Top Five IP Developments in China 2010

For the second consecutive year, The Congressional International Anti-Piracy Caucus (CIAPC) listed China, along with Russia, Spain and fellow NAFTA partners Canada and Mexico, as the top five violators on its “2010 International Piracy Watch List.” The list annually tops headlines and the news quickly moves to accommodate the attention span of the average viewer of today’s 24/7 news coverage. Most Americans assume US IP rights holders are the primary victims of the piracy and look no deeper. To parallel the “Top Five” CIAPC coverage, this article will address a “Top Five” IP events in China from 2010.

The list is intentionally limited to events the author has specific knowledge of. It is only intended to give a brief glimpse of into the IP world of China beyond the “Top Five” approach taken to CIAPC’s annual press release.

#5 Securing the Old: IP for “Time-Honored” Brands

Internationalizing Trademarks

China wants the label “made in China” to become “Created in China.” New patents are a priority. However, moving forward does not mean forgetting the past. China is long on tradition and 2010 saw increased efforts to secure IP rights for brands considered “Time-Honored” and encourage brands to register their names outside of China. This trend was partly prompted by a 2006 case from Germany over “Wangzhihe,” a famous Chinese bean curd. Okai, a German grocery store, registered the name “Wangzhihe” to sell bean curd in Germany. Though it is a household name in China, the company had not sought much protection outside of China. After the German court awarded a judgment for the Chinese bean curd, the Chinese government realized that up to 70% of the top 500 Chinese brands are not registered internationally, especially in the EU. 2010 saw efforts to remedy this in the form of including funding, legal assistance and “virtual homes” for companies that could establish themselves as time-honored.

To be a time-honored brand a Chinese company has to meet the following conditions:

1) Having the ownership or licensed right of the trademarks; 2) Having been created in 1956 or before; 3) Inheritance of unique products, skills or service; 4) Inheritance of the fine traditional Chinese corporate culture; 5) Having national characteristics and distinctive features of local culture, having historical and cultural values; 6) Having a good reputation, having gained wide range of social recognition and praise; and 7) Relative Controlling Share by domestic capital and regional capital of Hong Kong, Macao, operating in good condition, and having a strong capacity for sustainable development.

What’s in a Name?

Companies that had never competed regionally found themselves competing for recognition as the legitimate owner of “time-honored” brands or business names. Years earlier there was a knife fight over the name “Zhang Xiaoquan” (a famous name in Chinese cutlery). Three companies with disparate products have also been engaged in a ten year trademark dispute over the time-honored name “Xinyuanzhai.” The time-honored names are becoming time-honored disputes. The names will live on, but who bears those names is yet to be determined.

Homeless Time-Honored Brands: Location, Re-Location, E-Location

To qualify as a “time-honored brand” the business needs a location. However, many stores lost their time-honored locations to city expansion. Some were relocated far away from their customer base and some were rendered homeless. To assist these time-honored brands with location problems, a program started by the Ministry of Commerce called the “Project of Revitalizing the Old-Branded Shops and Businesses,” has stepped in. Under this project, the Beijing Government provides financial support and consultations under the Measures for the Administration of Special Funds Used for the Promotion of the Development of the Old Shops and Enterprises of the Commercial and Service Industries in Beijing. In addition, The Beijing Time-Honored Brands Association assists the dislocated time-honored brands by providing them “virtual stores” online through www.lzheshop.cn; keeping the time-honored brands alive through modern e-commerce.

#4: IP Enforcement: Wack-A-Mole, Education and Liability Addressed

Inclusion on the Piracy Watch List comes with the criticism the country lacks IP enforcement. Following are some significant IP enforcement activities from 2010.

BT Enforcement:

In early December 2009, the China State Administration of Radio, Film and Television (SARFT) shut down more than 530 BT sites. The 2010 news is more about the reaction. Many BT users spoke out in protest. The shutdown gave rise to a boom of pirated DVDs in subway stations and electronic zones. In 2010 Chinese officials’ have experienced the same “Wack-A-Mole” phenomena as all other international enforcement agencies.

Education:

The outcry was almost uniform. Netizens responded as if they had been deprived of a public right. Convinced the young did not see downloading as theft, mandatory IP education is now in school programs. The Guangdong Intellectual Property Office commissioned IP books for younger students. Renmin University of China hired IP scholar Liu Chuntian, and in 2010 began receiving students for China’s first university program on IP law.

Liability For Search Engines Articulated:

In 2008 Baidu, a company mentioned by name in the Anti-Piracy Caucus, was sued for providing song download links. A 2010 article by Wang Zhuo, Judge of the IP Division, the No. 1 Intermediate People’s Court of Beijing, clearly articulates search engine liability under Articles 14 and 23 of the Regulations on Protection of the Right of Information Network Dissemination. The court stated liability attaches if a site receives timely notice of; “(a) the name, contact and address of the rights holder; (b) the name (or names) and network address (or addresses) of the infringing work, performance, or audio/visual fixation to be deleted or disconnected with and (c) preliminary evidential materials for constitution of the infringement. ” If the information is properly provided and, “If the alleged infringer does not disconnect with the infringing songs upon the notification, then it will be deemed as knowing of those infringing songs and should be held jointly liable for the infringement. ” Defendant Baidu prevailed because the complainant failed to meet the notice requirements. This case analysis is highly recommended for IPR holders seeking liability against search engines in China.

#3 Taking IP into Their Own Hands: Artist Unite

Many Americans assume US IP rights are the primary victim of piracy. This may be true of software, but in terms of popular media, citizens generally target material in their native tongue. KTVs are very popular in China. For years KTVs have been charging customer to sing along to royalty free music. Article 47 of the Regulations on the Collective Administration of Copyright permits artists to form collective organizations to collect fees. 2010 saw increased momentum to exercise this right. Artists used Article 47 to form collective organizations with the legal right to collect royalties and sue over the unauthorized use of copyrighted materials. This happened with literature, film and music.

The China Written Works Copyright Society (WWCS) has worked to strengthen the law so that the organizations can also file lawsuits in their own name on behalf of artists.

Chinese artists are now telling citizens piracy is not just a harm exported to rich western countries that can absorb the cost. They are also collecting royalties through private organizations and bypassing local law enforcement; two giant IP steps forward.

#2 IP in the World’s Fastest Auto Market

No IP article on China would be complete without noting that it is the world’s fastest growing auto market. Tengzhong’s bid to acquire Hummer was just a small example of the huge appetite China has for big auto. But, China is not just after cars, it wants the IP rights that go with them.

Geely’s Acquisition of Volvo: “IP” on Board

Geely’s purchase of Volvo is an example of how China is using M&A to obtain IP instead of waiting for R&D. The buyout was announced in late 2009, with the IPR transfer to occur in early 2010. It was not a complete IPR acquisition. Volvo held onto core IP rights necessary to protect its ongoing business plans in China. However, Geely did acquire some key technologies vital to China’s automotive future; namely Volvo’s safety and environmental protection IP.

Chinese M&As and “buying the dips” may often be partially motivated by the desire to obtain IPRs. Volvo’s decision to withhold IPRs essential to the business plan limits the IPR implications of M&A. However, it illuminates the M&A approach to IP expansion.

BAIC’s Acquisition of Saab and its IP Rights

Beijing Automobile’s 200 million dollar acquisition of Sweden’s Saab’s IP is an even better example of this strategy. Many felt the price was higher than the IPRs were worth. But when you have the fastest growing auto market, time is money. The Saab 9-3 and 9-5, with their five-star safety ratings and lowest rated CO2 emissions standards, represent a great leap forward. The company will likely develop at least two independent car models based on the IP acquisitions and saved a great deal of time. Some estimate BAIC saved over a billion rmb and over 5 years in R&D by buying these IPRs outright.

#1: Parallel Imports – No Longer and Export Issue

Parallel importation is normally an issue for countries with strong currencies. Some EU countries, like France, allow IPR holders to restrict sales and re-importation. Other countries, like the US, follow the exhaustion doctrine or first-sale doctrine. IPR holders have limited abilities to restrict sales after the first sale. There are national and international versions of this theory and there have been many calls for the WTO to bring uniformity to the issue. China has no law on parallel importation and 2010 saw increased pressure for legislators to pick a side.

Three well known cases have hit China over the years: The Lux soap case, AN’GE clothing, and Michelin Tires. Which way China goes is not the issue. The legislative debate itself is the pinnacle of the ongoing story of China’s progress in terms of both IP and economy. China is routinely accused of currency manipulation. However, no country which sees itself as a low currency rate trader in perpetuity considers parallel importation a pressing concern. The debate is indicative of China’s projection of itself into the future. It does see itself as a player in the world of IP. It does not see itself on the bottom wrung of the world’s economic ladder. The seller that has been undercutting the world for decades is now worried about protecting its own trademarked goods from being re-imported at a lower price; that is why this IP story tops the list.

Conclusion

Piracy and currency manipulation easily resonate with Americans. In the real world of IP, China is ripe with many more interesting stories. Preserving IP for century old names through e-commerce; commissioning IP texts and opening the nation’s first university IP programs; domestic artists taking IPR into their own hands; by-passing R&D by using M&A for IP expansion; calls for IP legislation not even imagined a decade: these are five simple examples. In 2010 China passed Japan as the world’s second largest economy. IP will continue to be a part of that evolution. If coverage of this expansion evolves in a like minded fashion, we may agree that the national dialogue about China and IP needs to expand beyond the simplistic annual coverage of the CIAPC’s “Top Five List.”