Australia-China FTA Conference in Shenzhen

28-29 June 2006

Day 1 - Intellectual Property

Intellectual Property Protection: A win-win strategy for the Australia-China FTA

Mr Kevin Hobgood-Brown, Chairman, Australia China Business Council; Partner, Deacons (Sydney, Australia)

Introduction

I first realised that China would develop its own system for protecting intellectual property rights in 1983.  At that time, while I was living in Beijing, I remember a significant public controversy involving intellectual property rights.  In those days, the Flying Pigeon bicycle was one of the most popular and respected bicycles in China.  Many of my friends who did not already have bicycles, wanted to purchase a Flying Pigeon bicycle.  Flying Pigeon had a strong reputation for quality and durability.  The public controversy arose because quite a few consumers were purchasing bicycles which they thought to be Flying Pigeon bicycles, but were actually made by other factories.  These factories were making bicycles and labelling them as Flying Pigeon bicycles, even though the factories had no connection with the factory that produced the real Flying Pigeon bicycles.  As it happened, many of the "fake" Flying Pigeon bicycles were of sub-standard quality.  Consumers were outraged because they spent a considerable amount of money on bicycles that turned out to be of inferior quality to the real Flying Pigeon bicycles.  The Flying Pigeon factory was outraged because its reputation for producing sturdy and reliable high quality bicycles was being damaged by the sale of "fake" Flying Pigeon bicycles.  Even at this early time in China's reform process, it was clear that Chinese consumers would insist that product labelling, and particularly the use of trademarks and the trade names, be accurate and reliable.  At the same time, Chinese manufacturers who had developed strong reputations (such as Flying Pigeon) would want their names, trademarks and know-how to be protected from possible abuse by unauthorised individuals or companies.  These were important ingredients for the creation of a credible intellectual property protection system.

China will ultimately be successful in enforcing intellectual property rights

There are several factors which will drive China's success in enforcing intellectual property rights.  Some of these are:

Fostering the growth of China's innovative economy

In January of this year, Premier Wen Jiabao called for the creation of an innovation-oriented economy at China's 4th National Conference on Science & Technology.  Premier Wen emphasised that in order for China to reach its economic goals and to be competitive into the future, it must pursue scientific and technological innovation.

Premier Wen identified five areas of technical innovation that are priorities for China.

These are:

• technological development in energy, water resources and environmental protection;
• core technology and intellectual property in manufacturing and in the information industry;
• biotechnology;
• space and maritime technology; and
• fundamental and frontier sciences.

Premier Wen's challenge to China's scientific community goes to the heart of China's continued advancement and reform.  This challenge is relevant to China's system for protecting intellectual property rights because none of the goals identified by Premier Wen can be accomplished unless China has vigorous and effective mechanisms for enforcing intellectual property rights.

The costs of developing new technology are high.  In order for developers of technology to invest in creating new technology, they must have the confidence that they can develop and exploit that technology without having it misappropriated or infringed by third parties.  Therefore, it is clear that China must have a strong intellectual property protection system in order to reach its goal of becoming an innovative economy.

Protecting consumers

China is rapidly developing one of the largest consumer markets in the world.  As Chinese consumers have greater spending capacity, their desire to purchase a wider range of goods and services increases.  Generally speaking, Chinese consumers will pay extra for a good or service that has a reputation for being of high quality.  This means that consumers increasingly want to be confident that, if they are purchasing a product of a certain brand, it will be a genuine product which meets certain expected standards.

We have seen many examples over the years where pirated products in China have not only led to consumer disappointment, but from time to time have caused personal injury and an endangerment of public safety.  This is because pirated products are often manufactured to a sub-standard quality and may malfunction, or if the product is to be consumed, may make consumers ill.

At the same time, Chinese manufacturers of consumer products are rapidly developing their own highly valuable intellectual property.  Chinese manufacturers such as Haier, Lenovo and others are severely disadvantaged within China if their valuable trademarks and products are misused.

Therefore, Chinese consumers and the orderly development of a vibrant and strong consumer market will increasingly require that a stronger enforcement of intellectual property rights occurs.  Both consumers and manufacturers will demand this.

Encouraging foreign investment and technology transfer

Over the past 25 years, China has attracted many hundreds of billions of dollars of foreign investment to China.  Foreign investors have always considered the protection of their intellectual property as a key factor in deciding to establish operations in China and, perhaps more importantly, deciding which technology to utilise in China.  For many of the companies with which I have worked over the years, the misappropriation of their intellectual property in China has been a significant factor in the success or failure of their operations.

China's increased efforts to improve intellectual property protection over the years has definitely resulted in a more significant flow of foreign investment to China.  I think that it is also clear that if China continues to make further significant progress in the enforcement of intellectual property rights, the level and quality of foreign investment will further improve.

Impressive steps over the past 25 years

Trademarks

China has made tremendous strides to create and implement an effective intellectual property protection system over the past 25 years.  At the time of the "Flying Pigeon" incident that I referred to in my opening comments, China had just passed its Trademark Law in late 1982 and was in the initial steps of implementing its trademark registration system.  Since that time, the Trademark Law has been amended three further times and numerous regulations and implementing circulars have been promulgated over the years.  China's Trademark Law generally reflects international practice in most respects, although some registrants think that the registration process takes too long.  The importance of the Trademark Law is shown by the fact that in 2005, there were approximately 838,000 trademark applications for that year.  By the end of 2005, China had a cumulative total of approximately 2.5 million registered trademarks.  This clearly shows that both the international business community as well as the domestic Chinese business community have actively embraced and significantly rely upon China's trademark protection regime.

Patents

For a country that embraces and wishes to encourage innovation, a patent protection system is crucial.  China first adopted its Patent Law in 1984, and in the past 22 years, the Patent Law has been amended three times.  I think that the patent system is probably still understood in China less well than the trademark system.  Two years ago, the Shanghai Municipal Patent Organisation initiated a scheme to encourage local companies to protect their inventions by filing for patents.  It also created some incentives to encourage Chinese patent applicants to also apply for overseas patents.  Last month, the State Intellectual Property Office (SIPO) reported that it had received more than 115,000 patent applications just in the first quarter of 2006.  This is a number 20% higher than for the same period in 2005.  In general, approximately half of the applications for patents come from overseas companies and individuals.

Copyright

China's copyright system took longer to get started, but now is a very significant factor in the development of a comprehensive set of laws and regulations for the protection of intellectual property in China.  The Copyright Law was promulgated in 1990 and has been amended one time since then.  Copyright is increasing a complex area of the law, particularly as new forms of media and communication become available.  China has created regulations on software protection and has implemented specific regulations on the layout design of integrated circuits.

Trade secrets

The area of trade secrets is one in which China's relevant law should be further reformed.  Currently, there is no unified trade secret law.  Instead, there are provisions in the Criminal Code for serious trade secret offences, and there are provisions of the Unfair Competition Law and the General Principles of Civil Law which touch upon trade secret issues.  There are some administrative provisions which grant the State Administration of Industry and Commerce the authority to pursue some trade secret misappropriation, but this is an area of law in which a single unified trade secret law is needed.  The current scattered provisions in the foregoing laws and regulations are too complex and too difficult for most business people to utilise.

Current challenges in strengthening China's IPR system

Public education on the value of intellectual property

Over the past 25 years, many commentators, both Chinese and international, have commented on the lack of a tradition within Chinese culture in recognising and protecting intellectual property rights.  This has created an enormous challenge for the Government, since ultimately, the greatest deterrent to the misappropriation of intellectual property rights occurs when people voluntarily recognise and respect the intellectual property rights of others.  Among the Chinese Government leaders with whom I have spoken, there is no question about whether the public generally needs to be educated about the concept and consequences of intellectual property rights.  In some infringement cases with which we have been involved that involved relatively low level forms of infringement, we have concluded that the offenders often times are just unaware that their actions have been unlawful or have violated somebody else's rights.  Further education of the public is clearly desirable.

However, many product counterfeiting operations are more complex, more widespread and accordingly involve a greater number of people in the past.  Clearly, hardworking Chinese citizens would be less willing to participate in these activities if they readily understood them to be illegal.  While most Chinese citizens would immediately recognise that it is wrong to produce or distribute illicit drugs, I believe that a much smaller number recognise that the production, distribution and sale of pirated products is also illegal.  This is a challenge for public education.

Strengthening enforcement agencies

Our clients and colleagues who are involved in various phases of manufacturing in China advise me that the scope and scale of counterfeiting operations is more widespread today than at any time in the past.  Counterfeiting operations often use the most advanced manufacturing technology, often utilise sophisticated chain of supply and logistic systems, and sell through unrelated "front" organisations.  This level of activity is similar in its sophistication and strength to serious organised criminal syndicates in other parts of the world.  Although many of the people within the Chinese agencies which are responsible for enforcing intellectual property rights are well trained and diligent, there is clearly a serious shortage of well trained and diligent people in the system.  While this has meant that many intellectual property owners have had to take a very active participation in the investigation and pursuit of infringers, only a minority of intellectual property owners have the economic strength and personnel to conduct these activities on their own.  There is an urgent need for substantially increased funding and substantially greater resources to be applied to China's intellectual property rights enforcement system.

Pushing the political mandate to the country level

At the central government level, I have observed a clear recognition of the challenges facing China in intellectual property protection and a strong resolve to improve the system.  However, we have frequently experienced a substantially different attitude at the local level when attempts are made to enforce intellectual property rights.  While the enforcement structures in Beijing, Shanghai and major cities tends to be of fairly high quality, the knowledge and resolve of local officials in other parts of the country can be very unpredictable.  We know of situations in which local officials have failed to take action against an infringer when both the evidence and relevant of applicable law have been clear.  In such cases, the failure to take action has sometimes appeared to be related to the local economic influence of the infringing factory or businessman or possibly the existence of personal ties between the enforcement agent and the infringer.  We believe that problems such as these can be reduced if more active campaigns are implemented throughout all levels of bureaucracy to educate and enforce intellectual property rights.

An FTA with Australia can help meet these challenges

Cooperation in training and development

An FTA between China and Australia could contain provisions for the exchange of personnel and technology for the purpose of increasing the rate at which new personnel in the intellectual property registration and enforcement agencies in China are trained.

Expedited enforcement procedures

As a trial measure, perhaps an FTA can include special rules which allow for easier and faster enforcement procedures for Australian intellectual property owners.

Special dispute resolution body

Perhaps an FTA could create a special dispute resolution body in which disputes regarding Australian intellectual property rights in China and Chinese intellectual property rights in Australia can be considered on an expedited basis.

Enhanced exchange of information

An FTA could include provisions for the creation of a bilateral intellectual property monitoring committee.  This committee could serve as a special channel for the sharing of information regarding intellectual property violations and serve as a mechanism for involving other relevant government agencies when appropriate in order to enforce intellectual property rights.

Conclusion

Although China's international trading partners have long advocated improvements in China's intellectual property protection and enforcement system, it is apparent that China's own domestic self interest necessitates further improvements in intellectual property protection in China.  In order to foster its development as an innovative economy, in order to protect its growing body of valuable intellectual property, in order to satisfy the legitimate expectations of consumers for quality authentic products, and in order to further expand its attraction of foreign investment and technology, China needs to increase its efforts to enforce intellectual property rights.  By including a significant treatment of intellectual property rights in a Free Trade Agreement with Australia, China can further strengthen its ties with its intellectual property counterpart agencies in Australia, learn more about the Australian experience that may be relevant to China, and may experiment with some new techniques for intellectual property protection with Australian companies operating in China as a means of testing new procedures and approaches that may have a potential for wider application around China.