Chinesium Trade Secrets and Quality Assurance An Important Note on Chinese IP In our previous analysis on Chinese IP, we focused on the general quality of Chinese patents and patent applications, and how they are perceived by other patent offices. For example, when we looked at Chinese patent application quality, we tried to determine how those applications compared to U.S. patent applications, and how the former might impact the latter. However, we now focus on China’s trade secrets, as defined by Chinese IP law, and how that might impact other trading partners. The first thing to consider is the actual scope of Chinese IP rights. To put this in perspective, Chinese IP is divided into four types, and the ones relevant to trade secrets are the second and third ones: State-controlled inventions, which come from state ownership (e.g., state enterprises) or state investment Inventions generated by government-sponsored research (e.g., projects funded by national or provincial governments) Public information (government documents, patents or published papers); and Confidential business information Aside from the fact that “state-controlled” is defined as ownership by Chinese state-owned enterprises, and “confidential business information” is defined as all business information not disclosed publicly, including secrets, the remaining three classes of inventions have one thing in common: they are all owned by Chinese people. They also have one thing in common that they are not owned by the Chinese government. The exception to this is confidential business information, but that is owned by the government, but not the Chinese people. Since the state (and/or Chinese people) owns everything, they control everything. In fact, China justifies its lack of a patent system on this very fact. China thinks that it is the only way for its companies to innovate as if they were a world leader in cutting-edge technology. That is why the Chinese government insists that it does not need to follow global IP standards (and many of its state-owned enterprises do not have the rights to foreign patents or copyrights). China's IP laws allow companies to file for and receive trademarks, patents, copyrights, and other forms of IP from Chinese companies. They also allow Chinese companies to file patents and other forms of IP in other countries. They also allow Chinese companies to register trade secrets (which are classified as information with independent economic value). In other words, Chinese companies can claim IP rights from any country that they manufacture a product or perform a service in. So long as a company has offices in China, it has a right to file for patent and other IP from any other company in any country. They don’t need to be registered with the Chinese government first. For example, in 2013, Shenzhen Chunxiang Biotech was sued by Samsung for infringing on its patents, which allowed the Chinese company to bring its own patent and intellectual property suit against Samsung and Apple, who they say stole their own patents. This seems reasonable to Chinese companies because they have the right to file for and receive patents and IP from any country in which they have a presence. While most Chinese companies have their headquarters in China, they also operate plants, laboratories, and more in many other countries as well. Samsung, for example, has had a presence in China for decades and has its own R&D centers, which are run by some of its own employees. Since Samsung does not have a presence in the U.S., they would need to enter into an IP licensing agreement with the Chinese company, so long as they still have a presence in China. According to China’s law, information is no longer “confidential” when it becomes known publicly. In other words, if you can prove that it was in the public domain in China at the time that you created it, then it is no longer confidential, and no longer belongs to the Chinese company or person who invented it. It does not matter how private you consider the information to be. In contrast to the right to claim IP ownership, China does have restrictions on the “transfer” of trade secrets to non-Chinese parties, as long as it is not owned by any company registered in China. For example, in the case of the Samsung and Apple patents, Shenzhen Chunxiang Biotech has a right to sue Apple and Samsung for stealing their own IP, as it was in China that they originally invented the IP that is now owned by Samsung. However, the Chinese government does not want to see one of their companies selling to another, unless the Chinese company is the one buying. In the U.S. this is very important, because Chinese companies now run most of the production and manufacturing in America. They create most of the consumer products and electronics that end up in your house. China also has restrictions on exporting trade secrets. When a company in China exports a trade secret to another country, it must get that government’s approval. However, China views foreign companies as an integral part of its economy, and they understand that they do not want Chinese companies selling their trade secrets to other countries. It is in China’s interests to have most or all of its trade secrets “localized” in their own country. Even though China wants to dominate their industries, they also want to see their products manufactured in China by Chinese workers, rather than by non-Chinese workers in China or overseas. For China, workers are important, but they are also a means to an end. They want most of their manufacturing in China to be Chinese people working for Chinese companies, which allows them to profit from the export of their own labor. IP and IP Enforcement So far, we have discussed China’s IP and its standards, as well as trade secrets, but there is much more to discuss. In the first place, the Chinese system of IP enforcement has many problems, which I have outlined below. Unlike the U.S. or any other country, China does not have a system of civil or criminal penalties for any person or company for violation of any part of their IP laws. The only penalty for violation of IP is financial and not a criminal penalty. When China’s new rules were issued, they also created an organization called the State Intellectual Property Office (SIPO), which was responsible for any IP enforcement in China. If a Chinese company infringed on an intellectual property law, SIPO could file a lawsuit in China’s intellectual property court against the offending company. In the case of patents, the SIPO filed suit against the offenders. Since China has no civil or criminal penalties for any violation of their IP laws, SIPO created something that resembled a private enforcement agency. The SIPO acts like a private rights protection agency, which is supposed to give it the legal power to shut down a company’s operations if that company is deemed to be infringing on one of the agency’s patents. So, in China, if you have a patent infringement lawsuit or a patent dispute, you need to do one of two things: Send the evidence, either to the court or SIPO, or Submit your patent dispute to an arbitration body under Chinese law. In the event that you can not afford to get an expert to examine your case, you can still file for arbitration and submit your evidence to the arbitration organization. That is also what you do if you want to file for arbitration rather than trying to sue the offender in court. After you submit your evidence to an arbitrator, then you can decide whether you want to settle with the other party out of court or go ahead with the lawsuit. If you want to go ahead with a lawsuit, then your evidence must be submitted to the arbitrator. While you do have a right to petition the courts to enforce your intellectual property rights under the laws of China, it is much easier and less expensive to send your evidence to the SIPO in the first place. You simply submit your evidence to the SIPO and, if they find that your company is a “victim,” you can enter into an agreement with the offender and then have it enforced by the Chinese courts. Once you do this, you can go ahead and use the SIPO’s judgment as a basis for a court case. The advantage to the Chinese government is that this is the only way to enforce their IP laws because the Chinese courts will not do so. One thing that is different about China’s system from ours is that once a court decides that one of the IP rights have been infringed, any settlement must include a payment to the defendant. There is no settlement or arbitration without a monetary settlement in China, and that money is paid directly to the patent holder. The patent holder can then use that money to pay the SIPO, who will return a portion of that money as royalties to the other party. So, if there is a settlement, the settlement will include some kind of royalty or fee that you pay to the patent owner. With that in mind, you now know why the Chinese patent court and all patents issued in China have to be registered with the SIPO. As I mentioned before, they only issue patent certificates, and not patents. Once a patent or patent application is registered with the SIPO, it belongs to the SIPO, and then it can be submitted to the Chinese court for enforcement. In the United States, we would call it a “Patent Pending” for patent applications in the U.S., and a patent filing in China is similar to an application there. You should also note that the SIPO has the right to confiscate a patent application even before it has been approved.