China taking action to protect IP rights

There''s a lot of talk about how dilatory China is in its enforcement of intellectual property rights. Indeed, International Data Corporation (IDC), a U.S. technology research firm, estimates that 90 per cent of the software used in China in 2004 was unlicensed. Canadian rights holders are among the victims who lose an estimated $60 billion in revenues annually to IP transgressions on the Chinese mainland.

So the emergence of Chinese plaintiffs in North American patent courts is somewhat surprising. The first big splash came earlier this year when Netac Technology Co. Ltd., a Shenzhen-based Chinese company, became the first mainland enterprise to sue a North American corporation for patent infringement - and did so in a Texas court.

Netac claimed that New Jersey-based PNY Technologies infringed Netac's patent for USB flash-memory drives. "Flash drives," also known as "key drives," are nowadays the favourite medium for carting around data. The devices generate sales of $2 billion annually in the U.S. alone. Netac is seeking "significant" but unspecified damages and an injunction suspending sales of PNY's flash drives.

"The growing tendency of Chinese companies to enforce their IP rights at home against foreign companies foreshadows a similar campaign to enforce their rights internationally," says Stephen Judlowe of New York, who represents Netac and heads Morgan Lewis & Bockius LLP's IP practice.

Indeed, there are signs that China is beginning to take all its IP commitments more seriously. For example, Chinese courts have recently made findings favouring Starbucks and Dell Computer in IP cases.

And China's national working group for IPR protection, which co-ordinates the country's IP policies and is led by Vice Premier Wu Yi, is in the throes of implementing an aggressive action plan, whose highlights include:
•    making it easier to send people to jail for IP infringements;
•    overhauling the rules governing disputes between trademark owners and business name owners;
•    continuing the "Mountain Eagle" campaign launched in 2005 by police to crack down on IP crimes;
•    holding a "China IPR Criminal Protection Forum" that includes representatives from business as well as the U.S. and E.U. governments;
•    boosting co-operation between IP administrative officials and China's criminal law enforcement agencies; and
•    translating China's patent examination guidelines into English.

"The action plan has been endorsed by the very highest officials and things can change very fast in accordance with that plan," says Jane Clark of Ottawa, who leads Gowling Lafleur Henderson LLP's China initiative and who filed one of the first foreign patents in China on the day China's patent office opened in 1985.

By all accounts, the process has already started. In April, Lenovo Group Ltd., China's largest PC maker, and three of its competitors complied with a government mandate that hardware manufacturers install genuine operating software on PCs before the machines leave factories by purchasing $1.64 billion worth of Windows software from Microsoft.

Nick Groom-bridge, co-chairman of Weil Gotshal & Manges' patent litigation and counselling group in New York, says this is only the beginning.

"What we're going to see is an evolution of IP rights in China on a time scale that's greatly accelerated," he says.

With the mercurial rise in Chinese patents, the involvement of foreign parties in IP is likely to grow even further. The Chinese patent office handled about one million patent applications between 1985 and 2000, then doubled that number in the next four years. IDC reports that China's information technology market now constitutes almost 10 per cent of GDP growth, a 500-per-cent increase since 1989.

And although only 1.3 per cent of civil IP court cases in China featured foreign parties in 2003, the proportion more than tripled to four per cent of the 8,332 - or over 300 - such cases in 2004, the last year for which statistics are available.

Canada will inevitably feel the effects of the growing Chinese interest in IP enforcement.

"In the last three years, Chinese interests have started doing serious things in Canada," says Bing Ho of Vancouver, a Baker & McKenzie partner who used to manage the firm's Beijing office. "Their priority is energy, minerals, and metals, but we're also seeing manufacturing companies who are interested in brand acquisitions, distribution outlets, and technology.

"The point is that the Chinese have the workshops but they want to get further down the food chain."
Some of the food may prove unpalatable if the invading Chinese discover that Canadian businesses are abusing the invaders' IP rights.

"The shoe is definitely moving to the other foot in the sense that foreign companies used to complaining about Chinese abuse of their IP rights are now finding the same accusations leveled against them by Chinese companies," says Leo Seewald of Hong Kong, vice-president and chief legal officer with Manufacturers Life Insurance Company.

If that's true, even the grousers will likely see the long-term advantages of Netac's foray into plaintiff-friendly Texarkana.

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