China law and business eventOn Tuesday, April 18, I will be speaking on China IP at the Global Sources Summit in Hong Kong. This summit is designed to teach entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business. In 12 Business Conferences In China You Should Attend, Bay McLaughlin McLaughlin in Forbes Magazine describes it as follows:

This popular summit shows entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business. You’ll learn actionable strategies to grow your Amazon seller business and get insider tips on successful China importing. With over 3,000 booths this conference in huge! It will be held April 17-19, 2017, in Hong Kong.

I will be speaking Tuesday, April 18 on “How to Protect Your IP From China, Especially From Your Own Manufacturer,” focusing on the following:

  • How to choose the right China manufacturer
  • How to identify the IP assets you need to protect
  • How to structure your China manufacturing deal
  • How to draft your China manufacturing contracts to protect your IP
  • What you should know about trademarks, patents, copyrights, and licensing agreements
  • What to do when you’ve been copied

You can register for the Global Sources event here.

I will then cross the bay to speak in the middle of the afternoon on April 21 at Global From Asia’s Cross Border Summit, whose theme is “Grow Your Business in Asia.” This event too made Forbes Magazine’s top 12 for China list and Forbes justifies this choice as follows:

Held in Shenzhen, China, on 21-22 April, 2017, this event encourages international participation among industry leaders in cross border commerce between China and the rest of the world with content related to marketing, management, manufacturing, and technology. There are numerous roundtable discussions and networking sessions to encourage collaboration and idea generation. This event is hosted by Global From Asia, which also has a fantastic podcast about doing business in China.

My talk will be on “Global IP, In and Out of China: Protecting your brand via trademarks, inside China and globally.” You can register for the Cross Border Summit here.

Both events have a plethora of great speakers and I hope to see you at one or both of them.

China trademark registrationFor many years, China has sought to wield the sort of “soft power” that comes naturally to many other developed nations: power not from military or economic might, but from having ideas and cultural exports that are popular in other countries. China has no shortage of ideas or culture, but few people outside China are interested in either, with the notable exception of Chinese food.

Most people outside China can’t name a single Chinese brand. Not one Chinese brand! It’s sad, but perhaps not that surprising. I’ve seen a range of explanations, usually some variation on the following: China doesn’t understand foreign markets; China doesn’t care about foreign markets; China can only copy products, not create them; and China’s authoritarian government stifles creativity. All of these explanations have some element of truth, but aren’t the whole truth. And though China hasn’t broken through on the world stage yet, to many observers it’s only a matter of time.

In fact, it may have already happened. The hottest thing in popular music is the app musical.ly, which allows users to create and share a 15-second video of them lip-syncing to a popular song. As a recent Rolling Stone headline put it, musical.ly has become “too big for pop to ignore,” and it is not only a way for existing pop stars to connect with their fans but also a platform for new stars to emerge. The app has more than 133 million users worldwide, is massively popular in the US (the company claims half of all US teens are users), and is a serious rival to Snapchat, Twitter, and Instagram. And it is 100% Chinese, developed in Shanghai by two Chinese programmers who returned to China after working in California.

Did the founders of musical.ly crack the code, or just get lucky? It’s too early to tell, but thus far the one place where musical.ly has launched and failed to catch on is … wait for it … China. Meanwhile, do the millions of American teens using musical.ly know it’s a Chinese app? Do they even care? My guess is that very few know, and even fewer care. And that’s just the way China should want it. Only when Chinese products are accepted on their own merits can they form the basis for soft power.

Meanwhile, musical.ly waited until September of last year to file for trademark protection in China, which is about two years too late considering that the app was launched in 2014. Luckily for them, no trademark squatters filed in the interim; a bit shocking to me, but perhaps that’s the upside of not being successful in China. I’m not sure if it’s gratifying or discouraging to see Chinese firms make the same mistakes as foreign firms when it comes to trademarks in China, but I’m leaning toward the latter. Especially when the Chinese firms are backed by VC money and represented by multinational law firms. What are they thinking?

China trademark email

Our China lawyers regularly receive inquiries from companies (and other lawyers) asking if an email they have received from China is legit. The email usually goes something like this:

Dear [owner of US trademark]:

According to our trademark research team, the following mark has been published in the Chinese Trademark Gazette on [date]. We note that this mark is identical to a registration owned by your company.

[details of allegedly published mark]

The Chinese Trademark Office has already completed its examination of this mark and the mark is now open to opposition until [deadline]. The deadline is not extendable. If no one files an opposition before the deadline, the mark will proceed to registration.

Please let us know if we can be of assistance in opposing this mark.

[name of Chinese IP firm]

A lot of scams come out of China, including several we write about regularly: the bank account scam, the fraudulent company scam, the fake company scam, and the domain name scam. The first three are “carrots,” luring the mark with a promise of potential riches. The latter is a “stick,” offering assistance with a problem the mark didn’t know existed (and in most cases, doesn’t exist at all). And the emails described above seem to fall into the latter category of scams.

In my experience, however, these trademark emails are oftentimes not scams at all — at least not complete scams anyway. The firm sending the email is usually a real Chinese IP firm, a copycat trademark application really has been filed, and the deadline to oppose really is pending. Though the emails are a ham-handed form of business development they do sometimes provide a valuable service by alerting US trademark owners to an infringing China trademark application.

The problem is that the emails, and subsequent interactions with these firms (if any), rarely provide the proper context. Yes, under Chinese law it is possible to oppose a trademark application. But unless the applicant is your former business partner, your odds succeeding with a trademark challenge are generally not good. It doesn’t matter that the pending application is for a mark identical to your existing U.S. trademark registration. China is a first to file country for trademarks and that means that if you wanted to protect your mark in China, you should have filed an application in China before anyone else had the chance to do so. See Register your China Trademark NOW.

Recent decisions have given a glimmer of hope to owners of famous brands and to owners opposing applications filed by notorious trademark squatters, but those exceptions are limited. For the majority of trademark owners, filing a trademark opposition will not make sense. And that’s the point. If you get one of these emails what you need is not a law firm (real or fake) with just one goal in mind: separating you from your money to pursue a China trademark challenge claim that may or (more likely) may not make sense to pursue. What you need instead is a clearly real China IP lawyer who is looking out for your interests.

This lawyer then can undertake the following analysis to determine whether and how it may make sense for you to challenge the purported China trademark filing of your company or brand name or logo:

  1. Determine whether there really has been such a filing.
  2. If the email you received is not true and there has been no such filing, it may still make sense for you to apply for your own China trademark(s) so as to block such future filings.
  3. If the email you received is true and an application has indeed been filed for a China trademark that matches a name or even a logo used by your company uses, the next step is to determine whether granting the China trademark will negatively impact your business and therefore worth challenging. If you are planning to have your product made in China or to sell your product or services in China or even elsewhere outside your home country, determining whether you should challenge the trademark filing will require serious legal and business analysis. But if your company just provides plumbing services in your hometown, what happens in China likely will have no impact on you and so there is no point in your spending your time and money trying to fight off a trademark filing there.
  4. If the email you received is true and the application described in that email could negatively impact your business, you then need answers to the following questions:
    1. What can you do to try to stop the trademark application from succeeding?
    2. What are your odds of being able to stop the trademark application from succeeding?
    3. What will it cost you to try to stop the trademark application from succeeding.

Before deciding if or how to proceed in China against someone who is seeking to secure a China trademark for “your” name, you should first have thorough answers to the above questions.

Even better, if you do care about what happens to your name in China, file your own China trademark application now. Your costs will be less and your odds will be greater than having to file a China trademark challenge, especially since winning such a challenge only means that you now get to file for your own trademark. This beats waiting for a Chinese IP firm to tell you that you left the barn door open.

China counterfeit lawyersThe New York Times had a fascinating piece recently on the problems small business are having with knockoffs on Chinese e-commerce sites run by Alibaba. The story presented three case studies of companies making custom products: Vintage Industrial, a 25-person furniture maker based in Phoenix, All Earz Jewelry, a 1-person online jewelry shop based in Atlanta, and Reignland Concept, a 2-person online clothing store based in Los Angeles.

These companies all discovered multiple Alibaba listings for products that had been reverse engineered based on photographs on the companies’ own websites. Finding the counterfeit listings was the easy part, not least because the infringing listings use photos from the companies’ own websites. Removing those listings, and keeping new ones from cropping back up, has proven to be difficult and time-consuming, so much so that the small business owners are at their wits’ end.

I don’t blame them. Alibaba has a platform where IP owners can request removal of infringing listings, but it’s far from user-friendly. Our firm has never failed to remove an infringing listing, but we’ve been doing it for years and we have a team of Chinese-speaking lawyers and paralegals who understand China’s laws on intellectual property.

The best strategy, of course, would be to design a product that cannot be reverse engineered from a photo. But only a few products can be designed and marketed this way. For everyone else, protecting against infringement starts with registering your IP in China, and in particular any relevant trademarks, design patents, and copyrights. Without China registered IP, asking Alibaba to take down infringing listings will usually be an exercise in frustration.

Trademarks are the easiest to understand and the most important, because as we’ve discussed ad nauseam, China is a first to file country and once your brand gains notice in China, if you haven’t already filed for it someone else will. None of the products in the Times article were even remotely famous, which just goes to show how low the bar is in terms of gaining notice in China. A brand does not need to be famous to be profitable. And here’s the thing: a canny Alibaba seller will not only use the name of the brand but also register it himself, and thereby prevent not only the “true” brand owner but also other infringers from using that brand in China.

Are you listening, startups? I ask this because it is the smaller companies that so often have the problems described in the New York Times article, not because they are small, but because they did not do the registrations necessary to help prevent such problems or to be in a position to solve them if and when they occur. Our China IP team does a lot of work for big companies as well but much of that work is like shooting fish in a barrel. We send Alibaba the proof of our client having registered its trademark or its copyright in China and the offending product comes down.

Design patents protect product designs or aesthetic appearance. In the Times article, both the furniture and jewelry could maybe be protected by a design patent. But a design patent has an absolute novelty requirement: if a product isn’t new, it isn’t eligible for patent protection. And patent protection is country-by-country, so even if the products were protected by patents in the U.S. they wouldn’t be protected in China unless the owner had also filed in China. For companies that can easily tweak their product, this problem can be easily sidestepped; make a new version and it’s eligible for a design patent.

Copyrights protect original creative works in a fixed medium. In the Times piece, the furniture and jewelry could probably also be protected by copyright. China recognizes the validity of copyrights from any WTO signatory country, but if you are serious about taking down infringing listings on Alibaba, you’ll want to register your copyright in China. It just makes the process more smoothly and it increases your chances in making the process go at all.

Unfortunately for Reignland Concept, clothing designs can be difficult to protect under IP laws. Sometimes a clothing pattern can be protected by a copyright and/or trademark (e.g., the Burberry plaid) but that is more the exception than the rule. So although Reignland Concept may legitimately feel that its clothing is being knocked off by an Alibaba, that may just be the way fashion works.

However, Reignland could almost certainly use the protection of copyright infringement in one way: when the infringing listings use the exact photographs from Reignland’s website. The clothing may not be protected by copyright, but the photographs of the clothing are. This takedown approach works when Alibaba sellers are too lazy to take their own photographs, which is shockingly often.

Small business owners should take the Times article as a shot across the bow: no one is too small to need a China IP strategy.

China Design PatentsLast year, in the midst of media hullabloo regarding Apple having lost a design patent lawsuit in China, we wrote China’s Design Patent Scourge Has Snared Apple: Nobody Panic, calling for everyone to calm down because Apple would likely prevail in the end. Well Apple just did. Prevail that is. First though a large dollop of background, taken straight from last year’s post.

Big media today has been covering Apple’s BREA design patent dispute with “a small Chinese competitor” and I woke up this morning with my inbox filled with emails from financial analysts and reporters clamoring to talk with me about this news. I assume the other China lawyers at my firm are being similarly inundated. This is obviously huge news and for more on this story, check out the following:

But first, everyone calm down and let me explain.

I went on to make clear that I did not know anything but Apple’s specific case, but felt like I did, because our own China lawyers we had seen so many facially similar design patent matters.

I do not know anything at all specific about Apple’s case. Not a thing. My law firm does not represent Apple on its IP matters, nor do we represent the Chinese company with this patent claim. Additionally, I have not looked at a single pleading in this case, nor have I discussed this case with any of the China IP attorneys in my firm who may (or probably not) know more about this case than I. This post is based on what we have seen (especially lately) happening with China design patents, which is a whole lot.

In the last six months or so, we have gone from dealing with maybe one China design patent matter a year to at least one a month. We cannot pin down this massive acceleration in design patent matters on any one thing and so we simply think that word has gotten out among Chinese companies regarding the effectiveness of engaging foreign companies in design patent disputes.

I then explained China’s design patent laws:

China law defines a design as a shape, pattern, or combination thereof or the combination of a color with a shape and pattern, with an aesthetic appeal and for industrial application. If you think this definition is incredibly vague and potentially broad enough to drive a truck through, you would be right. On top of this, China’s patent office does not “review” design patents before granting them. Or, as I love to tell our clients over the telephone, “I could probably secure a China design patent on the blue socks I am wearing right now.” When I say that, I am being intentionally dramatic, but I honestly believe my chances of securing such a design patent are not that bad.

The other things you should know about Chinese design patents are that the patent grants its holder exclusive use of the aesthetic features of a product not its functioning portion. In other words, the patent is on how the product looks; its external appearance. Not kidding, but it is quite possible that the small Chinese company with the mobile phone design patent could use its design patent against any cell phone company with a product that looks like an iPhone.

I then discussed the design patent cases our China attorneys were handling:

These cases typically start with a phone call from a Western company telling us that some company (usually a company it already knows and usually either its manufacturer or a competitor) just contacted the Western company (or the Chinese company that makes the Western company’s product) and said that the Western company’s product is violating the Chinese company’s China design patent. The Chinese company then threatens to sue the Western company for patent infringement damages and to block any of the Western company’s “infringing” product from leaving China. Needless to say, the companies that call us on these matters are more than a little bit concerned.

Though I am not going to claim that these are pleasant situations or inexpensive for our clients, but I will claim that they are not as bad as they initially appear. I have heard that China issues around ten times more design patents than the United States patent office, which reinforces my contention that I could get a China design patent for my blue socks. There is no substantive examination of a design patent application in China. Instead, all you really need to do to get a China design patent is to complete your design patent application properly. So if I complete the design patent application on my blue socks, and attach a proper and appropriate drawing of them, along with a proper power of attorney and I make the right claims regarding my having designed my blue socks and regarding their being of a new design, I almost certainly will get my design patent.

I then explained why design patents are so weak as are most design patent cases filed by Chinese company plaintiffs:

BUT, my blue sock design patent will be as weak as a kitten. And it is for this reason why China design patent actions are not as scary as they first appear and why I am calling for nobody to panic on Apple’s behalf either.

In the cases we handle nobody has yet actually had customs block their product from leaving China. The reason is because China customs generally requires a party seeking such a block to post a substantial bond. That substantial bond then becomes available to the party whose product has been blocked by customs. Again though, you want to avoid these cases if at all possible because even if you end up prevailing, you will need to incur considerable time, trouble and money to get there.

The difference between the cases we have handled and the Apple one, however, is that in our cases the Chinese companies threaten to get an order blocking our client from having its product made in China, but they never do. They never do because they know the cost of doing so is high and the likelihood of their getting such an order and having that order stick is very low. I read somewhere once that something like 70 to 90 percent of all Chinese design patents get invalidated when challenged. These Chinese companies know that if we were to challenge their design patents we would prevail, so why spend big money only to lose in the end. The Chinese company’s power comes from the design patent threat, not from reality.

In the Apple case, the Chinese company has brought a lawsuit and by doing so it has increased its threat value. Did the Chinese company do this because it has a valid patent? Or is it because it views Apple has having such deep pockets it has decided to go strong in the belief that doing so will get Apple to pay big money in settlement to end the issue? I don’t have the answers.

Most importantly, I predicted both in my blog posts (“Based … on our own history with China design patents, I am guessing Apple will prevail in the end”) and in a CNBC article in which I was interviewed, that Apple would eventually prevail.

Well guess what. Apple just did prevail before the Beijing Intellectual Property Court: “The court ruled that the regulator {that previously ruled against Apple] did not follow due procedures in ordering the ban while there was no sufficient proof to claim the designs constituted a violation of intellectual property rights.” China design patents: fear them just enough to get your own as an offensive weapon, but not too much.

China Trademarks
by Meaghan O’Malley. http://bit.ly/2nE4kcw

The Boston-based hamburger chain Wahlburgers, founded by Hollywood star Mark Wahlberg and his brothers, recently announced plans to open three restaurants in China, with an ambitious goal of opening up to 100 restaurants in China over the next ten years.

The project was announced as a joint venture between Wahlburgers and the Shanghai-based Cachet Hospitality Group. I have no opinion on the deal Wahlburgers struck (aside from a general lack of enthusiasm for joint ventures), but I do have an opinion about their trademark protection: they don’t have enough.

According to the Chinese Trademark Office website, the only trademark registration for “Wahlburgers” is in Class 43 for restaurants (餐馆). Yes, covering restaurant services is essential, but it’s really the bare minimum, and almost certainly won’t provide as much protection as Wahlburgers would want.

To understand why, it’s important to realize how the Chinese trademark system works. With few exceptions, a trademark registration for goods or services in a particular subclass only provides protection for that particular subclass. That’s a double-edged sword. It means that you don’t have to worry about your trademark being rejected because someone else has a confusingly similar trademark in another class (or even another subclass within the same class). But it also means that your trademark registration won’t prevent third parties from registering your exact trademark in other classes.

Here, Wahlburgers should have filed a trademark application to cover not only restaurants but also food. Their trademark registration prevents third parties from operating a restaurant called Wahlburgers, but has zero effect on anyone calling their hamburgers “Wahlburgers.” Moreover, anyone else could register the trademark “Wahlburgers” to cover hamburgers and other food, and then use the tagline “Home of the Wahlburgers®” on their menu and in their advertising. I’m sure that wouldn’t sit well with the Wahlbergs or with their Chinese partners.

It’s possible Wahlburgers was under an actual or imputed contractual constraint, as the US registration for “Wahlburgers” had already been licensed from Tom Wahl’s, a Rochester, NY-based hamburger chain whose website proudly proclaims it is “Home of the Wahlburger®.” But any dispute about who had the right to file trademark applications in China should have been sorted out quietly before holding a press conference to announce that Wahlburgers would be opening branches in Shanghai, Hangzhou, and Wuhan. If Chinese trademark squatters haven’t already filed applications for Wahlburgers to cover hamburgers and other food, they will soon.

It’s 2017. American companies going to China need to get their trademark act together. When you’re filing for trademarks in China, don’t think that the same rules apply as in the United States. Operate within the system as it actually is, not as you think it ought to be.

China intellectual property lawyersWhen our law firm started drafting manufacturing agreements on behalf of Western companies having their products made by Chinese manufacturers, we mostly dealt with simple items like socks, shoes, rubber duckies, etc. Those contracts were relatively fast and cheap and easy. The core of the contract was essentially something like this: “Your Chinese company will make rubber duckies out of these specific materials and with these additional specifications and you will deliver them to our facility in the United States or in Spain or in Australia within 45 days after we issue our purchase order.” Becuase these contracts were so routine and so simple, we virtually always always charged a flat fee for them.

Those days are mostly over for China, though these sorts of agreements are still relatively common for Vietnam, Cambodia, Thailand and Sri Lanka. These days the typical manufacturing agreement on which our China lawyers work is far more complicated because the products made in China are far more complicated. And with complicated products comes complicated intellectual property issues involving trade secrets, trademarks, copyrights and patents.

I called up an email this morning to review a China intellectual property issue on an existing matter. That first email led me to a couple more emails and today’s idea for a blog post. The below is a merger of three emails (further modified to remove any identifiers), which should be helpful to anyone looking to manufacture IP sensitive products in China, especially those that include software.

Oh, and for further incentive to get you to parse through the below email, go read China and The Internet of Things and How to Destroy Your Own Company to see what can happen if you fail to realize how critical intellectual property protections have become when having your products made in China.

 

We still need more clarification regarding the issue of ownership of the various technologies that will be going into your product.

Based on my review, there are four separate forms of technology embodied in this single product:

  1. The case or external shell.
  2. The internal mechanism: electrical/mechanical.
  3. The internal mechanism: firmware.
  4. The smartphone/computer application software.

Based on this, my questions are as follows:

1. For the external shell (Item 1):

a. Who will do the design? Who will prepare the actual CAD drawings for the mold? Who will fabricate the physical molds?

b. How and when will you pay for the molds to be made? Will you do this as part of a separate contract or will you fold this process into the manufacturing agreement?

c. Note that you will need to be clear that you own the shell design. If it will be done before/outside the manufacturing agreement, we will a clear document that provides for ownership and control. Note that if a third party does the mold (which is likely), there is a risk of the third party appropriating the design and selling it to someone else. However, for this specialized product, the risk is low.

2. For the application software (Item 4):

a. Who will create the application software? If it will be outsourced, you need to know. If it will be done in-house, will it be done by _________? You need to know.

b. Has a fee and timeline been determined for the software application? If so, what is it? If not, when will this be done?

c. What if the application software does not work? What if the application software does not have the “look and feel” you want? How will you work with the programmers to ensure all this is done how you want?

d. The fee, once determined, will be amortized against the purchase of the first 200 units. Does this mean the price of each of the first 200 units will be increased by 1/200 of the application software fee? What happens if you never buy more than 200 units? What happens if you end up buying only 100 units? You need to determine the fee to be sure this makes economic sense for you.

e. Will you own the application software copyright for the entire world? If so, we will need to specifically provide that the application software will be done as a “work for hire” and that your company will own the copyright on it. If you own the copyright, the Chinese side cannot sell the software to anyone else or use it for their own purposes. Will they agree to this? If the Chinese side is sophisticated, they will NOT provide you with the software copyright because they plan to reuse the core software for other projects. In fact, they may not even own the copyright to the core software. They may instead agree only to provide you with the rights to the “look and feel.”  Many U.S. buyers ignore these software issues, leading to many problems down the road. You may recall that the multi-billion dollar legal battle between Apple and Samsung is centered on these difficult “look and feel” issues.

3. For the electro-mechanical/firmware (Items 2 and 3).

It is not clear who will own and control this item because there is an internal contradiction in the description. On the one hand, the Chinese side says it will provide you with all data necessary for your company to patent and copyright items 2 and 3 in the U.S. (Note that firmware is protected by copyright, as are mask works and related). This means you would then own 100% of the rights to items 2 and 3 for the United States: permanently and forever, to the exclusion of everyone, including _________. This means you would not even be required to purchase the product from ________ because you could have it manufactured by anyone in any location where a conflicting patent and copyright has not been registered. It also means even if you do not secure a patent or copyright on this, you still have an exclusive and perpetual license to the technology for the U.S. This perpetual license would have essentially the same effect as a patent or copyright registration with respect to your relation to __________ and its attempts to license to any third parties in the future. The point here is that a patent is not revokable; once you have it, it is yours for the term. On the other hand, the Chinese side wants to have the right to allow other U.S. entities to make use of the technology to sell competing products in the United States if your company does not meet certain sales quotas. Under this approach, the Chinese side is providing you with essentially a limited license with these terms: a) the product must be purchased from _________ and no one else, b) your sales territory is limited to the United Sates, and c) your license terminates if you fail to meet the sales quota. This has in fact become the normal approach for sophisticated Chinese companies making products like yours.

The issue though is that these two approaches are contradictory. Only one can stand. So which one is it? As I have noted, the second option (limited license) is most common. However, that means your company’s product development would be placed on a very weak footing because your entire product line could be terminated if you fail to meet the sales quotas. This termination could come either from the license becoming non-exclusive, (allowing the Chinese side to license to and manufacture for other U.S. companies) or from the Chinese side terminating the agreement.

This issue goes to the core of your agreement and so it is crucial that we get clear on on this for the agreement. As noted, most Chinese manufacturers/designers will take the limited license approach instead of terminating the agreement. If this is their approach here, their offer to provide you information for a patent application is not consistent because a limited license and absolute ownership rights are contradictory.

4. There is an additional issue related to the rights of non-U.S. entities to sell into the U.S. market. This can only be resolved after we get answers to the questions above.

5. There is an additional issue concerning what to do if _________ is unable or unwilling to manufacture your product at an acceptable price, at acceptable quantities, with acceptable delivery dates and at an acceptable level of quality. If ________ owns the core technology and is merely providing you with a limited license you could find yourself “stuck” with bad pricing, bad quantities, bad delivery times and/or bad quality products. The normal remedy would be for us to state that if any of the above problems occur, you have the right to have your product made by some other manufacturer and that ________ will provide you with a license to the technology that will allow this. Though this is the normal remedy, many Chinese manufacturers strongly resist this, putting you in a difficult position. You have indicated that ____________ will be required to accept purchase orders that meet the price agreement. You have also provided for penalties for late delivery and for defect issues. Though this is not ideal, it may be the best you can do in your current bargaining position. So the key issue is whether you are required to purchase from __________ or not. If you are required to purchase exclusively from ___________, you will need to face the fact that you are in a very weak bargaining position on many critical business issues and ____________ can fairly easily make life difficult for you by forcing you to fail to meet the sales quotas that will then enable it to start working with U.S. company that competes with you.

Please advise on the above. After we get clear on these various issues, I can begin drafting the agreement. I realize these issues are difficult, but it it is best to take a clear position from the start. Please let me know if you have any questions or if you need any additional explanations.

China IP LawyersOur China lawyers do the legal work on all sorts of transactions with China, ranging from relatively simply manufacturing contracts to purchase widgets to relatively complicated joint venture deals to technology licensing deals to mergers and acquisitions (involving both the purchasing of a Chinese company by a Western company to the purchasing of a Western company by a Chinese company). Nearly all of these deals have one thing in common: intellectual property. And on many (most?) of these deals, our lawyers will be far more skeptical of the intentions of the Chinese side than will our clients. We are perpetually concerned that the overriding goal of the Chinese side is to walk away with our client’s intellectual property without fairly compensating our client for that. That leads us to today’s question, which is one we are constantly asked in some form resembling the following: Do you really think XYZ Chinese company wants to steal our IP? To which the answer is pretty much invariably yes.

You can give all sorts of politically correct or politically incorrect answers as to why this is so, but it generally is. The answer I give is that Western companies want to steal your IP also, but because IP laws in the West are more developed and more likely to be enforced, their cost-benefit analysis is going to be different and so it will far less often make sense for them to try to steal your IP than it will for a Chinese company.

I was reminded of this ultra-common question today upon reading Mark Cohen’s always good China IPR Blog and his most recent post, entitled, Stealing IP from the Steel Sector. Mark’s post is about another article, Make the Foreign Serve China: How Foreign Science and Technology Helped China Dominate Global Metallurgical Industries, by Michael Komesaroff. Komesaroff nicely sums up China’s general thinking on IP with the following:

Chinese companies will infringe the proprietary technology of national champions as readily as they do to foreign competitors and the absence of an enforced intellectual property law accelerates diffusion of any new technology….with an endless supply of smart engineers and scientists, why pay for technology, something that you cannot touch, see, taste, or smell.

A reporter called me yesterday to check in on the “hot topic’ issues my firm’s China attorneys have been seeing lately. I told her of how my firm was getting a ton of matters involving Chinese companies claiming to want to invest in or buy out US technology companies, but in many instances, just using that claim as an excuse to “kick the tires” to see if there might be some way they can walk off our client’s technology for little to nothing. Just a more recent version of what Komesaroff describes in his article. For more on how Chinese companies have updated (but only slightly) their tactics of making off with Western IP and, more importantly, how to prevent that from happening to you, I urge you to check out the following.

Oh, and be careful out there.

China NNN Agreement and China Product Development Agreement
Eight China counterfeiting myths go up in flames

1. There’s no way to protect my brand in China against counterfeits, so I may as well not try. This is both false and self-defeating. China offers a number of ways to protect your IP, and is getting better every year. The first and most important step is to file a trademark application in China as soon as possible to cover your goods and/or services. This will provide you with a first line of defense against counterfeiters and trademark squatters. Once your trademark is registered you will be able to submit takedown requests to Chinese e-commerce sites, request Chinese customs to seize goods, and bring lawsuits for trademark infringement. And, at the same time as you file your trademark application, you can begin to craft a comprehensive IP protection strategy that incorporates copyright and patent registrations.

2. My Chinese trademark registration for my blockbuster movie will allow me to take action against people using “my” trademark on other goods, like clothing or breakfast cereal or toilets. Trademark protection in China is limited by the classes and subclasses of goods and services covered by your registration. If you want protection for other products, you need to register in the appropriate classes AND subclasses to cover those products. For some companies this means registering in all 45 classes. For other companies it means figuring out which products or services you really, really don’t want someone else to be selling under your name. And for most everyone, it is critical to file directly in China and not in Madrid.

3. You can remove counterfeit goods from Chinese e-commerce websites with a US trademark. Alibaba has been amenable to removing listings from Alibaba and Aliexpress, its foreign-facing sites, with just a US or a European trademark registration. But to remove listings from domestic Chinese e-commerce sites like Taobao and 1688.com you typically must have a Chinese trademark registration. Many other e-commerce or social networking sites require a Chinese trademark registration and every site will take action more quickly with one. When counterfeit goods of your product are being sold, time is literally money.

4. China is the biggest source of counterfeit goods in the world. Totally true. According to the 2016 annual report from the U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI), more than 80% of all seized merchandise that infringed intellectual property rights came from either China or Hong Kong.

5. Chinese customs will seize counterfeit goods even if you only have a US trademark. Trademarks are national in scope, and with few exceptions a US trademark has no relevance in China. It certainly means nothing to Chinese customs. Imagine trying to convince U.S. Customs and Border Patrol to seize goods based on a Chinese trademark registration. It would never happen. If you want to be able to have Chinese customs seize infringing goods you need to have a Chinese trademark registration and you need to have registered that trademark again with Chinese customs.

6. The only way to have Chinese-made counterfeit goods seized is when they come in to the United States. U.S. Customs does actively inspect incoming shipments, but Chinese customs also actively inspects outgoing shipments. If you can provide the who, when, and where details about an upcoming shipment of infringing merchandise, you can have that merchandise seized by China customs.

7. My brand is famous outside China so that means the Chinese government will take action against counterfeit goods. No. Just no. The only way to be sure you have trademark rights in China is to register your trademark in China.

8. If I have my products manufactured in China, there’s nothing I can do to stop my manufacturer from selling them out the back door. Wrong. There is a lot you can contractually do to prevent your own manufacturer(s) from selling your own products as its products, starting with a China-centric NNN Agreement and/or NNN provisions in your manufacturing agreement. Using a China Product Development Agreement also often makes sense when you are in the early stages with your China manufacturer.

China copyright lawsFormally, China’s copyright laws have been in line with those of the United States and other developed countries since China became a signatory to the Berne Convention in 1992 and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 2001. But it’s hardly news that you can get a pirated copy of pretty much any movie, CD, or book in China with only a modicum of effort. Years ago you could find bootleg DVDs outside nearly every supermarket and mall in the country. Nowadays it’s more difficult to find such sellers, but not because of China’s efforts to curtail counterfeit goods; it’s because the market has moved to the Internet.

But as China’s homegrown media companies like Baidu, Alibaba, and Tencent continue to pay serious money for the rights to stream tv shows, movies, and other copyrighted material, more lawsuits are being filed in Chinese courts seeking to enforce China’s copyright law, and more official efforts are underway to reduce the amount of pirated material available in China. A (slightly) more subtle form of copyright infringement is still thriving, however: creative works that coopt key elements from copyrighted material, from storylines to characters to music cues and beyond. Television shows in China will make a few slight changes to a copyrighted format and then insist it is an entirely new creation, as with The Voice of China last year. It’s not always clearly a copyright dodge, either; the popular Chinese singing competition I Am a Singer (我是歌手) is an official licensee of a copyrighted  Korean format – or was, until the title and format were altered recently in the midst of China’s unofficial restrictions on Korean content. Presumably it is no longer considered a Korean-content show, which as a side benefit probably means the show cannot be held liable for copyright infringement.

Chinese manufacturers have long excelled at taking the key elements of an existing product and incorporating them into a “new” product. So it’s no surprise that the same thing happens in entertainment. It’s been happening for decades with the most famous story in China, the 16th century novel “Journey to the West,” which has been adapted into a movie or tv series dozens of times. We complain in America about the overwhelming number of sequels and superhero movies, but at least most of them have a different plot. This would be like having one of our greatest stories – you know, like Point Break – remade multiple times in different formats every year for forty years.

It’s important to understand, however, that Chinese law prohibits the unauthorized use of a copyrighted work, or elements thereof, unless such use falls under one of the twelve specific exceptions listed in Article 22 of China’s Copyright Law:

(1) personal use;

(2) “appropriate” quotation in order to introduce, comment on, or explain;

(3) media use to report current events;

(4) republishing or rebroadcasting of another media entity’s story;

(5) publishing or broadcasting a public speech;

(6) translation or reproduction of a scientific work solely for use in teaching or research;

(7) use by a government entity “to a justifiable extent for the purpose of fulfilling its official duties”;

(8) reproduction of a work in its collections by a library, museum, etc. for display or preservation purposes;

(9) a free live performance;

(10) copying, drawing, photographing or video-recording a public artwork;

(11) translation of a Chinese citizen’s work from Mandarin into a Chinese minority language, for distribution in China; and

(12) transliteration of a published work into braille for publication.

The above exceptions are similar to the American concept of “fair use,” a doctrine that allows for unlicensed use of copyrighted material under certain conditions.

Although not always interpreted consistently, China’s fair use exceptions are quite limited. When you’re watching a Chinese reality show and hear a dozen music cues lifted from American pop songs, that’s not fair use. When you’re watching a Chinese television show that seems exactly like Mad About You, that’s not fair use either. That leaves copyright infringement (the former) and legal licensing of a copyrighted format (the latter).

As the value of copyrighted material in China increases, it’s increasingly important to take a broader view of IP protection. Licensing TV shows to China is a big and growing business. Anti-piracy efforts are still important, but it’s even more important to have a properly drafted license agreement. And to take legal action when you find another media company using your copyrighted material. If you don’t protect your own IP, who will?