Entry Strategies And Ipr Presentation -Tong Ji University


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An introduction to the Chinese legal system, Discussion of legal modules to do business in China, and protection of intellectual property rights.

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  • Entry Strategies And Ipr Presentation -Tong Ji University

    1. 1. Legal Strategies for Entering to the Chinese Market and Protection of Intellectual Property Rights 进入中国市场的法律策略及知识产权保护 Amit Ben-Yehoshua China Partner Shibolet & Co. Advocates & Notaries © Copyright reserved to Amit Ben-Yehoshua
    2. 2. I Love China
    3. 3. Topics of the Lecture <ul><li>Fast Brief about the Chinese Legal System </li></ul><ul><li>Entry Strategies to Chinese Market (Legal Models) </li></ul><ul><li>Intellectual Property Rights in China </li></ul><ul><li>Q&A </li></ul>
    4. 4. The People’s Republic of China <ul><li>23 Provinces </li></ul><ul><li>5 autonomous regions </li></ul><ul><li>4 municipalities under the Central Government </li></ul><ul><li>2 Special Administrative Regions (Hong Kong, Macau) “Two Systems One Nation” </li></ul>
    5. 5. Chinese Law From Lawlessness to Modern Law 中国法律 从法制缺失到现代法律 <ul><li>Law of the PRC on Chinese Foreign Equity Joint Ventures (合资公司) - 1979 </li></ul><ul><li>Contract Law – 1999 </li></ul><ul><li>Co mpany Law – 1996, amended 2005 </li></ul><ul><li>Property Law ( 物权法 ) – 2007 </li></ul><ul><li>Enterprise Bankruptcy Law (企业破产法 ) – 2006 </li></ul><ul><li>Civil Law System </li></ul>
    6. 6. The Chinese Court System 中国法庭体制 <ul><li>Four court levels: </li></ul><ul><ul><li>Basic People’s Court (10,392 courts) </li></ul></ul><ul><ul><li>Intermediate People’s Court (369 courts) </li></ul></ul><ul><ul><li>High People’s Court (369 courts) </li></ul></ul><ul><ul><li>Supreme People’s Court (32 courts) </li></ul></ul><ul><li>Low qualifications for judgeship (2 years of legal experience/3 years for Supreme Court Judge). </li></ul><ul><li>Local protectionism </li></ul><ul><li>Lack of judicial independence (司法独立) </li></ul><ul><li>No case precedents . </li></ul><ul><li>China is extremely diverse - major differences between rural and urban society, between the E ast and the W est. </li></ul><ul><li>Vital to consider arbitration clause </li></ul>
    7. 7. Quick Summary 概要 <ul><li>Chinese Legal system has underwent substantial changes, thousands of law promulgated, thousand of cases are argued in court. </li></ul><ul><li>The Chinese government is trying to stop the problems associated with local protectionism by various mechanisms. </li></ul><ul><li>The rule of law and the protections of the interest of foreign investors has been substantially improved compared to 10 or twenty years ago. </li></ul><ul><li>In 2006, over 41,000 foreign companies have established a legal corporations in China. </li></ul><ul><li>There are legal risks, however, most of the major firms in the world realize that every business must consider its China strategy. </li></ul>
    8. 8. Let’s Do Business – Entry Strategies Where to Invest? Second-Third Tier Cities <ul><li>Chengdu ( 成都) </li></ul><ul><li>Dalian (大连) </li></ul><ul><li>Wuhan (武汉) </li></ul><ul><li>Xian (西安) </li></ul><ul><li>Nanjing (南京) </li></ul><ul><li>Suzhou (苏州) </li></ul><ul><li>Chongqing (重庆) </li></ul><ul><li>Qingdao (青岛) </li></ul><ul><li>Hangzhou (杭州) </li></ul><ul><li>Wuxi (无锡) </li></ul><ul><li>Source: Amcham Shanghai 2008, China Business Report </li></ul>
    9. 9. <ul><li>No Partners </li></ul><ul><ul><li>Wholly Foreign Owned Enterprise </li></ul></ul><ul><ul><li>外商独资企业 </li></ul></ul><ul><ul><li>2. Representative Office - 代表处 </li></ul></ul><ul><ul><li>3. Logistics Companies – e.g. PTL Group </li></ul></ul><ul><li>Partners Needed </li></ul><ul><ul><li>Joint Ventures – Cooperative Joint Venture, Equity Joint Venture 合资公司 </li></ul></ul><ul><ul><li>Merger or Acquisition of an Existing Company 收购或兼并 </li></ul></ul><ul><ul><li>Foreign Invested Companies Limited by Shares 控股公司 </li></ul></ul><ul><ul><li>Partnerships 合作伙伴 </li></ul></ul>Let’s Do Business – Along or with Local Partners
    10. 10. Pros and Cons to Joining Forces with a Local Partner 与当地合伙人合作的优势与劣势 Inflexible – changes require unanimous consent and governmental approval Sometimes the law requires JV and no alternative options Risk of mishandling of intellectual property rights Guanxi Factor (network, connections) The need to share control of the Company Equity Injection Different Management Style. Market economy, relatively a new concept. Local partners’ knowledge and familiarity with the local market Cons 劣势 Pros 优势
    11. 11. Wholly Foreign Owned Enterprise 外商独资企业 <ul><li>Similar to Western style limited liability company </li></ul><ul><li>Full ownership by one or more foreign investors </li></ul><ul><li>May conduct full scope of business subject to the approved business scope. </li></ul><ul><li>Costly, although the Company Law requires a minimum registered of RMB 100,000 for a single shareholder limited liability company, in practice the minimum registered capital in Shanghai is over $140,000. </li></ul>Foreign Inventor 外国投资者 WFOE 外商独资企业
    12. 12. Representative Office 代表处 <ul><li>Limited to liaison ( 联络 ) activities </li></ul><ul><li>Permitted to act in a limited scope of business, such as data collection, market research, assistance in negotiation with contracts, management of warranty and after sale service. </li></ul><ul><li>May not engage in profit making activity and may not receive fees for services, sign contracts or directly generate income. </li></ul><ul><li>Substantially cheaper than WFOE. </li></ul>Foreign Investor 外国投资者 Representative Office 代表处
    13. 13. Comparison of Representative Office with WFOE 外商独资企业和代表处的比较 30-60 days 30 days Time of approval Based on profit Calculated based on expenses Tax May employ local and foreign employees Only through approval of approved labor bureaus Labor Yes- varies per jurisdiction Not required Minimum Registered Capital Yes No Limited liability Operates like a regular limited liability company, subject to its business scope. Limited to marketing research, and liaison activities Legal Capacity WFOE Representative Office Issue
    14. 14. Solutions for the Small Investor 小投资者的方案 <ul><li>Contact Logistic Companies which will provide office sharing services, will act as the formal employer of your employees. </li></ul><ul><li>33.1% of the companies in China employ less than 50 people. </li></ul>
    15. 15. Joint Ventures 合资公司 Foreign Party Chinese Party Joint Venture
    16. 16. Issues to Consider when Establishing a Joint Venture 建立合资公司需要考虑的问题 <ul><li>Avoid the Joint Venture Module. </li></ul><ul><li>Management control </li></ul><ul><li>Control over finance functions </li></ul><ul><li>Control over personnel policy (hiring and firing powers) </li></ul><ul><li>Control over manufacturing process </li></ul><ul><li>Quality control. </li></ul><ul><li>Control over Intellectual Property </li></ul><ul><li>Arbitration Clause 仲裁条款 </li></ul><ul><li>Exit Clause. </li></ul><ul><li>All changes to the Joint Venture’s Articles of Association (公司章程) require a unanimous consent of all parties and governmental approval </li></ul>
    17. 17. Mergers and Acquisition 兼并与收购 <ul><li>Before the mid 90’s, the sale and purchase of Chinese entities was considered by foreign entities only in exceptional cases. </li></ul><ul><li>China is facing a major wave of merger and acquisitions. The pattern of China’s foreign direct investment is changing from setting up new factories to acquisitions of existing companies. </li></ul><ul><li>In 2005, the value of announced M&A transactions rose by 38% from $2.1 trillion in 2004 to $2.9 trillion (万亿 ) . </li></ul><ul><li>Average size deal $181.7 million in 2005. </li></ul><ul><li>Over 20% of the American companies in Shanghai were in the process of acquiring a Chinese company or its assets in the last 24 months. (Amcham, 2008 China Business Report) </li></ul>
    18. 18. Foreign Direct Investment by Vehicle Type 不同投资形式下的投资额 (number of projects) 38 50 Foreign Investing Shareholding Ventures (Holding Companies) 29,543 30,164 WFOE’s 641 1,036 Cooperative Joint Venture 7,649 10,223 Equity Joint Venture 38,871 41,473 Total FDI 2007 2006
    19. 19. Type of Legal Entities <ul><li>Wholly Owned Foreign Enterprise – 47.3% </li></ul><ul><li>Representative Office – 12.6% </li></ul><ul><li>Joint Venture – 11.1% </li></ul><ul><li>Holding Company – 3.1% </li></ul><ul><li>Regional Headquarters – 6.1% </li></ul><ul><li>Global Headquarters – 0.2% </li></ul><ul><li>R&D Center – 7.0% </li></ul><ul><li>Other – 1.1% </li></ul><ul><li>Source: Amcham Shanghai 2008 China Business Report </li></ul>
    20. 20. Typical Offshore Structure Offshore Legal Entity Hong Kong, BVI, Singapore WFOE/Representative Office /Joint Venture
    21. 21. Due Diligence <ul><li>Cities compete – search for the best price. </li></ul><ul><li>Search for best price inside the city, districts compete. </li></ul><ul><li>Be creative, and bargain, the law is not rock solid as in the west. </li></ul><ul><li>Don’t fall to the guanxi trap – the Vice Premier is my close friend… </li></ul><ul><li>Invest money in legal and financial due diligence. Many smart people have lost money on very foolish mistakes. </li></ul><ul><li>Laws change very rapidly in China. </li></ul><ul><ul><li>Project preliminary approval for RMB 500,000, one year later RMB 5,000,000 </li></ul></ul><ul><ul><li>Minimum registered capital for foreign invested travel agency, reduced from 4,000,000 to RMB 300,000 in one month notice. </li></ul></ul>
    22. 22. Intellectual Property Rights 知识产权保护
    23. 23. Law and Practice 法律与实践 <ul><li>Patent (专利) Law. 1984, revised 1992, 2000, 2008 </li></ul><ul><li>Copyright (著作权) Law (1991, 2001) </li></ul><ul><li>Trademark (商标) Law (1982, amended in 1993, 2001) </li></ul><ul><li>Regulations for the Protection of Computer Software (软件) (1991, revised 2002) </li></ul><ul><li>Product Quality (产品质量) Law (2000) </li></ul>
    24. 24. IP Protection is Needed for China’s Economic Growth <ul><li>Manufactures of pirated technology do not pay tax. Do not contribute to the economy in the fullest extent. </li></ul><ul><li>It is estimated that in the US 373,000 jobs are lost do to IP infringement. </li></ul><ul><li>Due to IP infringement lower motivation for new innovations </li></ul><ul><li>Public health risk – medicine manufactured by on authorized agent. </li></ul>
    25. 25. Trademarks 商标 <ul><li>Trademarks must be registered under Chinese Law. Once registered the law gives an exclusive right to the holder to use mark for those classes of goods or services. </li></ul><ul><li>One can register words, letters, characters, designs, numerals, colors, and colors combinations. </li></ul><ul><li>In 2004, more than 588,000 trademarks were registered. 60,000 of the applications were filed by foreigners. </li></ul><ul><li>In the last seven consecutive years China has the largest amount of trade mark applications in the world per year. </li></ul><ul><li>First to File Rule. </li></ul><ul><li>Cost of registration approximately $400. </li></ul><ul><li>Duration 10 years. Can be renewed for additional 10 years. </li></ul><ul><li>All changes must be registered. </li></ul><ul><li>Any assignment of right must be registered. </li></ul><ul><li>If not used for three years will be regarded as abandoned and may be canceled. </li></ul>
    26. 26. Copyrights 著作权 <ul><li>Protected works, written literary works, music, films, television works, computer software, artistic and photographic works. </li></ul><ul><li>Registration the protected work is not mandatory required, however is recommended. </li></ul><ul><li>All works of Chinese citizens protected regardless were published. Works of foreigners protected in first published in China or according to the relevant bilateral treaties . </li></ul><ul><li>Copyright license contract must be in writing. Law encourages that the contract will be registered. </li></ul><ul><li>China is the third worst offender of software piracy after Vietnam and Ukraine with 90% piracy rate of computer software. </li></ul><ul><li>Protection the life of the owner, plus 50 years. If a corporation, 50 years. </li></ul>
    27. 27. Patents 专利 <ul><li>China revised its patent law this year. </li></ul><ul><li>The Patent Process </li></ul><ul><li>Patent for each State/Patent Cooperation Treaty </li></ul><ul><li>Patent valid for 20 years from the date of application. </li></ul><ul><li>Utility model (实用新型) is valid for 10 years from date of application. </li></ul><ul><li>Patent protection is available for both manufacturing process and chemical process, including production of pharmaceuticals, chemicals food, beverages flavoring. </li></ul><ul><li>First to File System. </li></ul><ul><li>Assignment of patent requires written contract and registration </li></ul><ul><li>Assignment of patents between Chinese and foreign parties requires approval of State Intellectual Property Office. </li></ul><ul><li>Chinese patent office has the third largest amount of patent filings, after US and Japan. </li></ul>
    28. 28. Intellectual Property Rights Violations: the Bad News <ul><li>“ China’s inadequate enforcement is resulting in infringement levels of 90% or above for virtually every form of intellectual property… Overall piracy rates in China has not declined significantly since WTO accession and in some cases have increased.” (US Trade Representative) </li></ul><ul><li>66% of the companies interviewed by Baker McKenzie said that counterfeits (制假) represent at least 5% of the market for their brands. with 34% saying that it represented at least 10%. </li></ul><ul><li>Biased Courts (偏见法庭) – the smaller the city the higher the bias. </li></ul><ul><li>“ It is not uncommon for local branches of the government agencies to seek to protect local business by refusing to take action on behalf of foreign companies.“ (Rouse &Co.) </li></ul><ul><li>Some opinion that the situation is not likely to change soon. </li></ul>
    29. 29. The Good News: Growing Number of Patent Application and Cases in Courts <ul><li>Mr. Jiang Zhipei, presiding judge of IPR court of the Supreme People’s Court, reported that from 2002, when China entered into WTO, till 2006, China's local courts had accepted a total of 54,321 cases involving IPR, and adjudicated 52,437cases, with an annual growth rate at 17.06% and 19.29% respectively. </li></ul><ul><li>Total of 248,757 foreign patents were granted in China between 1985-2006. </li></ul><ul><li>70% of the applications were filed between 2003-2006. </li></ul><ul><li>485 Israeli patents were filed in the corresponding period. 71% were filed between 2003-2006 . </li></ul>
    30. 30. The Good News: Continued <ul><li>“ There has been some progress with respect to protection of intellectual property rights as a result of high-profile campaigns to crack down on counterfeiting, greater reliance on criminal prosecutions, and institutional changes, including the establishment complaint centers for reporting intellectual property violations in 50 cities.” </li></ul><ul><li>“ Among foreign investors who cited intellectual property protection as a major problem, 44% agreed that there was overall improvement in the last two years, with 51% citing improvement in public security enforcement and 43% noting improvement in customs enforcement. (AmCham 2007).” </li></ul><ul><li>“ Intellectual property is increasingly important to China’s domestic economy. Domestic companies now have intellectual property worth protecting. The overwhelming majority of patent applicants are Chinese parties, as are the overwhelming majority of parties seeking administrative or judicial remedies for IP violations. China is now one of the leading exporters among developing countries of technological goods. “ </li></ul>
    31. 31. Enforcement of IP Rights 知识产权的行使 <ul><li>Administrative Proceedings 行政程序 </li></ul><ul><li>Court Civil Proceedings 民事诉讼程序 </li></ul><ul><li>Criminal Prosecution 刑事追诉 </li></ul>
    32. 32. Administrative Proceedings 行政程序 <ul><li>It is estimated that over 90% of all IP enforcement is conducted via the administrative route. </li></ul><ul><li>Quicker and cheaper than using the courts </li></ul><ul><li>Administrative authorities also accept a lower level of evidence. </li></ul><ul><li>Administrative actions are often most suitable in straightforward counterfeit cases, or cases in which the infringer is likely to settle the case quickly. </li></ul><ul><li>Fast results. </li></ul>
    33. 33. Court C ivil Proceedings 民事诉讼程序 <ul><li>Civil Proceedings typically are done in patent related case. </li></ul><ul><li>The damages awards in Chinese Courts are very low compared to the American judgments. </li></ul><ul><li>Typical case can take between 4 to 7 years. </li></ul><ul><li>Importance of including an arbitration clause in contracts </li></ul><ul><li>Growing amount of cases brought to Chinese courts an encouraging factor that shows growing enforcement of IP rights. </li></ul><ul><li>In 2008 there was an increase in 33% of the number of intellectual property related cases compared to the previous year. </li></ul>
    34. 34. Criminal Pro secution 刑事追诉 <ul><li>Criminal proceedings is relatively rare. </li></ul><ul><li>The official statistics showed that from 2000 to 2004, Chinese courts accepted a total of 1,710 criminal cases with 1,948 defendants being prosecuted for IP related criminal offences. </li></ul><ul><li>Individual is subject to prosecution where the number of counterfeit items exceed 20,000, or where the brand more than one brand, 10,000 items. Criminal prosecution is appropriate where the illegal revenues exceed RMB 50,000. If more than one brand is involved the threshold is 30,000 RMB. (minimum salary in Shanghai is 800 RMB per month.) </li></ul>
    35. 35. Prevention 预防 <ul><li>Consult with attorney experienced in IP matters </li></ul><ul><li>Get informed legal advice about the specific laws of the destination country. </li></ul><ul><li>Assign a person to handle your IP matters (renewal application, payment of annual fees in the related countries) </li></ul><ul><li>Screen employees/partners / train your employees on IP issues </li></ul><ul><li>share sensitive data with each department on need to know basis </li></ul><ul><li>Use smart chips, hologram labels to distinguish your products from fake – you carry the burden of proof that the product is fake. </li></ul><ul><li>Add an on-line form to the company’s website reporting about IP infringements. </li></ul><ul><li>Licensing Agreement ( 许可协议 ), Confidentiality (保密) , non compete (非竞争) , non disclosure (不泄密) clause. </li></ul><ul><li>Arbitration clause </li></ul>
    36. 36. Thank you
    37. 37. Questions and Answers
    38. 38. Contact Information <ul><li>Amit Ben-Yehoshua, China Partner </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Telephone: 86-13761360176 </li></ul><ul><li>Skype: china-law-desk </li></ul>