The Challenge of IP Protection in China

Enforcement of IPRs

While careful protection of its IPRs in the outsourcing contract is critical to a U.S. company outsourcing to a Chinese service provider, the protection is worth very little if the rights cannot be enforced in both the U.S.A. and, perhaps more importantly, China. In this respect, and regardless of whether the service provider is an independent Chinese company or the Chinese affiliate of a foreign company (including the outsourcing customer's own affiliates and subsidiaries), there are several provisions that should be included in the outsourcing contract to ensure adequate enforcement of the U.S. company's IPRs by the Chinese legal system. Primary among these provisions is a requirement that the outsourcing contract itself be registered with the Ministry of Commerce (MOFCOM), especially where the contract involves the import or export of technology or technology based services. Though not a blanket requirement for validity, registration with MOFCOM is recommended, if for no other reason than a failure to register may limit a foreign company's ability to enforce the contract, as well as the Chinese provider's ability to perform specific financial transactions using the subject technology.

A second provision that should be included in the outsourcing contract is intended to address the practical aspects of the service provider's day-to-day access to and use of the customer's or any third-parties' (to whom the customer is liable) information and technology under the contract. China's data security and privacy laws are limited, and far less protective than U.S. laws such as the Gramm-Leach Bliley Act and HIPAA. Thus, there must be clear, strict requirements of confidentiality for the service provider itself, as well as a requirement that all persons and entities having access to the information or technology (including agents and subcontractors) execute confidentiality agreements, with copies of such agreements required to be provided to the customer, preferably prior to the provider granting such access. In this respect, the contract should also contain restrictions on who can access the customer's information or technology, as well as clear logical and physical security requirements (For example: segregation, securing and monitoring of equipment, restrictions on items permitted, and information that may be removed from the facility and written logs that show who accessed the customer's materials, for what purpose and for how long).

In addition, the contract must address dispute resolution in an intelligent and practical manner. As a matter of fact, U.S. laws should always govern the contract. The reasons for this are many, but in short, the Chinese justice system remains decentralized and unpredictable, especially in the area of intellectual-property enforcement, where complaints may be filed either with local administrative agencies (the most common approach) or with intellectual-property panels in the civil-court system. Determining which administrative agency has jurisdiction over intellectual-property cases requires the claimant to navigate a confusing maze of geographic and subject-matter limitations. On the other hand, within the judicial system, there are Intellectual Property Tribunals in the Intermediate and Higher People's Courts throughout the country, however corruption, local protectionism and limited resources, coupled with burdensome evidentiary requirements and extremely slow administration, are reasons enough to avoid entering into this labyrinth.

In the event a U.S. company chooses, or is required to bring an intellectual-property enforcement action in China, it is advisable for the company to report the action to the U.S. state department, through the U.S. Embassy in Beijing and/or the U.S. Department of Commerce's Trade Compliance Center. Although the U.S. government is not permitted to intervene in the matter, it will monitor the case and, where necessary, contact Chinese officials regarding the status of the action and other concerns the U.S. company may have.

Even when U.S. laws govern an outsourcing contract, certain Chinese laws, including those regarding ownership of developments and import/export of technologies, remain enforceable in the eyes of the Chinese authorities. One way to limit exposure in this respect is to have the contract provide for binding arbitration in the event of a dispute, since China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, making arbitration awards enforceable in China. However, a caveat to this is that binding arbitration should be clearly and unequivocally identified as the sole manner of enforcing the contract. If the dispute resolution provision may be construed as allowing the parties to select the method of dispute resolution (For example: binding arbitration or litigation), the parties run the risk of having the provision deemed to be a non-binding arbitration clause and the dispute remitted to the jurisdiction of the Chinese courts.

While the need for caution remains high, all is not “doom and gloom” when it comes to evaluating outsourcing to China. As 2006 begins, there is encouraging news regarding the Chinese government's efforts to lure foreign investments, and create a more “western-friendly” legal infrastructure to protect IPRs. In Beijing's Haidian district, a special court has been established to prosecute software copyright violations, which are considered criminal offenses under Chinese law. And, to bolster enforcement efforts in the face of global pressures, China has lowered the threshold for punishable offenses to $6,000 (down from a range of approximately $12,000 to $24,000), and increased prison sentences from three to seven years. Also, one of China's highest-ranking and most powerful government officials, Vice-Premier Wu Yi, has taken a lead role in the enforcement of software copyrights and prosecution for piracy crimes.

Page 1, Page 2