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China; Outsourcing to the Wild Wild East

This article discusses the various modes of IP protection available in China, identifies the risks typically encountered in outsourcing to Chinese contractors, and suggests how Chinese and international law can be used to protect your intellectual property in an outsourcing arrangement.

China continues to have a challenging intellectual property rights (IPR) environment, although the legal framework for protecting IPR is improving. China is a contracting member state of several key international conventions that tend to strengthen and harmonize its intellectual property laws. Namely, China is a member of the Patent Cooperation Treaty (PCT), and Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement. [1] Furthermore, on October 1, 2009 the third amended Chinese patent act went into force, which further strengthened Chinese IPR. [2] However, enforcement remains an ongoing problem for several reasons including "China's reliance on administrative instead of criminal measures to combat IPR infringements, corruption and local protectionism at the provincial levels, [and] limited resources and training available to enforcement officials." [3]

Available Forms of IP Protection
1. Patents. Three types of patents are available under Chinese law: (1) a Chinese "invention" patent, (2) a "utility model" patent, and (3) a design patent. Similar to the United States, Chinese design patents protect only ornamental elements, and therefore will not be discussed further. Chinese invention and utility model patents both cover technical subject matter, similar to a US utility patent; however, the invention patent is substantively examined while the utility model patent is merely registered without a substantive examination. Consequently, invention patents have greater capacity as an offensive or defensive business tool, but they issue much more slowly, i.e. usually three to five years. Conversely, utility model patents have less offensive or defensive capacity, but they issue much faster, i.e. usually one to one and a half years.

The State Intellectual Property Office (SIPO) is the Chinese administrative agency responsible for receiving patent applications and issuing patents, similar to the United States Patent and Trademark Office (USPTO). However, unlike the United States system, a Chinese patent is not enforceable until the patent holder additionally registers it with provincial SIPO authorities. Inasmuch as there are a large number of such authorities, registration can be cumbersome and time consuming.

The Chinese system of patent enforcement has two tiers, an administrative tier and a judicial tier.[4] The Complainant has the option of choosing either tier to enforce his patent; however, they are not equivalent. The administrative tier has the authority to seize infringing goods, impose injunctions, and levy fines. However, only the judicial tier has the authority to award damages.

2. Trade Secrets. China adopted a trade secrets statute after ratifying the TRIPs treaty, and in general it closely parallels the trade secret laws of other nations including the United States. [5] For instance, similar to U.S. law, under the Chinese statute trade secrets are defined as technical or operational information that is not known to the public, has economic potential, has practical applicability, and its secrecy is maintained by affirmative measures. Furthermore, under Chinese law a trade secret can be infringed when an individual or entity obtains and uses the trade secret of another through theft, coercion, or breach of contract. Accordingly, all outsourcing ventures should be conducted under a non-disclosure/non-compete agreement. As in U.S. practice, such agreements should be used even when the technology being shared is under patent because trade secrets may be inadvertently disclosed in the course of disclosing the technology under patent.

Selecting a mechanism for resolution of contract disputes should be done on a case by case basis, but in general the trade secret holder has the option to sue in a People's Court of competent jurisdiction, or to arbitrate either in a foreign nation or in China. Although foreign companies have prevailed in Chinese courts, it may be advantageous to remove the home field advantage by including an arbitration clause in all contracts. [6]

China has acceded to the New York Convention which governs arbitration in international matters; therefore, Chinese courts must honor arbitral awards resulting from arbitrations carried out in other member states. [7] Accordingly, you may avoid nationalist bias that may be encountered in a Chinese court by requiring arbitration outside of China using non-Chinese arbitrators.

Alternatively, under Chinese law all arbitrations taking place within the People's Republic of China must be conducted under the auspices of the China International Economic and Trade Arbitration Commission (CIETAC). [8],[9],[10] Generally, CIETAC Rules confer flexibility on the arbitration process by allowing the parties to agree on: (1) the place of arbitration and/or hearing, (2) the language of the arbitration, (3) the number of arbitrators, (4) the nationality of the arbitrators, (5) the method of selection of arbitrators, (6) the applicable law of the contract, and (7) the application of ordinary procedure or summary procedure. Although the arbitration rules set forth by CIETAC appear to provide for a fair and unbiased proceeding, it may be advantageous to require arbitration outside of China. As a final alternative, Hong Kong could provide an advantageous forum for a foreign company inasmuch as Hong Kong courts are similar in structure to that of the English courts.

3. Copyright. China offers many of the same copyright protections as western nations including the United States. The PRC is a member state of the Berne Convention for the protection of literary and artistic works, the WIPO Copyright Treaty, and the Paris Convention for the protection of industrial property among other key treaties. [11],[12],[13] Accordingly, if your company is domiciled in the United States (a member nation) it is entitled to the same legal protections in China as in any other member state.

Notably, under Chinese law registration of copyrights is voluntary. This is significant because registration results in opening up the copyrighted subject matter to the public, which may enable rather than prevent piracy. Therefore, the risk of piracy can be reduced by refraining from filing for a Chinese copyright registration unless absolutely necessary.

With regard to enforcement, proceedings can be conducted through a provincial administrative copyright agency, through civil litigation in a People's Court of competent jurisdiction, or through criminal proceedings, which may be initiated by the copyright holder or by the PRC. Additionally, arbitration clauses can be incorporated into an outsourcing agreement so that misappropriations by the contractor can be dealt with outside of the Chinese courts.

Finally, authorship must be addressed contractually. Specifically, under Chinese law each individual is the default author, and therefore owner, of any copyrightable subject matter that he creates. Thus, the outsourcing agreement must require the contractor to assign to your company the copyrights in all copyrightable material he may create. More specifically, each individual performing work on your behalf must be required to execute such a contract. [14] It is not sufficient for a representative of the contracted company to execute a blanket assignment on behalf of the corporation.

4. Trademark. China has a first-to-file trademark system, meaning the first to apply for a trademark registration gains ownership of a mark, albeit with certain exceptions for famous marks.[15] Unlike the United States System, use of a trademark does not confer common law rights. This is particularly important for foreigners marketing a brand in China because Chinese business seeking to capitalize on the goodwill of the foreign brand can rush to register the mark, and in many cases this would be perfectly legal. Accordingly, registrations should be sought well in advance of an actual product launch. Furthermore, multiple registrations are usually necessary in order to adequately protect a single brand. This is due the inherent imprecision of translating English into Chinese.

Trademarks may be registered with the State Administration for Industry and Commerce, or CTMO under its Chinese acronym.[16] The application process is similar to that of the United States inasmuch as it involves a substantive examination, publication for opposition, and finally registration. Additionally, China has a cancellation procedure whereby members of the public believing a mark to be improperly registered may petition for its removal from the register.[17] Finally, if the mark is infringed the owner may obtain redress either in the Chinese courts or through administrative proceedings carried out by provincial Administration for Industry and Commerce offices, i.e. provincial offices of the CTMO.[18]

Conclusion
Foreign companies may safely enter into outsourcing agreements with Chinese contractors provided adequate steps are taken to protect their intellectual property. Particularly, (1) all outsourcing must commence under a non-disclosure/non-compete agreement, (2) Chinese patents should be sought as appropriate for patentable subject matter and registered with the appropriate provincial authorities, (3) computer code or other copyrightable subject matter should be subject to U.S. copyright registrations, but should not necessarily be registered in China, and (4) Chinese trademark registrations should be secure well in advance of an actual product launch.

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