Header graphic for print
China Law Blog China Law for Business

How To Protect Your IP From China. Part 3.

Posted in Legal News

This is part three of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In this post, “How to Protect Your IP From China. Part 3,” I look at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

When it comes to contracts, the field is so broad and so varied there is no way I can get into much depth regarding any particular type of transaction — which is probably just as well for all of you out there who are not lawyers.  But I can and will highlight certain stress points and mistakes I commonly see across the board in dealing with Chinese companies, and I will provide some tips for helping to ensure the efficacy of your various China contracts.

But before I talk about what should go into your China contracts, I will talk a bit about a few basic things you should know about negotiating contracts with Chinese companies.  This is new for me to talk about in a speech like this, but I think it is too important to simply ignore, particularly when it comes to protecting IP.  Most American companies have little idea about Chinese company negotiating tactics and this lack of knowledge is working against them.

Chinese companies are, almost without exception, world-class negotiators.  I am convinced that every Chinese businessperson has read Sun-Tzu’s Art of War and you should too.  If you go to any airport in China, you will see all the top books from various countries on how to negotiate – and guess what, most of these books violate China’s own copyright laws.

Chinese companies have more patience than you do, particularly if you are in China for only a week.  And they know this and they will take advantage of this.

So what tactics will Chinese companies employ? Here are a few of the more common ones:

  • The Chinese side will tell you something has to be done a particular way because it is the law in China.  They do this all the time to try to get you to assign over your IP.  Our response to this is to ask them to cite to the law.  We have asked this at least twenty times and not once has the Chinese company ever come up with a real cite. Sometimes they come back with an English language version of what they say is the law, but isn’t.  Sometimes they say there’s no point in giving us a cite because we can’t read Chinese.  When we say that we can, they tell us that we cannot understand it because we are not Chinese lawyers.  When we tell them that we will have our Chinese lawyers look at it, they go silent.  My favorites though are when they respond by saying it’s an “unwritten” law law or that “this is just the way it’s done in China.”
  • The Chinese side will say “this is always how things are done in China” or that “this is never done this way in China.” Rarely if ever is this true.
  • Anything you say you might consider doing once the relationship is established, the Chinese side will say that you promised them and it needs to go into the contract to be done right away.  So be parsimonious with what you say.  You can rest assured that your Chinese counter-parties are.
  • One of my firm’s lawyers [Steve Dickinson] used to teach International Law at the University of Washington law school and he’d do an international negotiating class each year for the LLM program, which was made up mostly of international students.  This is an advanced degree program for students who already have a law degree. He told me that the Chinese students would always fail the negotiating exercise because they would start out by staking out an extreme position, never move from it, and never even explain their goals or make any effort to compromise.  Probably the most famous panda in China is named Win-Win and so when referring to Chinese negotiating tactics, there is the joke that Win-win is only a panda in China.  It is not a negotiating method — that’s for sure.
  • Chinese companies often will use a young employee with good English to negotiate with you to the point where you think you have a deal. At that point, the person who actually holds power will step in and start negotiating with you again.  This tactic works especially well if you are in a situation where you are thinking, “I can’t go back to the United States and tell everyone I failed to reach a deal.”
  • Chinese companies will create a fairly arbitrary deadline at some point in negotiating with you. Then when you try to insist on a provision in the contract for protecting your IP rights or anything else, you will be assailed for putting the deal at risk by running up against a pretty much artificial deadline.  The goal of this tactic is to panic those employees at the American company with the greatest stake in seeing the deal get done and then get those employees to push the deal through as is.

One of the consistently best defenses against all of these negotiating tactics is to figure out early on your fail-safe position on various issues and then establish the proper expectations among all of your own key people by making clear what you will require before you will be willing to put your IP at risk. You need to avoid a situation where the Chinese company can make headway against you by dividing and conquering.

  • Karl Metzner

    These are great, informative points. But I’m a bit puzzled by the comment about Steve Dickinson’s experience with Chinese law students. It’s not that I disagree with his observation, but that I’m not sure how to interpret it, despite my experience as a U.S.-born lawyer who has practiced in China.

    How can almost all Chinese companies be “world-class negotiators” when their law students inevitably fail negotiation exercises?

    Here are a few possible explanations:
    1. Students at law schools in China are not taught how to support their positions with analysis. In other words, they are not taught how to think.
    2. Fear of losing face inhibits compromise.
    3. There is relatively little formal dialogue between actors of equal power in China. Formal conversations are dominated by issues of hierarchy and reciprocity rather than reason, and negotiation authority is not delegated to lower-ranking individuals.
    4. Chinese are more comfortable working in groups and less individualistic, which puts them at a disadvantage when it comes to negotiating on their own.
    5. The English skills of the Chinese students may not be as strong as that of LL.M. students from other countries.
    6. Lack of familiarity with the negotiation exercise creates anxiety. When this anxiety is combined with fear of failure, the student feels that they have no choice but to hold fast to the initial position.
    7. Though the concepts of compromise and negotiation have a more exalted status in China than the United States, rigid social forms that focus on hierarchy as well as a dislike of conflict mean that such interactions tend to take place in an informal setting.

  • andos

    Sure Karl, yeah