Research & Development in China - How to Address IP Issues Tony Chen Jones Day Shanghai tonychen@jonesday.com April 25, 2007 AmCham Shanghai Science & Technology Committee 1 Topics • • • • • Non-Compete Agreement Patent Filing for Inventions made in China Remuneration of Inventor Ownership of IP from Joint Development Trend in IP Litigation 2 Non-Compete Agreement Departing employees can not compete or serve a competitor for a period of time. Notice issued by former Ministry of Labor: • Length - usually less than 3 years • Reasonable compensation 3 Non-Compete Agreement Compensation requirement • Shanghai: “may pay” • Beijing Zhongguancun Science Park: ½ of the annual income • Shenzhen: 2/3 of the annual income 4 Non-Compete Agreement Draft Labor Contract Law (2nd revision) • • • No more than two years Compensation not specified Limited to (1) management, (2) senior technical personnel, and (3) those privy to trade secrets. 5 Portman Electronic Devices v. Liang (2004) Shenzhen Intermediate Court • No compensation specified in “Termination Agreement” related to Non-Compete clause, the Non-Compete provision is invalid. 6 Kingdee Co. Ltd. v. Liao (2006) Shenzhen Nanshan District Court • Fact: - Compensation for Non-Compete Agreement is included in monthly salary; - Compensation is less than 2/3 annual income. • Judgment: - Liao cannot work for competitor for one year; and - Liao to pay compensation to Kingdee 7 Employer Due Diligence in Lateral Hiring • Request exit testimonial from former employer • Reps. and warranties from lateral hires • Keep record of reverse engineering and notarize them as necessary 8 Criminal Liability for Trade Secret Misappropriation • • • Direct economy loss of half a million RMB Bankruptcy of the trade secret holder Other serious consequences 9 Huawei v. Wang et al 10 • Aug-Sep 2001，Wang et al left Huawei and registered Shanghai Huke Tech Co. Ltd. 3 months later • Oct 2002, Huawei filed a civil action against Huke for a damage claim of 2 million RMB. • Nov 2002, Huawei filed a criminal claim and Wang, Liu and Qin were retained in Hangzhou. • Dec 7, 2004, District Court Judgment: two employees received sentences for three years, and one for two years. • May 19, 2005, affirmed by Shenzhen Intermediate Court 11 How to Prove Trade Secrets “Business secrecy“ means technical information and business information, which is • Unknown by the public, • May create business benefits or profit for its legal owner, and • Kept secret by its legal owner 12 How to Prove Trade Secrets Misappropriation • Meets the statutory requirement • Defendant is in possession of product/information that is the same or substantially similar to proprietor’s trade secret • Defendant used unfair means in acquiring the trade secret materials 13 Patent First Filing Requirement in China Article 20. Where any Chinese entity or individual intends to file an application in a foreign country for a patent for inventioncreation made in China, it or he shall file first an application for patent with the patent administration department under the State Council. “中国单位或者个人 ” 14 Penalty for Violation Article 64 Foreign filing in violation of Article 20 which divulged State Secret shall be subject to • disciplinary sanction… • even criminal liability 15 1：Commissioned R&D • Article 8 …the right to apply for a patent belongs, unless otherwise agreed upon, to the entity or individual that made, or to the entities or individuals that jointly made, the inventioncreation. After the application is approved, the entity or individual that applied for it shall be the patentee 16 2. Filing a PCT application and designate China • Lose one year term • High fees from day one 17 3rd Amendment of Chinese Patent Law (Draft) Article 4 • Any entity or individual • Approved by the Patent Administrative department Under the State Council. Article 76 • Without approval…, the application regarding such invention can not be granted in China… 18 Remuneration of Inventor • Article 16. The patentee shall award the inventor of a service invention; upon exploitation of the patented invention, shall pay the inventor a reasonable remuneration based on the extent of application and economic benefits. 19 Technology Co-development 20 Patent Law • Article 8. the right to apply for a patent belongs, unless otherwise agreed upon, to the entity or individual that made, or to the entities or individuals that jointly made, the inventioncreation”. 21 Contract Law • Article 339 In commissioned development, the right to apply for a patent belongs to the party that undertakes the research and development, except as otherwise agreed upon by the parties. Where the party that undertakes the research and development is granted a patent right, the commissioning party may exploit the patent for free.” 22 Contract Law • Article 340 In cooperative development, the right to apply for a patent are jointly owned by the parties who participated in the cooperative development, except as otherwise agreed upon by the parties. Where one party transfers its part of the jointly owned right to apply for a patent, the other party or parties may have the priority right in acquiring such right on equal conditions. “ 23 Contract Law Article 341 The right to use or to transfer the know-how achieved in the commissioned development or cooperative development, and the method of distributing the proceeds derived shall be agreed upon by the parties in the contract. In the absence of such agreement or in case of ambiguity of such agreement, …, either party has the right to use and transfer it. 24 Terms to Avoid • Article 329 of Contract Law: A technology contract which monopolizes the technology or impedes the technological progress, or which infringes upon the technological achievement of others shall be null and void. 25 Supreme Court Interpretation • Restricting licensee from conducting improvement research; • Restricting licensee from using the improved technology, • Exchanging the improved technologies with each other under non-reciprocal agreement, e.g., requiring licensee to gratuitously provide licensor with the improved technology, to transfer the improved technology to licensor non-reciprocally. 26 Latest Trend in IP Litigation 27 2005 Accepted Cases 1st instance Cases Civil Action in 2005 1st Instance Cases Involving Foreign Parties Accepted Compare with 2004 Closed Compare with 2004 13424 26.00% 13393* 38.04% 3016 3.04% 449 1st Instance Cases Involving (3.35％of 1st Foreign Parties instance Foreign 268 23.01% 77.48% Hong Kong & Macau 108 -2.70% Taiwan 73 25.86% Copyright Cases 6096 42.96% Patent Right Cases Trademark Right Cases Unfair-Competition Cases Technology Contract Cases Right of New Plant Variety Cases Other IP Cases 2947 1782 1303 636 15.61% 34.49% -2.10% 0.95% 156 -10.26% 504 31.59% 2nd instance Cases 3114 2.40% Retrial Cases 45 1st Instance Cases by Case Types Total Accepted Cases 28 16583 44 20.66% 16453 29.60% 2006 Accepted Cases 1st instance Cases Civil Action in 2006 Accepted Compare with 2004 Closed Compare with 2004 14219 5.92% 14056* 4.95% 1st Instance Cases Involving Foreign Parties 1st Instance Cases Involving Foreign Parties Foreign Hong Kong & M acau Taiwan 1st Instance Cases by Case Types Copyright Cases 5719 5751 Patent Right Cases 3196 2521 1256 681 3227 2378 1188 668 846 844 Trademark Right Cases Unfair-Competition Cases Technology Contract Cases Right of New Plant Variety Cases Other IP Cases 2nd instance Cases 2686 Retrial Cases Total Accepted Cases 29 -13.74% 2652 -12.07% Civil Action • Most IP cases (65.38% in 2005) were filed in Guangdong, Beijing, Shanghai, Jiangsu, Zhejiang, and Shandong • Settlement of 1st instance cases - 7,247, about 54% of the total 30 Criminal Action • In 2006, 3508 individuals were found guilty • In 2005, 2963 individuals were found guilty. 31 Jones Day in Asia Beijing Tokyo Shanghai Taipei Hong Kong New Delhi Singapore Sydney 32