Lessons From a Year of Setbacks for Apple in China

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In May 2016, Apple was ordered to stop selling iPhone 6 and iPhone 6 Plus in Beijing, following the ruling by Beijing Intellectual Property Office (“BIPO”) that Apple has violated the design patents held by Shenzhen Baili Marketing Services Co. (“Shenzhen Baili”). Shenzhen Baili accused Apple of copying its prior design patent of 100C smartphone filed in January 2014 and successfully registered in July 2014. BIPO found Apple had infringed Baili’s registered design patent because of iPhone 6’s similarities to the 100C phone in appearance. Although BIPO recognized there are a series of differences between the prior design patent of 100C and iPhone 6, it ruled that the differences are minors and negligible to ordinary consumers, and ordered Apple to halt the sales of iPhone 6 and iPhone 6 Plus in Beijing. Apple has appealed and BIPO’s order has stayed pending review by the Beijing Intellectual Property Court.

This ruling is the latest in a series of setbacks for Apple in China, Apple’s largest overseas market. Earlier in April 2016, Apple has lost its exclusive right to use the name “iPhone” on products made of leather in China, after the Beijing Municipal High People’s Court ruled that Xintong Tiandi Technology (Beijing) Ltd., a Chinese accessories maker, has the right to use the name “IPHONE” on leather products. Apple, having applied for the “iPhone” trademark for electronic goods in 2002, which was not granted until 2013, filed an opposition to Xintong’s trademark registration on the ground that the name “iPhone” is a well-known trademark. Apple first took the case to the Trademark Review and Adjudication Board (“TRAB”), then a lower Beijing court, both rejecting the claim. In 2013, Apple appealed to the Beijing Higher People’s Court, which affirmed the TRAB’s conclusion that Apple could not prove “iPhone” was a well-known brand in China before Xintong filed its trademark application in September 2007, noting that Apple did not start selling iPhones in China until 2009.

This is not the first time Apple lost in intellectual property disputes in China. In 2010, Apple lost its “iPad” trademark in China against another Chinese company, to which Apple paid $60 million 2 years later to settle the dispute.

IP protection challenges faced by
overseas companies in China

What Apple has experienced in China manifests the difficulties faced by multinational corporations (MNCs) as well as small and medium overseas companies who try to get intellectual property rights (IPR) protection in China, typically trademarks and design patents, which are important sources of revenue. Some of the common challenges faced by overseas companies in enforcing their IPR in the gigantic Chinese market are set out below:

Prevalence of patent trolls and trademark squatters

China follows a first-to-file system for design patents and trademarks. It means design patents and trademarks are granted to those that filed first even if the filers are not the original inventor, or have not used the marks at all. This enables third parties, including patent trolls and trademark squatters to register popular foreign trademarks and design patents prior to the original inventors and users, with a hope to cash out from those registrations. There is no doubt that the existence of unscrupulous squatters creates headaches to legitimate right holders.

Inconsistent and uncertain court rulings

The legal framework for patent and trademark protection in China is far from satisfactory and is made even more problematic by the inconsistent court decisions. For example, the test of infringement of design patent in China is one of “ordinary consumer”, i.e. whether an ordinary consumer, familiar with the prior art and looking at the patented design as a whole, rather than focusing on minor differences, would find the two designs confusingly similar. However, in one case where Fiat sued the Great Wall Motor Company for design patent infringement, the Chinese courts ruled that the minor differences in the design outweighed the general similarities. Meanwhile in another case, where the German bus manufacturer Neoplan sued the Chinese company Zhongda, the Beijing High Court disregarded the minor differences and found infringement. The uncertain standard of assessment has made it harder and costly for foreign companies to protect and enforce its design patents.

Authorities’ favourable attitude towards local enterprises

It is widely believed by foreign companies that Chinese authorities, in particular those in the regional level, have the tendency to support domestic businesses in countering dominance of MNCs. In all three disputes discussed above, the lower courts coincidentally ruled in favour of the local entities, the little-known, “weaker” party. However, in recent years, some foreign companies have succeed in IPR legal actions before higher Chinese courts, which suggests that such favouratism may not apply if the cases are brought before courts higher up in the judicial ladder.

Lessons learnt

Given the prevalence of unscrupulous hijackers of IPR, the alleged authorities’ preference for backing local enterprises and the uncertainty of enforcement outcomes, the best way to protect IPR is to prevent disputes from arising in the first place. This can be achieved by applying for registration of patent, trademark and copyright as early as possible, which not only effectively denies opportunities for patent trolls and trademark squatters to benefit, but also enables holders to protect their patent or trademark rights against later infringement by local enterprises in a more cost-efficient manner. The key is to ACT FAST in China. At the same time, foreign companies are advised not to offer cash to settle with hijackers which will in turn encourage them to continue to exploit the system for their own benefits.

Conducting thorough clearance search for trademarks and design patents prior to product launch, aiming to identify not only identical but also similar marks or patents is another important aspect in avoiding disputes and lowering risk for potential infringement.

Conclusion

The Chinese government is under immerse pressure to continuously to improve its IPR legal framework to attract more overseas companies doing business in China and to be on par of international IPR standard.   While awaiting the more mature legal framework to be developed in China, foreign companies should file for strategic applications of patent, copyright and trademark in a timely and careful manner to guarantee IPR protection in China.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2016