FUNDAMENTALS OF LICENSING INTELLECTUAL PROPERTY IN CHINA 1© 2013. For educational purposes only. Not to be transmitted or reproduced without permission.

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

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WHY CHINA?

Foreign Direct Investment is encouraged

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Source:

China DailyAugust 17, 2010

Labor Advantages

Low labor costs

Educated workforce

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Natural Resources

China has abundant natural resources

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Source: chinaperformancegroup.com

Infrastructure

China spends more than any other country on infrastructure

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Source: chinafile.com

BUT….

Enforcement of IP rights is a serious concern.

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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?

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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

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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

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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.

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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

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Comparison of Chinese Patent Types

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• 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

.

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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

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Areas of Concern for Foreign Companies

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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

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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

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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

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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

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2012 Amendment Regarding Preliminary Injunctions

As of 2012, preliminary injunctions available for trade secret cases

Can also include provisions for injunctive relief.

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ExamplePatent Infringement

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Remedies Available in Patent Infringement Cases

Injunctions

Damages

Reasonable fee for pre-grant use

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

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Proving Damages in Patent Cases

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Include provisions for regular auditing

Include provisions for post-termination audits.

Collect and notarize audit reports regularly.

The License Document

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General Recommendations

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• 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

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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.

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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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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

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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.

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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.

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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.

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The 0.019% royalty rate:

An erosion of patent rights?

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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

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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

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Questions?

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