‘The Role of IP when distributing your products in China’ Valentin de le Court HFG Law Firm & IP Practice Shanghai Office BAR INTERNATIONAL: CHINA – VOKA Mechelen 3 September 2014

Introduction - IP and China: Some facts and figures I. IP Rights When Distributing Your Products In China – Why Bother? II. How to minimize the risks related to IP when distributing products in China? III. How to fight infringement? IV. What IP strategy to protect your business in China? Conclusion & Key Take Away Overview

Introduction - IP and China: Some facts and figures

China is No 1 country for trademark applications  Almost two million ( ) trademark applications filed in 2013 >< CTM applications with OHIM China is No 1 country for patent applications  patent applications filed with SIPO in 2013 (+15.9%)  Chinese invention patent applications in 2013 (+26.3%) >< European patent applications In 2013 No 2 and No 3 largest filers of PCT applications (international patent application system) were Chinese:  Chinese telecom giants ZTE Corporation and Huawei Technologies IP in China: facts & figures

China is the No3 country for PCT applications in 2013 China is the most IP litigious country in the world since 2005  In 2012, 98% of the IP litigation cases were purely domestic (Chinese >< Chinese) Some IP facts & figures (2)

Some IP facts & figures (3) What can we learn from these facts & figures? 1°It is possible to PROTECT your IP rights in China  Complete and advanced legal system for protecting IP  Widely used and accessible to foreign companies 2°It is possible to ENFORCE your IP rights in China  Domestic companies make an extensive use of the IP litigation system  Enforcement mechanisms are available to foreign companies 3°IPR ARE AS ESSENTIAL to the business of your Chinese competitors as they are to your business  Chinese companies are more IP aware and more IP rich  China’s stake in the IP system grows  Necessity for China to put in place effective IP rights protection mechanisms

I. IP RIGHTS WHEN DISTRIBUTING YOUR PRODUCTS IN CHINA – WHY BOTHER?

IP in China: WHY BOTHER? Strategic importance of IP  Technology, Know How, Brands is what Chinese companies and consumers are looking for  IP rights is what gives your company its competitive edge  Critical to understand the legal protection granted by each IP right What do you have that needs protection? What protection is available by law? What can you do with IP rights? Competitive advantage Patents Copyright Trade secrets Trademark

What to avoid when distributing your products in China? An example  BE company met with potential CN distributor at trade fair in Europe  After first contact and follow-up: decide to collaborate for CN market  CN distributor pushed for three things (“It’s always like that in China”) : 1.Have exclusivity 2.Exclusivity for the whole Chinese territory 3.Have the TM registered (CN distributor registers for the best protection of the BE company…)  What happened?  CN distributor did not push the product outside its provincial home town IP in China: WHY BOTHER?

 CN distributor had no capability for covering the whole country  Bad sales results  BE company wanted to terminate the distribution agreement BUT  No exits foreseen in the contract  CN distributor warned it would sue BE company for contract breach + TM infringement if worked with third parties  BE company tried to fight back  Failed to cancel the TM (CN distributor = rightful TM owner)  Had to indemnify the CN distributor for breach of contract + buy back the trademark at maximum price  Could have been easily avoided… IP in China: WHY BOTHER?

II. How to minimize the risks related to IP when distributing products in China?

II. How to minimize the risks How to minimize the risks related to IP when distributing your products I. Use the Chinese IP system – build an IP right portfolio II. Protection of Trade Secrets – protect your confidential information III. Work with the right people – know your distributor IV. Have appropriate contracts signed – contracts do work in China

No.1 BUILD AN IP RIGHT PORTFOLIO Measure No.1 USE THE CHINESE IP SYSTEM - BUILD AN IP RIGHT PORTFOLIO  Securing IP protection requires to be proactive  Registration  Territoriality  Understand the legal protection for each IP Right  Patents and Utility Models  Design Patents  Copyright  Trademarks  Protection of trade secrets

No.1 BUILD AN IP RIGHT PORTFOLIO Innovations in the field of TECHNOLOGY  Protected by invention patents and utility models (easier and less expensive to obtain)  Novelty, inventiveness, industrial applicability requirements  Need to apply for protection (SIPO)

No.1 BUILD AN IP RIGHT PORTFOLIO Innovations in the field of STYLING/DESIGN  Protected by design patents (easy and cheap)  Protected by copyright (no registration, recordal recommended)

No.1 BUILD AN IP RIGHT PORTFOLIO  LITERARY, MUSICAL, GRAPHICAL, CINEMATOGRAPHIC WORKS Protected by copyright (no registration ; recordal recommended) E.g. catalogs, text and photos on your website, external aspect of products  SOFTWARE Protected by copyright (no registration ; recordal recommended)

No.1 BUILD AN IP RIGHT PORTFOLIO  Distinctive SIGNS Protected by trademarks Registration required (CTMO) – first to file country `

Key take away: take China into account in your IP strategy  Building your IPR portfolio is the starting point  Many foreign companies are still filing too late and too little  Not applying in China = free license to use to your CN competitors  Not applying in China = risk that others will register No.1 BUILD AN IP RIGHT PORTFOLIO

Measure No.2 - PROTECT YOUR CONFIDENTIAL INFORMATION (Protection of know-how and trade secrets)  Often what distinguishes you from your Chinese competitors  Can be of great interest for your distributors or suppliers WHAT can be protected as trade secrets?  Broad range of technical and operational information Technical know-how, product formula, customer lists, marketing strategies, cost and price information, processes, management methods, production method, etc.  Must not be known to the public (i.e. ‘not commonly known or easily accessible to people in the field)  Must have economic value (competitive advantage/ economic benefits)  Owner must take measures to keep the information secret (!) No.2 TRADE SECRET PROTECTION

Trade Secrets protection strategy in China (1.) BE AWARE of what constitutes a trade secret  Make sure your employees are aware (2.) Use the right CONTRACTS  NDAs with potential distributors during selection process  Confidentiality provisions in your contract with distributors PREVENTION is the key No.2 TRADE SECRET PROTECTION

No.3 WORK WITH THE RIGHT PEOPLE Measure No.3 - Do business with the right people  Wrong distributor = root of many problems  Know your distributor (!!!)  Perform DUE DILIGENCE: get information on your potential distributor:  Background checks / Reputation checks / Clients check  Well established businesses have a reputation to defend  Avoid distributor that will be in a position of conflict of interest

Measure No.4 – Have appropriate distribution contracts signed  WHY? Ensure parties are on the same page (negotiate in great detail)  ENFORCING CONTRACTS WORKS (World Bank ranking: BE#16/CN#19) IP Rights Provisions  Keep the IP ownership (make it clear and register first)  Define how the distributor can use your trademarks (license + guidelines)  No right to register / use similar trademarks  Obligation to signal counterfeits  Remind that unauthorized use of IP rights will cause irreparable business harm + foresee liquidated damages Impose CONFIDENTIALITY / NON-USE obligations  Trade secret protection (!)  No use of trade secrets post-termination No.4 USE APPROPRIATE CONTRACTS

III. IP Enforcement Tools in China

Basically four ways to enforce your IP rights in China: 1)Administrative enforcement – through government agencies 2)Judicial enforcement– in the People’s Courts 3)Criminal enforcement – through the PSB and PP 4)Customs seizure - have goods (imported and exported) detained at the borders IP Enforcement in China

 Unique to China  through various Government Agencies (AIC, IPO,…)  What can they do? Investigative powers: raid, collect information, seize Issue injunctions Punitive powers: destroy goods, impose fines  Advantages: Speed, cost effective, lower burden of proof  Drawbacks:  Not suitable for all IP rights (strong for brand owners; weaker for copyright and patent owners)  No damage compensation / Local protectionism / Limited deterrence Administrative Enforcement

Recommended against manufacturers, large scale retailers, big players  Advantages:  Damages can be claimed  Court will take the case, even if highly technical  Broad powers in terms of remedies  Stronger impact on the infringer and market  Good preparation needed  Evidence collection: higher burden of proof (notarized purchase mandatory)  Forum shopping  Timing: between 6 to 12 months for first instance decision Judicial Enforcement

 Enforcement is not as bad as you might think Foreign companies often responsible when they fail to enforce their IP rights Lack of registration, Lack of appropriate contracts, misunderstanding of the Chinese IP system, no enforcement strategy  Have a TAILOR-MADE IP LITIGATION STRATEGY If well prepared, IP rights are realistically enforceable in China Do your part of the job HOW TO FIGHT INFRINGEMENT?

IV. What IP strategy to protect your business in China?

WHAT IP STRATEGY TO PROTECT YOUR BUSINESS WHEN DISTRIBUTING YOUR PRODUCTS IN CHINA? (1.) Be PROACTIVE:  Passivity is not an option  Measures can be taken to minimize IP risks when distributing your products in China  Have a strategy and be ready to implement it (2.) Perform an IP audit and REGISTER IP RIGHTS to protect your competitive advantage  Build an IP right portfolio: file, file and file!  Register your IP rights before entering the Chinese market  Layer your IP: the more IP rights you have, the better your protection IV. WHAT IP STRATEGY ?

IV. WHAT IP STRATEGY ? (3.) Adopt appropriate CONFIDENTIALITY POLICIES (protect your KH and Trade Secrets) (4.) Use CONTRACTS adapted to your needs and to the Chinese context  Ensure parties are on the same page  Helps prevent the need to litigate (5.) Be vigilant and MONITOR the market  Be proactive and take appropriate measures if infringement spotted (6.) Have an ENFORCEMENT STRATEGY: be ready to act

IV. To Conclude

Do your part of the job and your IP rights will be realistically protected in China  China’s commitment to IP is important (transition to an innovation based economy - from ‘made in China’ to ‘created/invented in China’)  Use the IP system & have appropriate contracts signed  Responsibility for lack of IP protection often lies with foreign companies (lack of understanding, lack of strategy, lack of registration) DO YOUR HOMEWORK Key take Away

For Any Question: Valentin de le Court Chinese Mobile European Mobile +32 (0) HFG Law Firm & IP Practice Shanghai Office