Juvan's Health Law & Private Equity Report : Corporate & Health Care Lawyer & Attorney : Jayne Juvan : Benesch Friedlander Law Firm : Private Equity, Corporate Governance

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In The Age of Turbulence,[1]  Alan Greenspan offers a lengthy assessment of the development of China over the past several years.  He contemplates not only the success experienced by China, but, especially in Chapter 14, entitled "The Choices that Await China," undertakes a review of challenges that may lie ahead. 

Specifically, Greenspan identifies the development of property rights as continuing to elude China.  Though "the National People's Congress passed a more comprehensive right of ownership that grants the same legal protection of property that is granted to the state . . . . the right to own property," he says, "still falls far short of the status of property rights in developed countries."  He continues,

Property rights require not only a statute but an administrative and judicial system that enforces the law.  In this regard, China lags.  An impartial judiciary is still a goal on the Chinese horizon.  There are breaches, especially in intellectual property rights:  complaints by foreign joint venture investors are rife that technology brought to a new plant turns up duplicated in a plant wholly owned by Chinese in direct competition. . . . I have no doubt that the Communist Party of China can maintain an authoritarian, quasi-capitalist, relatively prosperous regime for a time.  But without the political safety valve of the democratic process, I doubt the long-term success of such a regime.  How those choices evolve will have profound implications not only for China but also for the world at large . . . .

The status of Chinese law and enforcement generally, and intellectual property protections in China in particular, no doubt will have an impact on many of the readers of this blog.  Given this blog's continued focus on pharmaceutical counterfeiting issues, and in light of Greenspan's remarks, a review Chinese intellectual property law along with measures companies can take to increase the likelihood of intellectual property protection is in order.  It is with this in mind that I offer the article that follows, which I drafted several months ago in response to an issue that arose in connection with my practice.

Before proceeding further, I note that the content of this article should not be construed as an endorsement or criticism of Greenspan's ideas and opinions, but is only intended to direct readers' attention to the issues.  This article also should not be construed as legal advice (please make sure to review this blog's disclaimer, as continuing to access this blog and, inter alia, reading this article constitutes an acceptance of the disclaimer's terms).   

Exporting and Outsourcing to China:  Protecting Brand Integrity, Preventing Lost Revenues and Keeping Customers Safe in the Midst of China's Ever Expanding Market for Fake Drugs

I.                   Introduction.

In the middle of a domestic and global confidence crisis about China’s food and drug safety, Chinese police announced in July 2007 the arrest of fifteen individuals for manufacturing more than 30,000 counterfeit vaccines covered with seemingly legitimate labels of well-known pharmaceutical manufacturers but which contained only starch and water.[2] In the same month, Chinese officials disclosed the discovery of one ton of counterfeit Viagra, along with counterfeit Tamiflu and anti-malarial drugs.[3] Both of these events occurred around the same time as the execution of Zheng Xiaoyu, the commissioner of the China State Food and Drug Administration who served from its inception in 1998 until mid-2005. The Chinese government convicted Xiaoyu of taking bribes and for dereliction of duty in response to concerns about scandals involving contaminated food and counterfeit drugs.[4]

Historically, China has been alleged to be a producer of counterfeit products, including counterfeit pharmaceuticals.[5] These counterfeit products often enter the global supply chain, making their way both to developed nations such as the United States and Canada and to developing countries. For example, in May 2006, a jury convicted James George, a pharmacist licensed in the United States, of trafficking counterfeit drugs from China.[6] China also recently shipped cough medicine containing toxic diethylene glycol, a substance used in antifreeze, but labeled as syrup, to Panama, resulting in the deaths of about one hundred people.[7] The theft of intellectual property ("IPR") and the manufacture and sale of counterfeits not only potentially damages a company’s brand and has an adverse impact on revenues, but, in the case of pharmaceuticals, poses significant risks to public health and, as illustrated by the Panama incident, can even result in the deaths of unsuspecting consumers. 

While product integrity and consumer safety continue to be ongoing concerns, nevertheless, China presents a wealth of opportunities for pharmaceutical and other companies, and companies entering the Chinese market can take some comfort in the fact that this growing country has made significant strides in strengthening IPR protection since 2001, when members of the World Trade Organization (the “WTO”) formally approved China’s accession.[8] In the recent past, China has amended and expanded the scope of its IPR laws, causing some to indicate that China’s written IPR laws and regulations are on par with those in the United States.

Despite the positive developments, the incidents noted above cause some to pause. While the written laws provide a strong legal infrastructure for IPR protection, five years after China’s accession to the WTO, according to U.S. government reports, enforcement of these laws remains a concern. The 2007 Special 301 Report (the “2007 Report”) released by the Office of the United States Trade Representative (“USTR”) cites deficiencies in China’s enforcement of IPR laws and regulations and lists China as being of significant concern for the proliferation of counterfeit pharmaceuticals.[9] Additionally, the 2007 Report places China on the Priority Watch List and notes that “overall piracy and counterfeiting levels in China remain unacceptably high . . . . ”[10] To strengthen enforcement of IPR laws and regulations, the United States has entered in a formal dialog with China, which will include a discussion of issues specific to the pharmaceutical industry.

Companies doing business in China can take actions that provide increased IPR protection.  Many businesses fail to take advantage of the protections afforded by China's IPR laws because they are unaware of registration requirements. The United States Patent and Trademark Office estimates that approximately eighty-five percent of small and medium sized enterprises that export their products to China do not realize that, in addition to registering IPR in the United States, these companies should also register their IPR China.[11] China’s patent and trademark laws both require registration, and China’s copyright laws allow for registration, which provides evidence of ownership in an enforcement action. 

This Article provides a brief overview of China’s IPR laws and applicable regulations, as pharmaceutical companies outsourcing and exporting to China may benefit by becoming well versed in the applicable registration requirements set forth therein. This Article further provides a review of China's enforcement record as highlighted by the 2007 Report.

II.                Legal IPR Protection in China.

A.     The Development of China’s IPR Laws and Regulations.

China traditionally has viewed the copying and dissemination of information to all people favorably.[12] Historically, the imitation of another person’s invention was considered to be flattering. Nevertheless, in the 1950s, China adopted Provisional Regulations of the Protection of Invention Rights and Patent Rights. These regulations provided a modicum of protection to inventors, but maintained that the state retained IPR ownership. Thereafter, China continued to develop its IPR laws through the end of the century.

The greatest changes in China’s IPR protection mechanisms came around the time of China’s accession to the WTO, during which time China substantially revamped its IPR laws and regulations. The WTO obligates member nations, including China, to comply with the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), negotiated by WTO member nations in 1994 at the Uruguay Round of the General Agreement on Tariffs and Trade. The purpose of TRIPS is to increase globally the protection and enforcement of intellectual property rights, thereby assisting in the development of technological innovation and aiding in technology transfers. In compliance with TRIPS, China has written laws and regulations that extend protection for patents, trademarks and copyrights and that prohibit unfair competition.  Each of these IPR laws is discussed below.

1.  Patent Protection. 

Generally, patent protection allows an inventor to prohibit others from using, making and selling an invention if the inventor complies with applicable legal and regulatory requirements.  China passed the Patent Law of the People’s Republic of China (the “Patent Law”) in 1984. This law was limited in scope and did not extend patent protection to many classes of items, including, for example, scientific discoveries, methods for the diagnosis and treatment of diseases, and pharmaceutical products and substances obtained by means of a chemical process. The Patent Law was thereafter amended in 1992 and 2000, and the 1992 amendments expanded the scope of the law to cover the chemical process for pharmaceuticals. On June 15, 2001, the State Council of the People’s Republic of China passed the Implementing Regulations of the Patent Law.

To obtain patent protection in China, an inventor must submit an application to China’s State Intellectual Property Office in Beijing. The invention must possess novelty, inventiveness and practical applicability.[13] Unlike the United States, which grants patent protection to the first inventor, Chapter I, Article 9 of the Patent Law sets forth a “first-to-file” rule, meaning that, if two or more individuals file to obtain patent protection for the identical invention, the first inventor to file receives patent protection for twenty years.[14]

2.  Trademark Protection.

Unlike patent protection, which prohibits others from exploiting an appropriately registered invention, trademark protection prohibits others from using a distinctive design, indicator or unique identifier of an individual’s brand. China adopted the Trademark Law of the People’s Republic of China to protect these forms of IPR in 1982 and substantially amended the law in 1993 and again in 2001. The implementing regulations known as the Regulation for the Implementation of the Trademark Law of the People’s Republic of China became effective on September 15, 2002. 

Before exporting or outsourcing to China, companies should register their marks, logos and domain names, along with their Chinese counterparts, with the State Administration on Industry and Commerce, Trademark Office. Similar to the Patent Law, China has in place a “first-to-file” system for trademarks.[15] This “first-to-file” system does not require evidence of prior use or ownership and makes it possible for third parties to register well known foreign trademarks. 

3.  Copyright Protection.

As mandated by TRIPS, China also has written copyright laws and regulations. Copyright laws generally are designed to protect the expression of ideas, including written works. The Copyright Law of the People’s Republic of China (the “Copyright Law”) was first adopted in 1990 and thereafter was amended in October 2001. Regulations implementing the Copyright Law took effect in September 2002. The Copyright Law extends copyright protection to (1) Chinese citizens, legal entities and other organizations, (2) foreigners whose work is first published in China, (3) foreigners if the country in which the foreigner resides has entered into an international treaty that extends protection, and (4) foreigners even if the foreigner does not reside in a country that has entered into an international treaty with China if the work is first published in a country that has entered into an international treaty with China.[16] The copyright protection afforded extends for the lifetime of the author and fifty years thereafter.[17] In accordance with TRIPS, copyright registration is not required, but voluntary registration with China’s National Copyright Administration is advisable because it establishes evidence of ownership that may be relied upon in an enforcement action.  

4.  Unfair Competition.

In addition to patent, trademark and copyright laws, many countries also have in place unfair competition laws. In 1993, China passed the Law of the People’s Republic of China Against Unfair Competition (the “Unfair Competition Law”) with a view “to safeguarding the healthy development of the socialist market economy, encouraging and protecting fair competition, repressing unfair competition acts and protecting the lawful rights and interests of business operators and consumers.”[18] This law provides some protection to unregistered trademarks, packaging, trade dress and trade secrets. Additionally, in compliance with TRIPS, undisclosed information submitted to regulatory agencies for the approval of drugs is protected from disclosure or unfair commercial use. The Fair Trade Bureau under the State Administration for Industry and Commerce interprets and implements the Unfair Competition Law. 

B.    China’s Murky Enforcement Record.

Though China’s written IPR laws and regulations have become very sophisticated, many have argued that the lax enforcement of these laws and regulations severely diminishes the IPR protections afforded.  The 2007 Report provides a review of China's enforcement record. 

In the 2007 Report, the USTR announced the placement of China on the United States Priority Watch List. The 2007 Report provides that complaints by holders of IPR rights about failed attempts to enforce their rights, at least in part, prompted the move. The 2007 Report further states that “enforcement efforts, particularly at the local level, are hampered by poor coordination among Chinese Government ministries and agencies, local protectionism and corruption, high thresholds for initiating investigations and prosecuting criminal cases, lack of training, and inadequate and non-transparent processes.” 

The USTR calls upon authorities to “investigate when right holders present evidence supporting a reasonable suspicion of illegal production, and should permanently close down, revoke the business licenses, and confiscate and destroy the machinery and materials of commercial pirates and counterfeits, as well as criminally prosecute the persons responsible.”

In response to growing concerns about China’s enforcement of IPR laws, China presented a 2007 action plan (the “2007 Action Plan”) that outlines detailed IPR protection improvement strategies. The USTR comments that China may achieve significant results for holders of IPR rights in China if the 2007 Action Plan is fully implemented.[19]

III.              Conclusion. 

The economic boom in China has created substantial opportunities for United States pharmaceutical companies. Companies doing business in China should, however, contemplate taking steps to protect their IPR, including becoming well versed in China’s IPR laws and regulations so that they can take advantage of the benefits afforded by these laws. Such companies should also be mindful of China's enforcement record and that, while enforcement of these laws may get better over time, there may be greater risk in China than in the United States that governmental authorities will not enforce IPR laws.