OVERVIEW ON INTELLECTUAL PROPERTY PROTECTION NOTES IN CHINA DURING THE COVID-19 OUTBREAK

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source: https://gowlingwlg.com/en/insights-resources/articles/2020/ip-protection-notes-in-china-during-covid-19/

COVID-19 has swept across the globe causing massive disruption to businesses everywhere. While the impact of COVID-19 on other parts of the world continues to increase, China’s economic activity is now gradually returning to “business as usual”. This note will give an overview on the measures taken by the Chinese authorities in relation to IP during the period of COVID-19 outbreak in China and will shed light on what businesses should be aware of in terms of IP protection during this unprecedented time.

Time-out Period Mechanism

The P.R.C Tackling Emergency Affairs Law, the P.R.C Patent Law, the P.R.C Trade Mark Law, the P.R.C Regulations on Protection of Layout Design of Integrated Circuits and other relevant regulations have provided for a time-out mechanism to be applied in certain situations to prevent the expiration of statutory time limits due to circumstances outside relevant parties’ control. During the outbreak of COVID-19, the China National Intellectual Property Administration (“CNIPA“) issued the No. 350 Announcement to confirm that where a party had missed a stipulated deadline as a result of delay caused by reasons related to COVID-19, leading to the termination of relevant IP rights, the party could apply for restitution of those rights.

For patent and layout design of integrated circuits (“LDIC“) rights, an affected party can apply for restitution of their rights within 2 months from the date of removal of the obstacle ( e.g. a medical reason or restrictive measures related to COVID-19), or at the latest within 2 years from the date of expiration of the time limit. The application is free but the party must submit together with the application form evidence confirming the COVID-19 related reason for delay.

For trademarks, if a party is unable to progress trademark related matters due to issues related to COVID-19, the relevant time period will be suspended from the date on which the obstacle arose until the date it is removed, unless otherwise provided by law. If the trademark is terminated due to the obstacle, a party can request restitution of the trademark within 2 months from the date of removal of the obstacle or at the latest within 2 years from the date of expiration of the time limit, as with LDIC rights. On 27 March 2020, CNIPA announced that the No. 350 Announcement is applicable to all parties located in other countries and regions who are affected by COVID-19. In other words, foreign parties can benefit from the time-out mechanism as well.

With regards to court procedure, Article 83 of P.R.C Civil Procedural Law provides that if a party fails to meet a deadline due to a force majeure or another justified reason, the party can apply for an extension of the deadline within ten days after the obstacle is removed. The People’s Court shall then decide whether to grant the extension.

Online application for registration and online litigation service

For IP application for the IP rights which can only be obtained via registration, such as patents, trademarks and LDIC, the CNIPA has an existing online application system for registration and has encouraged parties to submit their applications online and submit relevant documents by post rather than in person to reduce physical contact.

For IP litigation, filing cases via the online system or by post has become more common. During the outbreak of COVID-19, such off-site filing is preferred by parties. By way of illustration, it was reported that from 3 February to 28 February 2020, the Beijing IP Court reviewed 207 cases that were filed online and 1506 cases that were filed by post, which constitutes a 15% and 700% increase (respectively) compared to the figures reported for the same period last year.

However, with regards to hearing trials, online hearings are not common in China. However, the Supreme People’s Court issued the No. Fa [2020] 49 Notice Concerning Strengthening and Regulating the Online Litigation Work during the Period of COVID-19 Epidemic Prevention and Control Period (the “No.49 Notice”) to encourage the courts to use digital means where appropriate for proceedings. In particular, it points out that courts should consider the technical requirements of the case, the specific situation and the parties’ willingness to proceed with an online hearing. Where the parties disagree with the method of online hearing or there are circumstances such as certain technical obstacles, where parties’ identities or originals of the documents have to be verified in person, or where alleged infringing products would have to be examined, the hearing would not be conducted online.

Rejection of COVID-19 related trademark with negative influence and green channel of IP rights application and IP rights pledge

Similar to trademark laws in many countries, the P.R.C Trade Mark Law rejects trademark registrations that are adverse to the public interest. During the outbreak of COVID-19, applicants tried to apply for trademarks for “Huo Shen Shan” and/or “Lei Shen Shan”; two hospitals built specially to treat COVID-19 patients in Wuhan city, as well as “Li Wen Liang” a doctor who passed away due to infection of COVID-19.

The China Trademark Office deemed that applications of above-mentioned marks were made in bad faith in relation to COVID-19, contrary to Article 10 (8) of the P.R.C Trade Mark Law[1] and that the applications should therefore be refused. Some of the applicants proactively withdrew their applications of the above-mentioned marks. Furthermore, a number of the trademark agents who represented the applicants for the above-mentioned marks were fined a sum of RMB 100,000 (approx. USD 14,000).

On the other hand, however, it is recognised that applications for certain IP rights that seek to improve the state of affairs during the COVID-19 outbreak deserve preferential treatment. In the document Ten Measures to Support Resumption and Production of Enterprises issued by the State Administration for Market Regulation, National Medical Products Administration and Administration and CNIPA, it is stressed that parties applying for patents and trademarks concerning protection against COVID-19 may apply for prioritised and/or expedited examination.

Advice for dealing with IP protection during the COVID-19

In light of the above-mentioned points, we set out below some preliminary advice in terms of IP protection in China in response to the COVID-19 outbreak.

Firstly, bear in mind that due to the first-to-file IP system in China, parties shall apply for the relevant IP rights as soon as possible. If COVID-19 influences the process of filing, applicants will have to apply the time-out mechanism to secure their rights. Please note that this mechanism is also applicable to foreign parties affected by COVID-19 in their own countries or regions.

Secondly, where applicable, try to use online filing systems and/or postal services. In addition, it is noteworthy that some of China’s courts are willing to explore the possibility of online hearings which is a very new development.

If one is planning to apply for patents or trademarks which genuinely relate to COVID-19, don’t forget to apply for prioritised and/or expedited examination to try to obtain the registered IP rights as quickly as possible.


[1] Article 10 (8) of the P.R.C Trade Mark Law[1] provides that: “[T]he following signs shall not be used as trademarks: … (8) Those detrimental to socialist morality, or having other adverse influences.”

Made in China 2025: OEM Manufacturing and Trademark Infringement in China

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source: https://www.iptechblog.com/2020/06/made-in-china-2025-oem-manufacturing-and-trademark-infringement-in-china/#page=1

For years Western companies have relied on Chinese factories to manufacture their products at low cost and export them back to other markets to be sold with high margin of profit. This is normally referred to as OEM manufacturing, where OEM stands for Original Equipment Manufacturer. This was for decades the main business model for China’s industrial and economic development and it earned China the nickname of “World’s Factory”. In recent years, things have changed. China is now a market with hundreds of millions of consumers buying foreign products online or traveling and shopping abroad, while cheap manufacturing is moving elsewhere to be replaced by High-Tech businesses. In this evolving socio-economic landscape, OEM manufacturing has lost its prior standing in the government policies. China is now projected towards a further integration of its economy into the global capital system. Aside from the already renown “Belt & Road” initiative, China has recently launched “Made in China 2025”, a new grand plan to showcase China’s own brands and industries to the world and move away from being the world’s “factory” to an economy producing higher value products and services.This policy change embodied in the “Made in China 2025” program, is also reflected in the recent legal developments concerning the relation between OEM manufacturing and trademark infringement. This article will explore the evolution of such relation and will comment on the most recent leading decision on this topic issued by the Supreme People’s Court this October 2019.OEM manufacturing and Trademark Infringement

First of all, China is a first to file country, where IP rights are owned by those who register them first. It is therefore not uncommon that a Chinese OEM may be manufacturing products upon commission of foreign clients, which bear a trademark that has already been registered in China by another person or entity. In the most typical case, the commissioning party owns that very same trademark in the country of destination of the OEM products. The question is whether affixing such trademarks of others by the OEM on such products meat for export constitutes an act of infringement of the third party’s registered rights in China.

Neither the Trademark Law of China, nor its implementing regulations provide an answer to this question. Therefore, the task of addressing this issue has been left to the People’s Courts. For a long time, courts adopted conflicting interpretations. Some courts deemed that affixing registered marks of others on products meant for export to a country where the consignee owns those same trademarks was not a “use” of the trademark in China and therefore could not cause confusion among the relevant Chinese public. Others held the opposite position. In 2015 and again at the end of 2017, the Supreme People’s Court stepped into the debate and issued a judgments that formed mandatory precedents to all civil judges facing the same type of issues.

The Pretul (2015) and the Dongfeng Cases (2017)

In 2015, the Supreme Peoples’ Court issued a landmark ruling on this issue, known as the PRETUL case[1]. The case reviewed by the court concerned a custom seizure action about the export of a number of products manufactured by the OEM of a foreign company. In this case, the holder of the Chinese mark affixed on these products meant for export claimed that this was an act of unauthorized sale of its registered mark and was therefore infringing its exclusive right. The Court eventually disagreed with this opinion and carved out the conditions and limits for an OEM to raise a successful defense against an infringement claim. In particular, the court concluded that, present the following conditions, an OEM act of manufacturing does not constitute a trademark use in the sense of the Chinese trademark Law and cannot therefore be an infringement:

  • the OEM was authorised to make the products by a foreign company;
  • the authorization was clearly limited to the manufacturing for the sole purpose of exporting the products abroad;
  • the foreign party owns a valid right on the marks affixed on the commissioned products in the country of destination.

A more recent judgement of the Supreme People’s Court in December 2017, further confirmed the PRETUL exception, but added an additional probatory burden to the OEM. In the case known as theDONG FENG case,[2] the plaintiff’s trademark “DONG FENG and Chinese Characters” had been recognized as well-known in China. At the same time, the products under the “DONG FENG” mark, were manufactured upon commission of an Indonesian company who had registered an identical mark in Indonesia in 1987. In this case, the lower court had found for infringement stating that the OEM duty of care stretched to examine and find out the well-known status of the mark “DONG FENG” and to determine whether the Indonesian mark had been filed in bad faith. The Supreme People’s Court rejected this view and concluded that the reasonable duty of care should be deemed discharged when the OEM manufacturer has verified the trademark rights of the foreign purchaser, unless there is evidence proving the contrary. In practice, this duty is discharged once the OEM receives from the consignee a copy of the relevant trademark certificates in the countries of destination. Overall, DONG FANG restated the teaching of PRETUL by confirming that once it is proved that the products are only meant for export, this will not infringe the relevant trademark because there is no use of this trademark in China among Chinese consumers. Therefore, they won’t be confused by the act of manufacturing that is confined to a factory and then the result is sealed and immediately shipped outside China.

Inversion of Direction in 2019

On October 14, 2019 the Supreme People’s Court published a judgment issued on September 23, 2019 in the HONDA case .[3] In this judgment, the Supreme People’s Court has come back to the OEM manufacturing exception, giving the whole matter a second thought and reaching conclusions that overcome PRETUL and DONG FENG.

In this case, Honda Motor, the owner of “HONDA” trademarks in class 12 in China, sued the defendants, Hengsheng Xintai and Hengsheng Group for having accepted an OEM order from a Myanmar company, Meihua Company Limited (“Meihua”), to manufacture 220 sets of Motorcycle parts and export them to Myanmar bearing a mark similar to the “HONDA” marks in China. In particular, Meihua is the licensee of a registered Myanmar trademark “hondakit” in class 12. However, the parts manufactured in China were bearing a trademark “HONDAKit”, where the word HONDA was highlighted in capital letter and in red color, unlike the simple wordmark “hondakit” in Myanmar.

The Supreme People’s Court found that:

  1. The relation between the Myanmary Meihua and the defendant Hengsheng group was that of an OEM arrangement.
  2. However, there can be trademark use in the sense of the trademark law also in case of an OEM arrangement during the processes of manufacturing and attaching trademark in the factory in China.
  3. Therefore, such use can be scrutinized as to whether it is infringing. To determine such OEM use as infringing, the involved enforcer will have to determine whether it can cause confusion among the relevant public in China.
  4. The relevant public standard to determine “confusion” in the trademark use analysis also includes operators of businesses related to the products. Products involved in an OEM arrangement can still be accessed by the relevant public of the PRC either online or when traveling abroad.
  5. Likelihood of confusion is the test, actual confusion or actual access to products is not required.

In sum, PRETUL and DONG FANG have been overruled. While in the prior jurisprudence of the Supreme People’s Court OEM manufacturing was always presumed not to be a “use” of a trademark in the sense of the Trademark Law, in HONDA, this presumption has been flipped around. After HONDA, the OEM may face infringement liability even if it was licensed by the foreign client to manufacture for export purpose only, and the foreign client can prove he validly owns the same mark in the country of destination. As long as the Chinese right holder can prove that the affixing of the marks in that specific case has the ability to create confusion among the relevant public in China, the OEM will have infringed the Chinese Trademark Law.

At the heart of this inversion is a reinterpretation of the role of OEM manufacturing in the current Chinese economy and development planning. In the past, when OEM manufacturing was the main driver for economic development, China needed to secure it from any risk of disruption. With PRETUL the court had insulated OEM manufacturing from being challengeable under the Trademark Law. After HONDA, OEM manufacturing is open to trademark infringement claims under the relevant provisions of the Trademark Law of the PRC. The court has expressly recognized that in the new economic context and in light of new government policies, it is no longer justifiable to put OEM manufacturing automatically above the trademark law and that other interests, such as those of the consumers or other right holders (including Chinese right holders) are to be weighed into the infringement equation.

The Proof of Confusion

For the holder of a Chinese trademark, these can be good news. Unlike PRETUL, he will have now a chance to stop the OEM from exporting those products and pay compensation in spite of the latter fulfilling all the PRETUL criteria. However, in order to succeed, the right holder must still prove that the OEM act of affixing his trademark on the commissioned products, can cause confusion among the relevant Chinese public for that type of products. Although HONDAdoes not require the proof of an actual “confusion”, this is still a difficult task. In OEM cases, there are no direct end users of those products in China because the OEM products are meant to be directly shipped abroad. How could this use then cause confusion? In order to lighten the burden of proof of the Chinese right holder, the Court has stretched the scope of “relevant public”. In particular, the Court has stated that Chinese users of the kind of products in question can theoretically see and buy them online or when they travel abroad. In both cases, it is abstractedly possible that the exported OEM production may find its way back to China. The court has stressed out the fact that nowadays Chinese people have access to the Internet and are online shoppers as well as travel abroad more often than before. Furthermore, the Court in HONDA has added that when determining the relevant public, we should not only look at the end user of the product, but, in case of spare parts like in HONDA, to the intermediate users, i.e. the people involved in the export logistic or any other person involved in the business of these spare parts. This will therefore help right holder in China build a case of “confusion” against an OEM.

Is there any room for an OEM to defend itself after HONDA?

Although it is going to be a much tougher battle than it was under PETRUL, an OEM still has defenses. First of all, the OEM must fulfill the PETRUL standards. This is in fact the starting point. Without an order from a foreign right holder (i.e. a foreigner that legitimately owns that same mark in the country of destination), the manufacturing and the export of the trademarked products would be an act of open infringement by counterfeiting.

Furthermore, there must still be at least a high similarity or identity between the foreign trademark affixed on the goods and the one registered in China by the third party. In HONDA, the OEM affixed a mark that was different from that registered by the foreign consignee in Myanmar and was more similar to that owned by Honda Motor in China. Had the defendant used the mark in the exact font and type as the one registered in Myanmar, they may have had a better chance to argue for non-identity of the marks in dispute. Therefore, mark similarity may be a defense line depending on the specific case. Eventually, in HONDA the court found for infringement because the mark “HONDA” in class 12 in China was recognized to be a well-known mark. This teaches us that the likelihood of infringement increases with the degree of notoriety of the Chinese mark. OEMs will therefore have a good chance of repelling attempts at enforcement of those Chinese marks that are little or not used by their holders in China and have not built any reputation among the relevant Chinese public. In that case, it is obvious that there won’t be any risk of confusion.

OEM may also try to build a defense around the delimitation of “relevant public” in each specific case. Although the HONDA interpretation of relevant public is rather broad and favors the Chinese right holder, it cannot stretch without limits and the facts of the case may offer natural and logical limitation to the creation of that test, which may help the OEM prove that there cannot be confusion in that specific case.

Conclusions

So, what is the practical impact of this decision? Certainly, it will make the holders of a registered trademark in China more inclined to sue an OEM once they find out it is manufacturing products with that trademark even if upon a legitimate commission by a foreign party. It is also clear that any administration (e.g. Customs, MSA or Police) or civil court called upon in a trademark enforcement action, will be less inclined to apply a blanket OEM exception as in PRETUL. The HONDA decision seems to provide now an assumption that OEM manufacturing is a trademark use and therefore potentially infringing as long as the China trademark holder can prove confusion of the relevant Chinese public. We can expect an increase of this type of litigation in the near future and an increase in the cases favorable to the Chinese right holder rather than the OEM and its foreign partners.

It is clear that the courts in particular, will be keen to implement this new jurisprudence in light of the final policy goals set forth in the “Made in China 2025” agenda. Likely, the ongoing trade wars will make judges even more sensitive about their policy enforcing role when confronted with OEM manufacturing cases of trademark infringement. It seems that a new IP front has now been opened!

[1] Fokker Security Products international Limited v. Pujiang Ya Huan Locks Co. Ltd.

[2] Shanghai Diesel Engine Co. Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd.

[3] Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd. et Chongqing Hengsheng Group Co., Ltd. [Min Gao Fa Zai No. 138/2019].

Changing perspective: why you should never underestimate trade secrets’ power

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If you heard about a threat that had already caused a loss of EUR60 billion in economic growth and almost 289000 jobs in Europe alone, that could lead to the loss of one million jobs by 2025, you’d try to do something about it, wouldn’t you?

Those are the estimated losses caused by the theft of trade secrets due to cyber-espionage only. From states to single companies, no one is doing enough to stop this problem.

It is important to change our perspective, to understand what trade secrets are and why they are so relevant, so you and your company can put adequate protection in place, especially when doing business outside Europe.

Starting with the basics: a trade secret is a piece of confidential business information that can be of considerable commercial value and can provide an enterprise with a competitive edge.

In other words, a trade secret can be anything from manufacturing processes or sales or distribution methods to consumer profiles, from advertising strategies to lists of suppliers and clients — as long as it is relevant for your business and you are keeping it secret.

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Most of the legislation used to protect information as a trade secret (and to prosecute infringers) requires companies to put some form of defence in place to protect the confidentiality of the information.

Trade secrets do not need to be registered to be protected and, as long as they are kept as secrets, the legal safeguards last forever.

A recent study commissioned by the European Commission (complete text here, executive summary here) shows that companies, especially SMEs, underestimate both the value of their trade secrets and the chances that they might get stolen due to cybercrime.

Consequentially, companies, especially SMEs, tend to underestimate the impact of a breach in their security. A stolen trade secret can lead to at least four kinds of economic damage.

  • Opportunity costs: the loss of business opportunities and market shares.
  • Negative impacts on innovation: companies lose their investments in R&D when their knowledge is stolen and given to the public.
  • Increase in the cost of cybersecurity: if the company has been attacked the costs of cleaning up the system can be very high, as can increases in cybersecurity insurance.
  • Reputational damage: if the fact that a company has been hacked becomes public knowledge, this will reduce the trust of investors, business partners and even consumers.

The report highlighted the importance of awareness among companies in terms of preventing the loss of trade secrets. A solid legal framework is not enough, you have to do your part, and put necessary protections in place.

SMEs are the main target of cyber thieves and make up the majority of cyber-espionage victims because their cybersecurity protocols are weaker than those of big companies.

Cyber-espionage mostly involves external perpetrators. This is a large part of the problem, but it’s not the only issue. Especially when you are doing business in South-East Asia.

Other kinds of barriers must be taken into consideration. The most basic protection is probably afforded by physical barriersstore the secret information in an undisclosed physical location that only some employees have access to.

Physical barriers can seem outdated now, and they probably are when it comes to documents (who doesn’t store them on a computer nowadays?). However, they are still relevant when you admit potential partners, or indeed visitors in general, to your premises. Make sure that they cannot take pictures of your innovative products and have them sign non-disclosure agreements (NDAs).

Technical barriers are the most relevant against cybercrime in general and cyber theft in particular. They consist of various information technology (IT) systems that safely store your secrets. They can be expensive, but, as the experts stress, the lack of adequate protection is exactly what makes SMEs the perfect prey for cyber-attacks. There are some basic steps you can implement yourself, from a good password system to basic encryption. However, it’s even more important to develop an IT strategy (for example, you should make it impossible for documents to be shared via the internet or saved on physical devices like USB sticks), possibly with the help of a specialist, and prepare a written technology policy agreement. Make sure that all your employees have read and signed NDAs.

gold-padlock-locking-door-164425Written agreements are among your best weapons when it comes to protecting your trade secrets. Having people sign an NDA will make them conscious of their actions and ensure they think twice before betraying your trust. Having an NDA in place will also make them legally liable for sharing a secret.

When you’re doing business in South-East Asia, it’s of great importance to have your agreements in the local language. This prevents the other party from claiming that they did not understand their confidentiality obligation.

Having a solid NDA in place is not only important for your relationship with your employees and partners (or potential partners), but also for your relationship with your suppliers and subcontractors.

NDAs are essential in a well-drafted trade secret strategy, but they are not the only element of it. Alongside the technology policy agreements already mentioned, a role can be played by non-competition and non-solicitation clauses in employment contracts. These kind of clauses prevent your former employees from using your list of clients in their new position. Singapore and Malaysia are the most favourable countries for these kind of agreements.

You can also upgrade your NDAs, following the Chinese practice you can draft a non-disclosure, non-use, non-circumvention (NNN) agreement. The idea is to bind your counterpart to strict confidentiality. They are not allowed to disseminate the information (as in an NDA), and nor can they use it for their advantage or circumvent the agreement with anticompetitive practices. The idea is to combine secrecy and non-competition elements.

Even in Europe, trade secret thieves can be hard to prosecute due to the difficulty involved with supplying adequate proof. It’s better to put prevention safeguards in place. After all, prevention is better than medicine.

An even higher level of caution needs to be in place when doing business in South-East Asia. Keep in mind that most ASEAN courts tend to favour a local labour force using knowledge acquired in their previous jobs to make a living, without paying too much attention to the fact that the information might be a valuable trade secret belonging to a former employer.

Many countries (such as Brunei and Cambodia) do not have proper protections for trade secrets in place, and in others (like Myanmar), trade secrets are only protected under contract law, so there is no protection without a contractual relationship.

In Indonesia, trade secrets are protected only when an unlawful appropriation can be proven. To prove an unlawful appropriation you have show that there was an NDA in place and that it was breached, or that your IT or physical protections were abused.

At the moment, the law in Thailand imposing registration on trade secrets is suspended. However, if you are doing business in the country, it’s better to keep a very close eye on this.

man-wearing-black-blazer-3051576

Even in countries like Malaysia, Singapore, the Philippines and Vietnam, where relatively sound protections for trade secrets are in place, it can be difficult to protect yourself in the absence of a contract.

To sum up: trade secrets are valuable intangible assets that do not need any registration and potentially last forever. However, you have to learn how to protect your valuable information from cyber thieves, unfaithful partners or greedy former employees.

The first step is to recognise what your secrets are, and then draft your strategy accordingly.

If you have any doubts or questions do not hesitate to reach out to us. The South-East Asia IPR SME HD offers free support to all EU SMEs.

 

Marta Bettinazzi

IP Business Advisor

South-East Asia IPR SME Helpdesk

E: marta.bettinazzi@southeastasia-iprhelpdesk.eu

W: www.southeastasia-iprhelpdesk.eu