January 2001

China Moves to Protect Intellectual Property, Encourage Foreign Business: A Summary of China's Regulation on Computer Software Protection 

by Gordon Liu

On September 2000, the U.S. Senate voted to pass the permanent normal trade relation (PNTR) with China, clearing the last hurdle in America's acceptance of China into the World Trade Organization (WTO). The Information Technology Industry Council (ITI)¹ hailed the vote as "a solid win for continuing America's technological leadership and one of the final steps in opening China to trade." ITI's reaction to the event symbolized the widespread optimism among U.S. technology companies about China's anticipated accession into the WTO.

From a statistical standpoint, the optimism may be justified. China, with its 1.2 billion people and ever-expanding middle class, is one of the fastest-growing markets for information technology. China is the world's second largest market for cellular phones, and the fastest-growing market for personal computers. China's Internet population has doubled every year since 1997 and is expected to reach 20 million by the end of 2000.

After China joins the WTO, its tariffs on the import of American technological products and services will be substantially reduced. American companies may own up to 50 percent of Chinese telecommunication companies, which is an unprecedented opportunity in the tightly controlled telecommunication sector.

China's market and profit potential cannot be ignored by U.S. software companies, which generate 60 percent of their revenue from overseas sales. Yet, a major concern about doing business in China has been its lack of protection of intellectual property, especially computer software. Industry experts estimate that over 90 percent of business application software used in China was pirated in 1998, depriving software companies of nearly $1.2 billion in licensing revenue.

In June 1991, China published the "Regulation on the Protection of Computer Software" promulgated by the State Council. The Regulation is the first of its kind and contains provisions closely parallel to the Berne Convention. It demonstrates the efforts of the Chinese government to bring its laws on intellectual property protection in tune with the global system. To provide a basic understanding of China's laws on computer software protection, this article summarizes the Regulation.

According to Article 1 of the Regulation, the purpose of the law is to (1) protect the rights and interests of creators of computer software; (2) adjust the relationships of interest during the development, dissemination and use of computer software; (3) encourage the development and circulation of computer software; and (4) promote the development of computer applications.

Under the Regulation, "computer software" includes computer programs and related documentation.

"Computer program" means coded instructional sequences, symbolic instructional sequences, or numeric language sequences which can be automatically converted into coded instructional sequences for the purpose of obtaining a certain result, and which are operated on information-processing equipment such as computers.

"Related documentation" means written materials and diagrams, using natural or formal language, which are used to describe the contents, organization, design, functions and specifications, development circumstances, testing results, and methods of use of the program (for example, program design explanations, flow charts, user manuals, etc.).

Under Articles 5 and 7 of the Regulation, to be entitled to protection, computer software must be independently developed and must be in material form. Ideas, concepts, discoveries, principles, algorithms, processing methods and operations used in the development of such software are not protected under the Regulation.

Under the Regulation, the intellectual property right related to computer software is classified as "copyright." The Regulation uses such terms as "computer software copyright," which includes the following particular rights:

• right of publication, meaning the right to decide whether the software should be released to the public;

• developer's right of authorship, meaning the right to indicate the developer's identity and to place his name on the software;

• right of use, meaning the right to use the software by copying, demonstrating, distributing, altering, translating, annotating, etc., under the precondition that such use does not harm the public interest;

• right of licensing use and receiving remuneration, meaning the right to license others to use the entire software or a part of it, and the right to receive remuneration for the license;

• right of transfer, meaning the right to transfer to others the right to use and the right of licensing the software under the Regulation.

The computer software copyright belongs to the "software developer," unless the developer transfers or assigns this right to others. "Software developers" are (1) legal persons; (2) organizations which are not legal persons but actually organize and undertake the work of development, or provide working conditions to complete the development of software and take responsibility for the software; or (3) citizens who rely on their own resources to complete the software and who take responsibility for the software.

Article 6 of the Regulation states that Chinese holders of computer software copyright enjoy protection under the Regulation regardless of whether the software has been published and regardless of where it has been published. Foreign computer software copyright-holders enjoy protection under the Regulation if the foreign copyright holder's software is first published in China. If such software is published outside of China, foreign copyright holders may enjoy protection under the Regulation according to a bilateral agreement signed between the copyright holder's country and China, or according to an international convention to which both China and the copyright holder's country are signatories.

Article 15 of the Regulation provides that, except for the right of authorship, the term of protection for computer software copyright is 25 years, ending on the 31st of December of the 25th year after the first publication of the software. However, prior to the expiration of the first 25-year term, the computer software copyright-holder may apply to the Software Registration Administration Organization to extend the protection by another 25 years. The term of protection for any computer software copyright shall not exceed 50 years. Subsequent transfer or assignment of computer software copyright does not extend the total term of protection of such copyright.

Although computer software copyright belongs to the software developer, the software developer may no longer be the "software copyright owner" if the software copyright is transferred or assigned to another party. According to Article 3 (4), a "software copyright owner" is an organization or a citizen who, in accordance with the Regulation, enjoys the computer software copyright.

Under Article 11, where there are two or more software developers for one piece of software, the ownership of such software copyright shall be enjoyed jointly by such developers, unless the shares of ownership are predetermined in a separate agreement among the developers. However, the exercise of the software copyright by co-owners/developers shall be according to the written agreement among the parties. In absence of such written agreement, each co-developer shall be entitled to enjoy the copyright on the part of the software which was developed by each co-developer if the software can be used in separate parts. If the software cannot be used in separate parts and a consensus cannot be reached by the co-developers as to the issue of ownership, neither party can prevent the other from exercising his rights, except for the right of transfer, unless an unusual reason exists. But the profits generated from the software shall be fairly shared by the co-developers.

Under Article 12, the person who developed the software under commission shall retain the copyright to such software if there is no written agreement indicating otherwise between the person who commissions the work and the person who performs the work, or if the copyright ownership is not clearly stated in the written agreement.

Article 13 provides that unless there is a project document or contract stating otherwise, an organization which developed the software pursuant to tasks assigned by its superior organization or governmental agency shall retain the copyright to the software. If a piece of software has significant implication to national and public-security interest and is developed by organizations within the national and public-security system, then the relevant departments of the State Council, the People's Government of provinces, autonomous regions, or centrally controlled cities shall have the right to designate organizations to use the software under permission. The designated organizations using such software shall pay a fee to the designating agencies.

Article 14 describes a "work-for-hire" situation where an employee of an organization develops the software within clearly defined developmental goals for work, or if the software is the predictable or natural result of the employee's work activities within the organization, the organization shall have the copyright to the software. However, if the software is not the predictable or natural result of the employee's work, has no direct relationship to the content of the employee's work, and is developed without use of the organization's material and technical resources, then the copyright for the software belongs to the employee.

Under Article 23, the Software Registration Administration Organization is the designated agency charged with processing and issuing software copyright registration. All applications for registration of software copyright must be submitted to the Software Registration Administration Organization which, if an application is approved, will issue document of proof of registration and make public notice of the registration.

Article 25 states that any application for software copyright must be completed with (1) a fully executed software copyright registration form; (2) the software identifying materials; and (3) a registration fee. The Software Registration Administration Organization is authorized and empowered under the Regulation to promulgate specific software copyright application procedures and fee standards.

The registration of software copyright is the prerequisite for initiating the alternative dispute resolution procedure or civil lawsuits under the Regulation. Documents of registration or application are the initial proof that a software copyright is effective or is being processed for approval.

Article 26 provides that a software copyright may be cancelled by the Software Registration Administration Organization if (1) a final judicial judgment compels such cancellation; or (2) it is determined that the applicant submitted materially false information in the application.

6. Transfer and Assignment

Under Article 9 (5), the right of transfer extends to the right of use and the right of licensing, but does not include the right of publication and the right of authorship. Articles 18 and 20 contain relevant language to the same effect.

Under Article 27, the transferee of a software copyright must notify and put the transfer on record with the Software Registration Administration Organization within three months of signing the contract of transfer, or otherwise lose the right to contest any infringement of the transferred software copyright.

In addition, Article 28 requires that when a Chinese national transfers his software copyright to a foreign national for software created within China's territory, the Chinese national must first request approval for such transfer by the relevant agencies of the State Council, and file a report with the Software Registration Administration Organization.

A software copyright owner may authorize the use or grant a license to use the software and charge a fee for such use or license. The terms and conditions of the use and license should be put in the form of a written contract in accordance with Chinese laws and regulations. The use and license contract may not exceed 10 years, however, the contract may be extended by the parties when the 10-year term expires. A transferee of the right to use, or license to use, a software copyright may transfer the same right or license to use to a third party. Such transfer should be in the form of a written contract in accordance with Chinese laws and regulations.

A software copyright is inheritable, and may be inherited by the software copyright owner's heirs under the People's Republic of China Inheritance Law. However, Article 16 of the Regulation specifies that the heirs may inherit the right of use and the right of licensing under Article 9, but is silent on the right of publication, the right of authorship, and the right of transfer. The act of inheritance does not change the term of protection in Article 15.

Article 17 describes that in the event of a reorganization or restructuring of an organization which owns a software copyright, the succeeding entity shall be the legal owner of the rights related to the software owned by its predecessor.

A software copyright shall terminate during its term of protection, and all rights relating to the software shall enter public domain, when either of the following events occurs: (1) the organization which owns the software copyright dissolves and there is no legal successor; or (2) the citizen who owns the software copyright dies without a legal heir.

In Article 30, the Regulation sets forth specific acts of software copyright infringement, which include: (1) publishing computer software without the owner's consent; (2) taking computer software belonging to another and publishing it in one's own name; (3) taking computer software developed in cooperation with another person and publishing it as one's solely owned work without the permission of the co-developer; (4) signing one's name on software developed by another person or altering the signature of another person on the software; (5) revising, translating or annotating the software without the permission of the software copyright owner or his legal transferee; (6) copying computer software, in whole or in part, without the permission of the computer software owner or his legal transferee; (7) disseminating or disclosing computer software to the public without the permission of the software copyright owner or his legal transferee; or (8) effectuating the licensing or transfer of computer software to a third party without the permission of the software copyright owner or his legal transferee.

However, under Article 31, the similarities between newly developed software and software already in existence do not constitute acts of infringement if such similarities are necessary to (1) implement national policies, laws or the regulation; (2) set technical standards; or (3) allow expression due to limited categories or forms of expression.

In the event a software user unknowingly used a software which infringed upon a software copyright, and the software user acquired the infringing software from a supplier who knowingly committed the act of infringement, the supplier of the infringing software shall be liable to the copyright owner for any loss and damage. However, the software users may also be required to destroy the infringing software in order to force the losses back onto the supplier.

Under Article 30, anyone whose copyright is infringed by another may bring civil action against the infringing party. The software copyright owner's legal remedies include restraining of infringement activities, elimination of the effects of the infringement, public apology, loss of profit, and other applicable civil penalties. In addition, the State Software Copyright Executive Administration Department may impose administrative punishments such as confiscating illegal income or fines, etc.

Articles 34 through 36 provide for mediation as an alternative dispute resolution to civil lawsuits. Under these articles, both software copyright disputes and software copyright contracts may be mediated. However, mediation is not a prerequisite to filing a civil lawsuit and is not binding upon the parties. A party may still sue in the People's Court if he is unwilling to mediate the matter or he is dissatisfied with the mediation result.

In addition, the parties may apply to the State Software Copyright Arbitration Organization for arbitration of their dispute pursuant to an arbitration provision in their contract or a subsequent written arbitration agreement between the parties. If a party fails to comply with the arbitration ruling, the other party may file a lawsuit in the People's Court to enforce compliance with the arbitration ruling. However, if the People's Court decides that the arbitration ruling is illegal and refuses to enforce such ruling, the party may bring a lawsuit on the merit of the case directly before the People's Court.

If there is no arbitration provision in the contract or subsequent written arbitration agreement, the parties may bring civil lawsuits directly before the People's Court.

Concerning the administrative penalties imposed by State Copyright Executive Administrative Department, the penalized party may seek review of the administrative penalties by the People's Court. If he chooses to do so, he must appeal the penalties within three months from the receipt of notice of penalty. Upon the expiration of the three-month period, if no action seeking review has been instituted, the State Copyright Executive Administrative Department may apply to the People's Court to force compliance with the administrative penalties.

While the Regulation adopts many concepts and provisions similar to international conventions on copyright protection, it is designed to cope with China's reality and the existing laws and regulations. China's legal framework is developing, and the laws are often enforced on the basis of need. For U.S. firms planning to develop or license computer software in China, the ownership and transfer provisions of the Regulation may prove problematic. Any joint venture agreement, employment agreement, or licensing and transfer agreement must be drafted carefully for effective protection allowed under the law. Upon occurrence of infringement, rather than taking the matter straight to court, U.S. firms should first consider alternative dispute resolution. China's administrative adjudication of disputes on intellectual property has been considered fair and efficient by many experts. Therefore, it may be advisable to include a binding arbitration clause in the software transfer or licensing agreement.

Of course, computer software piracy will not disappear overnight in China, with or without WTO membership. But signs indicate that the government and courts are beginning to take the matter seriously. There have been reports of Chinese authorities closing down factories which illegally copy and distribute computer software, music CDs, and hit Hollywood movies. But like most things in China, change will come slowly. As long as software piracy is still a major concern, U.S. firms should use all necessary caution in deciding on an entry strategy and selecting a local partner, and always be mindful that compliance with the law is but one step toward appropriate protection of their computer software.

NOTE

1. ITI is an industry-wide association that consists of such companies as 3COM, AOL, Apple, Canon USA, Cisco, Compaq, Dell, HP, IBM, Microsoft, Intel, Motorola, Amazon.com, Panasonic, Sony, Unisys, Eastman Kodak, and Nortel Networks. Its website is http://www.itic.org/.