Pirates no more

It is the high profile result that the international business community has been seeking for years.

A major company claims that it has suffered patent infringement at the hands of a rival in China. The case goes to trial. The defendant is found to have infringed and is punished with a record fine. Cue newspaper headlines extolling the rigour of the country’s intellectual property safeguards.

But the case has not turned out quite as many imagined: it has ended in victory for a Chinese firm, and not a foreign one. The local plaintiff CHINT Group is celebrating a record $23 million payout in an out-of-court settlement with French competitor, Schneider.

The settlement followed an initial judgement of $45 million in damages against Schneider’s local affiliate for infringements of circuit-breaker patents.

In a statement delicious in its irony, the CHINT chairman even had words of encouragement for other Chinese firms. In fact he urged them to stand up to the foreign firms abusing patent infringement rules.

So, a victory for China Inc?

China has a long history in keeping its prized technologies secret. The methods by which silk and paper were manufactured were protected for many hundreds of years on pain of death before they were finally smuggled across international borders.

But that was when China led the world in inventiveness and design. In more recent years, it has been playing catch up. As the Economist points out: “Patents date back to Venice in the 15th century, but Communist China did not allow them until 1985.”

So are standards lax?

It depends on the area of intellectual property that we are talking about.

China has updated its intellectual property (IP) laws over the last decade and now has a framework in place that should protect owners of patents, trademarks and copyrights. But actual enforcement is mixed, admits Dan Harris at Beijing-based law firm Harris & Moure. Patent and trade secret protection is incomplete but improving.

The legal protection of trademarks, however, is already quite good and getting much better. It is only in the area of copyright protection (particularly of DVDs, CDs and software) that the country still deserves its bandit reputation.

Why aren’t international companies winning more cases?

Well, they have been successful in a number of actions against Chinese defendants.

Motorola, Honda, Disney, 3M and Philips – to name a few – have all enjoyed their day in court. Pfizer fought off a low-cost Viagra counterfeiter too, much to the disappointment of elderly men on low incomes and even lower libidos.

Starbucks also won a judgement against a Shanghai coffee shop chain Xingbake that had chosen a name (“xing” means “star” and “bake” sounds much like “bucks”) and logo that were suspiciously similar to Starbuck’s own.

The victory was actually a surprise. Xingbake’s founder (who insisted that he had never heard of the Seattle-based heavyweight and that any similarities were an unfortunate coincidence) had a strong case in legal terms.

This was because he had registered his company’s name before Starbucks applied for its own trademark in China – and the domestic courts generally recognise trademark ownership on a first-to-register basis. In the US courts, as well as in legal systems based on English law, trademarks tend to arise more out of usage.

Breaking with tradition, the Shanghai court ruled that Xingbake had infringed on a globally recognised trademark that justified an exception to China’s first-to-file rules.

So there is protection if you register?

International law firms say registration is the key issue. Whoever registers first in China wins the prize.

And there are plenty of local opportunists ready to chance their arm in event of delay. One law firm tells of a local company that retrieved a list of all the patents held with the US authorities by an American client and then submitted it (without amendment) to China’s State Intellectual Property Office and claimed ownership. The goal is usually to sell or license the trademarks back to their international owners.

Another problem is that – even if you have registered your trademarks and won your case – the financial outcome can be a paltry one, as the Chinese courts have rarely insisted on big payouts. Starbucks was awarded $62,000 in compensation, for instance – not much of a recompense for an extensive period of infringement. And this all assumes that the successful party can chase down the proceeds of the judgement in the first place.

Legal analysts say that, although the courts are ready to make awards that cover the successful party’s legal costs, they are often reluctant to quantify extensive damages owed on lost profits resulting from any infringement.

Until recently, this has led to awards for financial losses being capped at Rmb500,000 ($73,000). Although the China Daily reported last week that the cap is set to be raised to Rmb1 million later in the year, the current approach means that many victims of trademark infringement will continue to be under-compensated.

The good news is that Beijing has become convinced that IP matters and is toughening its approach.

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