Many European entrepreneurs still tend to overlook the crucial importance of intellectual property (IP) protection when they start their activities in China. Or on the other hand, many decide not to invest at all in the Chinese market, fearing that the Chinese system is not able to protect foreign companies’ products and technology.
As China plans to become a global leader in innovation, it is in its interests to keep improving its IP system, and it has been proving this commitment through a series of initiatives and improvements to its laws. The most recent examples: China’s New Patent Law, which will take effect on 1 June 2021, will have an impact on all areas of patent prosecution, enforcement, and exploration; the EU-China landmark agreement on protecting European Geographical Indications came to force on 1 March 2021; IPKey China, an EU Project designed to enhance EU-China cooperation on selected emerging challenges in the area of intellectual property, proves the Chinese commitment to increase transparency and improve the implementation of IP and an IP enforcement system.
What is IPR?
Intellectual Property Rights are legally enforceable rights over the use of inventions or other creative works. They confer a right to exclude others from their use. Some examples of IPRs:
– Trademarks: protection of the company’s brand identity; – Invention / Utility model patents: protection of inventions in any technical fields; – Design patents: protection of the external aspects of products (e.g. graphical symbols); – Copyright: protection of creative works, including books, music, movies, but also computer programs, databases, technical drawings; – Trade Secrets: protection of confidential information, including data, algorithms, source code.
Developing an IP strategy when doing business in China should be considered one of the main pillars of internationalization process. Not only a strong IPR strategy and proactive preparation helps to prevent violations, but it also represents an important financial asset, resulting in increased revenue as well as more effective and quick enforcement in the case of an infringement. Furthermore, if in Europe, under certain conditions, proof of earlier use in European country markets might be sufficient to enforce unregistered IP assets, in China IP laws are territorial, meaning that IP is enforceable in China only upon valid domestic registration. China applies a ‘first-to-file system’, meaning that the first entity or individual who registers IP rights will hold those rights, irrelevant of the original user. Therefore, it is strongly recommended to register IP assets in the country before entering the market. Also, IPRs registration need to be done in Taiwan, Hong Kong and Macao individually, as each of these regions has a different legal framework.
Intellectual Property as a Financial Business Asset in China
For most businesses, intangible assets represent more than 50% of the value of the enterprise. The most significant group of intangible assets are those protected by intellectual property such as inventions, designs and brands. Since they form such a large part of the overall value, their management as financial assets is important to the success of the business.
Businesses that actively manage their IP as a financial asset outperform their peers by up to 30%. They do so by maximising the effectiveness of investment in the business, driving performance in areas that produce the best return and managing operational risk. They may also use their IP assets as security to obtain various forms of funding. Moreover, there are opportunities to gain strategic advantage in relation to the sale or purchase of a business.
Understanding the financial value to the business of specific IP assets is of particular importance when moving into a new market because there will be new risks as well as opportunities. China presents some special challenges, and practical steps to protect the value of IP assets are often as important as legal ones. Learn more here on how IP assets matter from a financial perspective and how to manage them to the greatest business advantage.
Some basic tips
Branding: get a local name for your trade mark
The registration of a trademark in original Roman characters does not automatically protect the trademark against the use or registration of the same or similar trademark written in Chinese characters. If a local equivalent is not chosen, consumers will almost certainly choose their own, which might affect the reputation of the company. Choosing a Chinese trademark equivalent is particularly important because not only the meaning, but also the sound, tone and even look of the Chinese characters chosen for a trademark name can affect the brand’s reputation. If this local name is not registered, companies also run the risk of another company freely copying or registering the local trademark themselves.
It is highly recommended to register a copyright
Although copyright is an automatic right established upon creation, China allows a voluntary record of copyright. This can provide useful proof of ownership in settling disputes efficiently. Registering a copyright is not expensive and most IPR enforcement authorities require local copyright registration to start handling company’s IPR infringement cases. European SMEs are recommended to register their valuable assets as copyrights. Furthermore, a registered copyright can be useful for backing-up other IPR in enforcement cases. For instance, a business can generally protect its logo under both copyright and trade mark law, or defend an innovative packaging design via a registered design and copyright.
Protecting trade secrets
China provides a legal framework for the protection of trade secrets, and the laws generally provide for remedies in the event that trade secrets are unlawfully disclosed. However, in order to deal with trade secret infringement cases, SMEs must be able to prove that an obligation of confidence was clearly stated during their business arrangements with third parties. Non-disclosure and confidentiality agreements can help SMEs ensure that measures have been taken to preserve secrecy. Employees can be contractually bound to confidentiality and creations made by employees in the course of business can be duly assigned to the employer. Such clauses protect the company’s existing and future IP and ensures that the company maintains IP rights to an employee’s work product created for the company.
Patents function under first-to-file and absolute novelty system
China operates an “absolute novelty” (innovation is not known anywhere) and, as mentioned, ‘first-to-file’ IP system. The confidentiality of a new invention should therefore be maintained as long as possible until a patent application date has been obtained. SMEs may consider taking advantage of the protection under the Patent Cooperation Treaty (PCT) to seek patent protection for an invention simultaneously in several countries by filing a single “international” patent application instead of filing several separate national applications. China is a signatory state of the PCT.
Be active in enforcing your rights
Entering a new market and protecting IPRs also means being ready to enforce or defend rights in order to ensure that business objectives are met and therefore a budget planning for enforcement is key. In most cases, when European SMEs identify infringement, they should actively enforce their rights. If SMEs manage to build a reputation for ‘being litigious’ then companies will be less likely to infringe their rights in the future. The resources required to achieve such a reputation depend on the extent of the infringement.
SMEs should also bear in mind that no matter which enforcement route they take, they will need to prepare and collect proper evidence to prove their ownership of IPR in respective countries (this is why IP registration in advance is very important) or that their IP right has been infringed by a third party. This means that European SMEs should be prepared to collect evidence and proactively work closely with the authorities in the enforcement process.
Registering your IP in China does not guarantee that infringements will not happen, but it will surely allow foreign companies to resolve such infringements if they occur, either through just mediation and arbitration, or, if needed, in court.