TP guidance (while, in principle, of uniform application across countries) looks set to be adopted by China in a manner which reinforces the current Chinese TP trends and preserves the unique Chinese TP concepts.  Ultimately this may largely put an end to the historic MNE practice of using ‘limited risk’ manufacturing, distribution and contract R&D arrangements in China, which had the effect of limiting profits booked to China and consequent China Corporate Income Tax (CIT)
  • The shift towards more MNE global value chain profits being taxed in China is also anticipated to be bolstered by heightened enforcement of the rules under which foreign MNEs are treated as having a ‘tax presence’ in China.  This expected change, following the OECD BEPS work on ‘permanent establishment’ (PE), may see many offshore sales hubs, currently used to sell into China, restructured as onshore buy-sell subsidiaries
  • The likely need, going forward, to book more profits ‘onshore’ into China subsidiaries, and the continued divergence in Chinese and foreign TP practices, may give rise to a greater risk of double taxation. It might be noted, in this regard, that upcoming enhancements to the TP documentation available to the Chinese tax authorities will provide them with a radically enhanced overview of the allocation of MNE profits across jurisdictions. It may emerge that the focus of MNE TP work in future will be less on limiting MNE profit attributions to given jurisdictions and more on ensuring that all countries, in which a MNE operates, accept a ‘unified narrative’ on why profit has been allocated as it has throughout the MNE’s global value chain.  Achieving agreement on such unified narrative is likely to require greater use of bilateral/multilateral Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAP) in future
  • Against this backdrop of increased profits booked to China from MNE value chains, the focus of China tax management efforts may shift from limiting ‘tax contact with’ and ‘tax presence in’ China to ensuring that the greater quantum of profits allocated to China may benefit from the best effective tax rate which can be achieved.  As such the various Chinese innovation tax incentives, such as the High and New Technology Enterprise Incentive (HNTE), accelerated depreciation, and the R&D super deduction, are likely to become significantly more sought after than may have been the case in the past, when the difficulties of reconciling MNE global TP strategies to obtaining such incentives may have led some MNEs to shy away from HNTE.  At the same time, the very shift towards MNEs conducting more innovative, value-adding activity on the ground in China, which spurred the change described above in the tax authorities’ TP approach, may equally put MNEs within reach of obtaining the innovation tax incentives in the first instance
  • This being said, MNEs need to be aware of the challenges involved in obtaining Chinese innovation tax incentives.  The HNTE incentive requirements in particular can be quite challenging given the ambiguity concerning when an applicant might be viewed as owning ‘core IP’ and there can also be difficulties in maintaining the R&D expenditure-to-turnover ratio when enterprise sales are increasing.  Furthermore, the variability across China in the application of the qualification criteria by local tax authorities, and the heightened tax audit scrutiny of HNTE applied by tax authorities in recent times, also need to be factored into planning.  

Managing the ‘tax friction’ arising from flows of technology into China

  • The seizing, by China, of the higher value-added, innovative stages of activity within MNE global value chains for production of high technology products happens at a time when China’s domestic market for technology transfer is becoming both more active and more formalized, as Chinese enterprises become vectors of innovation.  Technology transfer, and the licensing arrangements that enable it, are increasing between domestic firms, outwards from China to foreign enterprises, as well as inwards from MNEs to their China subsidiaries and China third parties.
  • For foreign MNEs this means that the existing flow of foreign technology, foreign know-how, and foreign expert services into China (much of it being inputs into Chinese high-tech exports) is set to steadily expand.  This will further increase the need to be aware of and manage effectively the related ‘tax friction’ on the licensing of technology into China and related service fee payments, including CIT withholding tax (WHT) and TP issues, as well as Customs Duty and VAT issues.

.Global management of MNE IP portfolios

Taxchart

  • The modern MNE increasingly draws its firm value from the complex portfolio of IP assets, ranged across the globe, which it has amassed.  Many MNEs have seen a strategic value to concentrating the coordination of IP development, protection and deployment in a single IP management centre, from which IP is then licensed to MNE operating subsidiaries around the world
  • Various jurisdictions, particularly in the EU, have provided for ‘patent’ or ‘innovation’ box regimes allowing for low effective taxation of IP license income received from group companies.  Incentivised income streams range from patent royalties, to license income from unpatented know-how and software, and even so far as income from marketing intangibles such as brand rights/trademarks.  Royalties paid from China, tax deductible at 25% where the standard CIT rate applies, may benefit from a lower level of taxation on receipt by such MNE IP management companies.  Tax treaty reductions for the Chinese WHT on royalties may also be available
  • This being said, the recent G20/OECD BEPS agreement on when such IP regimes constitute a ‘harmful tax practice’ will see such regimes be remoulded to only provide reduced taxation where substantial IP development work is conducted/coordinated through the IP management company. This may mean that many MNEs must decide whether commercial and strategic imperatives necessitate the retention of such companies (which may require the injection of additional ‘commercial substance’) or whether such entities are better dissolved and removed from the MNE structure
  • For MNE groups using such IP holding arrangements in connection with their China IP management, these must also reckon with the Chinese anti-treaty abuse rules and specific targeted TP provisions
  • China’s 2009 domestic law rules limit the benefit of treaty WHT reductions solely to those foreign companies with significant staff, premises and other business operations in their country of tax residence.  These rules are now being finessed to bring them more in line with the trend of BEPS developments. In this regard, China is relying more on treaty-based anti-abuse rules.  Furthermore, a new system of post-treaty relief, tax authority ‘follow up procedures’, based on the general anti-avoidance rules (GAAR), is set to be rolled out in place of the old treaty relief pre-approval system, potentially expanding access to treaty WHT relief, but also creating new administrative challenges
  • On the TP side, new March 2015 rules deny completely deductions  for royalty and service payments to low function entities overseas, in particular hitting royalties where the IP holding company did not ‘contribute’ to IP development
  • Use of IP management hubs, conforming to the new BEPS requirements, for China IP management should still be possible in future, but much greater preparation and planning may be necessary than was the case in the past.
Obviously, for company-specific tax advice, please consult tax professionals such as KPMG.

This article prepared by Conrad Turley at KPMGThanks again to KPMG for this guest posting!

Second US-China IPR Cooperation Dialogue Report Released

Dialogue Photo

The 2014-15 US – China IP Cooperation Dialogue report has been just released by the US Chamber of Commerce.  The  Chinese title: 中美知识产权学者对话纪要. Here is a link to last year’s report for comparison.

The report was chaired by former PTO Director Dave Kappos on the US side, and Dean Liu Chuntian of Renmin U. on the Chinese side.  Former judges Rader and Cheng Yongshun were also were part of the team.  At our various meetings we hosted former SIPO Commissioner Tian Lipu, NCA Vice Commissioner Yan Xiaohong, senior judges from the IP courts and Supreme People’s Courts, trademark officials, academics and others.  I was part of the U.S. side for a second year, and was joined by Tony Chen of Jones Day and Eric Priest of the University of Oregon.

The report looks at several issues: IP and innovation in the technical sector; IP and innovation in the pharmaceutical sector;  judicial protection of IP; trade secrets protection; and copyright enforcement.  The following are some of the baskets of proposals agreed to by both sides (more granular detail is found in the report itself):

  • Use quality instead of quantity as the measure of innovation.
  • Explore the possibility that a judicial interpretation be issued to ensure no injunctive threat is available until utility model patents have been substantively examined for validity.
  • Adopt a more balanced and market-driven approach to promote innovation by entrepreneurs, inventors and universities.
  • Improve the patent linkage system, and provide effective protection for clinical data of new chemical entities by using the ongoing effort to amend the Patent Law and the Drug Administration Law as an opportunity for change.
  • Initiate a special study on establishing a single IP appellate court to unify China’s judicial adjudication of IP.
  • Improve the guiding case system with respect to procedures for reviewing, selecting and releasing cases and support better adoption of case law information.
  • Recommend research on the possibility to have a stand-alone and uniform trade secret law, in order to effectively maintain a fair market competition environment.
  • Address new problems created by changing technology and business models; develop a good ecosystem for innovation by the interaction of law and the marketplace; and provide more market opportunities for copyright holders while dealing with piracy.

I have strongly supported the Dialogue since its inception, when I was at Fordham Law School, in order to provide a de-politicized, expert and wide ranging engagement on Chinese IP issues.  If last year’s report is an indication of how this year’s report will be received, it will likely be widely circulated inside and outside the Chinese government.

open dialogue meeting with Amb. Baucus, US and Chinese colleagues in Beijing in early 2016.

Photos above by Mark Cohen.  Top photo at Hainan Island meeting, bottom photo in Beijing at public meeting with U.S. Amb. Max Baucus, US and Chinese guests and dialogue experts (both photos early 2015).

UC Berkeley and FCBA Programs Upcoming in October

Two of my favorite China IP programs will be taking place this October.

From October 8-9, UC Berkeley will be hosting the 4th Annual US-China IP Conference: Best Practices for Innovation and Creativity(“创新驱动发展的最佳实践”)with Renmin University and Loyola University (Los Angeles) in Berkeley, California. Here’s the link for further information.  Here’s my blog on the program last year.

Registration is also now open for the Federal Circuit Bar Association’s program in Shanghai October 18-19.  Here’s the link to the program site.  The program is co-sponsored by the FCBA, East China University of Political  Science  and Law and the Intellectual Property Law Association of China.   The title for this year’s event is “ International Forum on Intellectual Property and Trade 2015 Adjudication, Administration, and Innovation.”  Here’s a link that describes, in part, the last major FCBA program in China and another link to an official USPTO blog about the significant of that event.

I hope to be speaking at both events.

Developments in Online Civil Copyright Enforcement in China: NCAC’s Analysis

The National Copyright Administration of China (NCAC), in its 2014 Annual Report Online Copyright Protection in China (2014年中国网络版权保护年度报告), analyzed published opinions on online civil copyright cases involving the “right of transmission to the public” (making available right)  drawing on three public databases (the Supreme People’s Court’s “中国知识产权裁判文书网” 、 “中国裁判文书网” ,and Peking University’s “法宝数据”).

There were 1650 reported civil opinions on online infringement in 2014, an increase of 18.8 percent from last year. Audiovisual cases occupied first place, at 44.5 percent of these opinions.  Literary works constituted 390 cases, or 23.6 percent. This was an increase of six times over last year. Graphical works were 363 cases, a 3.3 times increase. Video games totaled 56 cases and music was last of these major categories with 20 cases, or about 1 percent, a decrease from last year of 80 percent. In total these categories constituted 98 percent of reported cases.

The report identifies that were 86 cases involving 11 of the 20 websites that were subject to supervision by China’s copyright administrative authority (NCAC), and were 5.2% of the total cases.  These cases were a declining percentage of online infringement cases compared to past year.  It appears that NCA is using this data to show the effectiveness of its administrative mechanisms.

The decline in music cases, in my estimation, likely reflects the great difficulty the music industry faces.  Music is a priority area for NCA this year.  Improvements in administrative IP protection planned at the beginning of 2015, including a recently launched campaign,  will also hopefully reduce the level of infringement by key internet companies and/or support more effective civil enforcement in this sector.

Plaintiffs in online copyright cases were mostly enterprises, and defendants were mostly internet companies. Individuals were a small number of the plaintiffs (about 6.4 percent), which was about the same as last year. Online media companies were principal defendants (87%).  The remaining 13 percent consisted of traditional media companies, including traditional publishers, newspapers, motion picture studios, and television stations.

Civil online cases were principally heard in Guangdong, Beijing and Zhejiang with about 70 percent of the cases.  Zhejiang jumped from fifth place last year to third place.   Fujian also showed a significant increase.  A large share of the audiovisual infringement cases in Guangdong involved Kuaibo (www.qvod.com).  The regional distribution of the cases also shows that there was a drop in audiovisual cases in Beijing, but an increase in other areas such as written works.  Most of the plaintiffs in Beijing were well known companies in such fields as motion pictures, cultural product distribution, and internet technologies, which in NCAC’s view could suggest a maturing of the Beijing environment towards protecting a greater variety of content owners.

The increase in cases in Zhejiang in online cases is due to the rapid increase in online industries in that province, which also has consequences for trademark counterfeiting. As I recently reported, online counterfeiting has also become a priority for China Customs in China, with Zhejiang also figuring prominently in seizures of exports at such ports as Hangzhou and Ningbo.

The report also notes that there were 30 online criminal copyright cases as well, and that fines and punishment had increased, with one fourth of the cases involving fines over 500,000 RMB.

Note that I tried to compare this data with the data that is available on www.ciela.cn.  Unfortunately the data sets do not match well.  CIELA analyzes data by cities and provides more granular detail on proceedings and outcomes (length of time, damages, “win” rates, etc.).  Moreover, CIELA does not breakout on-line copyright cases.  I was thus unable to reliably further validate NCA’s observations in this report.

The NCAC report was released on April 22, 2015.  However, with only 219 hits since it was placed on line as of today, it remains a “sleeper” of a report, notwithstanding the dramatic growth in online copyright issues in China.

Vringo vs ZTE: What the NDA Dispute in New York Suggests For Licensing Strategies

As many of my readers may know, I was not a fan of the Chinese courts’ decisions in Huawei vs. Interdigital in Shenzhen and Guangdong, which raised a number of process and substantive concerns.  A key question raised in that case was whether “the licensee has been afforded a fair opportunity to take a license.  If the licensee has been afforded an opportunity and declines to take a license, then it is my personal opinion that the licensee should not take the “shield” of a FRAND commitment, and turn it into a sword that weakens the licensors ability to license on fair terms.”    The decisions in those cases plus the Qualcomm investigation has also raised many substantive and procedural concerns, including concerns regarding how to license IP within China in an environment that is increasingly seen as nationalistic, whether foreigners have been singled out, and counter-strategies to deal with Chinese companies inclined to seek protection under China’s antitrust laws.

Prof. Epstein expressed similar concerns in a policy brief  and a Forbes Magazine article earlier this year: “Far from being a device to promote competition, the AML is used to harass foreign firms that provide much needed competition to China’s state-protected agencies….The antitrust laws should not be applied so as to single out patents or any other intellectual property rights for special treatment; all property deployed in the marketplace should be treated equally under the competition laws.”

Two interesting decisions from Judge Kaplan in the Southern District of New York in the matter of Vringo vs ZTE Corp (14-CV-4988) highlight strategic responses to this perception of an aggressive posture of the Chinese courts and administrative enforcement authorities on alleged abusive licensing practices.

By way of background, Vringo has raised money from venture capital firms and is a licensor of telecomm patents, including patents formerly held by Nokia Corporation and Alcatel-Lucent.  From the perspective of a Chinese licensee, of which ZTE may be typical, Vringo is engaged in “abuses of intellectual property” as a “non-practicing entity” that uses “the threat of litigation and injunction to support [its] demands for unfair licensing fees.”  Vringo claims that patents it is asserting are standards essential.  Moreover, it has brought litigation in such places as Australia, Brazil,  France,  Germany,  India,  Malaysia,  the Netherlands, Romania, Spain, and the United Kingdom against ZTE for their alleged infringement.

In a June 3, 2015 decision by Judge Kaplan of the Southern District of New York regarding a July 2014 action filed by Vringo for breach of a Non-Disclosure Agreement (NDA) related to possible settlement of these litigations and any other disputes between them, Judge Kaplan issued a preliminary injunction to enjoin ZTE from further disclosing information subject to the NDA in antitrust matters in the EC and China brought by ZTE. The NDA specifically required that confidential information disclosed could not be used in “any existing or future judicial or arbitration proceedings” or “for [their] commercial advantage, dispute advantage, or any other purpose.”

Judge Kaplan’s decisions are suggestive of possible strategies for companies concerned about entering into settlement discussions without increasing Chinese AML litigation risks through well drafted NDA’s. Here is what I derive:

  1. Insist on Appropriate Governing Law, Know Chinese Legal Arguments and Make Sure Your NDA Has A Close Nexus to the Jurisdiction. Judge Kaplan applied New York law, and rejected ZTE’s arguments that Chinese law should govern the NDA and that that ZTE was required to provide the information to Chinese authorities.   Based on an affidavit submitted by my friend Doug Clark, a Hong Kong barrister with considerable Chinese patent experience, Judge Kaplan characterized ZTE’s assertions that it needed to disclose confidential information, as “nothing more than gamesmanship.”  Also of dispositive importance was that Vringo maintains its principal place of business in New York and sought protection under its laws when entering into the NDA.  ZTE voluntarily consented to New York law knowing this background.
  2.  Enter Into Settlement Discussions To Support Resolving Resolve Litigation. Judge Kaplan also rejected ZTE’s argument that the NDA is unenforceable under New York law as “an agreement to suppress evidence.”  The NDA was a permissible agreement between private parties about use of information in private litigation.  New York has a strong public policy encouraging settlement and “[t]here can be no doubt that the NDA was entered into for the explicit purpose of facilitating candid settlement discussions.”  Moreover, “it was entirely lawful for Vringo and ZTE to agree that they would not use information exchanged in settlement discussions in any judicial proceedings.”
  3. Make Out a Case for Irreparable Harm and Appeal to the Courts Sense of Equity. Judge Kaplan found that the irreparable harm requirement was met because “Vringo … probably would suffer injury in the future that could not be undone even if it prevails in this action.”  As with any well-crafted NDA, this NDA also contemplated the availability of equitable remedies for breach including by providing for procedures for the parties to seek a protective order from a court and by reciting, “that money damages may not be a sufficient remedy for any breach of this Agreement and that, in addition to all other remedies to which it may be entitled, the Parties will be entitled to seek equitable relief, including injunction and specific performance, for any actual or threatened breach of the provisions of this Agreement.” Judge Kaplan also noted that Vringo had not been made informed of the initiation of civil litigation or the unauthorized disclosure of its confidential information in an administrative action filed by ZTE in China, which had further compromised its position in those matters. Although he didn’t discuss the fast pace of litigation in China, which I have raised elsewhere in this blog, I am glad to see judges and rightsholders recognize how critical timing is to IP and antitrust matters involving China.

Note that Judge Kaplan did not enjoin ZTE from filing an AML action in China, but only from using the information obtained in violation of the protective order. Although the facts and circumstances are different, from the perspective of the Huawei vs InterDigital case, Judge Kaplan showed deference to the parties’ choice of law and did not take steps to interfere with decisions to file legal proceedings in other jurisdictions.  Of course, from ZTE’s perspective, it was likely being deprived of  information that it thought would be highly valuable to Chinese authorities.

In a more recent, July 24, 2015 decision, Judge Kaplan threatened sanctions against ZTE’s counsel for interposing objections that appear to be intended to delay or harass the deposition of ZTE’s counsel in what appears to have been subsequent discovery related to the above mentioned brief of the ZTE/Vringo NDA. This order appears to have been issued to support Vringo’s allegations that ZTE’s counsel “had an active role in coordinating pressure tactics by Chinese authorities in response to Vringo’s licensing demands.”   ZTE’s counsel have been ordered by Judge Kaplan to show cause why they should not be sanctioned under F.R.C.P, Rule 11.

The spate of IP-related Chinese licensing and antitrust decisions has also come at a time when the US and Chinese judicial and administrative systems are increasingly interacting, sometimes with a deepening sense of each other’s legal system or the comity that may be afforded to another court, or the different time frames that US and Chinese courts operate under.

The opinions expressed here are the author’s own academic perspectives and should not be taken as a reflection of any opinion of any client or employer, past or present, or a reflection on any market valuation of any stock or equity of any kind. Please email me with any corrections to this or any other posting, or feel free to post your own commentary on this blog.

US Chamber – China Director Position

The US Chamber of Commerce has posted a position for Director, China.  As much as 50% of the work in this position involves intellectual property and antitrust.   Please send your application to our HR dept. (all applicants must apply via the link below to be considered).

 https://www.uschamber.com/about-us/careers/apply-online-now

Job Title:

Director, China =

Job Type:

Full-Time

Location:

Washington,

 

Job Description:

Director, China
International Division

POSITION OVERVIEW:
Help develop, promote, and execute U.S. Chamber advocacy and programs relating to U.S. trade and investment policy with China.

RESPONSIBILITIES:
Work closely with a team to ensure that the Chamber actively identifies and manages key China trade and investment policy issues with a focus on competition, standards, procurement, and intellectual property; draft and present statistical and narrative analysis on trade and foreign investment trends, emphasizing member priorities; write briefings, testimony, speeches, and other communications materials; participate in the strategic development and implementation of a wide variety of China-related activities; represent the Chamber’s policy views and positions on China vis-à-vis U.S. and Chinese government officials in Washington, D.C. and Beijing; help with program development, speaker recruitment, communications, and research across the Asia Task Force; respond to China-related member company inquires on market access and operational concerns in the China market; and support the vice president and executive director to increase membership in and support for the Chamber’s China and broader Asia programs.

REQUIREMENTS:
An advanced degree and 7-10 years’ experience working with business, trade or investment issues focused on China; familiarity with PRC government practices, policies and government structure; exceptional interpersonal and communications skills, both written and oral; ability to work productively as a team player in a fast-paced environment; knowledge of the U.S. business community operating in the China marketplace; experience in a China-related business or policy context; a knowledge of the trade and investment policy formulation process tied to U.S. trade and investment with China; and a willingness to travel overseas. Chinese language skills, including the ability to read Chinese regulations, and fundraising or business development experience preferred.

Salary commensurate with experience.

For more information, please contact Megan Bartlett at x5314 at the Chamber.

Ministry of Justice Issues Report on Notarization in IP Matters

Notarization in IP Matters: Its Extensive Use and The Challenges It Poses for Foreigners

Two important but related aspects of IP litigation in China are (a) its reliance on formalities, including notarized documentation, and (2) its speed. The two go hand-in-hand, mandating that litigants prepare their cases and evidence, to the extent possible, before initiating a case. Comparing timetables in the US and China in a complex IP litigation, it is entirely possible that a decision may be rendered in the Chinese case (typically within six months of case initiation) before the US case has concluded pre-trial discovery.   Added to these challenges are the limited remedies available to victims of evidence spoliation, and the difficulty in securing digital evidence which, by its nature, may be ephemeral or easily destroyed.

Chinese domestic documents that are notarized are entitled to great deference by the court in proving relevant facts. It is not surprising then the notarization documents are common in IP litigation, and that they are frequently relied up by courts in reaching decisions. The data suggests that notarization in IP cases can be especially useful in proving infringement, in securing on-line evidence, and in supporting settlement discussions. However, at the same time excessive formalities can add additional burdens to litigants, particularly foreign litigants who often also have to have translations notarized and may needs foreign evidence to be both notarized and consularized.

According the Beijing Intellectual Property Institute and a Ministry of Justice news release, which both cite to a report prepared by the unit with the Ministry of Justice regarding notarization in IP matters, “Report on the Situation for Development of Notarization Services in IP in China” (中国 公证服务知识产权发展情况报告), from 2006 – 2013, there were 591,654 notarized IP matters in the Chinese courts. Trademarks constituted 54.18% of these matters; copyright 20.46%, patents 21.7%, and 3.66% were “other.” In 2013, notarized IP-related documents constituted only 0.93% of the total notarial work in China. Trademark matters continued to account for over 50% of the IP notarization “docket.” Notarization documents were most commonly used in IP matters involving “preservation” (51.06%). Contract and declarations were 41.73%. ownership and authorizations were 5.43%.

Data on notarization also shows differences in localities regarding the degree to which notarized documents are being used, the numbers of notarized documents per case and the types of cases in which notarized documents are being more frequently used. For example, 65.48% of IP cases in Zhejiang Province involved notarized documents. In 2009, the average case had 1.79 notarized documents. Growth in use of notarized documents to deal with on-line IP cases in Zhejiang has been especially dramatic: from 192 cases in 2007 to 933 in 2009. Indeeed, the use of notarized documents to prove digital evidence has been the subject of conferences and articles in recent years.

In Chongqing, about 65% of the IP cases heard by the High Court from January to November 2014 involved notarized documents. Other than notarizations to prove qualification of the parties, 84% of the cases involved notarization to prove infringement. About 63% of the IP cases in Chongqing were settled, and notarization was critical to establishing the evidence to support those settlements.

The Beijing Number 1 court had a different level of use of notarized documents. In 2013, thirty-five percent of the cases used notarized documents; however the notarized documents were accepted for evidence 83% of the time.  Perhaps the lower level use of notarized documents by this court is due to the high level of administrative cases, which rely up on government documentation, or alternatively it may be due to a high level of foreign cases in this court and low foreign familiarity with notarization documents.

These summaries did not address the difficulties and expense that notarization and consularization pose for foreign-related litigation in China. A USPTO report on patent enforcement in China summarized some companies’ concerns and reported as follows:

“Commenters report that U.S. rights holders find it very difficult to introduce evidence obtained in a foreign country. Chinese courts often refuse foreign evidence unless that evidence was first notarized by a notary in the foreign country where such evidence was obtained and then legalized by a Chinese embassy or consulate in that country. This results in a significant financial and time burden to U.S. rights holders. Commenters also identified unclear rules for submitting translations of evidence that is originally in a foreign language and requirements to submit evidence through live testimony. Commenters recommended that China ease its notarization and legalization requirements, including by joining the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents and/or by easing the requirement to legalize foreign evidence by, for example, eliminating the need to notarize and legalize foreign evidence. Commenters further recommended clear rules on the submission of translations of foreign-language evidence and on introducing evidence through live testimony.”