doing business in china making products, structuring investments and protecting your intellectual...
TRANSCRIPT
DOING BUSINESS IN CHINAMaking Products, Structuring Investments and Protecting Your Intellectual Property
March 16, 2004
DINSMORE & SHOHL LLPCharleston – Cincinnati – Columbus – DaytonLexington – Louisville – Nashville – Pittsburgh
255 East Fifth StreetSuite 1900Cincinnati, OH 45202Phone: (513) 977-8200Fax: (513) 977-8141
Harvey Jay Cohen
Email: [email protected]
Phone (513) 977-8200 / Fax: (513) 977-8141
Website: www.dinslaw.com
LEHMAN, LEE & XUA Licensed Chinese Law PartnershipBeijing – Shanghai – Shenzhen – Shaoguan – Hong Kong
6th floor, Dongwai Diplomatic Office Building23 Dongzhimenwai DajieBeijing 100600 ChinaTel: (8610) 8532-1919Fax: (8610) 8532-1999
Edward E. Lehman
Email: [email protected]
Tel: (8610) 8532-1919 / Fax: (8610) 8532-1999
Website: www.lehmanlaw.com
Chinese Business Environment
Many Investment Opportunities
Business Variety
Foreign Direct Investments
Joint Ventures
PRC Government Organization
Local Governments
Autonomous Regions
Centrally Governed
Municipalities
Special Administrative
Regions
CENTRAL GOVERNMENT
China’s Legal Structure
National People’s Congress Laws are enacted by the National People’s Congress.
State Council – Central GovernmentAdministrative regulations are passed by the State Council or organs under the State Council (eg. MOFTEC, Ministry of Agriculture, Ministry of Foreign Affairs etc).
China’s Legal Structure
Local Government AgenciesLocal government agencies (eg. COFTEC, Hygiene Bureau, Education Bureau etc.) are empowered to interpret legislation within their respective areas of jurisdiction.
People’s CourtThe People’s Court at various levels have authority to hear and decide criminal and civil lawsuits.
ProsecutorThe prosecutor investigates criminal matters and represents the State in criminal cases.
Foreign Investment in China
Central Government decides types of business open to foreign investors.
Ministry of Commercemonitors foreign investment, empowered to approve all applications to establish foreign investment enterprises (FIEs).
Foreign Investment in China
Foreign Investment Direction
MINISTRY OF COMMERCE
STATE DEVELOPMENT AND REFORM COMMISSION
Catalogue for the Guidance of Foreign Investment Industries (list of encouraged, restricted and prohibited industries)
Foreign Investment in China
Some industries (eg. telecommunication services) - mandatory that the foreign investor have a Chinese partner, or Chinese partner hold a majority interest in the FIE.
Foreign Investment Operating Structures
Representative Office
Equity Joint Venture
Cooperative Joint Venture
Wholly Foreign Owned Enterprise
Representative Office
Quick (procedure to register is not complicated) and inexpensive way to establish a legal presence in China.
Can carry out market research, render advice, collection of information, coordinate company activities in China.
No direct business activities – cannot enter into sales contract, issue invoices, arrange for importing goods.
Equity Joint Venture
A most commonly used foreign investment structure for the following reasons:
First foreign investment structure allowed in China;
Mandated by Chinese law to be used for most types of foreign investment;
Benefit to the Chinese economy - foreign party generally provides technology, management expertise & cash.
Equity Joint Venture
Benefit to the foreign party - Chinese partner may have established sale and distribution network;
Well connected Chinese partner can help cut through red tape.
Important ConsiderationsSelection of the Chinese JV partner and due diligence of partner/assets
WTO Schedule
Location set up
Equity Joint Venture
The joint venture set up requirements:Feasibility studyLetter of intentJV contractArticles of Association
Capital investment requirements
Minimum equity investment by the Foreign investor is 25%
Cooperative Joint Venture
Similar to Equity Joint Venture in structure but with more flexibility because
Sharing of profits is governed entirely by contract
Foreign partner can obtain return of investment in priority to Chinese partner
Establishment procedure similar to Equity Joint Venture
Wholly Foreign Owned Enterprise
A Wholly Foreign Owned Enterprise is basically a wholly owned subsidiary of foreign enterprise.
Restricted to fewer business sectors then Joint Ventures.
Wholly Foreign Owned Enterprise
Must further the development of the Chinese economy and should use some degree of advanced technology.
Approval and registration procedure similar to Joint Ventures.
Joint Ventures: After the Setup
GARBAGE IN – GARBAGE OUT
The majority of JV problems can be avoided through hard work and organization
Stumbling Blocks
Lack of transparency in legislation
Local protectionism in some areas
Cultural differences
Different management styles
Connections (‘Guanxi’)
Chinese Pride & Prejudice
“You foreigners don’t understand about China and the Chinese way of doing things”
“We don’t do it this way in China”
Be An Active Partner
A good foreign partner does not mean providing expertise and technology and then getting out of the way
When partners do not work together actively, inequalities cause problems
Do What You Say and Document What You Do
Follow-up on items agreed upon during setup
Example 1: land use rights (understand what is being promised and what one is getting, and then follow up).
Example 2: technology transfer and improvements (document what you provide and make sure it is adequately protected).
Do not leave important items to oral agreements during setup negotiations – document everything.
Importance of Continuity
Documentation should let a new company representative to JV step into his predecessor’s shoes smoothly.
Personal relationships and trust DO mean something.
Regulatory Filings
Technology Transfers, Trademark Licenses, Management Agreements.
All Must be Filed – this will not get done by itself, so follow up.
Royalty payments cannot be remitted unless filings are made.
Technology Transfer
Basis can be Patent, Confidential Information/Trade Secrets.
Must be recorded at local Ministry of Foreign Trade & Economic Cooperation (MOFTEC).
Royalty payments can be made following approval of State Administration of Foreign Exchange (SAFE).
Patent Law of China
1985 enacted
1992 first revision
2000 second revision-effective on July 1, 2001
Type and Duration of Patent Protection
TYPE DURATION
Invention 20 years
Utility model 10 years
Industrial design 10 years from the filing date
Requirements for Granting a Patent for Invention and Utility Model
Novelty
Inventiveness and
Practical applicability
For Utility Model & Design
Formality examination
Published after granting
Right of Patent Owner
No entity or individual may, without the authorization of the patentee,
make
use
offer to sell
sell
import
the patented product or patented method
Re-examination, Invalidation and Appeal to Court
When application is rejected , applicant can file reexamination request to Reexamination Board. After patent is granted, any party can request the Patent Reexamination Board to declare a patent right invalid.
Decision by the reexamination board can be appealed to court
Action should be taken within 3 months from the notification
Settlement of Patent Infringement
Consultation
Institute legal procedure to court
Mediation by the local administrative authority on patent work
Damage Calculation for Infringement
Firstly decided by the actual profits or losses by the patentee or infringer, or
1-3 times of royalties, or
RMB 500, 000 at most
Chinese Trademark Law
1982 took effect
1993 first revision
2001 second revision, took effect on Dec 1, 2001
Protection Scope of the Trademark Law
Registered trademarks
Unregistered, but famous trademarks
What Can Be Protected Under The Chinese Trademark Law
Trademark
Service mark
Collective mark
Certification mark
Trademark RegistrationWhat Can Be Registered
Words
Graphs
Letters
Numerals
Three Dimension Signs
Combinations Of Color
Combinations Of The Forgoing Elements
The Requirements Of A Registered Mark
The trademark will not be registered if its use would be considered contrary to law, public order, liable to cause offense or seen as immoral or scandalous.
The trademark should be distinctive
The trademark should not infringe any legitimate rights of others
How Do Foreign Entities Register Trademarks In China?
A foreign person or foreign enterprise, without a registered address in China that wants to apply for the registration of a trademark or deal with matters concerning a trademark in China must retain a Trademark Agent that is licensed by the Chinese government.
The Examination Process For Trademark Applications
Submit trademark application
Formal
Examination Substantive examination
Publish for opposition
(3 months)
yes yes yes2-3
months 5-8months
TMO issue Notification of Correction or
application shall be returned to the applicant
Application rejected
File an appeal with TRAB
Issue trademark Certificate
no nono
yes1 month
2 weeks
The Amended Chinese Trademark Law Owner Rights
Enhancement of trademark protection
Progress in application and dispute procedures
Improvement in Relief for Trademark Owners
Enhancement of Trademark Protection
Subject matter protection expanded
Lifts bans on trademark application by a natural person
Allows co-owned trademarks
Lowers threshold for registration
Protection for well-known marks
Added Protection-Subject Matter
Three-dimensional trademarks
Collective and certification marks
Geographical indication
Enhancement of Trademark Protection
Lowering threshold for Registration by introducing the concept of “Secondary meaning.” “Secondary meaning” - means “acquiring distinctiveness through use”
A trademark which lacks inherent distinctiveness may obtain registration if it can prove that it has acquired distinctiveness through use.
Evidence to show secondary meaning may include output, sales volume, advertisement coverage, especially market survey of the products/services in respect of which the trademark is used.
Enhancement of Trademark Protection
Explicit protection to well-known marks
If a trademark for which the registration is applied for is identical or similar to other goods or is a reproduction, imitation or translation of a well-known trademark of another which has not been registered in China thus being liable to create confusion to the public, registration will be refused and the use of such trademark will be prohibited.
If a trademark for which the registration is applied for is a reproduction, imitation or translation of a well-known trademark of another which has been registered in China and creates confusion to the public, thus causing a likelihood of infringement on the interests of the registered proprietor of the well-known mark, registration will be refused and the use of the trademark will be prohibited.
Enhancement of Trademark Protection
Explicit protection to well-known marks
If a third party registers a well-known trademark as part of its enterprise name, which is likely to deceive or mislead consumers, the owner of the well known trademark may apply to the enterprise registry for cancellation of the enterprise name.
Progress In Application And Dispute Procedures
Voluntary amendment and assignment are allowed for pending applications
Partial opposition/cancellation is introduced to trademark dispute cases
Oral hearing is possible for cases examined by TRAB
Introduction of judicial review
Improvement in Relief for Trademark Owners
Preliminary injunction available
Awareness of the selling of counterfeiting goods
Legislative remedy available (no more than RMB 500,000)
Improvement in Relief for Trademark Owners
Preliminary Injunction
If the trademark owner, its assignee or licensee can prove that the infringer is engaging in or will conduct infringement activities, and that without timely intervention from the courts, the trademark owner or assignee or licensee will incur irreparable loss, the trademark owner, its assignee or licensee may seek an order of injunction from the court and take measures to retain the infringing property.
Improvement in Relief for Trademark Owners -- Awareness of selling counterfeiting goods
Awareness of selling counterfeiting goods
The claim of being unaware of selling counterfeit products does not remove the liability of infringement. The only difference between an infringer who is aware or unaware of the infringing characteristics of the goods is that the latter does not bear liability if he is able to prove that he acquired the goods through a legitimate route.
Calculation of Damages
The amount of damages for infringement of a trademark will be either the income obtained by the infringer from the use of the trademark or the loss suffered by the owner of the trademark due to the infringement.The loss suffered by the owner of the trademark can include his reasonable expenses for preventing the act of infringement.
The profit earned because of the infringement may be calculated on the basis of a multiplication of the sales of the infringing goods by the unit profit of the goods. Where it is impossible to find out the unit profit of the goods, it is calculated on the basis of the unit profit of goods of the registered trademark.
Calculation of Damages
The injury suffered because of the infringement may be calculated on the basis of multiplication of the quantity of reduction suffered by the right holder in his sales of the goods because of the infringement or the sales of the infringing goods by the unit profit of goods of the registered trademark.
If neither the income obtained by the infringer, nor the loss suffered by the trademark owner can be calculated, the people's court can determine the amount which amount should not be more than RMB500,000
The reasonable expenses for stopping an infringing act can include the reasonable expenses of the right holder or his agent for investigation or evidence collection in respect of the infringing act.
Trademark License
Trademarks must already be registered or agreement invalid.
Agreement must be recorded at the Administration of Industry & Commerce (AIC).
SAFE procedure necessary before royalty can be remitted.
When to File?
Plan A: Take care of everything when JV is set up
Technology transfer usually part of contribution, filings done as part of setup
If all licenses filed during setup, initial momentum can ensure proper follow-up
Plan B: Calendar deadlinesExample: Trademark license entered into when trademark is registered (proper communication between trademark counsel and company representative)
Documentation
JV setup should be treated like an historical event – collect documents for posterity
Keep copies of everything that is executed by parties and filed with any government agency – keep copies with JV and parent
Exit Strategy
Long-term planning is never a bad thing
Time changes everything
new business strategy
internal reorganization
merger/acquisition
JV reorganization or buyout
Exit Strategy
Offshore vehicle enhances flexibility and presents options for both partners
Keep everything current
Board meetings
Redistribution of profits
Take care of internal disputes when they happen
Sourcing from ChinaSourcing from China
In time, China may be the factory of the world.
China may be the fuel for the world’s next great industrial revolution
Opportunities for everyone to participate
Why Source from China?Why Source from China?
Competitive costs
Lower cost alternatives
Extensive capacity resources
Time reduction
Overall substantial savings
QualityQuality
The quality and reliability of most products produced in China today have improved substantially in the past few years
The quality of most products such as chemicals purchased in China today is of world-class standards
No quality problems and no delivery problems
Why so?Why so?
Awareness - Chinese producers are aware of the demand and their advantage in the market. Thus, they begin to invest monies in training and modernizing their production sites as well as improvement in technology.
Condition - Purchasers demand that the local suppliers prove or verify that their products are consistent in quality and deliveries made on time.
Sourcing TeamSourcing Team
Establish procurement team that will help the company to identify and qualify new suppliers in China
Contract ManufacturingContract Manufacturing
Direct Sourcing
Vendor/Purchaser relationships
Auditing own resources
Quality control
Out-sourcing
Manage relationships
Quality control
Important Points For Important Points For Establishing ManufacturingEstablishing Manufacturing
Know your own criteria
Have foresight
Out-source experience
Consider investment options
Use a screening process
Site-selection-make sure the location is right
Partner due diligence
Market research
China as a source – take note!China as a source – take note!
Find experienced suppliersCheck referrals
QC is the key
Train supplier on foreign expectations
Minimize financial riskshave tight contracts with penalties
Understand logistics costs & timing
Basic Points in Contract Basic Points in Contract DocumentDocument
Terms of payment
Acceptance
Delays
License
Warranty
Infringement
Basic Points in Contract Basic Points in Contract DocumentDocument
Limitation of liability
Force Majeure
Dispute Resolution
Appendices must be checked for
consistency
ConclusionConclusion
Contract as a whole must make commercial and legal sense.
Keep long term perspective. Contracts may not be once off affair, so consider future implications of agreement (e.g. products, logistics, timeline, cash flow).