China 2013: A Year in Review by Stan Abrams

January 8, 2014 Posted by China Briefing Reading Time: 5 minutes

This week, China Briefing is featuring a series of specially-commissioned articles from prominent China-based writers regarding their thoughts on the key developments in the country during 2013, and what lies ahead in 2014. Today’s article is written by Stan Abrams, the head of Bentley Software’s Asia legal team and author of the blog China Hearsay.

China IP: the Year of the Duck, and Other Auspicious Signs

Jan. 8 – Looking back at the China IP scene in 2013, it is best characterized by a significant lack of newsworthy events. When it comes to intellectual property, no news is indeed good news. In years past, it was easy to pull out a list of nightmare disputes, usually involving a domestic company blatantly stealing a foreign firm’s IP rights. These were rarely representative of the state of the country’s IP protection environment and often lacked interesting legal issues upon which the IP cognoscenti could ponder, but when famous names like Nike, Apple and [insert luxury brand of your choice] are involved, those disputes tend to suck all the air out of the (news)room.

So what was the big IP case of 2013? Arguably it was the alleged infringement of copyrights held by Dutch artist Florentijn Hofman, creator of the giant inflatable yellow duck that graced harbors, lakes and rivers all over China earlier this year. This copyright issue, which never quite escalated to an actual legal dispute, generated a lot of talk but then fizzled out like air escaping a . . . well, a giant inflatable yellow duck.

The good news is that no other IP dispute in China this year combined egregious piracy with newsworthiness, and therefore 2013 was probably the first year in a very long time that the general public, particularly outside of China, was not repeatedly reminded of the PRC’s spotty record on IP enforcement. The face of IP progress in China this year was enormous, yellow and pneumatic.

That is not to say that all was quiet on the IP front in 2013. Although there was a notable dearth of infamous disputes, incremental progress on enforcement reforms proceeded apace. This of course is a continuation of policies that have been on an upward, positive trend since the late 1990s, but in the age of streaming entertainment, same-day delivery and ADD, the rate of change appears to be downright geologic.

Slow they may be in the eyes of brand owners, China’s IP reforms have been dramatic, and 2013 was a very good year with respect to reform and policy. Just consider the following:

1. IP Professionalization – It was only recently that China built up an “IP Industry” of professional agents, expert lawyers and experienced judges. We also now have special-purpose IP departments in Intermediate Courts in many cities. What many say is still missing is an appellate system where civil, and perhaps also criminal, IP matters can be escalated, probably within provinces. This is a complex issue that relates not only to the need for expert judges, but also the need to insulate courts from local influences that lead to protectionism. Many of these reforms have been under discussion for at least the past five years, but at the Third Plenum of the 18th Communist Party of China, which took place in November and touched on several IP matters, IP courts were mentioned specifically as an action item, a big thumbs-up from China’s new government leaders.

2. Trademark Law Reform – It may not be fair to peg this as a 2013 event as this new law has been percolating for several years now, but with the release of what will most likely be the last draft made available for public comment before passage of the revised law, it appears as if this is going to be wrapped up fairly soon. Among the changes is special emphasis on bad faith registration, which has received quite a lot of attention in the news as “trademark squatting.”

The new language here attempts to make it easier for brand owners to demonstrate that squatters filed with knowledge of a prior similar or identical mark. This is yet another incremental step forward; these cases always come down to evidence of prior “use” in the relevant market, which can often be exceedingly difficult to produce. The new law will also contain several provisions on the amount and calculation of damages, including a change that will make it much easier for brand owners to establish damages in judicial actions even in the absence of infringer sales records.

3. Transparency – China made general commitments to transparency when it acceded to the World Trade Organization over a decade ago, and it has, albeit sometimes in fits and starts, been making good on those promises ever since. A great deal of attention was paid to judicial and administrative transparency in 2013, emphasized in this year’s National IP Strategy Plan and with top players ranging from new Premier Li Keqiang and the Supreme People’s Court stressing not only the need for open trials and public disclosure of IP judicial decisions, which continue to be emphasized, but also administrative decisions and materials relating to both legal processes.

4. Criminal Actions – According to some IP professionals, particularly those who specialize in anti-counterfeiting work, an aggressive criminal enforcement system, with significant penalties for infringers including jail time, is key to an effective overall IP protection regime. Infringers can accept limited administrative fines as just another cost of doing business, but protracted prison time tends to make bad actors question their future in the industry.

Brand owners have been beating this particular drum for years with little to show for their efforts, but we are finally starting to see a significant shift in the number of IP criminal actions, which reportedly more than doubled in 2012. At the Third Plenum, criminal enforcement was specifically highlighted, with a particular emphasis on coordination with administrative agencies. This is significant as most enforcement actions are initiated at the local level via administrative action (a raid, for example); progressing these cases to criminal actions has, to date, been extraordinarily difficult. Administrative coordination and efficiency was also highlighted in the National IP Strategy Plan.

5. Actual Enforcement – No discussion of China IP would be complete without a quick disclaimer about the gap between policy and law and the reality of enforcement. This has been the source of the vast majority of criticism by brand owners in recent years, which has been echoed by foreign governments. The 2013 Special 301 Report issued by the U.S. Trade Representative, which contains effusive praise for China’s legislative efforts on IP enforcement, also notes that “At the same time, real world conditions for rights holders have overall seen little significant improvement.”

The accuracy of this statement has of course been challenged by Beijing, and the IP establishment here is always armed with a long list of questionably-relevant statistics showing increases in IP judicial and administrative actions, the upward trend in damage awards and a host of other positive signs. The U.S. government has its own statistics, including the usual brand owner survey data. As usual, the answer to the question of whether actual enforcement, as opposed to legal reform, has improved over the past year will most likely vary depending on who you ask.

For casual observers of the China IP landscape, 2013 was as silent as Hofman’s iconic water fowl. Some brand owners continued fighting an uphill battle, particularly with respect to trade secrets and e-commerce. Others enjoyed the fruits of past reforms, successfully applying for preliminary injunctions and working with police. China’s new government in 2013 strongly signaled its intention to continue the positive trend of IP reform in a variety of areas, and I would therefore in conclusion posit that as the year closes, China has made real, albeit incremental, progress over the past twelve months. Quack, quack!

Stan Abrams has worked as a lawyer and law professor in China for fifteen years, specializing in intellectual property issues and cross-border corporate transactions, and currently heads up the Asia legal team at Bentley Software. He writes regularly on China Hearsay, a blog devoted to China law, business and politics.