Slouching Towards Innovation – A Survey of the Surveys on China’s IP Environment

Here is a summary of the business surveys on IP protection in China, drawn from the European Chamber of Commerce in China, Business Confidence Survey 2015 (June, 2015), the US China Business Councils’ 2015 USCBC China Business Environment Member Survey (Sept. 2015), the American Chamber of Commerce 2016 Business Climate Survey (“Amcham China” Report, Jan. 2016), and Amcham Shanghai’s 2016 China Business Report (“Amcham Shanghai” Report, Jan. 2016), and others.

IP Issues a Core Concern

While IP issues are less dominant than in recent years, businesses report that IP is still critical to them. When Amcham China respondents in all sectors addressed what they considered their competitive advantage versus Chinese domestic entities, three of their top four perceived advantages were IP-related: Brands (74%), Technology & IP (63%), and Development and Innovation (59%). USCBC respondents listed IP concerns in a number four priority slot, having dropped from number 2 in 2014. However IP issues have averaged as a number 4.5 priority over the past ten years, so the drop is not that significant. According to Amcham Shanghai’s survey, 49% of respondents believed that lack of IPR protection and enforcement constrains their investment in innovation and R&D in China.

Still different IP concerns vary in their impact on different businesses. For example, tech companies in the USCBC survey noted the following IP-related issues in their top 10 challenges: Innovation policies (number 2), IPR enforcement (number 5), cybersecurity (number 6), government procurement policies (number 7), standards and conformity assessment (number 8) and antitrust/antimonopoly law (number 10).

IPR Enforcement is Improving

On the brighter side, 91% of respondents of the Amcham survey indicated that IPR enforcement had improved over the past five years, a view that was generally shared by USCBC respondents (38% reported some improvement over the past year).

USCBC’s survey addressed the most viable options for IP enforcement: administrative enforcement had a slight edge in terms of viability in some or most cases (78%), followed by civil cases (70%) and criminal courts (57%).

The data also suggests that trade secrets will be of continuing concern. Amcham China respondents were least satisfied with trade secrets legislation and enforcement (45/40%).  Amcham China respondents were most satisfied with patent legislation and patent enforcement (66%/54%), followed by trademarks (62%/51%) and copyrights (57%/48%). USCBC respondents similarly rated trade secrets as their top area of concern (32%) followed by trademarks (28%), patents (22%), and copyright (9%).

Of particular importance for trade secret protection are challenges noted in responses to surveys in attracting and retaining talent.   According to the Amcham survey, among the principal challenges in attracting the right talent were competition from local businesses (45%), and competition from other foreign businesses (34%). Data security and cybersecurity were also identified as concerns by many surveys.

China’s Efforts to Innovate Leads to More Foreign R&D in China

Innovating in China has clearly become a priority for the foreign business community. The EU Chamber notes that China R&D centers are increasingly achieving global levels of innovation, although a large percentage (42%) are primarily focused on product localization. According to USCBC, about 43% of large member companies had established an R&D center.

European companies viewed innovation as one of five most critical drivers needed to move the Chinese economy up the value chain. The USCBC report notes that more than 9 out of 10 US companies believe that innovation in China will be critical to their company’s future in China, with 40% of the companies reporting that that half their profits came from products designed, developed or tailored to local requirements (an increase from 32% last year). Companies prioritizing investment in R&D, according to the Amcham Shanghai survey, were in hardware, software and services (81%), automotive (65%), industrial manufacturing (55%) and health care (35%).

Continuing Concerns about Technology Transfer

USCBC reported that 59% of respondents expressed concern about transferring technology to China. Twenty three percent of USCBC respondents advised that their company had been asked to transfer technology to China and that central or local governments had requested the technology transfer 60% percent of the time. Concerns about technology transfer included maintaining protection of the proprietary information during certification/ approval (83%), protection of IP (75%), enforcing license agreements (51%) and the government dictating or influencing licensing negotiations (32%). Nonetheless, according to USCBC, technology transfer concerns fell out of the top twenty this year, to number 23 out of 30. However the USCBC noted that the companies impacted by this issue felt it “very acutely”.

Innovation Policies Not All Positive

Thirty two percent of technology and other R&D Intensive industries that responded to the Amcham China survey indicated that China’s increasing capability for innovation presented an important opportunity for their business. However, as the preceding data suggests, not all of China’s innovation and IP policies have been perceived to be positive by foreign industry. Fifty-five percent of USCBC tech companies stated that China’s innovation promotion policies had a significant negative impact on sales to date, or had a significant negative impact on sales or operation. Also of note was that 75% of USCBC respondents indicated that they limited the products that they introduced into China because of IPR concerns. In addition, 37% of USCBC respondents indicated that China’s level of IPR enforcement limited R&D activities in China, as well as limited products co-manufactured or licensed in China. The Amcham China survey also noted that 83% of technology R&D intensive companies feel less welcome than before.

Aggressive Antimonopoly Enforcement of Concern to Foreign Companies

Eighty percent of USCBC respondents were concerned about antimonopoly law enforcement in China. Among the key substantive issues were: (a) lack of transparency in AML cases (55%), excessive focus on foreign companies (50%), lack of clarity on key criteria and definitions (49%), lack of due process (29%), and inability to have legal counsel (26%).

Rule of Law: Another Overarching Concern

One common thread amongst antimonopoly and IP concerns was rule of law. The EU Chamber Report contains the most information on desires of foreign companies for the Chinese government to improve the rule of law, with 39% of European businesses rating the Chinese government’s efforts in 2015 as “below expectations”, and rule of law perceived as the main driver of future economic growth by 78% of respondents. For Amcham China, 57% of respondents believed that inconsistent regulatory interpretation and unclear laws were their top business challenge in China. Legal reforms were identified as the top reform priority by Amcham Shanghai members.  USCBC respondents rated uneven enforcement of Chinese laws, as their number nine challenge, however companies reported that the problems are persistent and worsened in the last year.

Putting China in Context: Not All That Patents Is Innovative

There are other reports that have been released have recently been released that also place China in a comparative perspective. The Information Technology & Innovation Forum, for example, recently issued a report Contributors and Detractors: Ranking Countries’ Impact on Global Innovation, which ranked 56 nations on how much they contribute or detract from global innovation. China ranked 44, and was classified as an “innovation mercantilist” that “significantly balkanize[s] both global production and consumption markets” and has “generally weaker protection” for intellectual property than the global norm. However, China does perform better than “innovation follower” countries in contributing to the global innovation ecosystem, largely due to investments in STEM fields and high numbers of graduates in those areas. China ranked twenty eight out of fifty six in terms of contributions, and was among the top five detractors from global innovation, according to this report (behind Thailand but ahead of India, Argentina and Russia).

Thomson Reuters in its China’s IQ (Innovation Quotient) Report (December 2015) analyzed China patent filings. The IQ Report noted that citations of Chinese patents had increased. In data processing patents, China had forward citation data of 1.17 This was much less than the United States (6.72), but comparable to Japan (1.82), and Europe (1.31), and better than South Korea (.78). Interestingly, another Thomson Reuters report on the top 100 innovators (2015), declined to include a single Chinese company. Huawei did appear as a top innovator in 2014. Its antitrust adversary, InterDigital, was considered a top innovator in 2015.

Policy Outcomes

The USCBC’s Board of Directors recently outlined its priorities for the year, which included: strengthening IP enforcement, including deterrent civil and criminal remedies; improving enforcement against online infringements; strengthening trade secret protections; harmonize patent examination practices; reforming China’s system of innovation incentives (HNTE incentives/service inventions). Other USCBC recommendations in transparency, antimonopoly law, and ecommerce also have IP-related implications.

Summary

There may be a number of reasons for the repetition in these reports, including a common core of concerns, a focus on issues in the media and bilateral relations, and common membership among the organizations. The location and membership of each organization can still result in different perceptions. Moreover, certain rights, such as copyrights, tend to be of core concern to fewer industries some of which, such as the entertainment sector, may be less extensively invested in China. As such, the surveys reflect concerns and priorities, and may not necessarily represent researched approaches to resolving specific problems of concern to all American industries. The surveys may also not align well with China’s own surveys such as on software piracy, where China has offered a counter-survey that counts other incidences of piracy, or on satisfaction with China’s IP system. As for satisfaction at least, it is all subjective. In some cases, the survey data likely aligns well with other factual or empirical data, such as licensing revenues, damages in antimonopoly law cases, IP enforcement activity, etc.

Here’s what this survey of the surveys suggests to me:

  1. China’s IP laws are generally good and its enforcement is improving but still problematic.
  2. China has become deeply interested in patents and innovation, which will present important strategic opportunities over time.
  3. There remains a low level of confidence in trade secret protection in China, which can be a significant impediment to China’s innovative ecosystem.
  4. China’s innovation environment has become increasingly complex and nationalistic, leaving many foreign tech companies with a sense that they are less welcome.
  5. Reforms in the legal system and antitrust enforcement are a high priority.

The US Chamber will be issuing its latest International IP Index February 10 in Washington, DC. Let’s see how China stacks up there…

Any corrections or comments? Something I have missed? Please write us!

 

The Scotch Whisky Victory for Trademarks

On September 17, the Scotch Whisky Association announced a significant anti-counterfeiting victory in the Anqing Intermediate Court in Anhui Province.  The case is Scotch Whisky  Association vs. Anhui Guangyu Packaging Company Ltd., Wang Xuming and others (Trademark Infringement, First Instance) ,” 苏格兰威士忌协会与安徽广宇包装科技有限公司、王旭明等侵害商标权纠纷一审民事判决书.”(August 31, 2015) ((2015)宜民三初字第00024号).  The case is available on line at the Chinese court website.

This case appears to have involved the unauthorized printing of Scotch Whiskey packaging in the form of bottle caps, some of which appears to have been made available for sale on line through Alibaba.com.  The court awarded damages of 100,00 RMB, and injunctive relief.  The court found that the SWA had difficulties proving damages and therefor awarded what appears to be statutory damages, plus costs of 11,820 RMB.

Damages may seem quite low, but according to the CIELA database, the average damages for the eight trademark infringement cases in the food and beverage area that they collected in Anhui Province (where SWA likely had to bring the case) was 6,000 RMB.

The case has been picked up by the media.  One article in the spirits sector noted that it was the second victory for Scotch Whisky, in addition to some additional recognition of its GI in Africa. Another article linked the victory to the Scotch Whiskey’s “historical granting” of a “Geographical Indication in 2010”which is “fully backed by China’s government through the GI”.

Curiously, both of these articles refer, directly or indirectly, to the sui generis GI system which is administrated by AQSIQ and the Ministry of Agriculture, and failed to mention the role of trademark protection.  This might lead one to suspect that the protection arose under China’s sui generis GI system,which the SWA has been actively promoting. However, China’s trademark system is much more fully developed in enforcement by comparison to the sui generis GI system, which lacks the full panoply of TRIPS-mandated civil, criminal and border remedies that attach to trademarks as intellectual property that may be granted to, and owned and protected by individuals and enterprises.

As I read the civil decision, the basis for the civil enforcement action was the 2008 collective mark obtained by the Scotch Whisky Association in Trademark Class 33  (no. 5915031  for “ScotchWhisky”).  Information on sui generis GI protection was, however, accepted as evidence of proof of the fame of the mark, although it had been introduced for its distinctiveness (evidentiary group 2, in the court’s decision).

The court decision did not analyze in great detail issues such as the application of the newly revised trademark law, the role of statutory damages and proof of injury,  and the role of the bottle caps in the export trade.  A principal of the company,l Wang Xuming was, however, held jointly liable with the packaging company for paying damages.   The caps were, according to one media report, used to produce counterfeit whiskey for sale in Burma.

Information presented on police actions involving these defendants in prior years were accepted into evidence.  According to the English press reports, additional police investigations are also possible.

Altogether, this is a well-deserved victory for the SWA.  In addition to vindicating the role of the trademark enforcement system, the case showed the impact of such hot issues as the efforts to better coordinate civil, criminal and administrative enforcement actions, address on-line sales,  consider the impact of the new trademark law on pending cases, address transnational sales, successfully bring a case in the home court of a counterfeiter, and address those who contribute to the chain of counterfeit production.

Congratulations to the SWA and its team!

Note: Please send any corrections to the author (chinaipr@yahoo.com).  This article consists of the author’s personal opinion only.

Chinese Customs’ Annual Report and What It Suggest for Corporate IP Strategies

Chinese Customs published its 2014 Report on the Situation for IP Protection last month. The report summarizes the current situation for Customs protection of IP in China as follows:

  1. The vast majority of seizures were initiated on an ex officio basis by customs (98% or higher)
  2. Nearly 97% of the seizures by quantity involved infringement of trademark rights. Chinese Customs can also seize goods that infringe copyright and patents. The low level of copyright seizures likely reflects the increased incidence of on-line infringement.
  1. About 96.5% of the product seizures were on exports.
  2. Consumer Goods Dominate Seizures. Amongst suspected infringing goods, tobacco products, light industry, cosmetics, clothing, etc. dominated. There was also an adjustment in product mix compared to last year, with a decline in hardware goods, pharmaceutical, hats, telecommunication equipment, toys, and food products. Note that 44 percent of the seizures were tobacco related. The next largest single category was cosmetics and personal care products. Less than one percent was pharma products.
  3. Postal and sea shipments are principal channels. Postal shipments accounted for 80.2% of seizures, with an increase of 33% from past year. 96.3 percent of the seizures were made involving shipments by sea.
  4. Greater Diversity in Destinations of Seizures. Chinese Customs seized goods involving 153 countries and territories. Amongst these, the Middle East and Latin American had significant increases.   By value the US was the second largest destination of seizures after Hong Kong. However many third world countries in Africa and elsewhere were in the top ten by value, quantity of products, and/or numbers of shipments. Brazil for example was number one for seized shipments.
  5. Seizure Activities Are Dispersed, but also Concentrated in Several Ports.  Shenzhen, Shanghai, Ningbo and Hangzhou regions dominate by value of seized shipments.

Based on this report, here’s my takeaway of steps US rights holders can take to improve cooperation with Chinese Customs:

A) Train Chinese Customs on product identification. As most of Chinese customs seizures are ex officio, the report underscores the importance of advising Chinese customs on how to identify infringing products. Of course, the prerequisite to these activities is recording your rights with Chinese Customs.

B)  Work with on-line e-tailers. There are an increasing number of seizures coming from inland ports, where goods are likely being booked on line. Moreover, goods are being shipped to a diverse number of ports. The report suggests the importance of working with on-line e-tailers, like Alibaba, to take down shipments.

C) Leverage cooperative agreements. Chinese Customs has numerous agreements with foreign countries, and has also been involved in several agreements to improve domestic enforcement, such as between Chinese customs and public security (police) authorities. Leveraging these cooperative agreements may help facilitate enforcement activity.

D) Use enforcement resources strategically. Clearly some Chinese ports are more active than others. In addition, some products seem to be attracting more attention than others. Although seizures of counterfeit pharmaceuticals, auto parts and other health and safety items are relatively low, I believe there is still room to encourage Customs to focus on items where public health or safety are affected.