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Intellectual Property Rights Protection in China
 

Key words: intellectual property right, infringement, trademark, patent, copyright, judicial enforcement

IPR Law Enforcement
There are two primary ways in which an IP owner can seek to assert its IPR in China: through an administrative procedure or through a criminal or civil judicial procedure. The administrative procedure is an unusual approach to dealing with IPR issues and may be unique to China. The judicial course of action is similar to that found in the United States and other Western countries.


Administrative Enforcement: Injunctions, Fines and Penalties
The administrative procedure is the most commonly used method for asserting IPR in China, especially for trademark and copyright matters. It can provide an effective method for adjudicating IPR disputes, though it offers no financial compensation for an IP owner who prevails.
The exact course of action will vary depending on the type of IPR infraction. In general, an owner of intellectual property that suspects infringement may compile evidence to substantiate its claim and even some indication of the location of the facilities in which the alleged infringement of IPR is occurring (e.g., where illegal copies of movie DVDs are being manufactured). Private investigators will frequently be hired to assist in compiling such evidence.


This evidence will be taken to the local branch of the agency responsible for the protection of the relevant form of IPR. If the agency agrees to take on the case, it may conduct raids to confiscate illegal goods and equipment and to gather more evidence. It will also issue an order requiring the infringer to cease production. At some point, it will also require the parties to mediate the dispute.


While administrative agencies cannot award compensation to an IPR holder, they do impose costs on the infringer for its acts of infringement. Administrative agencies may fine copyright infringers and those involved in passing off a patent owned by another entity (known as "passing off"). They may also seize goods or equipment used in manufacturing products that infringe trademarks. Information regarding such administrative actions is usually not made public, making it difficult to assess their effectiveness. Some commentators have stated that the costs of seized inventory and machinery are often too small to deter would-be infringers or to put offenders out of business.


Judicial Enforcement: Compensation and Damages
Parties may pursue civil judicial actions in the local people's court. Though small IP owners may continue to prefer administrative actions, the number of IPR cases pursued through the court system has been increasing. This increase appears to be due, in part, to changes to the laws which are designed to strengthen enforcement through court action and to provide more guidance and transparency to those pursuing such remedies. There has also been a successful effort to improve the qualifications of the judges presiding over cases involving IPR. Compensation is typically awarded in connection with an order to cease infringing activities and, in the case of copyright infringement, to make a public apology. While criminal prosecutions, including imprisonment, are possible under China's IPR law, they are not presently commonplace.


Usually, cases are first brought to the intermediate people's courts at the municipal and provincial level or, if the case is large enough, to the high people's courts. Special divisions that have jurisdiction over intellectual property matters have been established in almost all intermediate courts. There are at least 69 intermediate people's courts with such divisions. In courts that do not have such divisions, there are dedicated panels in charge of intellectual property matters. Divisions with jurisdiction over intellectual property cases have been established within the high people's court in all provinces. In 1996, the Supreme People's Court also established an intellectual property division. Cases may be appealed to a higher court if a party is dissatisfied with the decision in the first instance. However, the second decision is final and no further appeals are permitted.
Compensation for infringement in China is usually determined with simple calculations. For example, the plaintiff may be awarded an amount large enough to replace profits under the apparently straightforward assumption that plaintiff's sales would have continued at the same rate as occurred before infringement began.


While such calculations may be easy to implement, they often take inadequate account of how the market would have evolved in the absence of the infringement. For instance, the IP owner's products may have been in an early stage of its life cycle at the time that a key patent was first infringed. In such a situation, the IP owner's sales and market share may likely have grown in the future in the absence of the infringement. However, the infringement might have disrupted this potential growth. Thus, the pre-infringement sales levels might be a poor predictor of the sales the IP owner would have achieved had there been no infringement. On the other hand, assuming that the entire loss is the result of infringement might be an overestimation. It could be the case that the infringer might have been able to compete effectively and take away some sales from the patent owner without infringing. Such issues of market responses to infringing activity often require expert economic, business, and market analyses to calculate accurate and appropriate damage awards.


In Chinese courts, damages are frequently computed based upon the infringer's unjust enrichment. Since infringers usually sell their illegal copies at a small fraction of the price charged by the IPR owner, damage awards based on unjust enrichment are often modest compared to damage awards based on the IP owner's lost profits from lost sales. Moreover, some infringers do not maintain complete transaction records and the full extent of their gain can be very difficult to determine.


Chinese courts will award legal fees, but review them for reasonableness. They will not award fees that they consider to be excessive.24
Discovery is limited compared to the United States, the United Kingdom, Australia, New Zealand, and other common-law jurisdictions. In the United States, for instance, parties to a dispute are entitled to documents from the opposing party's records that may pertain to the dispute. By contrast, in China, as in other civil law jurisdictions, plaintiffs can simply petition the people's court to ensure that evidence is preserved. For instance, Article 50 of the Copyright Law allows an aggrieved copyright owner "before instituting proceedings, [to] apply to a people's court for evidence preservation where the evidence is likely to be missing, or to be difficult to obtain later." As is the case generally, in China, this situation may evolve to allow more comprehensive discovery.


In the meantime, new techniques and technologies may help parties in IPR litigation in China to develop more comprehensive and accurate damage estimates. For example, the increasing availability of retail scanner data may make it easier to collect information about past sales. In addition, surveys may also help to develop a more comprehensive estimate of infringer's gains due to IPR infringement. A simple survey may, for example, establish market share by randomly selecting the relevant population of consumers and asking which products they own or have recently purchased. A more complex survey may determine the value of a patented feature by asking consumers to select among alternatives with and without the feature at different price points. Such techniques may enable both plaintiffs and defendants to produce more precise and accurate damage estimates.


As the situation currently stands, however, economic damages claimed and awarded are low compared to those found in the US and other industrialized countries. The relatively low amount of even the largest awards in China is discussed below. Since there are no limits on the damages that can be awarded by a Chinese court, it appears that plaintiffs have generally been unable to provide sufficient evidence to convince a judge that they have suffered extensive damages. Such caution has both economic benefits and costs. Low damage awards have the benefit of reducing the risk of IP owners receiving excessive damage awards unrelated to the actual economic harm suffered. Low damage awards can result in the wider use of a technology to the benefit of consumers since a company will expect that, even if convicted of infringement, it probably will not have a large judgment awarded against it. The expectation of lower damages will also encourage companies to attempt to design around a patent. Frequently such a design-around may be found to infringe, despite the defendant's attempt to avoid a legal dispute. With generally low damage awards, the costs of having attempted to innovate around a piece of IP are also low.


But damage awards significantly below the actual economic harm suffered can impose real economic costs on the economy. If infringers are not adequately deterred from infringing, there tends to be insufficient protection for innovators and decreased incentives to invest in research and development. Low damages have been recognized as compromising the effectiveness of the IPR system in China. The challenge is to find the balance between providing adequate compensation to those who have suffered losses from infringement, and not imposing damages so high as to suppress innovation by companies trying to design around others' patents.


More detail regarding patent, trademark, and copyright infringement fine and penalty assessment and damage calculations in China is described in the table below.

 

 

 

Source: http://www.jvseek.com/due-diligence/due-diligence-foreign-joint-ventures-china



 

 

 

 

 

 

 

 

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