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Legal Strategies for Entering to the Chinese Market and Protection of Intellectual Property Rights

进入中国市场的法律策略及知识产权保护

Amit Ben-YehoshuaChina Partner

Shibolet & Co. Advocates & Notaries

©Copyright reserved to Amit Ben-Yehoshua

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I Love China

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Topics of the Lecture

• Fast Brief about the Chinese Legal System

• Entry Strategies to Chinese Market (Legal Models)

• Intellectual Property Rights in China

• Q&A

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The People’s Republic of China

• 23 Provinces

• 5 autonomous regions

• 4 municipalities under the Central Government

• 2 Special Administrative Regions (Hong Kong, Macau)“Two Systems One Nation”

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Chinese Law From Lawlessness to Modern Law

中国法律从法制缺失到现代法律

• Law of the PRC on Chinese Foreign Equity Joint Ventures （合资公司） - 1979

• Contract Law – 1999

• Company Law – 1996, amended 2005

• Property Law ( 物权法 ) – 2007

• Enterprise Bankruptcy Law （企业破产法 ) – 2006

• Civil Law System

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The Chinese Court System 中国法庭体制

• Four court levels: – Basic People’s Court (10,392 courts)– Intermediate People’s Court (369 courts)– High People’s Court (369 courts)– Supreme People’s Court (32 courts)

• Low qualifications for judgeship (2 years of legal experience/3 years for Supreme Court Judge).

• Local protectionism • Lack of judicial independence （司法独立）• No case precedents . • China is extremely diverse - major differences

between rural and urban society, between the East and the West.

• Vital to consider arbitration clause

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Quick Summary 概要

• Chinese Legal system has underwent substantial changes, thousands of law promulgated, thousand of cases are argued in court.

• The Chinese government is trying to stop the problems associated with local protectionism by various mechanisms.

• The rule of law and the protections of the interest of foreign investors has been substantially improved compared to 10 or twenty years ago.

• In 2006, over 41,000 foreign companies have established a legal corporations in China.

• There are legal risks, however, most of the major firms in the world realize that every business must consider its China strategy.

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Let’s Do Business – Entry Strategies Where to Invest? Second-Third Tier Cities

• Chengdu ( 成都）• Dalian （大连）• Wuhan （武汉）• Xian （西安）• Nanjing （南京）• Suzhou （苏州）• Chongqing （重庆）• Qingdao （青岛）• Hangzhou （杭州）• Wuxi （无锡）

Source: Amcham Shanghai 2008, China Business Report

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Let’s Do Business – Along or with Local Partners

No Partners1. Wholly Foreign Owned Enterprise 外商独资企业2. Representative Office - 代表处 3. Logistics Companies – e.g. PTL Group

Partners Needed 1. Joint Ventures – Cooperative Joint

Venture, Equity Joint Venture 合资公司2. Merger or Acquisition of an Existing

Company 收购或兼并3. Foreign Invested Companies Limited by

Shares 控股公司4. Partnerships 合作伙伴

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Pros and Cons to Joining Forces with a Local Partner

与当地合伙人合作的优势与劣势

Pros 优势Cons 劣势Local partners’ knowledge and familiarity with the local market

Different Management Style. Market economy, relatively a new concept.

Equity Injection The need to share control of the Company

Guanxi Factor (network, connections)

Risk of mishandling of intellectual property rights

Sometimes the law requires JV and no alternative options

Inflexible – changes require unanimous consent and governmental approval

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Wholly Foreign Owned Enterprise 外商独资企业

• Similar to Western style limited liability company

• Full ownership by one or more foreign investors

• May conduct full scope of business subject to the approved business scope.

• Costly, although the Company Law requires a minimum registered of RMB 100,000 for a single shareholder limited liability company, in practice the minimum registered capital in Shanghai is over $140,000.

Foreign Inventor外国投资者

WFOE 外商独资企业

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Representative Office代表处

• Limited to liaison( 联络 ) activities• Permitted to act in a limited scope

of business, such as data collection, market research, assistance in negotiation with contracts, management of warranty and after sale service.

• May not engage in profit making activity and may not receive fees for services, sign contracts or directly generate income.

• Substantially cheaper than WFOE.

Foreign Investor外国投资者

Representative Office代表处

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Comparison of Representative Office with WFOE外商独资企业和代表处的比较

IssueRepresentative Office

WFOE

Legal CapacityLimited to marketing research, and liaison activities

Operates like a regular limited liability company, subject to its business scope.

Limited liability NoYes

Minimum Registered Capital

Not required Yes- varies per jurisdiction

Labor Only through approval of approved labor bureaus

May employ local and foreign employees

TaxCalculated based on expenses Based on profit

Time of approval30 days30-60 days

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Solutions for the Small Investor 小投资者的方案

• Contact Logistic Companies which will provide office sharing services, will act as the formal employer of your employees.

• 33.1% of the companies in China employ less than 50 people.

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Foreign Party

Chinese Party

Joint Venture

Joint Ventures

合资公司

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Issues to Consider when Establishing a Joint Venture 建立合资公司需要考虑的问题

• Avoid the Joint Venture Module. • Management control • Control over finance functions• Control over personnel policy (hiring and firing powers)• Control over manufacturing process

• Quality control.• Control over Intellectual Property• Arbitration Clause 仲裁条款• Exit Clause.

• All changes to the Joint Venture’s Articles of Association （公司章程） require a unanimous consent of all parties and governmental approval

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Mergers and Acquisition 兼并与收购

• Before the mid 90’s, the sale and purchase of Chinese entities was considered by foreign entities only in exceptional cases.

• China is facing a major wave of merger and acquisitions. The pattern of China’s foreign direct investment is changing from setting up new factories to acquisitions of existing companies.

• In 2005, the value of announced M&A transactions rose by 38% from

$2.1 trillion in 2004 to $2.9 trillion （万亿 ） .

• Average size deal $181.7 million in 2005.

• Over 20% of the American companies in Shanghai were in the process of acquiring a Chinese company or its assets in the last 24 months. (Amcham, 2008 China Business Report)

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Foreign Direct Investment by Vehicle Type不同投资形式下的投资额

(number of projects)

20062007

Total FDI41,47338,871

Equity Joint Venture

10,2237,649

Cooperative Joint Venture

1,036641

WFOE’s30,16429,543

Foreign Investing Shareholding Ventures (Holding Companies)

5038

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Type of Legal Entities

• Wholly Owned Foreign Enterprise – 47.3%• Representative Office – 12.6%• Joint Venture – 11.1%• Holding Company – 3.1%• Regional Headquarters – 6.1%• Global Headquarters – 0.2%• R&D Center – 7.0%• Other – 1.1%

Source: Amcham Shanghai 2008 China Business Report

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Typical Offshore Structure

Offshore Legal Entity Hong Kong, BVI, Singapore

WFOE/Representative Office /Joint Venture

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Due Diligence

• Cities compete – search for the best price.

• Search for best price inside the city, districts compete.

• Be creative, and bargain, the law is not rock solid as in the west.

• Don’t fall to the guanxi trap – the Vice Premier is my close friend…

• Invest money in legal and financial due diligence. Many smart people have lost money on very foolish mistakes.

• Laws change very rapidly in China. – Project preliminary approval for RMB 500,000, one year later RMB

5,000,000

– Minimum registered capital for foreign invested travel agency, reduced from 4,000,000 to RMB 300,000 in one month notice.

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Intellectual Property Rights 知识产权保护

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Law and Practice 法律与实践

• Patent （专利） Law. 1984, revised 1992, 2000, 2008

• Copyright （著作权） Law (1991, 2001)

• Trademark （商标） Law (1982, amended in 1993, 2001)

• Regulations for the Protection of Computer Software （软件） (1991, revised 2002)

• Product Quality （产品质量） Law (2000)

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IP Protection is Needed for China’s Economic Growth

• Manufactures of pirated technology do not pay tax. Do not contribute to the economy in the fullest extent.

• It is estimated that in the US 373,000 jobs are lost do to IP infringement.

• Due to IP infringement lower motivation for new innovations

• Public health risk – medicine manufactured by on authorized agent.

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Trademarks 商标• Trademarks must be registered under Chinese Law. Once registered

the law gives an exclusive right to the holder to use mark for those classes of goods or services.

• One can register words, letters, characters, designs, numerals, colors, and colors combinations.

• In 2004, more than 588,000 trademarks were registered. 60,000 of the applications were filed by foreigners.

• In the last seven consecutive years China has the largest amount of trade mark applications in the world per year.

• First to File Rule.• Cost of registration approximately $400.• Duration 10 years. Can be renewed for additional 10 years. • All changes must be registered.• Any assignment of right must be registered.• If not used for three years will be regarded as abandoned and may

be canceled.

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Copyrights 著作权• Protected works, written literary works, music, films, television works,

computer software, artistic and photographic works.

• Registration the protected work is not mandatory required, however is

recommended. • All works of Chinese citizens protected regardless were published. Works

of foreigners protected in first published in China or according to the

relevant bilateral treaties. • Copyright license contract must be in writing. Law encourages that the

contract will be registered.

• China is the third worst offender of software piracy after Vietnam and Ukraine with 90% piracy rate of computer software.

• Protection the life of the owner, plus 50 years. If a corporation, 50 years.

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Patents 专利• China revised its patent law this year.• The Patent Process • Patent for each State/Patent Cooperation Treaty• Patent valid for 20 years from the date of application. • Utility model （实用新型） is valid for 10 years from date of

application. • Patent protection is available for both manufacturing process and

chemical process, including production of pharmaceuticals, chemicals food, beverages flavoring.

• First to File System.• Assignment of patent requires written contract and registration• Assignment of patents between Chinese and foreign parties requires

approval of State Intellectual Property Office. • Chinese patent office has the third largest amount of patent filings,

after US and Japan.

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Intellectual Property Rights Violations: the Bad News

• “China’s inadequate enforcement is resulting in infringement levels of 90% or above for virtually every form of intellectual property… Overall piracy rates in China has not declined significantly since WTO accession and in some cases have increased.” (US Trade Representative)

• 66% of the companies interviewed by Baker McKenzie said that counterfeits （制假） represent at least 5% of the market for their brands. with 34% saying that it represented at least 10%.

• Biased Courts （偏见法庭） – the smaller the city the higher the bias.

• “It is not uncommon for local branches of the government agencies to seek to protect local business by refusing to take action on behalf of foreign companies.“ (Rouse &Co.)

• Some opinion that the situation is not likely to change soon.

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The Good News: Growing Number of Patent Application and Cases in Courts

• Mr. Jiang Zhipei, presiding judge of IPR court of the Supreme People’s Court, reported that from 2002, when China entered into WTO, till 2006, China's local courts had accepted a total of 54,321 cases involving IPR, and adjudicated 52,437cases, with an annual growth rate at 17.06% and 19.29% respectively.

• Total of 248,757 foreign patents were granted in China between 1985-2006.

• 70% of the applications were filed between 2003-2006.

• 485 Israeli patents were filed in the corresponding period.

71% were filed between 2003-2006.

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The Good News: Continued

• “There has been some progress with respect to protection of intellectual property rights as a result of high-profile campaigns to crack down on counterfeiting, greater reliance on criminal prosecutions, and institutional changes, including the establishment complaint centers for reporting intellectual property violations in 50 cities.”

• “Among foreign investors who cited intellectual property protection as a major problem, 44% agreed that there was overall improvement in the last two years, with 51% citing improvement in public security enforcement and 43% noting improvement in customs enforcement. (AmCham 2007).”

• “Intellectual property is increasingly important to China’s domestic economy. Domestic companies now have intellectual property worth protecting. The overwhelming majority of patent applicants are Chinese parties, as are the overwhelming majority of parties seeking administrative or judicial remedies for IP violations. China is now one of the leading exporters among developing countries of technological goods. “

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Enforcement of IP Rights 知识产权的行使

• Administrative Proceedings 行政程序• Court Civil Proceedings 民事诉讼程序• Criminal Prosecution 刑事追诉

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Administrative Proceedings 行政程序

• It is estimated that over 90% of all IP enforcement is conducted via the administrative route.

• Quicker and cheaper than using the courts

• Administrative authorities also accept a lower level of evidence.

• Administrative actions are often most suitable in straightforward counterfeit cases, or cases in which the infringer is likely to settle the case quickly.

• Fast results.

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Court Civil Proceedings 民事诉讼程序

• Civil Proceedings typically are done in patent related case.

• The damages awards in Chinese Courts are very low compared to the American judgments.

• Typical case can take between 4 to 7 years.

• Importance of including an arbitration clause in contracts

• Growing amount of cases brought to Chinese courts an encouraging factor that shows growing enforcement of IP rights.

• In 2008 there was an increase in 33% of the number of intellectual property related cases compared to the previous year.

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Criminal Prosecution 刑事追诉

• Criminal proceedings is relatively rare.

• The official statistics showed that from 2000 to 2004, Chinese courts accepted a total of 1,710 criminal cases with 1,948 defendants being prosecuted for IP related criminal offences.

• Individual is subject to prosecution where the number of counterfeit items exceed 20,000, or where the brand more than one brand, 10,000 items. Criminal prosecution is appropriate where the illegal revenues exceed RMB 50,000. If more than one brand is involved the threshold is 30,000 RMB. (minimum salary in Shanghai is 800 RMB per month.)

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Prevention 预防• Consult with attorney experienced in IP matters• Get informed legal advice about the specific laws of the destination

country. • Assign a person to handle your IP matters (renewal application,

payment of annual fees in the related countries)• Screen employees/partners/train your employees on IP issues• share sensitive data with each department on need to know basis • Use smart chips, hologram labels to distinguish your products from

fake – you carry the burden of proof that the product is fake. • Add an on-line form to the company’s website reporting about IP

infringements. • Licensing Agreement ( 许可协议 ), Confidentiality （保密） , non

compete （非竞争） , non disclosure （不泄密） clause.• Arbitration clause

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Contact Information

Amit Ben-Yehoshua, China Partner

Email: amitben@shibolet.com

Telephone: 86-13761360176

Skype: china-law-desk