The U.S. and China signed an IPR Memorandum Of Understanding (MOU) in 1992, pursuant to which China improved its laws governing IPR protection over the following two years and joined the Berne Copyright and Geneva Phonograms Conventions. The March 1995 extension of the IPR MOU sets out a plan for enforcing IPR and grants market access to certain products. In 1998, in an effort to improve IPR coordination and enforcement, China established a new organization, the State Intellectual Property Office (SIPO). As envisioned, SIPO will eventually have authority over the Patent Office, the Trademark Office, and the National Copyright Administration. At present, however, SIPO only controls the Patent Office, with which it is co-located. The Trademark Office falls under the authority of the State Administration of Industry and Commerce, while the National Copyright Administration is controlled by the State Printing and Publishing Administration.

Enforcement: Large-scale violations of intellectual property rights in China, including counterfeiting and smuggling, often overwhelm enforcement efforts. In recent years, China has had considerable success in closing down factories that produced illegal optical disks (CD's, VCD's, and CD-ROMs) computer software products - only to see an increase in such products smuggled across its borders. The authorities have also conducted thousands of raids at both the manufacturing and the retail level, resulting in the confiscation of counterfeit or smuggled products. In 1999, the State Council issued a decree admonishing government agencies to purchase only legal computer software.

At the same time, in 1998, in reaction to continuing IPR violations, over twenty U.S. companies in China formed an informal coalition to draw the attention of Chinese and U.S. Government authorities to the counterfeiting problem, and to propose ways of strengthening enforcement. These companies estimate their annual losses due to counterfeiting at over USD 1 billion. Severely limited market access for products such as foreign movies and computer software provides an additional incentive for smugglers and counterfeiters. Some U.S. companies have devoted considerable on-the-ground resources to combating IPR violations, with mixed results.

Enforcement options: The Chinese government agencies most often involved in enforcement actions are the Quality and Technical Supervision Bureau (TSB) and the State Administration of Industry and Commerce (SAIC). U.S. companies have also reported success in registering trademarks, patents and copyrights with the Customs General Administration, which can then confiscate infringing products. The Trademark Office and the National Copyright Administration also can take action in cases involving trademark and copyright infringement. In addition, China's court system can be utilized to enforce IP rights. In fact, China has established special IPR chambers in the Supreme Court and in many Intermediate Courts, whose judges have had special training in IPR protection. Compared with the administrative agencies (such as the SAIC and the TSB), which reportedly sometimes conduct raids within hours of receipt of a complaint, the court system is relatively slow.

Patents: Under China's patent law enacted in 1984, domestic and foreign patent applications have increased steadily. Patent protection was extended in January 1993 to pharmaceutical and chemical products, as well as processes; the period of protection was lengthened to 20 years. The amendments also provide the patent-holder the right of importation and expand the scope of patent infringement to include unauthorized sale or importation of products manufactured with the use of patented processes. Under the provisions of the MOU, China extends transitional administrative protection to some U.S. pharmaceutical and agrichemical products for up to seven-and-a-half years.

China acceded to the patent cooperation treaty on January 1, 1994, and will perform international patent searches and preliminary examinations of patent applications. Under the patent law, foreign parties must utilize the services of a registered Chinese agent to submit the patent application. Preparation of the application may be done by foreign attorneys or the Chinese agent.

Copyrights: In March 1992, China established bilateral copyright relations with the U.S. and in October 1992 acceded to both the Berne Convention and the Universal Copyright Convention. China also joined the Geneva Phonogram Convention in April 1993. Following accession to the Berne Convention, China explicitly recognized computer software as a literary work and extended protection to computer programs for 50 years without mandatory registration requirements.

Trademarks. Although problems remain with enforcement, China's trademark regime basically conforms to world standards. In October 1989, China joined the Madrid Pact for protection of trademarks; the latter grants reciprocal trademark registration to member countries. China amended its trademark regime in February 1993 to add special regulations for criminal prosecution for trademark infringement.

Legal framework: As of mid-year in 1999, China was engaged in revising its basic IPR laws - patent, trademark and copyright - in an apparent effort to bring their provisions more into accord with international practice. No drafts have been released to the public as yet.

China has a "first-to-register" system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to anyone. The Unfair Competition Law extends IPR protection to trade dress. Under the trademark law, foreign parties must utilize the services of registered Chinese agents to submit the trademark application. Preparation of the application may be done by foreign attorneys or the Chinese agent.

Trade secrets: In September 1993, the Chinese government adopted the Law Against Unfair Competition. This law defines unfair competition to include conduct that infringes the "lawful rights" of another business operator, including acts that violate "commercial secrets" rights. Commercial secrets which can bring economic benefits to the authorized users and which are protected by taking appropriate security measures are defined to include technical and operational information not available to the public. Sanctions under the law include civil remedies such as damages, administrative sanctions such as fines, and criminal penalties for "serious violations." China is further obligated to protect trade secrets under the Paris Convention for the Protection of Industrial Property, to which it is a signatory.

Regulation of Technology Licensing: Technology transfer by foreign companies is governed by 1985 regulations on technology import contracts, which include contract-licensing patents, trademarks, know-how or trade secrets; contracts for technical services; and other technology import contracts. Contracts transferring intellectual property as part of the foreign equity contribution to FIEs are generally regulated by laws concerning foreign investment. Technology licensing contracts must be approved by MOFTEC or its provincial commissions. Some of the issues of particular concern to U.S. companies include:

*The licensor cannot require confidentiality beyond the duration of the contract, except where the supplier provides improvements to the technology, and most technology contracts are not to extend beyond 10 years.

*The licensor cannot restrict sales channels or impose unreasonable restrictions on the export of products produced with the licensed technology.

*Special approval is required for extended confidentiality, export restrictions, and preferential treatment for payment of royalty tax.

G. Local Professional Services

Licensing technology, opening a representative office and establishing a subsidiary in China all involve Chinese tax and other laws, as well as complex questions on structuring and business practices that necessitate the use of attorneys, accountants and consultants familiar with Chinese requirements.

Chinese law requires representative offices and FIEs to retain the services of accountants registered in China to prepare for official submission of annual financial statements and other specified financial documents. To date, only Chinese accountants and joint-venture accounting firms may provide these services. However, all the major international public accounting firms have offices in China and operate a thriving practice providing services to foreign firms, from advice on tax matters to assistance in setting up accounting systems and preparation of feasibility studies.

Only attorneys licensed in China may appear in court and advise on questions of Chinese law. At present, foreigners are not permitted to qualify to practice Chinese law, nor are foreign law firms permitted to form joint ventures with Chinese lawyers. Registered foreign law firms in China are restricted to advising on the law of their own jurisdictions. Nonetheless, many U.S. and international law firms which have had years of experience in doing business in China are an invaluable source of advice and guidance in setting up ventures, drafting agreements and resolving disputes. As of mid-1999, there were 105 foreign law firms registered with the Ministry of Justice, including 26 firms from Hong Kong, and 27 firms from the United States. Foreign law firms are allowed to open only a single office in China, and may not employ Chinese attorneys in that office.

Commercial Service posts in China maintain lists of U.S. law, accounting and consulting firms with offices in China, as well as of Chinese firms with which the office or its customers have had favorable dealings.

H. Due diligence

Doing business in China is not easy. Chinese bureaucratic organizations may have unclear or overlapping authority. Laws may be vague or contradictory. For U.S. companies, the single most prevalent cause of trade and investment disputes has been the joint venture partner. For this reason, there is a trend towards wholly-owned foreign enterprises. At the same time, in many cases there are good reasons for U.S. companies to seek a Chinese joint venture partner: a Chinese company can assist by providing advice, local experience, and connections, as well as plant and equipment. Due diligence is the key to locating a reputable company. Both Chinese and U. S. firms with offices in China conduct due diligence investigations; the latter include Dunn & Bradstreet, Kroll Associates, and Pinkerton Consulting Services. Investigations are done for a fee, of course, but companies should measure this fee against the possible costs of attempting to cooperate with a local company which turns out to be unreliable. The U.S. Commercial Service's International Company Profile (ICP) service is not offered in China.