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BCLA Seminar, July 25,2002, Clifford Chance, London INTELLECTUAL PROPERTY: LAW AND ENFORCEMENT IN POST-WTO CHINA
Enforcement of Intellectual Property Law in Post-WTO China
He Zhonglin[1]
In a broad sense, enforcement of intellectual property (IP) law comprises of the recognition,[2] grant and maintenance (or revocation) of intellectual property rights (IPR) and dealing with infringement.
Today I will focus mainly on the topic of handling IP infringements and give a brief introduction about the mechanism of IP enforcement in China and two special issues: pre-trial provisional measures and calculating compensation.
For the first question, China has established quite a unique mechanism compared with its counterparts in the world. The second one concerns some newly introduced concrete systems according to the requirements of the TRIPs Agreement. Of course, the last one is probably the most concerned issue by the parties in addition to preventing an alleged infringement to continue. All these three questions have been taken as the countermeasures of China to satisfy the requirements of the WTO membership.
1. The mechanism of IP enforcement 1) General ideas Dual-track system -two parallel approaches Three kinds of liability Three forms of litigation A. Authorities The major organs of enforcement of IP law are the courts and the designated administrations. The courts play a vital role and hold the power of final decision-making. B. Possible Liability for IP Infringement In China, one always needs to bear in mind that in an IP infringement, the infringer may be held separately or simultaneously liable in three ways - namely under civil liability, administrative liability and criminal liability. Among these, administrative liability for an IP infringer is imposed by the IP administrations and less common worldwide.
C. Forms of Litigation As to IP infringements, there are three kinds of possible litigation existing, namely civil litigation, administrative litigation and criminal litigation, under the corresponding three procedural codes.
2) Administrative Intervention - A Unique Device of Dual-track system - “The Way of Two Legs” A. What is "the way of two legs"? Unlike most countries in which civil cases should be dealt with by courts, China set up a special solution in addition to the judicial approach for IP civil infringement cases which the administration can actively or passively intervene in an IP civil disputes, to assess infringement and mediate damages. Such a dual-track system is also called “The Way of Two Legs” which is a Chinese proverb. It only exists in IP civil cases rather than other civil cases. This unique device was firstly set up for patent cases in 1985 when the first Patent Act came into force and now extends to almost all IP fields. This is one of the most distinctive characteristics of IP protection in China and rarely found around the world.
B. Which organs hold the powe In the UK, the Patent Office is responsible for all IP administrations. It is quite convenient and effective to administer IP affairs. However, there are too many named administrations involved in enforcement of IP in China, as they are not only involved in the grant and maintenance of IPR but also dealing with infringements.
The designated IP administrations involving in dealing with IP infringements are as follows:
Other administrations may also involve in dealing with serious IP infringements, such as the Ministry of Public Security (MPC) and local Public Security Bureaus (PSB), the General Administration of Quality Supervision , Inspection and Quarantine of the State (AQSIQ) and local Technical Supervision Bureaus (TSB) and the Ministry of Culture (MC) and Culture Bureaus (CB), etc..
C. How is the administrative approach operated? A'. Active investigation and imposition of administrative liability for serious infringements According the relevant IP law, the designated administrations should actively investigate and decide on an administrative punishment (administrative liability) for serious IP infringement cases including the cases involving piracy or counterfeit or with other nature which harms public order, without the request of the owner of IPR.
B'. Passive intervention - handling infringements on the parties' request On the other hand, except for copyright cases, the plaintiff in other IP cases can initially choose to where he will bring the action - court or IP administration. Where the IP administration considers the infringement well found, it has the power to order the infringer to stop infringement acts immediately, but no power to decide damages. In case the party concerned is not satisfied with the decision, they may, within 15 days from the receipt of the notification of the order, institute legal proceedings in the court, according to the Administrative Procedure Act. The administration may, upon the request of the parties concerned, mediate on the damages concerned. If the mediation does not work, the parties concerned may lodge a lawsuit with the court according to the Civil Procedure Act.
C'. Performances IP administrations have handled a great amount of IP cases. Local patent administrations deal with nearly a half of all patent infringements. Especially for trademark cases, about tens thousand are dealt with by the local AICs per year.
According to statistics in 2000, local patent administrations received 722 cases related to patent infringement. The AICs across the country investigated and handled 22,001 related to trademark-infringement and counterfeiting. The local copyright administrations received and handled a total of 2,457 cases.[3]
D. Why China adopts such an approach? In China, traditionally the administrative power can interfere intensively in civil affairs. However, the initial reason for such a unique device was lack of competent IP judges to deal with IP cases when the patent system was introduced into China in early 1980s.
After nearly 20 years development of the IP system and improvement of judicial competence, many scholars and practitioners urged to hand over the whole jurisdiction to the courts. However, the latest amendments of the three IP acts not only refuse such a suggestion, but extends such an approach to all IP fields.
The new reason has been explained as that the administrative intervention is quite effective for crackdown on piracy and counterfeiting in such a so-called "special period". Of course, it is a well-known fact that it is easy to confer power or right to someone but difficult to withdraw.
E. What is the crucial problem? Such administrative proceedings may cause some practical problems and some serious conflicts between court and administration. Since the IP administration can only decide whether there is an infringement in existence and if so order to stop infringement rather than order to make compensation for losses, the case may not be finally resolved in the same proceedings. That means there may be two contentious procedures processing at the same time in one or different courts and may lead to contradictory decisions between administrative litigation and civil litigation. According the judicial interpretations[4], the court which deals with the civil case (damages) still has a power to review all issues relating the case, no matter whether an infringement has been determined by the administration.
Of course, with such problems I mentioned above, the parties may have to spend much more time and costs on resolving a disputes, compared with directly bringing the case to court.
Chart 1 - Comparison of Administrative and Judicial Approaches
2) Judicial approach A. Courts, IP Divisions In most counties, IP disputes are concentrated on designated courts, but the extent is quite different from country to country. In the UK, the courts have jurisdiction over the issues both of validity and infringement in a same case.
Chart 2 - IP Litigation for Infringement and Revocation
Basic allocation of jurisdiction over IP cases in China- Exclusive jurisdiction over revocation cases and Non-exclusive but designated jurisdiction over infringements.
In China all cases concerning the validity of IPR should initially go to the corresponding re-examination boards, then may be brought as administrative lawsuits before the sole court (No.1 BIPC or No.2 BIPC[5]) and will generally be concluded in the BHPC which is acting as a court of appeal.
A number of local courts have jurisdiction over IP infringements and generally limited to intermediate courts. Patent and plant variety infringements are more strictly limited to those experienced and specifically designated intermediate courts.[6] As for trade mark and copyright cases, general intermediate courts have the jurisdiction.
China does not have a Patent Court or IP Court specifically dealing with patent or IP cases. However, many scholars and practitioners including judges are keen to set up separate IP courts other than the IP division under the general fora. In my view, considering the big area of China, a practicable option would be that to establish a separate IP Court of Appeal to hear all second instance IP cases including infringement and revocation of IPR.
Since 1993, Chinese courts have made positive efforts on establishing special trial chambers of IP. In the year 2000, China launched a modest judicial reform. According to the guideline of the reform, all High Courts, Intermediate Courts in all provincial cities and many big cities and even few District Courts have set up a special and independent division – namely, No.3 Civil Division, to exclusively deal with IP related all civil cases and some administrative cases.
The Supreme People's Court (SPC) is the highest judiciary of the state. Its No.3 Civil Division was established in October 2000 on the basis of the previous the IP Division which was founded in October 1996.
B. Types of IP cases The scope of judicial protection of IP includes dealing with infringements of all IPRs and unfair competition cases (including trade secret) and technology contract disputes.
C. Cases Load and Trend From 1991 to 2000, there were totally 34,902 first instance IP civil cases to be dealt with by the courts. The annual number of IP civil cases has increased steadily by 10% or so except for a slight drop in 1997. In 2001, the courts accepted 5,265 and concluded 5,041 first instance IP civil cases. In the same year, the courts received 319 and concluded 314 first instance IP criminal cases.
As far as the No. 3 Civil Division of the SPC is concerned, generally it deals with IPR cases of between about 100 and 200 per year including from about 10 to 30 final trial cases. Since the year 2000, the SPC issued 13 judicial interpretations which concern IP issues and were drafted by the division.[7]
D. Time and Costs for IP Litigation The time and costs consumed for IP civil actions vary. Under the Civil Procedure Act,[8] cases in first instance should generally be concluded within 6 months from the date of filing, but may be extend another 6 months under special circumstances. Cases in second instance should generally be finalized within 3 months but may also be deferred under special circumstances. In practice, most IP cases can be finished within 6 for first instance and 3 months for second instance respectively. Generally speaking, the time and costs of IP litigation is less than the UK. As for cases involving foreign factors, such as foreign parties, the disputed asset located outside China, there is no such time limitation.
However, many patent infringements may go beyond such terms, since a number of defendants may take counterclaims against the validity of the alleged infringed patents. The SPC has taken some measures to resolve such problems and two judicial interpretations issued in 2001 regulate the discontinuation of action.
E. Criminal Litigation The Criminal Code of the PRC which was amended in March, 1997 defines 7 kind of the crime of IP infringement. Article 213. Crime of counterfeiting the registered trademark Article 214. Crime of selling merchandise under a faked trademark Article 215. Crime of forging or manufacturing without authorization or selling or manufacturing without authorization the registered trademark or identification Article 216. Crime of counterfeiting the patent (Maximum 3 years imprisonment) Article 217. Crime of infringing the copyright Article 218. Crime of selling the infringed duplicate works (Maximum 3 years imprisonment) Article 219. Crime of infringing the trade secret Article 220. Corporate crime[9]
Like the UK, there are also no criminal sanctions for general patent infringements.
Offenders committed IP crimes may be punished with imprisonment of no more than 7 years or criminal detention[10], with a fine, or a separately imposed fine.
According to the Criminal Procedure Act (1996) and relevant judicial interpretations, the claimant may report a crime of infringing intellectual property to the police and a public prosecution may be followed later. Alternatively, a simple way is that the claimant may directly bring a lawsuit to court and the court should accept and hear the case (private prosecution), except for the cases which seriously harm the social order or national interests.
Moreover, in light of the Criminal Procedure Code, generally basic-level courts (lowest court) deal with the IP criminal cases (by its Criminal Divisions).
2. Pre-trial Provisional Measures 1) Establishment According to the requirements of the TRIPs Agreement,[11] Article 61 of the latest Patent Act (2000) expressly sets up the system of pre-trial injunction (Preliminary injunction) for the first time in China as well. Thereafter, the revised Copyright Act, the revised Trademark Act, the Regulations for Protection of Computer Software and the Regulations for Protection of Topographies of Integrated Circuits also provide similar provisions. The revised Copyright Act, the revised Trademark Act and the Regulations for Protection of Computer Software clearly stipulate the system of pre-trial preservation of evidence. Those revised IP acts and relevant regulations also reaffirm the system of pre-trial preservation (attachment) of property which had been established under the Civil Procedure Act.
The pre-trial injunction, pre-trial preservation of property and pre-trial preservation of evidence in China correspond largely to interlocutory injunction, freezing injunction (used to be Mareva injunction and search order (used to be Anton Piller order) in the UK.
2) Time and choice of application The IPR holder may separately or simultaneously apply for the court to take such pre-trial provisional measures. This can occur before the institution of an action, or filing the case or in the course of proceedings.
3) Grounds for application When applying for a preliminary injunction and a pre-trial preservation of property, the applicant (IPR holders or other interested parties) needs to show that other parties have carried out or will carry out acts which infringe their IPR and will cause irreparable harm. Under the circumstance where evidence could be lost or is difficult to obtain afterwards, IPR holders may apply to the court for evidence preservation before initiating legal proceedings.
4) Guarantee, supplementary guarantee and counterguarantee Any applicant shall provide guarantee when filing an application for pre-trial injunction. The court may order the applicant to provide supplementary guarantee in an extroactive manner. The party against whom an application is filed may provide a counterguarantee, but any measure taken to execute the ruling of pre-trial injunction shall not be removed.
The court may order the applicant to provide a guarantee for an application for pre-trial preservation of evidence.
5) Application for reconsideration Where the interested party is not satisfied with the ruling, it or he may apply for reconsideration within l0 days from the date of the receipt of the ruling. However, the execution of the ruling shall not be suspended during the reconsideration.
6) Implementation For all application of those provisional measures, a court must make the decision within 48 hours after the application and the measures should be taken without delay if they are considered necessary.
Where the applicant fails to institute legal proceedings within 15 days after the court adopted the measures of preservation, the court should terminate such measures.
Since pre-trial injunction is a new system incorporated in the Chinese legal system, people may need time to understand and learn to apply such proceedings, whereas pre-trial preservation of property has long been in the procedural law and often applied to in various civil actions.
3. Damages 1) Principles of Compensation According to the General Principles of Civil Code (GPCC 1986, Art. 117 & 118), the basic principle of compensation for damages in civil cases is compensatory damages rather than exemplary (or punitive) damages. In the cases of IP infringement, the principle is full compensation to IP damages.
2) Calculating Methods According to the IP law including those relevant judicial interpretations,[12] there are four methods of calculating compensation for IP infringement.
A. Loss of the IP Owner The loss of the obligee (generally IP owner) can be calculated by multiplying the reduced sales volume of patented products by the profit per patented product. If the reduced sales volume is hard to be determined, then the sales volume of infringing products may be considered as the reduced sales volume of patented products.
B. Gains of the Infringer The gains of the infringer can be determined by multiplying sales volume of infringing products by the profit per infringing product (profit of infringing product generally means operating profit). For infringers who make their whole living on infringement, quantum of damages can be calculated according to sales profit.
In my view, in the cases of intentional infringement, the profit of infringing product should be calculated according to sales profit other than operating profit since it should fall into the reasonable anticipation of infringers.
C. Referring to Royalty At present, only a judicial interpretation promulgates that when determining quantum of damages with reference to patent license royalty, the court should determine the damages within the range of 1-3 times of the patent license royalty.
D. Discretionary Damages When quantum of damages cannot be determined by all three methods mentioned above, the court might generally determine quantum of damages no more than RMB 300,000 (rough equals to $ 38,000 or £ 25,000). For cases of severe consequence or serious circumstances, quantum of damages can be above RMB 300,000 but no more than RMB 500,000 (rough equals to $ 63,000 or £ 42,000).
3) Should the lawyers’ fees be included under the reasonable expenses? Whether lawyers' fees are/should be included under/within the "reasonable expenses" is still not clear under the current Chinese law. Some drafters of the IP judicial interpretation said the lawyers’ fees are not included since the TRIPs agreement only say "may include appropriate attorney's fees" rather than the word of "shall" or "must". However, in practice the courts award an IP owner a reasonable amount of attorney fee in many cases.
4) New trend or isolated outcome? On January 17, 2002, the SPC issued a potentially ground breaking judgement in relation to the enforceability of copyright contracts. In making the claim the plaintiff relied on a clause within the film distribution agreement, which stated that “the Distributor (defendant) undertakes to compensate the Investor (plaintiff) ten times of any discovered omission or concealment of film revenue”. The Court found that the clause was both valid and enforceable, and accordingly awarded the Investor RMB 2.277million (approximately US$ 280,000) in damages. This result was unexpected since no such clause has been invoked successfully in a contract dispute in China before.[13]
Although this decision is clearly an important one, it is not yet certain that it will set a precedent for the use of “10:1” damages clauses in contracts generally or just simply an isolate outcome for the idiosyncrasy of the film distribution industry in China where there is a problem with the concealment of film revenue. It remains to be seen what will be considered to be unfair in future cases or in fact how this will be interpreted in practice.
4. Optimistic Prospective In my view, the outlook for a strong IPR legal system in China is a very hopeful one and may indeed be stronger than our current expectations. There is reason to be confident that IPR will contribute greatly to the flourishing economic future of China.
[1] Zhonglin He is a judge of the Third Civil Division (Intellectual Property Rights) of the Supreme People’s Court of the People’s Republic of China, stangding director and deputy secretary-general of the China Intellectual Property Society. [2] I use "recognition of IPR" here referring to those IPRs such as copyright and neighbouring rights which generally need not formalities of grant or registration which are generally required for acquisition of industrial property rights such as patents, trademarks. [3] "White Paper on the Intellectual Property Rights Protection in China in 2000", the State Intellectual Property Office of the P.R. China, Searched on 11th July, 2002 from: http://www.sipo.gov.cn/sipo_English/gftx_e/zscqbhbps_e/200203060007.htm. [4] One was issued on June 22, 2001 which is related to the trial of patent cases. Another was issued on January 9, 2002 which concerns the trial of trademark cases. [5] No.1 BIPC is responsible for the cases of patents, trade marks and integrated circuits. No.2 BIPC is on duty of new plant variety cases. [6] Up to now, there are 44 intermediate courts holding such a jurisdiction, namely intermediate courts in all provincial capitals, 4 special economic zones (Shenzhen, Zhuhai, Shantou, Xiamen) and Dalian, Qingdao, Wenzhou, Foshan, Yantai and Huludao. As for new plant variety, only intermediate courts in provincial capitals (34) are entitled to try. [7] Generally, the SPC issues 20-30 Judicial Interpretations every year. [8] Articles 135, 146 & 159, CPA. [9] Article 220 of the Criminal Act provides that "When a unit commits the crimes stated in Article 213 through Article 219, it is to be sentenced to a fine; its directly responsible person in charge and other personnel of direct responsibility should be punished in accordance with the stipulations respectively stated in these Articles of this section." [10] A criminal detention is less than six months. [11] Article 50.1 of the TRIPs Agreement provides that "The judicial authorities shall have the authority to order prompt and effective provisional measures: (a) to prevent an infringement of any intellectual property right from occurring, and in particular to prevent the entry into the channels of commerce in their jurisdiction of goods, including imported goods immediately after customs clearance; (b) to preserve relevant evidence in regard to the alleged infringement." [12] The judicial interpretation of June 22, 2001 provides detailed calculating methods. Such methods can be references in other IP infringements. [13] In first instance, the Jiangsu High Court actually awarded 5 times of the discovered concealment to the plaintiff.
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