DOING BUSINESS IN CHINA Making Products, Structuring Investments and Protecting Your Intellectual Property March 16, 200

1. DOING BUSINESS IN CHINA Making Products, Structuring Investments and Protecting Your Intellectual Property March 16, 2004

2. DINSMORE & SHOHL LLPCharleston – Cincinnati – Columbus – DaytonLexington – Louisville – Nashville – Pittsburgh255 East Fifth StreetSuite 1900Cincinnati, OH 45202Phone: (513) 977-8200Fax: (513) 977-8141 Harvey Jay Cohen Email: harvey.cohen@dinslaw.com Phone (513) 977-8200 / Fax: (513) 977-8141 Website: www.dinslaw.com

3. LEHMAN, LEE & XUA Licensed Chinese Law PartnershipBeijing – Shanghai – Shenzhen – Shaoguan – Hong Kong6th floor, Dongwai Diplomatic Office Building23 Dongzhimenwai DajieBeijing 100600 ChinaTel: (8610) 8532-1919Fax: (8610) 8532-1999 Edward E. Lehman Email: elehman@lehmanlaw.com Tel: (8610) 8532-1919 / Fax: (8610) 8532-1999 Website: www.lehmanlaw.com

4. Chinese Business Environment • Many Investment Opportunities • Business Variety • Foreign Direct Investments • Joint Ventures

5. PRC Government Organization CENTRAL GOVERNMENT Local Governments Autonomous Regions Special Administrative Regions Centrally Governed Municipalities

6. China’s Legal Structure • National People’s Congress • Laws are enacted by the National People’s Congress. • State Council – Central Government • Administrative regulations are passed by the State Council or organs under the State Council (eg. MOFTEC, Ministry of Agriculture, Ministry of Foreign Affairs etc).

7. China’s Legal Structure • Local Government Agencies • Local government agencies (eg. COFTEC, Hygiene Bureau, Education Bureau etc.) are empowered to interpret legislation within their respective areas of jurisdiction. • People’s Court • The People’s Court at various levels have authority to hear and decide criminal and civil lawsuits. • Prosecutor • The prosecutor investigates criminal matters and represents the State in criminal cases.

8. Foreign Investment in China • Central Government • decides types of business open to foreign investors. • Ministry of Commerce • monitors foreign investment, empowered to approve all applications to establish foreign investment enterprises (FIEs).

9. Foreign Investment in China MINISTRY OF COMMERCE STATE DEVELOPMENT AND REFORM COMMISSION Foreign Investment Direction Catalogue for the Guidance of Foreign Investment Industries (list of encouraged, restricted and prohibited industries)

10. Foreign Investment in China • Some industries (eg. telecommunication services) - mandatory that the foreign investor have a Chinese partner, or Chinese partner hold a majority interest in the FIE.

11. Foreign Investment Operating Structures • Representative Office • Equity Joint Venture • Cooperative Joint Venture • Wholly Foreign Owned Enterprise

12. Representative Office • Quick (procedure to register is not complicated) and inexpensive way to establish a legal presence in China. • Can carry out market research, render advice, collection of information, coordinate company activities in China. • No direct business activities – cannot enter into sales contract, issue invoices, arrange for importing goods.

13. Equity Joint Venture • A most commonly used foreign investment structure for the following reasons: • First foreign investment structure allowed in China; • Mandated by Chinese law to be used for most types of foreign investment; • Benefit to the Chinese economy - foreign party generally provides technology, management expertise & cash.

14. Equity Joint Venture • Benefit to the foreign party - Chinese partner may have established sale and distribution network; • Well connected Chinese partner can help cut through red tape. • Important Considerations • Selection of the Chinese JV partner and due diligence of partner/assets • WTO Schedule • Location set up

15. Equity Joint Venture • The joint venture set up requirements: • Feasibility study • Letter of intent • JV contract • Articles of Association • Capital investment requirements • Minimum equity investment by the Foreign investor is 25%

16. Cooperative Joint Venture • Similar to Equity Joint Venture in structure but with more flexibility because • Sharing of profits is governed entirely by contract • Foreign partner can obtain return of investment in priority to Chinese partner • Establishment procedure similar to Equity Joint Venture

17. Wholly Foreign Owned Enterprise • A Wholly Foreign Owned Enterprise is basically a wholly owned subsidiary of foreign enterprise. • Restricted to fewer business sectors then Joint Ventures.

18. Wholly Foreign Owned Enterprise • Must further the development of the Chinese economy and should use some degree of advanced technology. • Approval and registration procedure similar to Joint Ventures.

19. Joint Ventures: After the Setup • GARBAGE IN – GARBAGE OUT • The majority of JV problems can be avoided through hard work and organization

20. Stumbling Blocks • Lack of transparency in legislation • Local protectionism in some areas • Cultural differences • Different management styles • Connections (‘Guanxi’)

21. Chinese Pride & Prejudice • “You foreigners don’t understand about China and the Chinese way of doing things” • “We don’t do it this way in China”

22. Be An Active Partner • A good foreign partner does not mean providing expertise and technology and then getting out of the way • When partners do not work together actively, inequalities cause problems

23. Do What You Say and Document What You Do • Follow-up on items agreed upon during setup • Example 1: land use rights (understand what is being promised and what one is getting, and then follow up). • Example 2: technology transfer and improvements (document what you provide and make sure it is adequately protected). • Do not leave important items to oral agreements during setup negotiations – document everything.

24. Importance of Continuity • Documentation should let a new company representative to JV step into his predecessor’s shoes smoothly. • Personal relationships and trust DO mean something.

25. Regulatory Filings • Technology Transfers, Trademark Licenses, Management Agreements. • All Must be Filed – this will not get done by itself, so follow up. • Royalty payments cannot be remitted unless filings are made.

26. Technology Transfer • Basis can be Patent, Confidential Information/Trade Secrets. • Must be recorded at local Ministry of Foreign Trade & Economic Cooperation (MOFTEC). • Royalty payments can be made following approval of State Administration of Foreign Exchange (SAFE).

27. Patent Law of China • 1985 enacted • 1992 first revision • 2000 second revision-effective on July 1, 2001

28. Type and Duration of Patent Protection TYPEDURATION Invention 20 years Utility model 10 years Industrial design 10 years from the filing date

29. Requirements for Granting a Patent for Invention and Utility Model • Novelty • Inventiveness and • Practical applicability

30. For Utility Model & Design • Formality examination • Published after granting

31. Right of Patent Owner • No entity or individual may, without the authorization of the patentee, • make • use • offer to sell • sell • import • the patented product or patented method

32. Re-examination, Invalidation and Appeal to Court • When application is rejected , applicant can file reexamination request to Reexamination Board. After patent is granted, any party can request the Patent Reexamination Board to declare a patent right invalid. • Decision by the reexamination board can be appealed to court • Action should be taken within 3 months from the notification

33. Settlement of Patent Infringement • Consultation • Institute legal procedure to court • Mediation by the local administrative authority on patent work

34. Damage Calculation for Infringement • Firstly decided by the actual profits or losses by the patentee or infringer, or • 1-3 times of royalties, or • RMB 500, 000 at most

35. Chinese Trademark Law • 1982 took effect • 1993 first revision • 2001 second revision, took effect on Dec 1, 2001

36. Protection Scope of the Trademark Law • Registered trademarks • Unregistered, but famous trademarks

37. What Can Be Protected Under The Chinese Trademark Law • Trademark • Service mark • Collective mark • Certification mark

38. Trademark RegistrationWhat Can Be Registered • Words • Graphs • Letters • Numerals • Three Dimension Signs • Combinations Of Color • Combinations Of The Forgoing Elements

39. The Requirements Of A Registered Mark • The trademark will not be registered if its use would be considered contrary to law, public order, liable to cause offense or seen as immoral or scandalous. • The trademark should be distinctive • The trademark should not infringe any legitimate rights of others

40. How Do Foreign Entities Register Trademarks In China? • A foreign person or foreign enterprise, without a registered address in China that wants to apply for the registration of a trademark or deal with matters concerning a trademark in China must retain a Trademark Agent that is licensed by the Chinese government.

41. The Examination Process For Trademark Applications yes yes yes 2-3 months 2 weeks 5-8 months no no no yes 1 month

42. The Amended Chinese Trademark Law Owner Rights • Enhancement of trademark protection • Progress in application and dispute procedures • Improvement in Relief for Trademark Owners

43. Enhancement of Trademark Protection • Subject matter protection expanded • Lifts bans on trademark application by a natural person • Allows co-owned trademarks • Lowers threshold for registration • Protection for well-known marks

44. Added Protection-Subject Matter • Three-dimensional trademarks • Collective and certification marks • Geographical indication

45. Enhancement of Trademark Protection • Lowering threshold for Registration by introducing the concept of “Secondary meaning.” “Secondary meaning” - means “acquiring distinctiveness through use” • A trademark which lacks inherent distinctiveness may obtain registration if it can prove that it has acquired distinctiveness through use. • Evidence to show secondary meaning may include output, sales volume, advertisement coverage, especially market survey of the products/services in respect of which the trademark is used.

46. Enhancement of Trademark Protection • Explicit protection to well-known marks • If a trademark for which the registration is applied for is identical or similar to other goods or is a reproduction, imitation or translation of a well-known trademark of another which has not been registered in China thus being liable to create confusion to the public, registration will be refused and the use of such trademark will be prohibited. • If a trademark for which the registration is applied for is a reproduction, imitation or translation of a well-known trademark of another which has been registered in China and creates confusion to the public, thus causing a likelihood of infringement on the interests of the registered proprietor of the well-known mark, registration will be refused and the use of the trademark will be prohibited.

47. Enhancement of Trademark Protection • Explicit protection to well-known marks • If a third party registers a well-known trademark as part of its enterprise name, which is likely to deceive or mislead consumers, the owner of the well known trademark may apply to the enterprise registry for cancellation of the enterprise name.

48. Progress In Application And Dispute Procedures • Voluntary amendment and assignment are allowed for pending applications • Partial opposition/cancellation is introduced to trademark dispute cases • Oral hearing is possible for cases examined by TRAB • Introduction of judicial review

49. Improvement in Relief for Trademark Owners • Preliminary injunction available • Awareness of the selling of counterfeiting goods • Legislative remedy available (no more than RMB 500,000)

50. Improvement in Relief for Trademark Owners • Preliminary Injunction • If the trademark owner, its assignee or licensee can prove that the infringer is engaging in or will conduct infringement activities, and that without timely intervention from the courts, the trademark owner or assignee or licensee will incur irreparable loss, the trademark owner, its assignee or licensee may seek an order of injunction from the court and take measures to retain the infringing property.