Protecting Intellectual Property In China - Part I

Monday, May 1, 2006 - 00:00

Editor's Note: This is another in our series of "seminar interviews" in which we capture some of the highlights of presentations on significant legal issues for corporate counsel sponsored by leading law firms. This interview is based on the presentation that was given by Mr. Hu at a program that took place on April 25 in Philadelphia, which is part of Akin Gump's continuing CLE Series for Corporate Counsel. Announcements about any future Akin Gump programs in this series may be found at www.akingump.com/event.cfm.

Part II of this interview will appear in our June issue.

Editor: Please tell our readers about your educational background and practice experience before joining Akin Gump.

Hu: I received my B.A. in physics from the University of Kansas and my J.D. from the University of Maryland School of Law. I was a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, and then at Shaw Pittman, LLP. When Shaw Pittman merged with Pillsbury Winthrop, I joined Akin Gump's renowned IP practice. I am excited to be helping the firm to grow in both Northern California and Asia.

Businesses in Taiwan were among the first to expand their markets into China. I have advised clients in these burgeoning markets since the early days in 1995, and I am very fortunate to have built an expertise in navigating through the cultural and legal landscape in Asia.

Editor: How has your understanding of cultural differences played a role?

Hu: Understanding cultural differences can be critically important in representing international clients whether one participates in judicial proceedings, works with government agencies or engages in negotiations. Ignoring even small cultural differences can damage relationships.

When I lecture on international IP issues at professional and business seminars and other conferences around the globe, I use the example of a computer company that was looking to enter the marketplace in China but was having difficulties. The company therefore engaged my services. A few days later, I received an email from the company, which opened "Dear Yitai-san."

When doing business in Japan, including "san" at the end of the name adds a tone of respect, such as "Mr." would at the beginning of a name in the U.S. In China, however, the use of "san" can be offensive because it reflects that the user lacks the sensitivity to distinguish between Japanese and Chinese etiquette.

Editor: What are some examples of the IP matters you handle for your U.S. and Chinese clients?

Hu: I have extensive experience litigating patent matters before U.S. district courts and the International Trade Commission. I have worked with leading electronics, computer and semiconductor manufacturing companies, successfully litigating matters involving patent infringement, validity and enforceability, trade secret misappropriations and licensing disputes. In addition to assisting clients in uncovering and closing down sources of pirated goods, I have concluded complex technology and patent license negotiations in Taiwan, Hong Kong and China. My counseling practice includes rendering infringement and validity opinions and advising clients on licensing and related matters.

Editor: What recourse exists in China in the case of pirated or counterfeit goods?

Hu: The more obvious sources of such goods include small entrepreneurs and organized crime looking to make a quick profit. Both these sources are relatively easy to deter through use of administrative proceedings and lawsuits. A more troublesome source has been within the "investment" community, particularly where the investors have had strong influence with local authorities. Early in 2000, the Chinese government mandated changes to certain investor qualifications in an attempt to ameliorate this problem.

The counterfeiting of movies, music and electronic games has been a persistent problem. Few U.S. companies go to courts with this issue because for the most part these operations are small and it is difficult to get to the person financing them. They do use the relevant administrative agencies, which act quickly to issue search warrants and seize any counterfeit goods. But, because of the large number of counterfeiters, this seldom effectively addresses the problem.

Editor: How are trade secrets treated?

Hu: Although many of the legal principles underpinning patent, trademark and copyright protections in China are similar to those in the U.S., China has no protection for trade secrets that are strictly intangible. More importantly, there is no trade secrets law per se . Thus, if an employee passes an employer's computer program to a third party based on his recollection of that program, absent any contractual obligations on the employee's part, it would not be protected. However, if he walks away with a document which details that program, the owner would have a remedy for theft because the trade secret is embodied in a tangible item (the document) that has been stolen. In this example, the Chinese courts have prosecuted this conduct as trade secrets' misappropriation. To me, however, the act being prosecuted is theft, not misappropriation of trade secrets, because if nothing is taken except for confidential information in the employee's or business partner's head, then the trade secret owner would have little recourse and would be relegated to any contractual rights that it might have.

Editor: Will contracts and due diligence provide protection?

Hu: It is important to be mindful of the fact that provisions which are customary in the U.S. may not be valid in China. A company should seek the help of a legal expert familiar with China's myriad laws, regulations and industry practices rather than merely assume the validity of any U.S. contractual provision in China.

Covenants not to compete are often seen in U.S. contracts. In China, covenants not to compete are not enforceable unless payments are made to the non-competing party during the term of the non-compete clause. For example, a non-compete clause that bars an employee for three years from working for another company manufacturing similar products may be enforceable in the U.S. but will not be enforceable in China unless you pay the former employee a portion of his regular salary during that time. The adequacy of the amount paid in non-compete agreements of all kinds is dictated by local laws, which may vary depending on where the company is located or the territory throughout which the covenant not to compete is intended to extend.

Employers should protect themselves by having employees exposed to trade secrets sign employment agreements with provisions in which they agree that will not reveal them. Chinese courts will not enforce agreements for such things as punitive or liquidated damages, which provide remedies that the Chinese courts deem as unreasonable. A provision requiring employees to arbitrate disputes may not be enforceable if the courts feel that it is unfair.

The key to doing business in China is to exercise due diligence with respect to everything you do. You must exercise care with respect to the employees you hire and the business partners you select because if something happens down the road, chances are that the protection afforded by Chinese law will not be adequate by U.S. standards. The Chinese courts will not award huge monetary awards. They are more likely to side with employees if you try to enforce a non-compete agreement.

Due diligence will help you to avoid being the victim of such practices as the "shop with a back door." This is the colloquialism for sharing trade secrets with the expectation that your business partner will produce goods for you to market. Before long, however, you will see competing goods with the same quality being sold by your partner at half the price of your goods. All of a sudden, you find yourself competing, in essence, against yourself.

Editor: Does the legal framework for protecting and enforcing patents differ between the U.S. and China?

Hu: Yes. For example, patentable subject matter in China includes utility models. In China there are two subcategories of utility patents: inventions and utility model. The utility model is directed to a simple improvement of existing inventions. The Chinese Patent Law looks at the utility model patent as being less inventive. The duration of a utility model patent extends for 10 years from the date of filing. In contrast, the duration of a conventional patent extends for 20 years from the date of filing.

The application process for a utility model patent does not involve substantive examination required for a conventional patent. The application process for conventional patents in China generally requires three to five years. For inventions with a short shelf life, obtaining a utility model patent can be a viable option for securing IP protection.

If a U.S. company doing business in China does not file for patent protection, it can expect that someone else will. This can result in litigation being brought by the Chinese patent holder against the company for use of its own invention.

In China, the courts are involved only with allegations of infringement. Invalidation of a patent requires going back to the Chinese patent office. The specter of the inconvenience, cost and time involved in a patent proceeding, whether judicial or administrative, often results in a company making a quick settlement.

Another significant difference is China's statutory bar against granting patents for rules and methods relating to mental activities. The effect is to preclude the issuance of business method patents.

Please email the interviewee at yhu@akingump.com with questions about this interview.