FUNDAMENTALS OF LICENSING INTELLECTUAL PROPERTY IN CHINA 1© 2013. For educational purposes only. Not to be transmitted or reproduced without permission.
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FUNDAMENTALS OF LICENSING INTELLECTUAL PROPERTY IN CHINA
1© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Joseph Eng Jr.King & Spalding LLPNew York, NY, 10036
He JingAnJie Law FirmBeijing, China 100022
AIPLA Fall MeetingOctober 2013
2© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
WHY CHINA?
Foreign Direct Investment is encouraged
3© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Source:
China DailyAugust 17, 2010
Labor Advantages
Low labor costs
Educated workforce
4© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Natural Resources
China has abundant natural resources
5© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Source: chinaperformancegroup.com
Infrastructure
China spends more than any other country on infrastructure
6© 2009. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Source: chinafile.com
BUT….
Enforcement of IP rights is a serious concern.
7© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
2013 USTR Priority Watch List
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Trade Secret Theft
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“The theft of trade secrets is an escalating concern.”
Other Potential Problems
Unfamiliar legal system
Civil law system = no case law precedent
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China’s IP Laws are relatively new
First Chinese Patent law passed 1984.
First Chinese Trademark Law Passed 1982.
Revisions to IP laws improve protection but create uncertainty.
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The Shanzhai Phenomenon
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Source: Wikimedia
Shanzhai Phones
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HiPhone
More Shanzhai Phones
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Marlboro phone Adidas Phone
More Shanzhai Phones
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Razor Phone
150 million Shanzhai phones sold in 2007
(10% of worldwide cell phone sales)
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Source tech.163.com; see http://tech.163.com/09/0420/10/57BBE6EL0009388P.html
Strategic Considerations
For Foreign Companies
Entering China
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Three Key Questions
1. What is the business plan?
2. How would we protect our IP?
3. How would we enforce our IP rights?
18© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
19© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
What is the business plan?
Question #1:
Some Possible Types of Ventures
Wholly Foreign-Owned Entity
Manufacturing Joint Venture
Joint Venture with State Owned Enterprise
Technology license to Chinese business partner
20© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Confidentiality Agreements Anyone with trade secret access should sign agreement.
Technology license to Chinese business partner Three-way agreement (licensor, licensee, employee)
Wholly Foreign Owned Entity Be clear that you will prosecute if theft occurs Include provisions for paying ex-employees to keep secrets
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China has Strict Rules About State Secrets
Non-public SOE information is treated as a trade secret.
Criminal liability for divulging non-public SOE information
Standard is “knew or should have known.”
Penalties: up to life imprisonment; death penalty in some cases
22© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
License Provision for SOEs
Consider differentiated document handling provisions
Treat public and non-public SOE info differently.
Mitigates liability
Establish good-faith basis for believing that info
was not non-public SOE info.
23© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
24© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
How would we protect our IP?
Question #2:
Chinese Definition of Trade Secret Elements (Art. 219 Criminal Law / Art. 10 Anti-Unfair
Competition Law):
Technological information or business operation information
Unknown to the public
Can bring about economic benefits to the owner
Has practical utility
Owner has adopted secret-keeping measures
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Trade Secrets
Document trade secrets beforehand.
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Patents
File patents beforehand
Know the 3 types of patents
Understand patent enforcement
Know how damages are awarded
27© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Comparison of Chinese Patent Types
© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
• Invention Patents― Like US utility patent; 20 year term
• Utility Model Patents― No US equivalent, protects shape and structure of physical
products― Not examined substantively― Half the cost / half the term of invention patents
• Design Patents― Protects ornamental designs, 10 year term
Trademarks
Register trademarks (both English and Chinese equivalents)
Registration must be timely (China uses a “first-to-file” system)
Regularly record evidence of use of trademark
.
29© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
30© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
How would we enforce our IP rights?
Question #3:
Areas of Concern for Foreign Companies
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Venue Litigation Timeline / Evidence / Discovery Remedies / Damages
Areas of Concern for Foreign Companies
Venue Litigation Timeline / Evidence / Discovery Remedies / Damages
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Chinese Court System
• China has a civil law system similar to that of Germany.
• Most foreign matters start at the Intermediate People’s Courts (IPC) level.
• Most IPCs have specialized judges on an elite “Intellectual Property Bench.”
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Supreme People’s Court(Highest Court)
Higher People’s Courts(One per Province)
Intermediate People’s Court(~370, in major cities)
District People’s Court (>3000, further sub-divided)
Chinese Court System
Venue Considerations for Foreign Companies
Include forum selection clause
Avoid District People’s Courts – protectionism of local businesses.
Seek IPC in a major city (e.g., Beijing, Shanghai, Shenzhen)
IPC’s are more sophisticated and less protectionist.
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Consider Adding Arbitration Clause UN Convention on the Recognition and Enforcement
of Foreign Arbitral Awards US and China are part of convention US arbitral awards can be enforced in China 90% successful enforcement rate IPCs enforce arbitral award Disadvantage – could be slow
35© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Areas of Concern for Foreign Companies
36© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Venue Litigation Timeline / Evidence / Discovery Remedies / Damages
Roadmap for Litigation in China:Timeline
37
ComplaintFiled Court
accepts or rejects case
7 days 5 days
Court serves
Defendant
15 days
DefendantStatement of Defense
due
15 days
Defendantevidence
due
6 Months
Trial Appeal
3 Months
Trial Trials are short
Trademark (~ 20 min) Complicated IP case – from 2 hrs to one week (rare).
Special Considerations No battle of the experts (but see 2013 amendments) Quality of documentary evidence is key
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Evidence
Must comply with Chinese authentication rules• Notarize (Chinese documents)• Notarize and legalize (foreign documents).
Foreign companies struggle to make production deadlines
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Discovery
No discovery under Chinese legal system!
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“Backdoor” Discovery Methods Criminal Liability for Trade Secret Theft
Police become involved if losses > $80,000 USD Seized evidence is available for later civil litigation
Use Administrative proceeding Can compel production of evidence Fines and injunction / no damages
41© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Summary of Issues Related to Burden of Proof
Little time to gather documentary evidence
Documentary evidence basis for decisions
Must undergo complex authentication
No discovery available in general
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Example
Trade Secret Enforcement
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Scenario
Foreign Co. enters into a technology license agreement with Chinese partner, then discovers trade secret misappropriation…
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Elements to Prove in Trade Secret Action
• Technological or business operation information
• Unknown to the public
• Economic benefits to the owner
• Information has practical utility
• Owner has adopted secret-keeping measures
45© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Possible defenses in Trade Secret Action
Information was known to public.
No secrecy measures were in place.
Scope of the trade secret was unclear.
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License as Evidence in Trade Secret Case Reps and Warranties Section
Acknowledge trade secrets were licensed Acknowledge licensed trade secrets are not public Licensee promises to protect trade secrets Licensee acknowledges trade secrets necessary to produce
product
Agreement documents scope of licensed trade secrets Memorialize secrecy measures in place
47© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Areas of Concern for Foreign Companies
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Venue Litigation Timeline / Evidence / Discovery Remedies / Damages
Damages for Trade Secret Theft (Art. 20)
Actual losses; or
Profits the infringer obtained from infringement.
With no discovery, how to prove?
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Use License to Help Prove Damages
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Include provisions for regular auditing.
Include post-termination auditing provisions.
Collect and notarize audit reports regularly.
Liquidated Damages Consider adding liquidated damages provision
Can ask Chinese Court to freeze licensee assets to ensure liquidated damages can be paid
Threat of frozen assets often is a useful deterrent
51© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
2012 Amendment Regarding Preliminary Injunctions
As of 2012, preliminary injunctions available for trade secret cases
Can also include provisions for injunctive relief.
© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
ExamplePatent Infringement
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Rules for Calculating Damages (Art. 65)
1. Actual losses plus costs
2. Benefits derived by infringer, if not #1
3. Multiple of a reasonable royalty, if not #1 or 2
4. Statutory damages, if not #1-3.
Statutory Damages
Statutory damages often used, since there is no discovery
Range: RMB 10,000 - 1,000,000 ($1,630 -$163,000 USD)
Treble damages proposed for new rules
56© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Proving Damages in Patent Cases
57© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Include provisions for regular auditing
Include provisions for post-termination audits.
Collect and notarize audit reports regularly.
The License Document
58© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
General Recommendations
59© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
• Use appropriate Chinese counsel.
• Be aware of formalities - use templates tailored for China.
• Be aware of differences in law (e.g., no parol evidence rule in China)
Steps to take prior to licensing Get business license for your company in China
Get official Chinese name and use consistently
Obtain Chinese seal
Identify which employees are duly authorized to sign binding contracts
60© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Formalities - License Agreement Use registered Chinese name consistently.
Stamp document with official company seal.
Duly authorized representative must sign.
Check to be sure that the business licenses are valid.
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Formalities – Record License Agreement
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Record license with appropriate authorities. Patent licenses: MOFCOM and SIPO
No transfer of intellectual property rights if not recorded.
No royalty payments from Chinese banks to overseas accounts if license not recorded and registered.
Technology license to Chinese business partner
Some important license terms to consider
• “technology license” not “technology transfer.”
• Trade secret rights terminate with license or joint
venture.
• Licensee must return trade secret information.
• Post-termination audit to confirm compliance.
63© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Licensing and China’s Anti-Monopoly Laws
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Brief History of China’s Anti-Monopoly Laws
August 1, 2008 China's first anti-monopoly laws take effect
Article 55: Anti-monopoly laws do not interfere with the lawful
exercise of intellectual property rights Intellectual property rights cannot be abused to
eliminate or restrict market competition.
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Brief History of China’s Anti-Monopoly Laws
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May 2012 SIPO given authority to grant compulsory licenses
Includes situations where “the act of claiming the patent right is deemed to violate the anti-monopoly law.”
April 2013: SAIC seeks comments on “Regulation on the Prohibition of Conduct
Eliminating or Restricting Competition through Abuses of Intellectual Property Rights”
Some prohibited acts under new regulations:
• refusal to license
• tying the license of an intellectual property right with other intellectual property rights or products; and
• imposing unreasonable restrictions when licensing intellectual property rights.
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Brief History of China’s Anti-Monopoly Laws
The Huawei v. InterDigital Case
The Parties Huawei Technologies Co., Ltd (“Huawei”)
• global wireless mobile device and infrastructure
• manufacturer, distributor, and service provider.
InterDigital Technology Co. (“InterDigital”)
• holds US and Chinese patents covering technology related to the 2G, 3G, and 4G wireless standards
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A Brief Primer on Standard Essential Patents
Standard Setting Organization (SSO): sets technical standard for a given industry.
Standard Essential Patent (SEP): cover technology that has been adopted as part of a technical standard set by SSO
FRAND: SEP Patentees are under an obligation to license SEPs under Fair, Reasonable, and Non-Discriminatory terms.
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70© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
Benefits of Standards
Standard Essential Patentee
Manufacturer (3rd party
beneficiary to SSO/SEP patentee contract to FRAND
license)
Consumer
• Promotes interoperability
• Shorter R&D time
• Increases competition by lowering switching costs for consumers
• SEPs lower licensing costs for manufacturers
• SEP patentee gets more licensees
• Reduces policing and litigation
“Hold-out” vs. “Hold-up”
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Hold-upHold-out
Strong SEP Patentee rights
Weak SEP Patentee rights
Refusal to negotiateor pay FRAND royalties
Enjoin or extract High royalties
The Huawei v. InterDigital Case
The Issues
Appropriate royalty rate for InterDigital’s “standard essential patents” (SEPs)
Did Interdigital violate its obligation to license under FRAND terms?
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Negotiations between Huawei and InterDigital
InterDigital’s terms:
Non-exclusive license to Huawei for 2G, 3G, and 4G SEPs
Huawei to pay higher royalty rates than Apple, Samsung, etc.
InterDigital gets a free cross-license to relevant Huawei patents
Non-essential patents included in license of SEPs
73© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Huawei v. InterDigital Litigation US Litigation
InterDigital asserts seven patents in ITC and District of Delaware
ITC: six not infringed, infringed patent was invalid.
Delaware: Pending
China Litigation
Huawei files two actions in Shenzhen Intermediate People’s court
First suit: abuse of market power, illegal tying, discriminatory pricing
Second Suit: Failure to meet FRAND obligations
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Holdings of the Shenzhen Intermediate People’s Court
First suit:
InterDigital royalty rates were excessive.
Tying of non-essential patents to SEPs was improper.
Demanding free cross-license to Huawei patents was abusive.
Viewed InterDigital US litigation as strong arm tactic.
75© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Second suit:
FRAND obligation not met under the Chinese Anti-Monopoly Law.
Rejected InterDigital patent royalty and tying provisions
Awarded RMB 20 million (approximately USD 3.3 million) to Huawei
Mandated 0.019% royalty rate per unit.
76© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Holdings of the Shenzhen Intermediate People’s Court
Importance of Huawei vs. InterDigital Case First major decision regarding a violation of China’s
Anti-Monopoly Law through intellectual property licensing.
First decision by Chinese court on appropriate royalty rate for FRAND obligated SEPs.
77© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
The 0.019% royalty rate:
An erosion of patent rights?
78© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Recent US cases on FRAND Licensing of SEPs
In re Innovatio IP Ventures Patent Litigation: (N.D. Illinois) FRAND Royalty = 9.56 cents per unit
Microsoft v. Motorola (W.D. Washington) FRAND Royalty
3.5 cents per unit for a certain portfolio
0.6 - 16.4 cents per unit for other portfolio
79© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the authors alone.
Huawei Royalty Rate is Comparable Cost Per Unit Under Huawei
Typical phone is 1,000 RMB (~ $150) Royalty Rate of 0.019%
FRAND royalty of 3 cents per unit
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Summary China still offers great opportunities for foreign companies
China’s IP and Anti-trust Laws are evolving quickly
Minimize risk by Having an appropriate business plan Crafting license agreement to mitigate potential issues
81© 2013. For educational purposes only. Not to be transmitted or reproduced without permission of the author. The views expressed are those of the author alone.
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