China’s economic success has been built on a foundation of manufacturing on a massive scale. In 2013 Chinese machine industries netted global revenues in excess of EUR 678 billion, with growth of around 20% on the previous year.
This success, resulting in a reputation as ‘the world’s factory’ has made China’s demand for machinery, tools and related technologies insatiable, making it a fantastic potential marketplace for Europe’s high quality products and innovative technologies.
Unfortunately, rampant transgressions upon foreign IP by Chinese infringers in the past has left a black mark on China’s history, leaving potential importers and manufacturers wary of doing business in the country. It has been estimated that German mechanical engineering companies alone suffer a combined loss of approximately EUR 7.9 billion due to product and brand counterfeiting.
However, as China’s market develops and demand for the modern technologies required to succeed in the increasingly competitive global market has grown, China’s legislators and enforcement authorities have made swift progress in updating IPR practices and educating Chinese manufacturers and other entities in the sector as well as awarding record numbers of Chinese patent applicants. As a result, domestic patent applications have rocketed and new IP registration procedures and dedicated IPR courts have made application and enforcement of IP rights more accessible for foreign actors.
Taking full advantage of this advancing system is essential in China, where timely and comprehensive registration of IPR can be the difference between soaring success and crushing defeat in the increasingly competitive Chinese marketplace.
The mechanical engineering sector presents some unique challenges when it comes to IPR protection in China, and requires a proactive approach and a continuing IPR strategy well after registration has taken place.
Along with the usual issues of brand infringement, unauthorised use of trademarks and counterfeiting of copyrighted promotional material, manufacturers also have to consider the infringement of their patents, whether this be an entire machine or individual parts or mechanisms. Counterfeiting of components and whole pieces of machinery has been a common complaint of companies operating in this sector in China, and is made possible due to the presence of a skilled, experienced work force and the use of reverse engineering.
As in the EU, reverse engineering, or the reproduction of a product through dissembling and copying the internal mechanisms, is a perfectly legitimate means of obtaining business secrets through lawful research and is not considered as an infringement activity in China.
This makes comprehensive registration of patents and utility models for parts and mechanisms essential for proper IPR protection against reproductions of products.
Timely application for protection is crucial in this industry. China operates a ‘first to file’ system with regard to trademarks. This means in general that whoever registers the trademark first in China, has the right to that trademark. With regard to patents, Chinese companies are also registering more and more patents for use against foreign competitors. These two features of the Chinese system can leave EU SMEs unable to use their own branding or products in China without risking being sued by the domestic rights holder.
So get IPR savvy, know before you go and get those applications in before your products hit the market!
Trade Marks: Brand protection
First on any company’s list of priorities before entering the Chinese market, or at least as soon as possible in case the company is already active in China, should be protection of their core brand and market reputation. This is achieved through registration of the company name and/or logo and any other distinguishing visual marks which are associated with the brand and its’ products as trade marks.
China operates a ‘first to file’ system in China which makes early application essential before entering the Chinese market in order to avoid potential issues of trade mark hijacking by domestic companies seeking to take advantage of the target brand’s reputation or make a profit selling the mark back to the EU SME that has the registered trademark for the EU at a profit.
Registration of trade marks in China can be done domestically through the China Trade Mark Office (CTMO) with the aid of a local trade mark agent, or through an international registration under the Madrid protocol. However there are a number of issues to bear in mind when seeking registration in China which can make or break a brand in the Chinese marketplace:
- China has a more narrow specification of classes of products and services than required by the classes set out in the Nice Agreement used in the EU to designate use of trade marks. In essence, China has divided the classes of the Nice classification further into subclasses. Often this means that if you have protection in China for the overarching Nice class, but not for a certain subclass within that class, you are not protected for that specific subclass in China. It is therefore essential to register the appropriate sub-classes yourself to ensure that all of your products are protected. Failure to do so may result in guesswork by your agent or the CTMO leaving some of your products outside of the scope of protection provided by your trade-mark.
- Foreign language names are rarely used in China, and if you do not designate your company or product a Chinese language name consumers will likely come up with their own. Once this has been done there is nothing stopping competitors from registering the Chinese name as a trade mark and cashing in on your success, so it is worth considering registering a Chinese language mark for your company and products!
For more information on registering and protecting your trademarks, take a look at our Guide to Trade Mark Protection in China.
Trade Secrets: Loose lips sink ships
A trade secret is any commercially exploitable information which is not public knowledge and is protected by confidentiality measures. To receive trade secret protection in China, EU SMEs need to take physical protection measures, technological protection measures and contractual measures.
Trade secrets are especially important to bear in mind when negotiating with potential partners in China and when hiring staff to work with sensitive material. Successful protection can be achieved through control of information and by requiring employees as well as domestic manufacturing and distribution partners to sign comprehensive Non-Disclosure Agreements before transferring any information for sample product runs etc.
NDAs are especially important and SMEs should always insist on signing as a term of doing business. There have been reports of domestic companies claiming that NDAs run against ‘local business practice’ acting as a sign of distrust, but if a Chinese individual or company is sincere, experience shows that they will sign the NDA.
For more information on trade secrets and NDAs, check out our Guide to using Contracts to Protect your IPR in China and the Guide to Protecting your Trade Secrets in China.
Patents: Protection for your portfolio
SMEs seeking to operate in China’s mechanical engineering sector must secure their domestically registered patent portfolio in order to succeed. It is important to remember that patents registered in EU countries do not provide automatic protection in China. For patent protection in China, a Chinese patent is needed. Please be aware that a patent needs to be new, inventive and industrially applicable. The requirement with regard to novelty means that the invention cannot be disclosed anywhere in the world by any means before the patent application in China is filed. If you do not adhere to this requirement, your patent can be invalidated at any time because it does not meet the novelty requirement.
There should be no hesitation amongst EU SMEs entering the Chinese market when it comes to registering patent protection for their core technologies, either via invention patents (max 20 years protection) or as utility models (max 10 years protection).
Design patents (which protect the looks of a product) are also a key area of IPR protection for EU SMEs in this field. This would also include component manufacture. Components which are unsuitable for trade marking such as handles and fittings, or too small such as machinery components can be protected by design patents, which cover the visual characteristics of products. Please be aware that the novelty requirement also applies to design patents.
Whilst copyright may not seem immediately applicable in the mechanical engineering sector it is an important tool for protecting your marketing material, manuals, packaging, and ultimate market share.
Most common copyright infringements in this sector consist of copied product images featured on the infringer’s website to advertise their products. However other examples include copies of sections and occasionally entire brochures, product descriptions, packaging and also manuals and instruction materials.
Whilst copyright is an automatic right in China, not requiring registration, any evidence of copyright ownership brought to courts in China must be notarised, i.e. witnessed by a notary public, or must be the copyright certificate as registered with the China Copyright Protection Centre (CCPC).
As such, it is often easier to simply make a voluntary registration of copyright with the China Copyright Protection Centre (CCPC), which will provide the owner with a certificate of copyright usable as evidence in any future actions. In the software industry, EU SMEs tend to prefer registration of source code with a notary public.
For more information on copyright, see our copyright guide on the China IPR SME Helpdesk website.
In China, IP actions can be enforced both before a civil court and through specialised administrative bodies. Where certain thresholds are met as to the extent and value of the infringement criminal proceedings may also be actioned. Additionally, where IP is registered with Chinese customs authorities, exports of infringing goods may be prevented from leaving the country.
Take Away Messages
Some points to remember:
- Before you take any action, make sure you have notarised proof of the infringement.
- Administrative actions can be handy to get a ‘quick fix’ for infringements.
- Civil courts are the only forum through which IPR owners can claim economic damages derived from IP infringement.
- Judicial decisions in civil courts take longer to reach but act as a stronger deterrent to future infringement.
- Civil court action can be expensive and time consuming, requiring well documented evidence which has been legalised, notarised and translated. SMEs should seek local legal advice as to the likelihood of success of potential claims before committing. If the litigation is successful however, the opportunity to claim damages, and the influence on local industry might set a reminder against future infringement.
- Customs authorities can provide an effective bar to export of counterfeits, and they might be able to stop infringing exports pro-actively if the relevant IP has been registered with them. See our How to Record Trade Marks with Customs for more information.
- Enforcement is an ongoing practice, SMEs must be proactive in checking competitor websites, patent portfolios of competitors, and the website of the CTMO for trademark registrations, in order to detect possible infringement in the first instance.
For more information on IPR enforcement see our Guide to IPR Enforcement in China on the Helpdesk website.
 VDMA Study Product Piracy – 2014, published by German Engineering Federation