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Top Seven Intellectual Property Mistakes By Foreign Companies Doing Business In Or With China.

Posted in Legal News

I am always counselling patience to young lawyers who want to start their careers doing international law. I explain that international law is really just “regular” law with an international component. I thought of that today when I read a post on the High Touch Legal Services Blog, entitled, “Top Ten Intellectual Property Mistakes of Startup Entrepreneurs” and realized how many of those mistakes have commonalities with the IP mistakes we so often see with foreign companies going into China.   

I am going to set out (in bold) six of the mistakes outlined in the High Touch blog post most relevant to China and then discuss how they relate to China. 

1.  Failing to use employee invention agreements.  True of China as well. These agreements essentially require new hires agree to report anything to the company that they invent that result from any work performed on behalf of the company or relate in any manner to the existing or contemplated business of the company, or result from the use of the company’s time, material, employees, or facilities. They also mandate that any such inventions are assigned by the employee to the company. These agreements make sense in China as well.

2.  Assuming that the company owns contractors’ work product.  Even though there is almost no such thing as an independent contractor in China, we see a similar thing all the time. We have been contacted at least a half a dozen times by a US company that has in some strange and illegal capacity retained people in China to conduct R&D for and then when that R&D group goes off on its own, the US company wants to sue them for stealing the US company’s IP. My response is usually to ask how it is that the US company proposes to explain the illegal situation to a Chinese court and then note that what the R&D people walked off with probably did not belong to the US company in any event.  

3. Using another company’s license agreement.  Fortunately, we have no encountered this situation all that often in a China context. Apparently, most companies do realize that if they are going to be involved in a China licensing arrangement they need a customized licensing agreement. I will note here also that China requires you to register your licensing agreements with the government.   

4.  Thinking that patents are the only IP that matters.  We do see a bit of this in that companies seem to underestimate the importance and value of trademarks and trade secret agreements in China.  

5.  Neglecting to identify and protect trade secrets.  Very true of China where companies far too often fail to do all that they can to protect their trade secrets via agreements with their employees or via NNN Agreements with outsiders.  

6.  Giving the “family jewels” to an overseas supplier.  This one obviously applies to China in that companies so often make the mistake of not requiring their China suppliers to sign confidentiality, non-compete and/or non circumvention agreements.  

The seventh mistake (not set forth in the High Touch blog because it is a China-centric tip) is believing that registering your trademark under the Madrid Protocol is the same thing as registering it in China.   

What are you seeing out there? 

  • http://www.foreignentrepreneursinchina.com Clara Muriel Ruano

    I some time back wrote a post on the difficulties entrepreneurs face managing IP as it may be quite expensive and they may lack the resources to follow up on law suits even if they patent their IP (it was inspired by a lecture on IP rights hosted by CEIBS in Shanghai and delivered by Mr. Douglas Clark, a Partner at Lovells LLP).
    Your post highlights several ways to protect your IP that don’t imply a big expense and that any entrepreneur relying on IP for their businesses should follow. I will write a follow up post recommending your post & the original one you mention.
    In my original post I mentioned the importance of one of the points you stress here “Trade Secrets”. During the lecture Mr Dingkun, a CEIBS Professor of Strategy and Entrepreneurship, contributed with a comment on the fact that trade secrets seem to be highly valued by companies here as a way to protect IP. I quote from my post :
    “KEEP IT A TRADE SECRET- DON’T PATENT IT.
    This piece of advice was prompted by Mr. Ge Dingkun, a CEIBS Professor of Strategy and Entrepreneurship. He mentioned a study conducted by university professors which came up with a revealing finding. Companies believe that the most effective mechanism to protect their IP is actually not to patent it. The belief is that if you can work on the development for a few years and get well ahead of your competitors then you have lead time advantage… and that could be the most effective way to protect your IP.
    Mr. Clark agreed with this suggestion and even gave an example of a situation in which he had given the same piece of advice to a company that would have not been financially capable of fighting back an infringement on a patent.
    You can always file the patent later on (unless somebody comes up with the exactly same invention in the meantime!). But something important to consider if you decide to go the “trade secret” way is “Do you have the ability to keep it secret?”. The “secret” definitely needs to be something that can’t be reversed engineered (for example a production process) and you must be confident in your ability to maintain the secrecy.”
    http://www.foreignentrepreneursinchina.com/2010/04/6-tips-for-start-ups-and-innovators-on-intellectual-property-management-in-china/

  • http://www.utilitycomputing.com.cn Richard Ford

    On the issue of IP and trademarks:
    http://www.chinaiceberg.com/lessons/file-for-trademark-protection-lesson-2
    On the issue of employees. It should be standard to have anti employee poaching, non competes, corporate secrecy and stated penalties in he contract. When people knowingly sign and understand something – with clear penalties and no room for post facto wiggle room – you’d be amazed at the “Loyalty” that ensues.
    Also – having IP that is linked to methods and unique skill sets is far more important IMHO. Otherwise this whole IP/Copyright thing is a dead dinosaur and not the way of the future – which is open sourced software, non patents and royalty free IP. If your business is fundamentally structured to protect some intangible object (say software) or some design for something – then you are facing extinction anyway.
    Best to use ones brains and inventions to focus on service delivery (ASP, SaaS in IT land for example) and just side step all of these very “western” and ultimately futile inventions (when it comes to IT) of copyright and IP/Patents.

  • anonymous

    Many companies jump into mistakes because of their lack of awareness on how to achieve intellectual property rights for their products. I work in India and I see the exact same sorts of mistakes here as well.

  • http://4limos.net/new-jersey.html gary345

    Great list. Very helpful. Thanks.