China,  Updates and Changes

New Guidelines! How to Apply China’s Criminal Law in IP Infringement

New announcements have been made by the Supreme People’s Court and the Supreme People’s Procuratorate (Prosecutor General’s Office) as they jointly issued Interpretation on Applying the Law in Intellectual Property Infringement Criminal Cases, which has taken effect on 14th September 2020.

As a whole, the most recent interpretations aim at enhancing efforts to protect intellectual property rights by simultaneously creating stricter rules for criminalizing offenders and increasing the scope of protection for IP rights’ owners. The new revisions further standardize and regulate parts of the legal process, providing clarity to all and building a healthy legal and business environment.

Counterfeits with Minor Alternations still Infringe (Provision 1)

Counterfeits have been a big problem in China, and the measures further aim to deter this activity. Although the current trademark law defines the standard for what is considered an “identical trademark” as something that is “visually basically indistinguishable and sufficient to mislead the public”, in practice the courts have interpreted this statement both broadly and narrowly. This new Interpretation provides six specific situations clarifying what definitely constitutes “identical trademark”, including minor alterations in font, spacing, color or other distinctive features. This clarification prevents very obvious counterfeits that rely on such minor alterations to skirt the law and provides more specific guidelines for the unification of referee standards.

Protecting the Originals – Copyrights (Provision 2)

In China copying is rampant, and sometimes it’s hard to figure out whether something is original or not. The new measures stipulate that those whose signatures appear on an original work shall be considered the original content creator by default unless proven otherwise. Even though this principle has been adopted in China’s Copyright Law, it was unclear whether it could be used in criminal cases. This guideline confirms that it can and also simplifies the criminal procedure.

In addition, sometimes after mass copying, a large variety of infringing products exist and are widely distributed, making it difficult to determine whether a particular publisher has permission from the original copyright owner. In these cases, if a publisher cannot provide relevant evidence to prove such permission, the court will convict the publisher absent any showing that the legal owners gave up their rights to the IP.

Criminalizing IP (Provision 3)

Under the Criminal Law, different types of trade secret violations are criminalized in different ways. The most serious crimes involve obtaining trade secrets by theft, inducement, coercion, or other inappropriate conduct (“Trade Secret Theft”) and disclosing, using, or allowing others to use the trade secrets obtained by Trade Secret Theft (“Disclosing Trade Secrets”). A less serious violation involves disclosing trade secrets in violation of an agreement to keep the trade secrets confidential.

These new guidelines clarify that stealing trade secrets by illegal copying, unauthorized or over-authorized use of computer information systems would fall under Trade Secret Theft, while using bribery, fraud, electronic “hacking” to steal trade secrets would fall under “other inappropriate conduct” in the law, and thus would still fall under Trade Secret Theft. These clarifications further strengthen the protection of trade secrets and provide clearer guidance for the public to regulate behavior.

How to Measure Losses Suffered by Trade Secret Owners (Provision 4)

The guideline has clarified the definition of “significant losses” with respect to losses suffered by trade secrets owners, such as when a trade secret misappropriation action (1) incurs a loss of more than 300,000 CNY, (2) directly causes bankruptcy or closure, or (3) causes other significant losses. In other words, the penal standard is reduced from 500,000 CNY to 300,000 CNY, and the circumstances of conviction are expanded.

The damages vary depending on whether the “stolen” trade secret was subsequently disclosed or used, whether the “stealing” act was intentional, and whether the trade secret is now in the public domain. Below is a general summary of the key factors:

Trade Secret Misappropriation (Provision 5)

FACTORS IMPACTING DAMAGESDAMAGES

If the secret was NOT disclosed or was provided to others for use with permission after it was obtained inappropriately

Reasonable license fee

If the secret was disclosed or was provided to others for use with permission after it was obtained inappropriately

Greater of lost profits and license Fee (meaning if lost profits is lower than the license fee, then license fee)

If defendant breached an agreement to keep the trade secret confidential

Lost profits

If the defendant knowingly obtained the secret in an unauthorized way

Lost profits

If the secret is now in the public domain

Commercial value of the trade secret
(cost of R&D + potential profits)

Applying for Confidentiality during a Criminal Proceeding (Provision 6)

During criminal proceedings, if the defendants, plaintiffs, agent ad litem or other stakeholders outside of the case apply for confidentiality measures, the court shall grant an order according to the circumstances. A breach of the order will result in legal consequences.

Destroying Counterfeits (Provision 7)

All those fake Louis Vuitton bags found in a truck in China? They should be completely destroyed, together with the counterfeit LV print textile and hardware used to make them. Save a few pieces as evidence for the trial, but destroy those after the case is concluded. According to the revised law, except in special circumstances, any raw materials or tools that can only be used to manufacture copyright-infringing counterfeit products shall be confiscated and destroyed. If the counterfeit is needed as an exhibit for civil or administrative cases, the defendants can submit an application to destroy the counterfeits after the completion of court proceedings.

Who is Subject to Severe Punishments? Conditions for a Lighter Punishment (Provisions 8 & 9)

Recalcitrant offenders who refuse to change and willfully continue to violate the law will be punished the most severely. Pleading guilty or seeking reconciliation can lessen a sentence.

The guideline/interpretation clearly lays down “severe punishment” for those who

  1. infringe on IP rights mainly for commercial business reasons;
  2. are repeated offenders in the infringement of IP;
  3. make counterfeit products using registered trademarks for commodities such as emergency supplies or epidemic prevention materials during a major crisis such as natural disasters or public health outbreaks; and
  4. refusing to hand over illegal gains

Those who plead guilty, have already sought reconciliation from the rights owner or have not yet disclosed the trade secret will be considered “extenuating circumstances” and will be dealt with more leniently.

How to Determine Amount of Fines (Provision 10)

Determining the proper fines to impose in a criminal case is always tricky. Unlike civil cases where damages are based on actual losses caused to a party, fines in a criminal case take into account many more factors and needs to balance all of these. According to the guideline, these various factors should be considered together as a whole and could include, for example, the amount of income illegally obtained, size of the illegal business, loss incurred to the right owner, number of counterfeit goods and the impact to society.

The fine amount should normally be one to five times the income illegally obtained. If the illegally obtained income cannot be determined, the fined amount will be between 50-100% of the illegal business volume. If the illegally obtained income and the business volume both cannot be confirmed, for those sentenced to less than 3 years, there will be a fine between ¥30,000 and ¥1,000,000; while those sentenced to more than 3 years will have to pay a fine between ¥150,000 and ¥5,000,000.

Concluding Thoughts

China is still one of the top manufacturing locations in the world. Despite the ongoing trade war causing possible shifts in the long run, for now many foreign companies have little choice but to manufacture in China. As a result, businesses must still seriously weigh the risks of sharing their trade secret information, such as valuable manufacturing know-how, with Chinese manufacturers. The clarity that these revisions provide to the law highlights the grave consequences attached to blatant counterfeits and the willful misappropriation of trade secrets.

As a practice tip, businesses should clearly identify and mark all of their trade secrets when dealing with Chinese manufacturers, thus fulfilling the knowledge requirement of willful infringement. This increases the risk of misappropriation for the manufacturer and should hopefully provide an added layer of protection for the trade secret owner.

About the Authors

Jennifer Che, J.D. is Vice President and Principal at Eagle IP, a Boutique Patent Firm with offices in Hong Kong, Shenzhen, and Macau.

Sally Yu is a Chinese Patent Attorney at Eagle IP, a Boutique Patent Firm with offices in Hong Kong, Shenzhen, and Macau.

Thanks also to our intern and law student Janet Li who helped write this article.

eip@eipgroup.asia

This article is for general informational purposes only and should not be considered legal advice or a legal opinion on a specific set of facts.

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