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New Law on Foreign Investment into China

Date: 30 April 2019

On 15 March 2019, China's National People's Congress passed a new Foreign Investment Law to supersede earlier laws on joint ventures and WFOEs. Under these, foreign-invested companies (FIEs) that are not operating in forbidden or restricted sectors[1] are to be treated like Chinese companies and will be subject to normal Chinese company law, including partnership enterprise law and social insurance regulations. The new law will come into force on 1 January 2020. Foreign businesses already incorporated before January 2020 will have until 2025 to adjust their internal governance structure to the new requirements.

 

The new law has been in the works for some years, but was pushed through in order to address US concerns raised in ongoing trade deal negotiations. In particular, it is intended to address concerns relating to intellectual property theft and forced technology transfer and compulsion for foreign businesses to partner Chinese firms.

 

“Forced” technology transfer

China has been accused of forcing the transfer of technology from Western companies into China, in part by the effect of Article 27 of the existing TIER regulation discussed in our Spring 2019 edition of Patent issues. That provision, on its face, required that a Chinese licensee of background IP must own any improvements to a licensor’s technology. In practice, there were various ways by which a licensor could maintain ownership of improvements made by its licensees in China (also discussed in our newsletter). Nevertheless, to end the controversy, new Art. 22 of the Foreign Investment Law states:

 

“The conditions for technological cooperation in the course of foreign investment are to be negotiated by the various parties to the investment, and administrative organs and their employees must not force the transfer.”

 

Article 16 of the new law says that foreign–invested enterprises should be allowed to participate in government procurement through fair competition “in accordance with the law”, giving equal treatment to products manufactured by or services provided by foreign-invested enterprises in mainland China. Whether this is borne out in practice uniformly across China remains to be seen, but the provision falls far short of allowing foreign companies to compete through importation. Many say it is the widespread procurement practice (not just by government but by health services and in many other areas of the economy) of insisting that goods are manufactured in China that is a greater factor on the forced transfer of technology into China than the detailed provisions of the present TIER regulation.

 

Recognizing and upholding foreign intellectual property rights

Art. 22 of the new law also re-affirms a commitment already publicly stated that the State will protect IPR of foreign investors and enterprises.

 

Indeed, there are already stronger indications coming out of the Chinese Courts of the commitment to uphold IPR rights of foreigners. An example is the success by Jaguar Land Rover against a local car manufacturer, Jiangling and its distributor, Beijing Dachang, on 13 March 2019 before the Beijing Chaoyang District Court.[2] Jaguar Land Rover sued for unfair competition on the basis of copying of the unique appearance of the Range Rover Evoque® and likelihood of confusion as to the origin of the copycat vehicles.

 

Jaguar Land Rover calculated damages on a basis of number of units sold and profit per unit and claimed a sum less that the full calculation. The Court awarded the damages claim in full saying that Jiangling’s profits gained from the infringing acts went far beyond the amount claimed. A measure of costs was also awarded. This is a significant win for a foreign car manufacturer, especially in the light of earlier failures by Fiat and Honda against other manufacturers in China.

 

Protecting foreign investment

The new law attempts to alleviate fears over expropriation of investments made by foreign investors, but fails to do so through the generality of its language. Thus, Art. 20 says on the one hand that the State shall not expropriate the investment of foreign investors, but on the other hand has an open-ended exclusion for “special circumstances” that are “in the public interest”. in doing so it raises as many questions as it attempts to answer, and we await guidelines on the application of the new law to give clarity and to ensure consistency of implementation.

 

Crackdown on trademark squatters 

In order to facilitate the successful implementation of the new Foreign Investment Law, amendments have been made to the Trademark Law of the People's Republic of China. The revised Trademark Law will come into effect on 1 November 2019.

 

According to the National People’s Congress (NPC) Observer blog[3], the amended Trademark Law aims to penalize “bad-faith trademark registrations without intent to use” (Article 4), also known as “trademark squatting.” The China Trademark Office (CTMO) will be able to deny bad-faith applications and trademark agencies will be prohibited (on pain of a warning or fine) from taking on clients who intend to file such applications (Article 19). Furthermore, Article 44 of the amended law states that all trademarks that have been registered in bad faith will be declared invalid.

 

The NPC Observer blog also notes that heavier penalties for infringement are imposed under the amended Trademark Law:

  • quintuple damages for “malicious” trademark infringements (Article 63);
  • increased maximum statutory damages from RMB 3 million to RMB 5 million (Article 63);
  • directing the courts to order destruction of articles with counterfeit registered marks as well as tools and materials used to manufacture such articles (Article 63); and
  • authorizing the courts to sanction malicious filing of trademark lawsuits (Article 68).

 

Click here for a detailed summary of the legal update.

 

 

Top Three IP Tips in China

 

Number 1: register your trademark first. Do this before you even think about approaching anyone in China. Do it now!

 

China, like many countries, is a first-to-file country. 5 million trademark applications were filed in China in 2017 – more than in the entire history of the EUIPO. China is notorious for trademark and domain name “squatters” – people who file registrations for foreign trademarks and domain names in the hope that sooner or later the foreign owner will want to use the mark in China and will have to pay through the nose for their own rights when the time comes. In contrast to other jurisdictions, bad faith alone is not a ground for revocation of a trademark registration in China. There are other grounds for remedying a case of trademark squatting, and at present more such cases are being won by the original foreign trademark owners than are being lost, but the 2012 “Muji” case is a sobering warning that a Chinese company can register and commence use of a mark not previously widely known in China and take ownership of that mark.

 

Number 2: execute a non-disclosure agreement. It is important to do this in Chinese, under Chinese law, under the jurisdiction of the courts of China, with clear penalties for breach, and have it stamped by the local authority. Chinese courts will enforce Chinese agreements but will not enforce agreements that say they are subject to other jurisdictions. Chinese contracting parties respect enforceable agreements and respect the authority of a government stamp on an agreement.

 

Number 3: register your copyright. What’s that? Register copyright?Isn’t it inherent under international convention? Well – yes it is, but it can be registered and stamped in China, and this gives evidence of ownership. So register your software (you don’t have to disclose all the code) and your tables of data and your instruction manuals etc. We can do this for you (and, if you wish, we can also register your copyright in the US to give you the benefit of statutory damages there for added protection).

 

[1] These are set out in the Catalogue of Industries for Guiding Foreign Investment, and anyone considering doing business in China should first consult that catalogue to see whether the sector of interest is encouraged, restricted or forbidden.

 

[2] CIPA 2019 Vol. 48 No 4 p19

 

 

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