Many foreign companies are nervous about investing in China because of the country’s poor record of protecting intellectual property rights (IPR). The announcement in March this year that INEOS was suing state-owned Chinese oil and petrochemical company Sinopec for violating its acrylonitrile patents will have justified their concerns.

In its annual Special 301 Report on IPR released in April this year, the Office of the United States Trade Representative (USTR) once again expressed “ongoing, serious concerns about the protection and enforcement of trade secrets with respect to China.” The country remains on its Priority Watch List, along with nine others.

The report did acknowledge, however, that China’s authorities were undertaking wide-ranging legal reforms relating to protecting and enforcing IPR, but said at the same time that US organisations continued to report serious obstacles to effective protection of IPR in all forms, including patents, copyrights, trademarks and trade secrets.

INEOS’ recent experience undoubtedly reinforces this view. The Swiss-headquartered chemical company - and the world leader in acrylonitrile production - claims that at least three new plants have been built in China without its permission. INEOS has a long-standing licence agreement with Sinopec Ningbo Engineering Company which covered the construction of a plant in Anqing, Anhui province. However, INEOS believes that other plants based on its technology have been built without its knowledge. The company fears that a wave of copycat acrylonitrile plants will cause major harm to its business which generates profits of $500m a year and supports 5,000 jobs in Europe and the US. Sinopec denies the allegations.

Yet, a win in a Chinese court for Belgium-based Solvay last January has bucked the trend. In a landmark ruling, Solvay won two patent cases on rare earths against China’s HySci (Tianjin) Specialty Materials and was awarded damages of RMB 5.6m (€0.67m).  HySci was ordered to stop the production and sale of certain rare earth mixed oxides used in automotive catalysts.

“This is the first time that an intellectual property case has been won against China in this industry,” says Jean-Francois Serrier, Solvay’s general manager, intellectual assets. “It has had a major impact on customers and competitors. China has become a major supplier of rare earths over the past four years and customers are now taking more notice of the risks to intellectual property. We have also seen renewed interest from competitors to get their situation in order. It is a reminder that everyone cannot ignore intellectual property protection.”

For Solvay, the ruling has given it a signal that it is feasible to get a court decision against a Chinese company in China. Arnaud Wisnia, Solvay’s global business director of catalysis, says: “We are taking much more assertive steps towards customers and competitors in terms of intellectual property enforcement. We are looking at other cases in other jurisdictions.”

Elliot Papageorgiou, partner at Rouse Legal based in Shanghai, China, says that China’s legal system has become much more sophisticated and the laws to protect intellectual property are in place. What the system still lacks, however, are the legal framework and the knowledge, skills and experience of the judiciary to enforce and protect IPR. As China steps up its innovation efforts, IPR is becoming of increasing importance. The country has become the world’s top filer of domestic patents, surpassing the US and Japan, as it moves from counterfeiter to competitor. “China wants ‘invented in China’, not ‘made in China’”, says Papageorgiou.

In Papageorgiou’s view, the biggest problem for foreign investors is that there remains an overriding national interest in legal cases as courts have to ensure that decisions are aligned with government aims. He says less bias and more judicial independence is needed. “China needs to create a level playing field in ensuring laws are implemented and it needs to work on training and reducing local influence,” Papageorgiou comments.

Solvay’s Wisnia agrees that it is important to educate customers and competitors in China about IPR, particularly as the Chinese do not regard copying as intrinsically wrong. One key factor behind the passing on of trade secrets is the Chinese culture of changing jobs frequently. Papageorgiou says the biggest leak of technical information is attributed to researchers moving from one company to another.

The best advice for any company operating in China is to patent. Papageorgiou says companies are not registering their intellectual property in China because they fear copying. “This is a myth and a self-fulfilling prophecy. If you do not have intellectual property protection in China you cannot enforce it”, he says. He points to China’s utility model – like a mini patent – which has a lower inventiveness threshold (more for improvement than outright innovation) and believes companies are “missing a trick” in not using this option more. He concedes that the utility patent model would be more difficult for chemical manufacturers to use but insists companies should look at all options to get protection.

Although Solvay believes China is moving in the right direction in protecting and enforcing IPR on products and product compositions, Serrier points to one major and persistent problem with the system on process patents.  The main issue surrounds China’s requirement for plaintiffs to have notarised and approved evidence of infringement. Serrier says it is extremely difficult for foreign firms to visit a Chinese plant to obtain such evidence and the courts do not help them. He would also like the amount of damages imposed on infringers to be closer to reality – those awarded against Solvay’s infringer HySci were very low, he says.

Many chemical companies cannot afford not to be in China with the opportunities offered by its huge domestic market. Despite its pending court case in Beijing and arbitration hearings in Stockholm, Sweden, INEOS continues to progress its business in the country. The company broke ground on a phenol/acetone plant in Nanjing last year which is being built as a 50:50 joint venture with Sinopec. It also licenses polypropylene and polyethylene technology to the state-owned enterprise.

Papageorgiou says if cases continue to go in favour of foreign firms, as it did for Solvay, then confidence will rise in China’s justice system and bolster a willingness to invest. Companies already operating in China, or planning to invest there, should heed his advice: “Adapt your intellectual property strategy to China, get patent protection and have a water-tight confidentiality policy for your staff.”

Elaine Burridge