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China’s Progress on Intellectual Property Rights (Yes, Really)

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China Power

China’s Progress on Intellectual Property Rights (Yes, Really)

Foreign firms have been slow to realize the substantial changes in China’s protection of IP rights.

China’s Progress on Intellectual Property Rights (Yes, Really)
Credit: Flickr/ Vernon Chan

China has long been seen as the “world’s factory,” churning out low-quality manufactured goods and imitating products and business models from abroad. Whether it is due to heavy-handed government interference or some cultural argument about Confucian educational values, China — or so the story goes — is a land of copycats incapable of innovation with no respect for intellectual property rights (IPR).

This, of course, is not accurate.

Yet many U.S. companies still believe this story. According to a 2017 survey conducted by the American Chamber of Commerce in China, member businesses are split on their views of China’s IPR laws and regulations; however, more than half of the respondents remain largely skeptical that laws protecting intellectual property will be properly enforced in China.

Foreign firms have long complained that enforcing their intellectual property rights in China is difficult due to local judicial protectionism, challenges in obtaining evidence, small damage awards, and a perceived bias against foreign firms.

However, over the past decade, China has become increasingly innovative and has demonstrated a serious resolve to enforce an effective IPR regime. Indeed, as Chinese firms focus on global expansion abroad and high-tech innovation at home, they have increasingly demanded effective IP protections from the government. In fact, many of the concerns raised by foreign companies operating in China have been addressed by legal reforms and new enforcement mechanisms.

Local Judicial Protectionism

One major complaint levied against China’s IPR regime is that cases brought to an intermediate court (at the municipal level) will suffer from local judicial protectionism. Long and Wang found in their 2015 study that in IP cases between Chinese firms, plaintiffs litigating in their hometown are significantly more likely to win. However, they also found that when cases are appealed to the higher courts (at the provincial level), plaintiff location no longer has a significant effect on case outcome.

As summarized in a white paper from the Supreme People’s Court, China has taken important steps to eliminate local judicial protectionism and ensure a fair adjudication process in IP cases. In October 1995, the Supreme People’s Court established its Intellectual Property Division to oversee national cases. In 2014, Beijing, Shanghai, and Guangzhou set up their own intellectual property courts. In early 2017, Nanjing, Suzhou, Chengdu, and Wuhan launched specialized intellectual property tribunals.

Because these courts have first instance jurisdiction over all IP cases in their respective provinces, not only will the negative effects of local protectionism be mitigated in a more systematic way by removing cases from local jurisdiction, but the courts will also be able to better provide judges and technical investigators with the required expertise to deal with the complex nature of their caseloads. This will ensure that both domestic and foreign litigants receive fair treatment.

Challenges in Obtaining Evidence

In order to effectively litigate intellectual property cases, IP holders need evidence. In the United States, parties usually obtain information through the pre-trial procedure of discovery, which includes interrogatories and depositions, as well as requests for admissions and access to documents, real property, or other relevant items for review or testing. In China, on the other hand, no formal process of discovery exists, and there is no requirement that IP infringers provide evidence, such as sales or accounting documents, that could be used to show infringement. In fact, the burden to provide evidence is on the plaintiff. Many companies have claimed that this makes it impossible to conduct fair IP litigation in China.

Interestingly, Article 65 of China’s Civil Procedure Law stipulates, “The people’s court shall have the authority to obtain evidence from the relevant units or individuals, and such units or individuals may not refuse to provide evidence.” The ability to subpoena records would hypothetically mitigate the lack of a formal discovery process, but until recently it has not been widely invoked.

In 2015, however, the Supreme People’s Court promulgated a new interpretation of the Civil Procedure Law, which, according to Article 112 of the interpretation, allows one party to request that the court order the opposing party to produce specific documentary evidence that is under the other party’s control. This interpretation will “encourage requests for the production of accounts, records, and books, as the judges were having difficulty with properly assessing damages” and create a fair process for procuring information.

Small Damage Awards

These new interpretations of evidence will also help with the problem of damage awards. Many businesses have complained that pursuing intellectual property cases in Chinese courts is not worthwhile because the damages awarded are too small. Some estimates indicate that patent holders currently receive around 36 percent of the damages they seek in litigation, with damage awards averaging around just 80,000 RMB ($12,400) and legal fees between 10,000 RMB and 30,000 RMB ($1,550 to $4,650).

However, last July at the National Financial Work Conference, President Xi Jinping proclaimed that China “must step up efforts to punish illegal infringement of intellectual property rights and force infringers to pay a heavy price.” This is reflected in a proposed policy change of the fourth Patent Law amendment, which is still under review. The statutory damages would increase from their current levels, between 10,000 RMB to 1 million RMB ($1,550 to $155,000), to between 100,000 RMB and 5 million RMB ($155,000 to $775,000.

In line with this policy objective from China’s top leadership, the courts have also made efforts to increase damages to protect intellectual property in their rulings. In 2016, the Beijing IP Court found in favor of plaintiff Watchdata System Co., Ltd. and ordered defendant Hengbao Co., Ltd. to pay 49 million RMB in damages for a patent infringement plus an additional 1 million RMB in legal fees (for a total of $7.2 million). Similar landmark victories in IP protection include a trademark infringement ruling that ordered three Chinese shoemakers to pay New Balance 10 million RMB ($1.5 million) for copying New Balance’s logo and a copyright infringement ruling that ordered Baofeng Technology to pay over 6 million RMB ($930,000) to Tencent for illegally streaming six episodes of The Voice of China.

These cases all follow a general trend in increasing damage awards in IP litigation. In fact, the average damages awarded for patent infringement by the Beijing IP Court have increased more than three fold from 450,000 RMB ($70,000) in 2015 to 1.4 million RMB ($217,000) in 2016. Trademark infringement cases now see average damages around 1.7 million RMB ($263,500) and copyright cases see awards that average 458,000 RMB ($71,000).

Bias Against Foreign Firms

Finally, a string of high-profile losses to relatively unknown Chinese companies in patent infringement cases by companies like Apple, Samsung, Sony, and Dell have convinced many observers that it is impossible for foreign firms to get a fair shake in China’s courts. Nevertheless, these anecdotal cases tend to mistake the spectacular for the systematic.

In reality, foreign companies fare just as well in enforcing IP rights in trial as privately-owned Chinese firms. A 2016 study by Love, Helmers, and Eberhardt found that between 2006 and 2011, foreign companies brought over 10 percent of patent infringement cases in China and won over 70 percent of those cases. Today, win rates average around 80 percent and injunction rates average around 98 percent. With these numbers, it is no wonder that China is increasingly being selected as the forum of choice for non-Chinese companies to litigate IP disputes.

In terms of policy, just last month, China finished a four-month nationwide campaign coordinated across 12 government agencies to protect the IP rights of foreign firms. The hope is that the campaign will improve cooperation among IP enforcement bodies, create a sound environment for foreign investors, and deter future violations of foreign IP.

While some have argued that domestic political constraints prevent China from making significant legal changes, China has already embarked on the arduous task of reforming its IPR regime. Indeed, domestic demand has made this essential. Not only has China reformed its IP laws to expand admissible evidence and increase damages for violations, but it has also reformed its legal structures and implemented new policies to limit the possibility of protectionism and bias against foreign litigants.

While the system is far from perfect, the impact of these reforms should not be understated. These changes represent a positive trend in China’s commercial environment and as the laws continue to nurture domestic innovation, foreign firms ignore this progress at their own risk.

William Weightman is a 2017-18 Fulbright Fellow based in Chengdu, China, where he researches intellectual property law, IP enforcement, and technology innovation policy.