A free-trade zone (FTZ) is a specific class of special economic zone. It is a geographic area in China where goods may be imported and exported under specific customs regulations and partly excluded from customs duty. It offers corporations free trade advantages and a more liberal regulatory environment. The FTZ is aimed at attracting foreign investment and collaboration, thus fostering economic activity and promoting employment.
In 2013, the first FTZ in China was established in Shanghai and since then, 10 more FTZs have been established in succession. Foreign investors have taken an optimistic view of the prospects of business in FTZs, while at the same time, they are also concerned about the potential IP infringement in FTZs.
Below we briefly introduce IP protection in the Shanghai FTZ, and provide our recommendations on how to address IP infringement.
I. The basic principle of intellectual property protection in FTZs in China
The free flow of goods is highly emphasized in FTZs, but these zones are definitely not a paradise for intellectual property infringers, as is often suggested. Exclusiveness and territoriality, the characteristics of intellectual property, ensure that no one can engage in the behaviors restricted by the exclusive rights granted under intellectual property laws without the right holder’s permission. This basic understanding remains unchanged even as FTZs are established. FTZs in China fall within the jurisdiction of the current Chinese intellectual property laws, regulations, and courts.
II. The change of supervision patterns of FTZs in China
Simplified customs clearance and efficiency are two typical characteristics of FTZs. Article 18 of Regulations of China (Shanghai) Pilot Free Trade Zone stipulates as follows:
“The management between the FTZ and overseas countries/regions shall be referred to as "front-line" management, while the management between the FTZ and regions that are outside the FTZ but within the Mainland shall be referred to as "second-tier" management.”
There are therefore two levels of customs regulation. Article 18 calls for the relaxation of regulation at the “front-line,” while ensuring safe and efficient customs controls at the “second-tier,” and “free flow” within the FTZ. The intention of the statute is to establish in the FTZ regulatory models suitable for the development needs of international trade and other business. This is necessarily a delicate balance for all countries involved in the setting up of FTZs. It is especially difficult for China, where IP infringement remains rampant.
Twenty three new measures have been unveiled in the FTZ to simplify customs procedures. The “enter first, declare later” policy is one of the measures, and it has been generally hailed as one of the most welcome policies. According to Feng Bingbing, general manager of USP-China, a Shanghai-based research and development arm of U.S. Pharmacopeia, “Our logistics cost have been cut by about a quarter and our lab’s global competitiveness has vastly improved.”
This change in customs regulation brings new challenges to intellectual property owners. By “relaxing regulation at the front-line,” all imports are allowed to enter the FTZ first, and are later declared to customs. This is compared with the original practice outside of FTZs, where the goods are declared to customs prior to entry into the territory. Enterprises can therefore bring goods directly into the FTZ with import manifests. The previous measures of detaining the suspected infringing goods at customs have in reality been weakened. This undoubtedly provides opportunities to counterfeiters to infringe a right holders’ intellectual property rights.
In practice, we find more exports than imports are detained by customs as suspected intellectual property infringement. It is not clear whether the detainments are a result of inspections conducted at the “front line,” or at “second-tier” customs inspections. On the one hand, this may mean intellectual property infringements occur more often in the Mainland (including FTZs); on the other hand, the customs regulation for export goods is still stringent.
In Shanghai and Xiamen, an Intellectual Property Office in which all the issues regarding patent, trademark and copyright are administered has been established to deal with IP claims, in lieu of claims brought before the AIC. This IP Office is the first “three-in-one” administrative body in China, which embodies administrative and law-enforcement functions to deal with patent, trademark and copyright claims. This one-stop model consolidates the functions of several law-enforcing departments, simplifying the procedure and increasing the efficiency of anti-counterfeiting efforts.
For example, before the Intellectual Property Office was set up, a right holder had to apply to several different enforcement authorities (depending on the nature of the claim) when infringing behavior was identified. Now, the office can accept issues related to a wide variety of intellectual property infringement matters, which can reduce confusion and procedure and promote a more unified enforcement standard.
The Fujian FTZ has also set up a “three-in -one” Intellectual Property Offcie in its Xiamen district. In other FTZs around China, traditional raid actions can still be utilized for brand owners by filing complaints before the AIC. That is to say, the Intellectual Property Office has replaced law enforcement functions of the AIC in Shanghai FTZ and the Fujian FTZ. The process and cost of filing complaints before these Intellectual Property Offices are similar to actions brought before the AIC.
The Shanghai FTZ has adopted a dispute resolution mechanism for intellectual property matters. For example, in 2016, the Intellectual Property Office of the Shanghai FTZ received 10 complaints related to intellectual property rights owned by Disney. Among the 10 complaints, 6 were settled by mediation in a day. 727 infringing goods were confiscated. The right holder, Disney, was satisfied with the results of the settlement. In 2016, the Intellectual Property Office of Shanghai FTZ settled 57 disputes regarding varieties of intellectual property.
III. Characteristics of IP cases in Shanghai FTZ
According to the White Paper of Trial relating to FTZ released by Shanghai Pudong New Area Court, in 2016, the characteristics of IP cases at the Shanghai FTZ from 2013 to 2016 include increases in the amount, diversity and type of cases, as well as an increase in awards for damages.
Pursuant to the White Paper, during the past 3 years, the amount of IP cases at the Shanghai FTZ has increased sharply from 37 to 3070, nearly 80 times that of 2014. These cases are diverse with regard to the type, involving disputes concerning domain names, IP contracts, unfair competition, trademark infringement, and copyright infringement. In particular, there are a great number of cases that relate to original equipment manufacturing, parallel imports, and e-commerce. Lawsuits are abundant and judicial enforcement continues to play a big role in IP enforcement in Shanghai FTZs.
The volume of cases reflects a strong demand for goods in FTZs, as well as an active enforcement mechanism. For example, the Shanghai Pudong New Area Court has expressed its determination to reinforce intellectual property protection in the FTZ. Preliminary injunction and asset preservation are measures a court can take to safeguard the plaintiff’s interests. Taobao Co. v. Zaihe Co. & Zaixin Co., as known as “Bang 5 Tao” case, was the first case in mainland China concerning a FTZ. In this case, the Pudong New Area Court, ordered a preliminary injunction against “Bang 5 Tao”e-commerce platform, citing claims of unfair competition and IP infringement.
As mentioned above, although the formalities for the entry of goods are simplified in a FTZ, customs inspections are still performed for the import and export of goods. The recordation of IP with customs is therefore still an effective way to stop the flow of infringing goods passing through a FTZ. Given the focus on speed of inspections, the creation of FTZs has made the adoption of customs recordation and customs training imperative for IP owners to employ the reduced benefits of customs inspections. We recommend that clients take advantage of these customs procedures to record its IP, set up training sessions, and prepare training materials on its key intellectual property to make it easier for Customs to help IP owners at the border.
Filing an administrative complaint with the AIC or Intellectual Property Office in FTZs is a cost effective tool to stop infringements and to destroy infringing goods. The advantages of an administrative raid action are speed, low-cost, and effectiveness. By way of adminstrative mediation, the right holders’ demands can also be met.
Civil and criminal remedies are increasingly in demand in China’s FTZs, as is the court’s willingness to grant preliminary injunctions, in the appropriate cases. Claims for damages have been steadily rising as well.
In conclusion, it appears the laws and mechanisms for the enforcement of IP rights in FTZs are actively being utilized by IP owners. We recommend that clients take advantage of existing customs procedures, as well as the administrative procedures with the AIC or Intellectual Property Office, so that they can find and stop infringement as early as possible.
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