Patent Law

China's New Patent Law will take effect on July 1, 2001. The new Patent Law is the first revision since 1992 (initially enacted and promulgated in 1984), and will combine the cancellation and invalidation procedures into one, thus eliminating the opportunity for a second challenge to a patent by the same party. The new Law will also provide for judicial review of grant and invalidation decisions. This revision has been awaited for some time, as it was needed to bring China in line with TRIPs.

The new Law also provides guidelines for damages from patent infringement. In addition to stating that damages should be calculated based upon the illegal profits of the infringer, actual losses to the rights owner or a multiplier of the applicable patent royalties, fines for infringement are set at three times the illegal profits. The maximum fine where no profits were earned by the infringer is RMB 50,000 (US$ 6,000) or less. Patent owners will still find that the law provides insufficient deterrence to serious piracy. Unfortunately, as the new Law merely addresses the minimum amount needed to achieve TRIPs' basic standards, pirates will continue to deny the existence of business records and will continue to pay minimal fines as a cost of doing business.

Provisions on Compulsory Patent Licensing are not substantially changed in the revised Law. Since, China, like many other nations, provides for compulsory licensing of patented pharmaceuticals in the event of "national need" and "need for use of a subsequent patent," many are watching to see if the current South African situation will eventually affect the pharmaceuticals market in China. China watchers, however, expect China's authorities to continue to officially respect the rights of patent owners.

Medicine Law (Law on Pharmaceutical Administration)

China has promulgated a completely revised Medicine Law, effective December 1, 2001. The first revision since 1984, the law has doubled the number of articles, and substantially strengthened the quality and safety criteria for medicines distributed in China. The Law provides license requirements for pharmaceutical producers, distributors and medical organizations. Approval from local pharmaceutical authorities and inspection by the National Medicine Inspection Bureau is required for import of any medicine. The new Law sets stricter requirements on labeling, including directions, expiration dates, etc. It also specifies penalties for transport, storage and distribution of fake medicines, including: sequestration of illegal gains, imposition of a penalty equal to two to five times the price of the medicine and suspension of a company's medicine license. Serious violations of the Law shall be subject to criminal liabilities.

Internet Pharmaceutical Information Services

China's National Medicine Bureau has promulgated Provisional Regulations on Administration of Internet Pharmaceutical Information Services, effective as of February 1, 2001. The new Regulations govern pharmaceutical information services, including pharmaceutical packaging and materials, provided over the Internet. Pharmaceutical information services are classified into two categories: free service and fee for services. Those providing fee-based services must obtain an Internet Information Service License from local information industry authorities. In addition, approval from local medicine authorities is also required. As to pharmaceutical information services provided for free, the provider must record their activity with the local information industry authorities, but a license is not required. The provider must also obtain approval from local medicine authorities. If the pharmaceutical information service provider violates the new Regulations or other relevant laws, the pharmaceutical authorities shall give the violator a warning. If the violation is deemed serious, the provider's Internet service shall be suspended.

Restrictions on Foreign Investment into Internet and Telecommunications Activities

Although value-added telecommunication businesses are generally prohibited to foreign invested enterprises, Shanghai municipal authorities have approved a reported 100 or so such businesses. China's Ministry for Information Industry recently directed that the situation must be rectified, and has sent a list of foreign invested enterprises engaged in value-added telecommunications services to the Shanghai authorities. The Ministry is pointing out that all entities engaged in such business must obtain a special license to do so. However, since foreign-invested enterprises are prohibited from engaging in value-added telecommunications services, foreign invested enterprises will not be granted licenses for such activities. Article 17 of the Regulations on Administration of Information Services promulgated last September opens a narrow door for foreign investment in the generally prohibited area, provided that at least the following strict conditions are satisfied:

1) The Chinese party is an Internet Information Service Provider,

2) The investors must obtain the approval of the Ministry of Information Industry, and

3) The percentage of equity interests in the Joint Venture owned by the foreign investor is limited in accordance with relevant regulations. (Normally minority interests)

Although the new regulations took effective last September, according to the Shanghai authorities, they have not been actually enforced so far. After China joins WTO, a foreign company may own up to 49% of the ownership of such an entity, and two years after China joins WTO, a foreign entity may own up to 50% of such an entity.

Interpretation of Digital Copyright Cases

The Supreme Court has issued a directive to lower courts in assessing liability for Internet copyright infringements. The Interpretation states that courts shall measure damages based upon the infringer's illegal gains, or the copyright owner's losses, in the range of RMB 500 to RMB 300,000. In the case of very serious infringement, depending upon the speed of the network and territory, a court can assess up to RMB 500,000 (US 61,000) in damages. Jurisdiction can be found either where the infringer acted or where the defendant company is located. The location of the infringing act includes the location of the Internet server, the computer terminal and other equipment used for infringement activities. Copyright owners shall have copyrights to their works in digital form. Copyright owners have the right to use their works or allow others to use their works in digital form.

Copyright owners shall publish a copyright notice of their works over the Internet declaring that the works may not be adapted or re-published. Otherwise, ISP's and ICP's will not be deemed to have notice of copyright protection if they adapt or republish the works and make proper payments to copyright owners.

The Interpretation also deals with the legal liabilities of Internet Service Providers and Internet Content Providers. An ICP will be jointly liable for copyright infringement with the infringer if the ICP is aware of infringing activities by Internet users or refuses to remove the infringing content after a warning supported by sufficient evidence is sent by the copyright owner. An ISP has an affirmative responsibility to provide identifying information of the infringer upon receiving a qualified request by a copyright owner. The copyright owner must provide proof of the identity of the copyright owner, proof of copyright ownership, a valid business certificate, and evidence of the infringement. The ISP who acts under this Interpretation will not be liable for losses to the infringer. If the accusation ultimately is adjudicated to be false, the copyright owner making the claim will bear all liability. Whether this interpretation will be followed by ISPs and ICPs, and whether there will be any enforcement of this Interpretation by other administrative authorities is a serious question.

Incentives for Software Export

China's Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") has issued a notice encouraging software exports by domestic enterprises through various incentives. The notice specifies that "software exports" primarily includes transfer or licensing of software technology, information data services and software products exports in combination with equipment export. The incentives for software export include: grant of export authority (not allowed to all companies) for software enterprises with a registered capital of more than RMB 1million (approximately US$800,000.00) preferential tax, reimbursement from relevant authorities for the fees for GB/T19000-ISO9000 and CMM certifications, grant of tax exemptions for exported software products ,and various other incentives. Software export contracts must be recorded with the On-Line Software Export Contract Recordation Center at MOFTEC's website. A separate regulation will be enacted to govern software exported abroad over Internet transmission.