In an interview, Mark Cohen, of counsel at Jones Day in Beijing and was senior intellectual property (IP) attache at the US Embassy in Beijing from 2004 to 2008, talked about IP issues in China. Changes surrounding IP in China are currently driven by the Chinese economy. It's not only an issue for foreign companies; it affects Chinese companies, too. There have been three predominant phases of IP development in China during the past 20 years. During the first phase the US government was a significant source of pressure for IP reform. The drive for innovation means that there will be more patent filings by Chinese companies, both within China and overseas. It's very important for businesses to put together the right team in China to protect their rights and to recognize that even in the best of circumstances, the government can't do everything.
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China's IP legal framework has grown more sophisticated, but companies must still aggressively register and protect their IP
Mark Cohen is of counsel at Jones Day in Beijing and was senior intellectual property (IP) attache at the US Embassy in Beijing from 2004 to 2008. He recently spoke with CBR Editor Virginia Hulme about IP issues in China.
CBR: What improvements have you seen in IP protection and awareness in China in the last 5-10 years? What and who is driving these improvements?
Cohen: Changes surrounding IP in China are currently driven by the Chinese economy. Chinese officials are painfully aware that China is a manufacturing center for the world but not an innovation center. China can remain a lowcost manufacturing center for only so long. Eventually, those jobs will migrate out. The way to move up the value chain is by harnessing their own R&D [research and development] talent and entrepreneurial instincts, developing brands that have worldwide repute, filing patents, and commercializing technology. The way to accomplish that is by developing confidence in the IP system.
Over the last 10 years, the IP environment has become more complex. There is a greater need for companies to strategize, plan, and acclimate their approach to IP to the different rights, remedies, and problems that exist within China.
There are a number of people in China today who not only understand IR but are using the system in a way that, to many of us, looks unfair. For instance, foreigners can find that someone has filed a patent on their design or technology, and they now have to invalidate those patents. Similar things happen with trademarks and domain names. The US system affords many protections to ensure the fair use of rights, including granting trademarks based on use, not on registration, protecting patents based on first to file - all these things that give you rights, even without applying. By contrast, in China, as in many countries, there is a race to the registration office.
CBR: If companies find that their patents and trademarks have already been taken, what can they do about it? How successful have foreign companies been in regaining their trademark and patent rights?
Cohen: Its not only an issue for foreign companies; it affects Chinese companies, too. In many cases they have been successful, sometimes at great cost. The global trademark system works mostly on a first-to-file basis, and if someone files before you without any proven ill intent, they could have the right to use the mark. This problem is especially acute for many SMEs [small and medium-sized enterprises] . Some companies may not even have a physical presence in China but find when they open up a factory or a representative office that others have secured rights they thought they had owned simply by reason of prior use.
CBR: How has Chinas legal and regulatory landscape for IP changed? What do you see as the most significant legal developments?
Cohen: There have been three predominant phases of IP development in China during the past 20 years. During the first phase the US government was a significant source of pressure for IP reform. The United States has had a history of encouraging China to accelerate developments in its IP system. The second phase was in response to WTO [World Trade Organization] accession, and the need to bring Chinese laws into compliance with WTO requirements. The third and current phase is IP for Chinas own development. Chinas 15-year science and technology plan, National IP Rights Strategy, and recent amendments to the Patent Law are all part of this process. Issues that were not under consideration at the time of Chinas WTO accession are now appearing, such as protection of folklore, genetic resources, or traditional Chinese medicine. China is also interested in the relationship between standards and patents, the role of antitrust law in IP protection, the economic impact of IP rights enforcement and protection, the balance between private and public interests in IP, and other complex IP policy issues. These are hot international issues that China is now looking at for its own development interests.
China also shares some challenges with the United States as its economy develops. In 2008, China overtook the United States as the country with the most Internet users in the world - it now has nearly 300 million Internet users. Protecting copyright in the Internet environment has become a great concern to many Chinese officials. As another example: The explosive growth in Chinas patent and trademark offices, including increasingly sophisticated patent applications, has brought challenges that are similar to those in the United States.
Another major change of the past 10 years is the development of a pool of sophisticated IP professionals in China. China has sent officials, scientists, businesspeople, and lawyers to the United States, Europe, and Japan to study IR The Chinese patent office has sent many of its officials to universities overseas. The European Community is implementing "IPR-2," its large IP rights technical assistance program. The US government is also active. This is all making an impact. Admittedly more capacity building is still needed, but it is not unusual to find individuals in most Chinese ministries today who have PhDs in relevant IP fields and to find many knowledgeable officials at the local government levels. As another example, in the view of most foreign and Chinese observers, the judges in the IP courts are the best educated in China.
We should not think that many of the officials and lawyers we deal with dont understand our system well. Developments in the United States that have redirected policy - and there have been several over the past few years - are carefully analyzed in China. If, for example, the FTC [Federal Trade Commission] criticizes aspects of the US patent system and its effects on innovation, China looks at this carefully and frequently considers and implements similar policies.
CBR: Are there any areas related to IP protection that have gotten worse? What challenges still remain?
Cohen: Continuing growth in seizures of counterfeit goods made in China overseas is a problem (see p. 34). Its been growing for many years in both absolute numbers and as a proportion of total seizures. The widespread growth of the Internet and difficulties enforcing IP rights is another area.
Innovative pharmaceutical companies find continuing problems. The protection of clinical data exclusivity, which China was obligated to provide as part of its WTO accession, hasn't occurred as expected.
The other area where there has been some decline is product safety and quality. Substandard products are usually regulated and enforced by agencies such as AQSIQ [Administration for Quality Supervision, Inspection, and Quarantine] and SFDA [State Food and Drug Administration], as well as SAIC [State Administration for Industry and Commerce] under its consumer protection mandate. There is a clear overlap in authority over many counterfeit and substandard products. In some instances, more serious penalties may be imposed for "fake and shoddy goods" or "illegal business operations" than for IP infringements. There is administrative enforcement in these areas, but as with IP, there are concerns over exports of shoddy products, local protectionism, weak civil remedies, and weak interagency coordination.
Another emerging trend that may be of concern involves large awards in cases where foreigners are named as def endants. In the Schneider case, the Chinese plaintiff won a ¥334.8 million ($49 million) judgment, which was many times larger than the next largest civil judgment of any kind. If the system is supposed to be fair, why have foreign plaintiffs generally received very low levels of damages, while Chinese plaintiffs with a home court advantage are getting very favorable outcomes?
So there are still concerns about transparency, and national treatment concerns remain, particularly at a local level. Local funding of courts and enforcement agencies remain key problems, which are now further magnified by local government subsidies for local companies to file patents and trademarks.
CBR: As you noted earlier, the latest developments in IP are aimed at promoting innovation in China and protecting Chinas own IR What implications does Chinas drive for innovation have for IP protection in China?
Cohen: The drive for innovation means that there will be more patent filings by Chinese companies, both within China and overseas. More attention will be focused on aspects of IP that are closely related to technological innovation, namely patents, and some other rights like plant variety protection. There may be more opportunities for foreign-invested R&D in China, yet a more nationalistic interest will be associated with the fruits of that R&D. There may be more problems with government procurement that favors Chinese innovation or the transfer of technology from foreign-invested R&D in China to overseas. The government may subsidize certain types of R&D and projects and may try to create winners in certain technical areas through national standards, export controls, or other policies, which may tilt the playing field unfairly. But opportunities to engage with the Chinese government also exist. The question is whether China will get the mix right so that foreigners feel they are being treated fairly. The very term, indigenous innovation, gives many people cause for concern.
CBR: What are some of the emerging issues in IP protection, especially for foreign companies in China?
Cohen: There are three main issues: global enforcement, increasingly sophisticated counterfeiters, and local Chinese companies as rights holders. To give an example of the scope of the problem - a company could seize Chinese counterfeit goods in a Gulf state bound for Africa or Europe. A company may have a criminal case in one country, a customs matter in another, and a civil case in a third country. The challenges of dealing with the problems criminal or quasi-criminal nature have become increasingly globalized.
CBR: What are some of the most important IP issues facing US companies in China today?
Cohen: Enforcement is still top of the list and has been for years. For the copyright industries, enforcement issues are also linked to market access issues. For the pharmaceutical industries, IPR issues rank closely with reimbursement and pricing issues for innovative products. Even though its not strictly an IP issue, market access is critical in many sectors. If you don't have market access, illegitimate goods enter the market, and your problems multiply with less revenue available to address them. There are issues with the Internet, such as the unauthorized webcasting of sporting programs that was encountered during the Olympics. Many companies are also concerned about industrial policy linkages to IP, or about threats of compulsory licensing in a variety of areas.
CBR: Given everything going on in IP in China today and the difficulties companies have enforcing their IR what advice would you give to US companies in China, or that are thinking about going to China, in terms of IP protection?
Cohen: Too many companies go to China without having secured the trademarks or applied for appropriate patent protection. They may thereafter complain that their rights have been stolen. However, they may not have a legal claim, and certainly there is not much the US government can do if they didn't try to obtain and enforce their rights at the outset. Companies have to secure their rights, and do it strategically. They need to have a plan, so they know what their expenses will be and the approximate value it will bring.
The other part of securing rights is that companies have to adjust their strategy to China. They can't just secure the same rights that they do in the United States, use the same procedures, and think that will work the same way in China. China does many things differently. In some cases, it has procedures or rights that are not available in the United States. And some of them are not expensive. Design patents and utility model patents are relatively inexpensive, as is administrative enforcement. China has customs remedies against exports. The United States does not have such an administrative system. The bottom line: have a strategy, secure your rights, adjust what you're doing to the Chinese market. Those remain the three key things that companies have to do.
Companies should also incorporate a government relations strategy into their IP approach. Multinationals may need to work more closely with their local corporate security personnel, who may be concerned about brand integrity and theft of trade secret information. Corporate security can help vet employees and support vigorous steps to control the supply chain. Companies also need to work with their PR [public relations] people. If a case is resolved in your favor, thank the Chinese government. If you have a problem you think the government is unaware of, bring it to their attention through government and media relations. AU of these things build a more comprehensive approach that can be very different than what companies use in the United States.
CBR: What role should the US government play in improving the IP environment for US companies in China? What advice would you give to the new administration to improve the current approach?
Cohen: The Bush administration, including Commerce Secretary Carlos Guttierez, Ambassador Clark Randt, and Patent and Trademark Office Director Jon Dudas were very active and concerned about IP issues. They placed me in the embassy in Beijing, and when I left I had a staff of about 12 people, which was the largest presence of the US government on IP overseas. Sister agencies that also have a stake in the IP system have a presence in China and other markets.
Our government's challenge is coordination. Currently in the United States, we have cooperative MOUs [memoranda of understanding] with China: patent office to patent office, trademark office to trademark office, copyright to copyright, law enforcement to law enforcement, customs to customs. Multiple avenues exist for cooperation and exchange. Most of the big issues, though, transcend individual agencies. That means the US government has to work hard to ensure that there is cooperation among federal agencies, as well as between the federal government and state governments or the legislative and judicial branches, as may be required.
We also need to be able to marshal softer diplomatic approaches, such as providing technical assistance - whether government, industry, or jointly funded. Just recently in Beijing, arrests were made on a criminal Internet copyright issue, and I was pleased to learn that two of the PRC law enforcement officials involved were people I had sent to the United States on a training program. Targeted training programs, can be an effective trade tool.
I once went with a US federal judge to the Supreme People's Court (SPC). The federal judge walked out of that meeting saying it was one of the most interesting discussions he's ever had. The people we met at the SPC were very knowledgeable. You have to be prepared to meet China at that level of depth. That requires a lot of sophistication, coordination, and internal training of our negotiators. It also means rewarding people for cooperation. It's great to have an IP czar in the White House or in the Department of Commerce, someone who can marshal the resources for individual agencies. It's equally important, however, to have someone in Commerce who is encouraged to work closely with the Office of the US Trade Representative and the Patent and Trademark Office on a particular training issue. We have to find ways to reward people for dealing with an issue that transcends agencies, that sometimes transcends the executive branch as well.
That's where industry - including associations - can play a vital role. We should be giving the US government a road map. We should be saying, to give a hypothetical example: "We have a huge problem with copyright in China. We think you should focus on the Internet. We think a good way of focusing on the Internet is to get joint criminal cases. We want to be able to support training programs in this province and that province - they're our priorities. We understand the civil system is weak in this city. We think you should consider a visit." For example, we might encourage the Obama administration to go more often to Guangdong and not initially focus on just Beijing and Shanghai. We should be telling the US government: "This is where the problems are." This is especially critical in light of the current financial crisis, when resources have to be marshaled more efficiently.
Ultimately, though, IP is a private property right. It's very important for businesses to put together the right team in China to protect their rights and to recognize that even in the best of circumstances, the government can't do everything. You have to protect yourself.China Business Review
