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January 21, 2009 11:48 AM

LETTER FROM ASIA: China's IP Crackdown

Posted by Anthony Lin



For years, foreign companies have complained that patent and trademark infringers in China are treated too lightly. With damages typically capped at 500,000 yuan ($73,000), actual awards are often much lower.

But some courts in China's Zhejiang province have recently gotten tough, ordering high-profile infringers to pay millions of dollars in damages. Unfortunately for multinational corporations, the verdicts have all been against them.

Last month, Samsung Corp. was ordered by a Zhejiang court to pay 50 million yuan ($7.3 million) for infringing  local company Holley Communication's cell phone technology patent. Earlier in 2008 another Zhejiang court ordered well-known Hong Kong clothing chain G2000 to pay 20 million yuan ($2.9 million) for violating a local entrepreneur's "2000" trademark. In 2007 brewer Zhejiang Lanye won a 3 million yuan ($439,000) judgment against Pepsi over the latter's use of the phrase "blue storm" in a marketing campaign.

These verdicts follow the most closely watched case of all: In September 2007 France's Schneider Electric was ordered to pay a whopping 334.8 million yuan ($49 million) for violating Wenzhou-based CHINT Group's circuit breaker patent. Schneider says the damages are more than 20 times greater than the next-highest award by a Chinese court in a similar case.

The Schneider decision, by the Wenzhou Intermediate Court, is now under appeal to the Zhejiang People's High Court. Schneider says that the case involves an inadequately reviewed "junk patent" on a device that the French company invented 20 years ago.

If the ruling is upheld, "the whole [intellectual property rights] environment in China would be compromised," Schneider warned in a statement. "This could slow down the technology transfer to China, limit the innovation and development of new technologies by Chinese companies and impact the overall foreign and local investment in China, thus hurting all innovation-based companies throughout the world."

Liu Daochen, one of CHINT's lawyers with the Beijing law firm Han Ding United Lawyers, dismissed Schneider's statements. "I don't care about what Schneider has said to the media," Liu said. "I only care about what Schneider has said to the court." He declined to discuss the appeal.

Douglas Clark of Lovells's Shanghai office, who is representing Schneider in its appeal, also declined to discuss the details of the case. But he said a number of prominent Chinese legal academics have in recent years argued that Chinese courts should treat foreign IP differently than Chinese IP.

"The main argument is that China cannot move beyond its current state of development when a small number of Western companies control so much in terms of intellectual property," said Clark. Thus, infringements by foreign companies should be dealt with more harshly than infringements by Chinese companies.

Clark noted that such arguments might be particularly well received in Zhejiang province, which is less reliant on foreign investment than Guangdong province, Beijing, or Shanghai but has a large number of small local enterprises.

The worsening economy, which has seen a vast number of small companies shut their doors throughout China in the past few months, has added an additional wrinkle to the debate. Jones Day's Mark Cohen--until last August the IP attaché in the U.S. embassy in Beijing--said Chinese courts have indicated they may decline to issue injunctions in IP cases where doing so might result in job losses.  In one recent case, an injunction was not issued, while in another, a patent holder was ordered to provide a royalty-free license to implement a government standardization procedure.

"The economy puts a lot of pressure on the system that plays into the hands of those who argue for things like compulsory licenses," says Cohen.

But the former diplomat says there are countervailing forces at work too. He notes that the small number of IP disputes in China between foreign and local companies is now dwarfed by the burgeoning docket of cases in which Chinese companies sue each other for infringement. The most successful and innovative Chinese companies increasingly feel themselves persecuted by the holders of "junk patents," says Cohen.

"China can't create an innovative economy that way," he says.

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