The obvious availability of counterfeit products in China obscures the huge progress that the country has made toward making intellectual property (IP) a mainstay of its economy. Problems remain, most of which the government is working hard to address. Some of these will take decades to truly change, but as premier Wen Jiabao has said on many occasions: “future competition in the world is IP competition”.
To understand any IP system, we need to look at the law, the rights and the enforcement.
China introduced its IP laws, based on civil law, in the mid-1980s, to become compliant with the international Berne and Paris IP treaties. Subsequent updating laws mean that today its IP laws are of a very high quality by global standards. Some of the criticisms voiced by US companies would apply to any civil law system and not just China.
IP “rights” for foreigners in China are generally of good quality, reasonable cost and timely. Patents issued to foreigners by the Chinese Patent Office have usually been well “examined” by their best patent examiners.
The 20-year lifetime cost (US$20,000 to $50,000) of a Chinese patent is about 10% of the total cost of patents for the Group of Eight (G8) countries. Because of the shortage of trained and experienced patent examiners, however, patents granted to Chinese inventors may not always be as critically examined, which can give rise to accusations of domestic bias.
The time to grant a patent is substantially quicker than in the European Union, about the same as Japan and slightly longer than the United States.
Although problems remain, enforcement, has improved substantially and continues to improve. It is quite possible to get a patent or trademark enforced using the Chinese courts, administrative or customs systems.
The cost is not high, $60,000 to $120,000, compared with about $100,000 in Germany, $500,000 in the UK and $5 million in the US.
The time for the case, including appeal and enforcement, is quick by international standards. It can often be as short as one year, compared with two to three years in the UK, two to four years in Germany and five to seven years in the US. As it is a civil law system, more time may be needed to collect evidence before the start of the trial. If the administrative route (funded largely by the Chinese government) is chosen, enforcement can take place in a few weeks and cost less than $10,000.
Last year China was the first country to reach 700,000 patent applications, yet it has only one-third the number of patent examiners of the US. The Chinese patent office (SIPO) has a huge recruitment and training program, supported by the UK and European patent offices. Unsurprisingly, the majority of examiners are still inexperienced. Given this lack of experience and the pressure of volume, some poor patents will be granted – just as they were in the US in the mid 1990s, during its upsurge in patent applications.
China is a huge country of 1.3 billion people. There is a wide variation in the quality of courts and respect for IP law – just as there is in Europe between, say, Greece and Germany. The quality of the first-level courts ranges from excellent in most of China's eastern seaboard (with a population of 400 million), to less good in some of the poor, inland provinces. Five years ago, 60% of the judges hearing IP cases had no IP legal training. Now the government has a programme, supported by the EU, to provide this formal training.
Provincial officials do not always accept that their courts need to be impartial between foreign and Chinese litigants. This is similar in some respects to the US, where juries tend to have a domestic US bias. For example, in the jurisdiction of East Texas no foreign litigant has ever succeeded in an IP case against a US firm. The Chinese government has actively encouraged foreign firms to use the “federal” IP Tribunal of the Supreme (Appeal) Court, whose decisions have been sophisticated and of very high quality.
Corruption is recognised as a problem, particularly in the least developed provinces. Structural changes to counter this will take time to have an effect.
In 2004, there were more patent litigation cases filed in China than in any other country, including the USA. Over 98% of these litigation cases involved only Chinese parties. Chinese companies today are acting as though their IP is important, is worth defending and that their judicial system is worth using.
In the 2% of patent litigation cases brought by foreigners, we estimate that over 90% are decided by the courts in favour of the foreign patent holder – compared with about 35% in front of a jury in the USA. This is counter to the all-too-common view that foreign patents cannot be enforced in China.
Although problems remain, many Western companies’ problems are self-inflicted wounds. Many of the myths are created by foreign senior executives who do not understand IP, nor the mistakes their own companies have made in creating the problems. The most common failures are:
• Not registering rights in China: unless they register their trademark, or design right or patent they will have no “right” to enforce – just as in the US or Europe.
• Inadequate understanding of the market place: many companies leap quickly into China without a proper analysis. This omission is surprising given its size and diversity.
• Limited or non-existent on-the-ground IP expertise: many (even large) companies have limited IP expertise in China and thus do not understand and cannot cope with what is happening. By contrast, 95% of Philips’ 50 IP lawyers and patent attorneys in China are Chinese.
• No delegation and too slow: the Chinese have a fast legal and enforcement system where a company must respond rapidly. With their low level of IP representation in China, many companies must refer this to head office for approval and simply run out of time.
• “We mustn’t sue – it would annoy the government”: far from it – the government and judiciary have made clear that the system is there to be used. What they will not accept are complaints from companies about “poor IP enforcement” who have not made use of the legal and judicial routes available to them.
There are many examples of foreign companies that have been successful in China. The large electronics firm Philips has a profitable €7 billion business with 35 companies, 15 research centres and 20,000 employees in China. About 15% of its global inventions now come from China. It already has four IP centres and supports “IP Academies” in three universities.
Much smaller is Zwilling-Henckels, the top-end cutlery manufacturer, with global sales of €250 million and the oldest trademark in Germany. It had a major problem with Chinese-origin counterfeits during the early 1990s. Today, there is no infringement. The city of Yangjiang has stopped infringing activity from its 2,000 cutlery factories and Henckels has its own factories in that city as well as profitable sales across China. Its head of IP is now a fluent Chinese speaker.
There are many indications that Beijing is intent on having an effective IP system. It took 30 to 40 years for Japan and South Korea to get to the same point that China has in 20 years. China, contrary to popular perception, has made very good progress.
This article is the first part of a series about intellectual property. Read the other parts here:
Ian Harvey is chairman of the UK Intellectual Property Institute www.ip-institute.org.uk
© Ian Harvey, October 2008