Hong Kong: An IPR Risk Management Center for Your Business in China Why Hong Kong as Your IPR Risk Management Center? Daniel R. Fung Chairman, Des Voeux Chambers Former Solicitor-General of Hong Kong November 2005

IPR in China (1) Background China is one of the world’s largest trading nations and fastest growing economy, potentially the world’s largest consumer market with a population of 1.3 billion. Ever increasing demand for new products & services, designs & technology, know-how & techniques incorporating IPR. Potential market for higher end products and services consistent with increasing social affluence, lowering of import tariffs and elimination of further trade barriers under WTO. IPR becomes an increasingly valuable economic asset as China moves to become a developed economy. 2

IPR in China (2) Common modes of exploitation of IPR Supply of products/services incorporating IPR (e.g. brand name, design, invention). Sub-contracting manufacture (OEM) of products incorporating IPR for supply in China market and/or for export to overseas market. Licensing of IPR including character merchandising, brand names, trade marks, designs, copyright, inventions, know-how & technology. Franchising of business operations. Tech-transfer, joint venture, agency, distributorship, marketing, sale & purchase & other commercial arrangements & agreements involving IPR. 3

IPR in China (3) IPR risk factors Registration of IPR Enforcement of IPR Licensing, merchandising, franchising, transfer, joint research & development, marketing & sale & other commercial arrangements involving IPR Negotiation, drafting, execution, performance and monitoring of commercial agreements involving IPR 4

IPR in China (4) IPR in China Since 1978, China has made considerable progress in establishing an IP system for registration and protection of IPR. It has acceded to major international IP conventions, treaties and agreements including WTO – TRIPs Agreement. IP laws were amended to be TRIPs-compliant by 2001 and are being continuously updated. Special IP courts are established in major cities in addition to administrative authorities to enforce IPR. There has been ongoing reform of judicial and administrative systems. Central Authorities recognize the importance of innovations to sustain economic growth and the necessity to protect IPR. High expection of overseas investors for IPR protection as China moves to become a developed economy. 5

IPR in China (5) Registration of IPR Most IPRs must be registered before they can be protected, e.g.  invention, utility model, design under the China’s Patent Law  trade mark under China’s Trade Mark Law Application may be opposed and registration may be cancelled or invalidated on various grounds Unsuccessful registration, opposition, cancellation or invalidity challenge of IPR pose risk factors to IPR owner 6

IPR in China (6) Enforcement of IPR Apart from registered IPR, certain unregistered IPR may be protected, e.g.  well-known trade mark under Trade Mark Law  unregistered trade mark under Anti-unfair Competition Law & Product Quality Law  trade dress under Anti-unfair Competition Law  trade name  copyright under Copyright Law Administrative action to enforce trade mark, patent & copyright infringements, unfair competition and Product Quality Law. Court action to enforce trade mark, patent & copyright infringements. 7

IPR in China (7) Customs protection of IPR  border measures to control import & export of infringing goods  customs records Criminal enforcement of serious infringements of trade mark, patent and copyright, unfair competition, false trade descriptions, counterfeit, adulterated and sub-standard goods by local Public Security Bureau & other administrative authorities. China is the largest emerging economy in the world. The Government is determined to respect IPR. As has been experienced in other developing economies, enforcement of IPR is a continuing battle the success of which depends very much also on IPR owner’s vigilance. Ineffective enforcement of IPR pose risk factors to IPR owner. 8

IPR in China (8) Licensing & other commercial arrangements and agreements In line with owner’s overall IPR programme & strategy (e.g. exclusive or sole licence, scope of licence including limitation as to manner of use, time and area) Comply with relevant laws & regulations Provisions for ownership of any derivative IPR Due performance of agreements Effective dispute resolution for breach of agreements – choice of law, jurisdiction & arbitration clauses Unsuccessful making and implementation of IPR commercial arrangements and agreements pose risk factors to IPR owner 9

Your IP Risk Manager Understand your IPR portfolio that may require protection in your business in China, devise an overall IPR programme & strategy. Secure and maintain necessary registrations, renewals and recognition (well-known trade mark). Beware of cancellation/ invalidity challenges to registrations. Monitor competitor’s application & registration – oppose or apply to cancel/invalidate if appropriate. Monitor the market through investigators and local agent, identify problem areas and subjects. Organize & co-ordinate enforcements actions. Ensure your commercial arrangements and agreements involving IPR are best made and implemented. 10

Enter Hong Kong  HK’s empathy with Asia’s tradition of mediation and skills at blending the best of East and West.  Bilingual professionals with knowledge of Mainland laws  Excellent support services from large pool of other experienced professionals and experts  Unsurpassed geographical location as the hub of the Asia-Pacific  Excellent infrastructure in transport and communications 11

Hong Kong as a SAR of China Under ‘One Country, Two Systems’, Hong Kong as a Special Administrative Region of China exercises a high degree of autonomy enjoys executive, legislative & independent judicial power including that of final adjudication retains the previous capitalist system and way of life preserves pre-existing laws and judicial system (save for establishment of its own Final Court of Appeal) has independent finances, taxation, monetary & financial systems, no foreign control remains a free port and separate customs territory on its own formulates policy, laws & administrative arrangements to protect IPR 12

Hong Kong as Your IPR Risk Management Center: Why? (1) Hong Kong’s strengths Mature market economy with developed institutional framework International financial, business & service center Respect for the rule of law, clean government, independent judiciary, level playing field for business Confluence of East & West with intimate knowledge of China & the World Geographical proximity (all major cities within three hour flight time) & deep economic, commercial & cultural ties to Mainland Regional legal services & dispute resolution center  Legal system familiar to international business community – fair & transparent legal proceedings  Commercial, contract & IP laws in line with international practices 13

Hong Kong as Your IPR Risk Management Center: Why? (2)  Wide experience of courts & professionals in handling such matters  Large pool of professionals including lawyers having presence or professional connections in Mainland –7,000 lawyers (solicitors & barristers), 700 law firms –Foreign lawyers from 19 jurisdictions –47 law firms have established 56 representative offices in Mainland (as of 12/2004), offering professional services on HK legal affairs in areas including international trade & IP –Many law firms have been working closely with Mainland law firms 14

Hong Kong as Your IPR Risk Management Center: Why? (3)  Increasing acceptance of HK as an international arbitration & mediation center HK’s arbitral awards are enforceable in Mainland (Memorandum of Understanding on the Arrangement concerning Mutual Enforcement of Arbitration Awards between the Mainland and the Hong Kong SAR, June 21, 1999)  HK’s judicial documents can be served on parties in Mainland (Memorandum of Understanding on the Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and Hong Kong Courts, January 14, 1999)  HK’s judgments in commercial matters may gradually be able to be enforced in Mainland. It is expected that initially reciprocal enforcement of judgments will apply to a money judgment arising from a contractual dispute. This will strengthen HK’s status as a regional dispute resolution center. 15

Hong Kong as Your IPR Risk Management Center: Why? (4) Regional IPR risk management center  HK a WTO Founding Member & adheres to standards of major international IP conventions, treaties & agreements  Long history & experience of IPR protection  Strong & effective IPR regime derived from British model & familiar to international business community  IPR protection through clear & firm government policy to promote creative industries, modern laws continuously updated, efficient & responsive registration & information systems, effective enforcement & remedies, public education, co-operation with relevant parties  Government maintains close co-operation with Mainland authorities for IPR promotion & protection particularly in Guangdong & the Pearl River Delta (PRD) 16

Hong Kong as Your IPR Risk Management Center: Why? (5)  HK’s copious efforts to protect IPR well recognized internationally  Deep experience of government authorities, courts and professionals in handling IPR matters  Large pool of IPR professionals (lawyers, patent agents, trade mark agents, licensing agents, investigators, designers, marketing personnel, administrators, managers), well-versed in English & Chinese, knowledge of East & West, experienced in international & Mainland business practices  World’s first in securing criminal conviction for unauthorized internet bit downloading on October 24, 2005 in BitTorrent case (HKSAR v. Chan Nai Ming). 17

Hong Kong as Your IPR Risk Management Center: Why? (6) Hong Kong’s unique advantages Benefit from being a part of China but at the same time retaining its own separate capitalist system Gateway & two-way platform: for foreign businesses entering Mainland & for Mainland businesses ‘going global’. Closer integration of HK’s service economy & Mainland’s manufacturing economy reinforces HK as a service platform for its vast & rapidly developing hinterland Regional headquarters & offices for overseas companies & Mainland enterprises Mainland enterprises increasingly set up headquarters in HK. HK has become the world’s 3rd largest capital-raising market as more Mainland enterprises come to HK, and will continue to benefit from Mainland enterprises ‘going global’. 18

Hong Kong as Your IPR Risk Management Center: Why? (7) Free Trade Arrangement between Mainland & HK for liberalization of trade in goods & services: Closer Economic Partnership Arrangement (CEPA) offers earlier & preferential treatment for HK goods & services entering Mainland. Under CEPA I (June 29, 2003), CEPA II (October 27, 2004), CEPA III (October 18, 2005) & continuing  Zero import tariff for 1,108 types of products of HK origin (basically covering goods manufactured and to be manufactured in HK)  Better access to Mainland services market for HK’s providers of services including legal, accounting, management consulting, convention & exhibition, videos & sound recording products distribution, wholesale trade, retailing, franchising & trade mark agency services. HK law firms with representative office in Mainland can operate in association with Mainland law firms. HK Chinese can qualify as Mainland lawyers and patent agents. 19

Hong Kong as Your IPR Risk Management Center: Why? (1) Regional co-operation between Mainland & HK –Increasing co-operation with Mainland provinces & cities on trade, technology and IPR –Co-operation within Pearl River Delta (PRD) & Greater PRD –HK as part of the new 9+2 Pan-PRD co-operation (7 Mainland provinces, HK & Macao with a population of 450 million) Increasing cross boundary business activities between Mainland & HK 20

Hong Kong as Your IPR Risk Management Center: How? (8) HK IPR professionals & service providers (including lawyers, patent agents, trade mark agents, licensing agents, investigators) through their HK and/or Mainland offices, if necessary in association their counterparts in Mainland, provide one-stop service & solution to your IPR programme & strategy in Mainland & HK including registration, enforcement, licensing, merchandising, franchising & other commercial arrangement & agreements. 21

Hong Kong as Your IPR Risk Management Center: How? (2) Licensing (A) Hong Kong as a Regional Licensing Hub 2nd most developed licensing market in Asia after Japan, based on per capita retail sales of licensed merchandise (Source: Hong Kong Trade Development Council, 2003) Major international licensors use HK as their primary base Under CEPA, HK manufacturers become stronger licensees for popular properties Strong legal framework; strong IPR protection; respect for commercial agreements Large pool of professionals & talents International-standard accounting World-class center for dispute resolution Extensive trade promotions, distribution and marketing networks in the region Trend setter for Mainland market22

Hong Kong as Your IPR Risk Management Center: How? (3) (B) Licensing on the Chinese Mainland: Huge Growth Potential China has the 2nd largest licensing market in Asia, worth US$600 million (Source: TDC, 2003) Current per capita retail sales of licensed merchandise at US$0.4, compared to US$92 in Japan (TDC, 2003) Over 60% of respondents in a TDC survey of licensing companies on mainland reported double-digit growth in the past few years, and anticipate a similar rate of growth in the next few years (TDC, 2003) PRD as a mega-factory: manufacturing items (e.g. toys, stationery) of tremendous business potential, items that are popular for licensing 23

Hong Kong as Your IPR Risk Management Center: How? (4) (C) Longstanding Business Relationship between US and Hong Kong As of June 2005, there were 262 regional headquarters and 601 regional offices of US companies in Hong Kong. That's around 22% of overseas companies having regional operations in Hong Kong. In that year, a total of 3,798 overseas companies had regional operations in Hong Kong. (Source: Research Department, TDC) Hong Kong is valued by of US industries and organizations as a stepping stone into Mainland (Source: Invest HK) 24

Hong Kong as Your IPR Risk Management Center: How? (5) (D) Proactive Initiatives of the Hong Kong Trade Development Council Annual Licensing Show and Conference: 40 local and overseas exhibitors showcased over 200 brands and properties in 2004 (Source: TDC) TDC actively fosters partnership opportunities and networks between licensors, licensing agents and licensees TDC offers a range of business matching, data search and support services such as hkenterprise.com 25

Hong Kong as Your IPR Risk Management Center: How? (6) Consider Hong Kong as your Licensing Hub Consider Hong Kong as your Dispute Resolution Center. For resolving disputes arising from your commercial arrangements and agreements involving IPR, consider choosing  HK law as the governing law  Arbitration and Mediation in HK  HK Courts 26