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Why China Is Still A Challenge for In-House IP Counsel

For most global companies, the need to think about how to protect intellectual property in China is an inevitable reality. For a few years, there have been indications that the nation is willing to be more protective of IP owners’ rights – from revisions to trademark law that aim to provide greater protection of IP and impose harsher penalties on infringers, to an unprecedented $1.5 million award to New Balance Athletics Inc. in a trademark dispute.

But recent events – such as the ordered investigation into China’s alleged theft of IP and the country’s inclusion on a priority watch list earlier this year by the Office of the United States Trade Representative because of IP concerns – signal there’s still work to be done. These developments highlight that, despite small gains, protecting intellectual property in China can still be a major headache for companies and in-house attorneys.

There are positive developments, such as the New Balance award and the fact that China has created specialized IP courts, said Geoffrey Lin, managing partner of Ropes & Gray’s Shanghai office, who focuses his practice on advising global companies on protecting intellectual property. But China remains a challenging environment for protecting intellectual property, at least in part, because “you’re asking fairly young courts to interpret some challenging issues,” Lin said.

“Oftentimes, you have massive intellectual property disputes, but in many ways, the court systems are just getting their handle on how to properly adjudicate these disputes,” Lin added. “And sometimes, they don’t necessarily come out with decisions that folks think are commensurate with the scale or potential harm that is happening.” 

The amount of damage awards is one area where improvement is needed, Lin said. “If you truly respect IP…then damage awards should regularly be in the tens of millions of U.S. dollars, if not hundreds of millions of U.S. dollars,” according to Lin. He pointed to the example of trademark infringement cases, for which he said “there shouldn’t be these kind of token awards of 50,000 U.S. dollars or 5,000 U.S. dollars.”

Asked whether this is likely to happen, Lin said it may not. It would really take “a lot of support” and “some risk-taking on the part of [China's] judges to really, you know, be trailblazers and pioneers in that space,” he explained.

It’d also be helpful to have a unified appellate IP court in China, so that all appeals go to one appellate court, Lin said. This, he added, is more realistic to expect and could happen as soon as in the next three to five years.

With respect to protecting trademarks, specifically, companies and counsel face a China Trademark Office that is “overwhelmed” with bad faith trademark applications and the office’s examiners are ill-equipped to deal with this volume, said Daniel McKinnon, senior counsel for IP and global brand protection at New Balance, who spoke to Corporate Counsel about the company’s $1.5 million award in late August.

“Because of the volume of trademarks that are being applied for in China…[examiners] simply do not have the time to do the proper analysis,” McKinnon said. “Basically, it’s putting the onus on the brand holder to really, really tightly police the trademark office.”

This is compounded by the fact that it’s difficult for legitimate right holders to oppose or invalidate marks, according to McKinnon, which he said is problematic in light of China’s first-to-file system, which gives priority to whoever files an application first.

“It used to be the case that we would win the vast majority of our oppositions. However, now, as the examiners are overwhelmed, the people now handling the opposition matters are overwhelmed. It’s a domino effect,” McKinnon said. “The filter is just breaking down.”

Companies looking to tap into the Chinese market also have to deal with requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the market, according to the USTR report.

As for how companies and their law departments can mitigate these risks, Lin said, “practical by far trumps legal.” While legal steps taken to protect IP are critical, such as proper contracting and taking action against infringers when necessary, the practical protections go further, noted Lin.

For trademarks, this can mean doing searches and filing for marks early. For copyrighted, trade secreted and patented technology, an effective way to handle the risks is by black-boxing part of the technology so there still some “control of part of your technology,” Lin said.

“If you expect to provide all of your technology from start to finish with the Ikea manual on how to make everything and make it work efficiently and at scale, and you’re relying on well-drafted contracts as your only recourse, it’s very challenging,” he said. Having control of some component of the technology, he added, is a “better way.”

Contributing Author

Jennifer Williams-Alvarez

Jennifer Williams-Alvarez is a staff reporter for ALM Media and Inside Counsel. She can be contacted at jwilliams@alm.com.

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