‘The Role of IP when distributing your products in China’

Valentin de le Court

HFG Law Firm & IP PracticeShanghai Office

BAR INTERNATIONAL: CHINA – VOKA Mechelen3 September 2014

Introduction - IP and China: Some facts and figures

I. IP Rights When Distributing Your Products In China – Why Bother?

II. How to minimize the risks related to IP when distributing products in China? III. How to fight infringement? IV. What IP strategy to protect your business in China? Conclusion & Key Take Away

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Overview

Introduction - IP and China: Some facts and figures

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China is No 1 country for trademark applicationsAlmost two million (1.881.546) trademark applications filed in 2013 >< 114.468 CTM applications with OHIM

China is No 1 country for patent applications2.377.000 patent applications filed with SIPO in 2013 (+15.9%)825.000 Chinese invention patent applications in 2013 (+26.3%) >< 266.000 European patent applications

In 2013 No 2 and No 3 largest filers of PCT applications (international patent application system) were Chinese: Chinese telecom giants ZTE Corporation and Huawei Technologies

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IP in China: facts & figures

China is the No3 country for PCT applications in 2013

China is the most IP litigious country in the world since 2005In 2012, 98% of the IP litigation cases were purely domestic (Chinese >< Chinese)

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Some IP facts & figures (2)

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Some IP facts & figures (3)

What can we learn from these facts & figures?

1°It is possible to PROTECT your IP rights in China Complete and advanced legal system for protecting IP Widely used and accessible to foreign companies

2°It is possible to ENFORCE your IP rights in China Domestic companies make an extensive use of the IP litigation system Enforcement mechanisms are available to foreign companies

3°IPR ARE AS ESSENTIAL to the business of your Chinese competitors as they are to your business

Chinese companies are more IP aware and more IP richChina’s stake in the IP system growsNecessity for China to put in place effective IP rights protection mechanisms

I. IP RIGHTS WHEN DISTRIBUTING YOUR PRODUCTS IN CHINA –

WHY BOTHER?

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IP in China: WHY BOTHER?

Strategic importance of IP Technology, Know How, Brands is what Chinese companies and consumers are looking for

IP rights is what gives your company its competitive edge

Critical to understand the legal protection granted by each IP right

What do you have that needs protection? What protection is available by law?What can you do with IP rights?

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What to avoid when distributing your products in China? An example BE company met with potential CN distributor at trade fair in Europe

After first contact and follow-up: decide to collaborate for CN market

CN distributor pushed for three things (“It’s always like that in China”) :1. Have exclusivity2. Exclusivity for the whole Chinese territory3. Have the TM registered (CN distributor registers for the best protection

of the BE company…)

What happened? CN distributor did not push the product outside its provincial home

town

IP in China: WHY BOTHER?

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CN distributor had no capability for covering the whole country Bad sales results

BE company wanted to terminate the distribution agreement BUT No exits foreseen in the contract CN distributor warned it would sue BE company for contract breach +

TM infringement if worked with third parties

BE company tried to fight back Failed to cancel the TM (CN distributor = rightful TM owner) Had to indemnify the CN distributor for breach of contract + buy back

the trademark at maximum price

Could have been easily avoided…

IP in China: WHY BOTHER?

II. How to minimize the risks related to IP when distributing products in

China?

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II. How to minimize the risks

How to minimize the risks related to IP when distributing your products

I. Use the Chinese IP system – build an IP right portfolio

II. Protection of Trade Secrets – protect your confidential information

III. Work with the right people – know your distributor

IV. Have appropriate contracts signed – contracts do work in China

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No.1 BUILD AN IP RIGHT PORTFOLIO

Measure No.1 USE THE CHINESE IP SYSTEM - BUILD AN IP RIGHT PORTFOLIO

Securing IP protection requires to be proactive Registration Territoriality

Understand the legal protection for each IP Right Patents and Utility Models Design Patents Copyright Trademarks Protection of trade secrets

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No.1 BUILD AN IP RIGHT PORTFOLIO

Innovations in the field of TECHNOLOGYProtected by invention patents and utility models (easier and less expensive to obtain)Novelty, inventiveness, industrial applicability requirementsNeed to apply for protection (SIPO)

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No.1 BUILD AN IP RIGHT PORTFOLIO

Innovations in the field of STYLING/DESIGN Protected by design patents (easy and cheap)

Protected by copyright (no registration, recordal recommended)

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No.1 BUILD AN IP RIGHT PORTFOLIO

LITERARY, MUSICAL, GRAPHICAL, CINEMATOGRAPHIC WORKS Protected by copyright (no registration ; recordal recommended)

E.g. catalogs, text and photos on your website, external aspect of products

SOFTWARE Protected by copyright (no registration ; recordal recommended)

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No.1 BUILD AN IP RIGHT PORTFOLIO

Distinctive SIGNS Protected by trademarks Registration required (CTMO) – first to file country

`

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Key take away: take China into account in your IP strategy

Building your IPR portfolio is the starting point

Many foreign companies are still filing too late and too little

Not applying in China = free license to use to your CN competitors

Not applying in China = risk that others will register

No.1 BUILD AN IP RIGHT PORTFOLIO

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Measure No.2 - PROTECT YOUR CONFIDENTIAL INFORMATION (Protection of know-how and trade secrets) Often what distinguishes you from your Chinese competitors Can be of great interest for your distributors or suppliers

WHAT can be protected as trade secrets?

Broad range of technical and operational information Technical know-how, product formula, customer lists, marketing strategies, cost and

price information, processes, management methods, production method, etc.

Must not be known to the public (i.e. ‘not commonly known or easily accessible to people in the field)

Must have economic value (competitive advantage/ economic benefits)

Owner must take measures to keep the information secret (!)

No.2 TRADE SECRET PROTECTION

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Trade Secrets protection strategy in China

(1.) BE AWARE of what constitutes a trade secret Make sure your employees are aware

(2.) Use the right CONTRACTS NDAs with potential distributors during selection

process Confidentiality provisions in your

contract with distributors

PREVENTION is the key

No.2 TRADE SECRET PROTECTION

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No.3 WORK WITH THE RIGHT PEOPLE

Measure No.3 - Do business with the right people

Wrong distributor = root of many problems

Know your distributor (!!!)

Perform DUE DILIGENCE: get information on your potential distributor: Background checks / Reputation checks / Clients check Well established businesses have a reputation to defend

Avoid distributor that will be in a position of conflict of interest

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Measure No.4 – Have appropriate distribution contracts signed WHY? Ensure parties are on the same page (negotiate in great detail) ENFORCING CONTRACTS WORKS (World Bank ranking: BE#16/CN#19)

IP Rights Provisions Keep the IP ownership (make it clear and register first) Define how the distributor can use your trademarks (license + guidelines) No right to register / use similar trademarks Obligation to signal counterfeits Remind that unauthorized use of IP rights will cause irreparable business

harm + foresee liquidated damages

Impose CONFIDENTIALITY / NON-USE obligations Trade secret protection (!) No use of trade secrets post-termination

No.4 USE APPROPRIATE CONTRACTS

III. IP Enforcement Tools in China

Basically four ways to enforce your IP rights in China:

1) Administrative enforcement – through government agencies

2) Judicial enforcement– in the People’s Courts

3) Criminal enforcement – through the PSB and PP

4) Customs seizure - have goods (imported and exported) detained at the borders

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IP Enforcement in China

Unique to China through various Government Agencies (AIC, IPO,…)

What can they do? Investigative powers: raid, collect information, seize Issue injunctions Punitive powers: destroy goods, impose fines

Advantages: Speed, cost effective, lower burden of proof

Drawbacks: Not suitable for all IP rights (strong for brand owners; weaker for copyright

and patent owners) No damage compensation / Local protectionism / Limited deterrence

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Administrative Enforcement

Recommended against manufacturers, large scale retailers, big players

Advantages: Damages can be claimed Court will take the case, even if highly technical Broad powers in terms of remedies Stronger impact on the infringer and market

Good preparation needed Evidence collection: higher burden of proof (notarized purchase

mandatory) Forum shopping

Timing: between 6 to 12 months for first instance decision

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Judicial Enforcement

Enforcement is not as bad as you might think Foreign companies often responsible when they fail to enforce their

IP rights Lack of registration, Lack of appropriate contracts,

misunderstanding of the Chinese IP system, no enforcement strategy

Have a TAILOR-MADE IP LITIGATION STRATEGY If well prepared, IP rights are realistically enforceable in China Do your part of the job

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HOW TO FIGHT INFRINGEMENT?

IV. What IP strategy to protect your business in China?

WHAT IP STRATEGY TO PROTECT YOUR BUSINESS WHEN DISTRIBUTING YOUR PRODUCTS IN CHINA?

(1.) Be PROACTIVE: Passivity is not an option Measures can be taken to minimize IP risks when distributing your

products in China Have a strategy and be ready to implement it

(2.) Perform an IP audit and REGISTER IP RIGHTS to protect your competitive advantage

Build an IP right portfolio: file, file and file! Register your IP rights before entering the Chinese market Layer your IP: the more IP rights you have, the better your protection

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IV. WHAT IP STRATEGY ?

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IV. WHAT IP STRATEGY ?

(3.) Adopt appropriate CONFIDENTIALITY POLICIES (protect your KH and Trade Secrets)

(4.) Use CONTRACTS adapted to your needs and to the Chinese context Ensure parties are on the same page Helps prevent the need to litigate

(5.) Be vigilant and MONITOR the market Be proactive and take appropriate measures if infringement spotted

(6.) Have an ENFORCEMENT STRATEGY: be ready to act

IV. To Conclude

Do your part of the job and your IP rights will be realistically protected in China

China’s commitment to IP is important (transition to an innovation based economy - from ‘made in China’ to ‘created/invented in China’)

Use the IP system & have appropriate contracts signed

Responsibility for lack of IP protection often lies with foreign companies (lack of understanding, lack of strategy, lack of registration)

DO YOUR HOMEWORK

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Key take Away

For Any Question:

Valentin de le Court

vdelecourt@hfgip.comChinese Mobile +86 157 2150 0100

European Mobile +32 (0) 492 86 93 25

HFG Law Firm & IP PracticeShanghai Office

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