Intellectual Property Protection In China - Part 2

by David Carnes

Administrative Enforcement Action

Various government organs have the power to take administrative action against IP infringers:

National Copyright
Administration - The NCA is the “big gun” of the Chinese IP enforcement arsenal and is endowed with broad enforcement powers. They may order cessation of the infringing activities, confiscate illegal income, confiscate and destroy illegal copies, and impose fines.

Customs - may confiscate products that infringe trademarks, copyrights and patents.

China Patent Office - may help with patent enforcement through investigation, mediation and raids.

General Administration of Quality Supervision, Inspection and Quarantine - may get involved if product quality and health issues are at issue.

Administrative enforcement is a relatively inexpensive and efficient alternative to litigation, and it is easier to win a conviction.

Litigation

If administrative action fails to bring the desired result, litigation may have to be resorted to. Chinese courts can issue injunctions and award damages, although in practice their enforcement powers are typically weaker than in Western nations.

Criminal Prosecution

Criminal liability, including imprisonment, can be imposed for IP violations, although successful prosecutions are rare. Financial thresholds that must be met before criminal liability can be assessed can be difficult to prove. These thresholds include:

RMB50,000 turnover for knowingly selling goods with counterfeit registered trademarks

RMB50,000 turnover or RMB30,000 profits if trademarks are applied to goods without authorization

International Enforcement

Products that infringe intellectual property rights can be interdicted by customs at the destination port. It is also possible to seize the overseas assets of infringers located in China.

Technology Transfers and Licensing

Foreign investors often license technology and intellectual property such as trademarks, patents, copyrighted material and trademarks to the FIEs they invest in. A foreign party may also license technology to unaffiliated Chinese companies, such as in manufacturing or management contracts. Unlike joint venture contracts, licensing contracts can be governed by foreign law.

Proper licensing will help the foreign party control its technology and secure the payment of royalties (registration is required for the latter). Only the brave, however, will dare to license sensitive technology to an entity which the foreign party does not control.

Technology transfers are understandably less common than licensing and are usually used as part of the foreign investor’s contribution of technology to a Foreign Invested Enterprise as Registered Capital.

Technology Restrictions

Chinese foreign trade law recognizes three categories of technology: Permitted, Restricted, and Prohibited. These are contained in a catalogue that lists specific technologies.

Permitted technology is simply technology which has not been classified as Restricted or Prohibited.

Restricted technology may not be imported without a license, and is generally related to the chemical, petrochemical, biochemical, biological, and petroleum refining industries.

Prohibited Technology is technology that is considered to endanger national security, the public interest, or public morals by placing people’s lives or health at risk or destroying the environment.

Paperwork

A license for restricted technology must be approved by and registered with the Commission of Foreign Trade and Economic Cooperation (COFTEC). COFTEC will adjudicate a license application within 30 days. Licensing contracts for Restricted technology are effective only after COFTEC issues the corresponding Technology Import License.

Prohibited technology may not be brought into China.

Certain types of Permitted technology, while not subject to licensing requirements, are still subject to filing with COFTEC.

Technology transfers relating to certain major projects must be registered with and approved by the Ministry of Commerce. Trademark licenses must be filed with the China Trademark Office within three months of execution in order to remit royalties out of China. Foreign trademarks must be recorded at the China Trademark Office in order to remit royalties out of China. Trademark recordation takes about a year and a half.

Improvements

A foreign company may not prohibit a licensee from improving the licensed Technology, and these improvements become the property of the improver.

Technology as FIE Capital Contributions

Technology may be contributed as part of an FIE’s Registered Capital; however, the FIE will then become the owner of the technology and the foreign contributor will have to license the technology from the FIE if it wants to use it.

Technology contributed as capital is required to be appraised upon importation and should also be appraised by the Ministry of Commerce or the relevant local COFTEC as soon as the FIE is approved.

Since the Company Law requires 30% of the Registered Capital of an FIE to be contributed in currency (20% of the initial installment of Registered Capital), it follows that alternative forms of contribution, including technology, cannot total more than 70% and 80%, respectively.

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