By Mary L. Williamson and Kim Newby

Summary: The following is the second in a two-part series provided by Preston Gates & Ellis LLP, a Seattle law firm specializing in international trade issues. It was originally published in AsiaLaw, October 1996, “Special Supplement AsiaLaw: A Legal Guide to Doing Business in Asia.” It’s reprinted here with permission of the authors. No one should act upon this information without seeking legal counsel.


In September, we discussed copyrights, patents and the status of related laws to ensure intellectual property protection for companies doing business in Asia. Here, we’ll develop that further with a discussion of trademarks, trade secrets, unfair competition laws and other proprietary rights.

Ownership and rights
Trade secrets are recognized in one form or another in most major Asian jurisdictions. This area of intellectual property law will also benefit from ongoing implementation of the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement, which is the first international convention to address trade secret protection. A requirement for inclusion in the World Trade Organization (WTO), the TRIPs Agreement defines a trade secret as being: 1) not generally known among or readily accessible to persons who would normally deal with such information; 2) having commercial value as a consequence of such secrecy, and 3) capable of being preserved by reasonable steps taken by its owner to protect the secrecy of the relevant information. However, the scope of protection provided by the TRIPs Agreement is limited because under the agreement, a plaintiff seeking relief in a national court for trade secret misappropriation may be required to prove the defendant knew or was grossly negligent in not knowing it was acquiring trade secrets through behavior that is “contrary to honest commercial practices.”

Some Asian countries have enacted specific laws to protect trade secrets. For example, the Unfair Competition Law in China protects trade secrets through civil damage actions. Taiwan’s Trade Secrets Act covers confidential and commercially valuable information. This statute raises the possibility of future conflicts in the employment setting, because Taiwanese law recognizes employees as the owners of copyrights and moral rights in their work product, while an employer is deemed to own trade secrets created by its employees unless a contract states otherwise.

One other area of intellectual property law that deserves mention is the treatment of integrated circuits, or “mask works,” as they are denominated in U.S. law. Hong Kong and Taiwan provide protection for this form of intellectual property that’s modeled somewhat on copyright principles, but allows for more flexibility to protect innocent infringers and prevent intellectual property owners from resting on their rights. China has signed the World Intellectual Property Organization’s Treaty on Intellectual Property in Respect of Integrated Circuits and is currently formulating regulations that would protect this type of property. It’s likely this trend of intellectual property rights protection will spread throughout the region. Prominent international organizations, such as the World Intellectual Property Organization (http://www.wipo.org/), shall continue to play an important role in Asia by providing legal and technical assistance for developing countries to help them deal with copyright, patent, trademark and related matters.

Enforcement of rights
The practical realities of enforcing intellectual property rights are less encouraging than the status of relevant legislation in Asia. Hong Kong, Macau and Taiwan have relatively well-developed enforcement authorities (including in some instances computerized tracking systems that assist customs in identifying infringing uses of registered trademarks), but the incidence of piracy even in those jurisdictions is estimated to be high. Indonesia, Thailand and various other jurisdictions are also widely accused of being sites of significant infringing activities. Recently, however, China was the focus of international (and particularly United States) attention concerning intellectual property piracy, and it participated in two intensive rounds of negotiations concerning its efforts to adhere to the Berne Convention and other international agreements.

The two foremost potential avenues for enforcing intellectual property rights in China are judicial and administrative. With respect to judicial measures, specific courts have been established in a number of regions to handle piracy cases, but they have had little power to search and seize infringing items, freeze assets or enforce judgments. Furthermore, as is common in other Asian countries, discovery obligations during litigation are not as extensive as those in, for example, the United States. Thus, it may be difficult to obtain and introduce the necessary evidence in a court of law.

Two Chinese cases, however, were encouraging. The Walt Disney Company won the first significant copyright infringement judgment ever issued to a foreign party. In the second case, a Chinese company was found to have unlawfully copied and distributed software products of prominent U.S. software publishers, and the defendants were ordered to pay approximately US$60,000 in damages—a very substantial fine by Chinese standards. The parties in the software case were also allowed considerably more discovery than has been the norm in previous instances. These cases may signal a new trend toward more vigorous enforcement of intellectual property via judicial channels in China, and it will be important to closely monitor progress in this area.

In the meantime, administrative channels in China are generally thought to be more effective, especially in the case of trademark enforcement. However, there are several conditions that must be taken into account in using these channels. In particular, one should consider the relative strength of the agency involved, the remedies available (and how clear-cut they are, such as whether the agency will have the legal right to enter the premises of a suspected infringer without that enterprise’s permission), and finally the local political exigencies that may result in some agencies being reluctant to investigate cases involving powerful local companies. It’s also important to note that decisions made by administrative agencies may be appealed in court.

In an effort to bolster enforcement, China has strengthened powers allocated to its customs authorities. Foreign companies may now record their intellectual property rights with the Customs General Administration, and may then ask the customs authorities to seize and detain suspected infringing goods as they leave China. This provision hasn’t yet been widely used, however, because the regulations are new and each item for which protection may be sought must first be registered separately by trademark and class.

Whether in China or other countries still developing enforcement regimens—because enforcement of intellectual property rights has often proven so difficult—investors owning intellectual property may also want to consider the alternative tactic of entering into licensing agreements with local entities, including even actual infringers. This solution may carry the benefits of practicability in at least some industries in the short term and it could also serve in the longer term to bolster indigenous support for intellectual property rights regimes by creating local stakeholders in an enforcement scheme.

Transferal transactions
Intellectual property rights are transferred through assignment agreements and licenses. In an intellectual property assignment, all right, title and interest in an intellectual property right (e.g., a patent or copyright) is conveyed to the assignee. In a license agreement, the intellectual property owner grants either exclusive or nonexclusive rights for specified uses of its intellectual property in exchange for royalties or other consideration. For example, an author may assign all right, title and interest in an article to the journal that has commissioned it; or he may license the journal to publish the article and portions thereof in print format, while reserving digital electronic publishing and other distribution rights for himself.

A license agreement should specify its term, geographic territory and fields of use it covers, the circumstances under which the license can be terminated or revised, whether it’s exclusive or nonexclusive, whether the licensee can assign or sublicense any of its license rights, and what quality control requirements may apply. The agreement should also define which party will own any modifications or improvements made by the licensee to the licensed property and what uses may be made of such modifications or improvements by each party. Non-competition arrangements, exclusive or nonexclusive licenses to such improvements, and assignments back to the original licensor are among the options for disposing of such rights.

The tax implications of a technology transfer arrangement also merit close attention. Payments under license agreements—typically denominated as one-time license fees and/or royalties—are frequently subject to withholding taxes in the licensee’s country. But certain license and fee structures may result in more favorable treatment than others.

Both licensors and licensees should research whether any export or import restrictions apply to the intellectual property being licensed (e.g., transfers of encryption software could run afoul of both). Furthermore, some jurisdictions require technology license agreements be approved by or at least registered with the government in order to take effect, or for royalty payments to be made using foreign exchange. Licensors should be especially alert to possible impediments to receipt of royalty payments in hard currency, either because of failures to comply with local policies on obtaining advance approvals for technology licenses or because of changing foreign monetary policies. Licensors and investors need to take into account the effects of exchange controls present in many Asian countries in structuring their agreements.

Intellectual property owners must tread a fine line between protecting their intangible rights and seeking to extract too much leverage from such rights. Licenses that tie grants of intellectual property rights to input purchasing requirements or which require royalties beyond the term of the underlying right (e.g., a patent term) may constitute misuse of intellectual property.

Licensors of intellectual property should also be wary of mandatory technology transfer laws and policies, which may override the contractual terms governing license arrangements in some jurisdictions. Requirements that a licensee assign or license back to the licensor any intellectual property the former develops in the course of using the licensed intellectual property may also be subject to challenge, because such property may—under local regulations—be deemed to be the property of the local party at the end of the license term, regardless of the ownership provisions in the original agreement.

Although developments and agreements in the international arena are working to lessen such risks to technology licensors, national laws and policies intended to promote technology transfer and protect domestic inventions will persist and remain relevant to structuring international transactions in the years to come.

Conclusion
The recognition and protection of intellectual property rights continue to be a matter of crucial importance for Asian economies and their trading and investment partners. Many countries have recently enacted important expansions and clarifications of relevant laws, and are putting in place potentially more effective enforcement mechanisms. Only time will tell whether such enforcement regimes will really take hold, but as more intellectual property is created within Asia rather than originating elsewhere, it seems likely protection of such property rights may indeed be significantly strengthened in the future.

About the authors
Mary L. Williamson is a member of Preston Gates & Ellis LLP’s Technology and Intellectual Property Department and chairs the firm’s International Practice Group. She earned her master’s degree in international studies at Johns Hopkins University and her law degree from Stanford University. She operates out of the firm’s Seattle office.

Kim Newby also holds a master’s degree in international studies from Johns Hopkins, but earned her law degree from Valparaiso University in Indiana. She has been working with Preston Gates & Ellis’ resident partners in Hong Kong since 1990. Before that, she was with the U.S. Department of Commerce in Washington, D.C., Hong Kong and Dalian, P.R.C.

Related and other articles can be found on the Preston Gates & Ellis website: http://www.prestongates.com/articles2.asp

Trademarks
Trademark protection—along with copyright enforcement—has been central to many recent disputes and allegations concerning intellectual property protection weaknesses in Asia. Important differences exist among Asian jurisdictions concerning treatment of well-known but unregistered marks; recognition of service marks and collective and certification marks; and the registerability of trademarks that comprise colors, shapes, sounds and smells. Given the many variables involved in trademark protection, both the scope and procedural elements of trademark laws in Asia will probably continue to vary widely even after TRIPs has been broadly implemented.

The TRIPs Agreement does require signatory countries to establish at least a minimum set of procedural safeguards for obtaining and maintaining rights in both trademarks and service marks. Such safeguards include implementing trademark registration systems that allow examination of applications, publication of marks, and an opportunity for others to oppose registration of such marks by bringing timely challenges. WTO members must recognize a trademark licensee’s use of a mark as qualifying for protection. Furthermore, under the Paris Convention (discussed in connection with patents in Part 1), an applicant for trademark registration in any member country receives an opportunity—for six months after filing in such a country—to file a trademark application in other member countries. Within this period, the filing will be deemed to have occurred as of the date of the initial covered filing. About half of all Asian countries are parties to the Paris Convention. Another treaty, the Madrid Protocol, enforced on Dec. 1, 1995, allows residents of member countries to file a single trademark registration application in all member countries. Membership in the Madrid Protocol is limited, however, and in Asia, only China, Macau and North Korea are signatories.

Even with establishment of international standards for trademark protection and the fact major Asian jurisdictions now extend at least some protection to famous unregistered foreign marks, trademark registration remains essential to obtaining protection for most trademarks throughout Asia. In China, considerable international pressure has been exerted to obtain protection for well-known but unregistered foreign marks. Hong Kong requires registration of trademark licenses by the “registered user.” Similarly, in Taiwan, any assignment or license of a trademark (other than to a branch office) must be registered in order to be enforceable against third parties. Such registrations may be renewed without limit. Taiwan also applies a principle of reciprocity to its trademark laws and has bilateral treaties with certain countries permitting priority to be granted based on applications filed in such countries.

Investors in Asia should be aware rules for trademark registration continue to evolve and it’s important to keep abreast of new developments in the region. It’s also important for investors to be aware of disfavored categories of marks established in each country. For example, registration is often not allowed for marks that include a well-known geographic name, the name or flag of a nation, common names for commodities, names that indicate quality, or exaggerated or deceptive words.
FYI—IPR and China

For more information, see Judicial Protection of Intellectual Property Rights (IPR) in China:
http://www.chinaiprlaw.com/english/news/news2.htm

Additionally, a new website from the Trade Development Council in Hong Kong was launched in February:
http://www.tdctrade.com

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