What with we lawyers needing to complete our Continuing Legal Education (CLE) credits before the end of the year, my November and December are jam-packed with speaking engagements.  In the hope that some of our readers will be able to attend one or more of these events, I will briefly set them out here now and then discuss them in greater detail in the coming days/weeks. We are always getting emails from readers looking for “good China conferences” and this post is in answer to those, with an international trade conference thrown in for good measure.

1.  November 8, 2012, Chicago, Illinois.  I will be on a panel at the 2012 PLUS International Conference discussing “The Evolution of D&O Insurance in Asia.”  I will mostly discuss the risks that foreign companies have been facing of late in China, arising, at least in part from the downturn in China’s economy.  My short speech will deal with some of the same issues raised in my recent Wall Street Journal article, “China’s Slowdown and American Business,” but focus more on insurable risks. My co-panelists will be the following:

2.  November 12, 2012, Seattle, Washington.  I will be moderating a panel at the Annual Washington Trade Conference, put on by the Washington Council on International Trade.   The entire day is devoted to international trade policy.  Governor Christine Gregoire, Senators Maria Cantwell and Patty Murray, Commissioner Meredith Broadbent of the U.S. International Trade Commission, and U.S. Representative Adam Smith, are all on the program.  My panel is on “Challenges and Opportunities for Washington Services Exports” and it consists of the following:

3.  November 15, 2012, San Juan, Puerto Rico.  I will be speaking on  “What You Need to Think About When Doing Business in China – A Legal Perspective” at the 19th World Offshore Convention.

This is an excellent conference, at which I spoke in Shanghai last year. Last year’s conference lived up to this year’s promise to “reveal real life, tried and tested solutions together with bold alternative strategies for those forward thinking international financial professionals and wealth managers committed to being at the forefront of this ever changing industry.”

4. December 7, 2012, New York City.  I will be speaking on China IP at a conference on Protecting Intellectual Property in a Global Economy – Was it Made in China and Stolen from America? This conference is being put on jointly by HB Litigation Conferences and Bloomberg BNA.  I have spoken previously at HB Litigation conferences and they have been uniformly excellent.  The upcoming conference is to have the following “eight central topics”:

  1. The Threat to U.S. Companies Posed by Foreign Entities
  2. Economic Espionage Act Prosecutions
  3. Understanding the Eastern Business and Cultural Perspective
  4. Litigating an Infringement Case with a Chinese Company
  5. Evaluating the Threat of Computer Hacking
  6. The Dangers of Counterfeiting
  7. Protecting Intellectual Property in China
  8. Negotiating Supply Chain Agreements

The conference is being chaired by August J. Matteis, Jr. and Peter J. Toren of Wesibrod Matteis & Copley and Beau Oliver, and Sean Page of Toffler Associates. Matteis and Toren were the winning lawyers in a recent USD$26 million copyright/design misappropriation case against a Chinese tire manufacturer.  The following people are also on the faculty:

  • Helene Kim, Executive Director of International & Executive Legal Programs at UC-Berkeley Law School
  • Julie Myers Wood, President of Compliance, Federal Practice and Software Solutions for Guidepost Solutions
  • Paul Maric with the Federal Bureau of Investigation’s Economic Espionage Unit.
  • Spring Chang, Attorney at the China law firm Chang Tsi & Partner
  • John Falk, President and CEO of Vigilent Inc
  • Donald McPhail, Attorney at Cozen O’Connor
  • John Gibbons, Senior Managing Director of Investigations at Guidepost Solutions
  • Shaun Kennedy, Director of the National Center for Food Protection & Defense
  • Angelo Mazza, Attorney at Gibney, Anthony & Flaherty
  • Stephen Weisbrod, Attorney at Weisbrod Matteis & Copley
  • Jordan Fishman, Inventor of the tires at issue in the USD$26M case mentioned above.

I will be writing more on this conference shortly, but right now I urge you to attend by writing to HB’s Managing Director Tom Hagy at tom.hagy@litigationconferences.com or by calling him at (610) 312-4754.  Tom has promised me that if you mention “China Law Blog” he will give you a “special price.”

5.  December 13, 2012, Seattle, Washington.  I will be co-chairing a seminar on “The China Market: Selling Products and Services in the New China.”  As you can tell by the seminar’s name, its focus will be on China as a place to make money, not so much to save money.  I will be writing more on this conference as it approaches.

If anyone has any questions regarding any of the above, please let me know.  Otherwise, I will see you there.

By: Steve Dickinson

The PRC State Council Information Office just published  a White Paper on Judicial Reform in China. The purpose of the White Paper is to provide a snapshot view of the progress of legal reform in China over the past ten years. Readers who are interested in the current state of the Chinese legal system and the projection of future trends should take a look. Even for those who do not fully agree with the assessment will benefit by seeing what the top level of the Chinese government believes is important about China’s legal system and its future development.

Four issues raised in the White Paper are of particular interest to foreign investors in China:

1.  The number of lawyers and lawsuits is rapidly increasing. This is contrary to what many foreign investors believe and the implications of this must be understood. The White Paper provides the following basic statistics:

  • There are currently 18,200 law firms in China, up 31.6% from 2000
  • There are 210,000 lawyers registered in China.
  • In 2011, Chinese lawyers acted as counselors for 392,000 clients, up 24.6% from 2008.
  • Chinese lawyers handled 2.315 million litigation cases in 2011, up 17.7% from 2008.

The White Paper does not mention that the number of judges in China has remained static at about 200,000 over this same period.  This has meant an increasing workload for the judges and has negatively affected the quality of decisions. Nonetheless, Chinese people are still making active use of the court system to resolve disputes.

Most foreign business people are unaware of the large amount of litigation that occurs in China and tend to believe that they will never be sued. They therefore do not prepare for lawsuits and, when sued, they do not take the matter seriously and often do not respond promptly and effectively. This is a mistake. As the numbers above show, there are a lot of lawyers in China and they make their money suing people. When a dispute arises, the likelihood of being sued in China is actually quite high. Far higher for example than in Japan or in Korea.

2. China has made major progress in the administration of civil justice.

The improvements fall into four areas:

1) The functions of case filing, trial and execution have been clearly separated. The major change here is in the substantial improvements in executing on judgments. Though this may sound like a purely technical issue, it actually has important practical consequences for foreign companies doing business. Criticisms of the Chinese legal system often center on the difficulty in enforcing judgments. As a result of recent reforms, most Chinese courts have a created a department that focuses exclusively on enforcement. This has resulted in substantial improvement in the enforcement of monetary awards in most major jurisdictions. In addition, pre-judgment attachment of assets has become much more effective, adding a major tool for enforcing monetary awards. For foreign investors, this change cuts both ways. It has made litigation against Chinese companies more attractive since the Chinese company now has a real fear that any judgment will be enforced against it by seizure and sale of assets. On the other hand, it means that where the foreign party is a defendant, there is now a substantial risk that an adverse decision will have a strong negative impact. We are already seeing the impact of this in the willingness of Chinese companies to settle our clients claims against them.

2) The application of the law has been clarified through legal guidance. China is a civil law system, meaning that decided cases are not binding. This lack of case law precedent is often cited as a weakness of the Chinese system, since the laws are written in a sketchy and often vague manner. The Chinese themselves have recognized that weakness and have filled the gap in two ways. First, the Supreme People’s Court regularly issues binding guidelines on the interpretation of important statutes. Second, the SPC and local high courts regularly publish authoritative cases with extensive commentary. These measures have been well received by Chinese lawyers and judges and have substantially improved clarity in the interpretation of Chinese laws. This too has led to Chinese companies focusing on settling claims so as to avoid being sued and losing.

3) Standardization in awards.

The Supreme Court has worked to achieve greater certainty and predictability in damage awards in civil cases. This removes much uncertainty in the litigation process and it also decreases opportunities for local judges to engage in bribery or other unacceptable practices.

4). Case management has been improved.

China’s major courts have installed modern case management systems. Many courts now use an on-line management system that allow parties to independently monitor the progress of a case. In many jurisdictions, streamlined case systems have been adopted that allow for quickly resolving simple matters and small claim matters. The result of all this is that Chinese lawsuits proceed to trial much faster than is common elsewhere in the world. This speed can take foreign parties very much by surprise. A Chinese lawsuit can be filed and tried in the time it takes merely to provide an answer in North American and European courts. From my experience, Chinese courts are not concerned about the thorough preparation of a case. They are more concerned that a case be heard quickly. The Chinese court motto seems to be “Justice delayed is justice denied.” Foreign investors need to take this into account. When service of a lawsuit is received, the defendant must respond immediately. There is no room for delay.

In part two, we will discuss the impact of China’s legal reforms on criminal cases.

 

This is the final part 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 How To Protect Your IP From China. Part 3, I looked at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

In How To Protect Your IP From China. Part 4, I wrote on the basics of what goes into Chinese contracts, particularly those related to protecting your intellectual property.

In this part 5, I discuss some of the most common situations companies face where they must focus on protecting their IP.

  • Employees

Confidentiality agreements. In China, unlike in the United States, it is the norm to have a written employment contract with all employees. This is because not having a written agreement can lead to having to pay a year or more in salary to anyone you terminate.  You should use the written contract to your advantage by putting in a confidentiality provision that sets out your company information that must be kept confidential. Confidentiality agreements can protect company information that may not rise to the level of a trade secret, but they cannot be so broad as to protect everything.  China actually has very sophisticated trade secret laws — they come the US’s Uniform Trade Secrets Act — and the courts there are not bad at all in ruling favorably in favor of employers on confidentiality and trade secret cases.  But for you to be able to prevail, just as in the United States, the information you are seeking to keep confidential must have commercial value and you must make a reasonable effort to keep it away from the public.

Non Compete Agreements – These generally work in China only with very high level employees.  Very high level. And even then, they are enforceable only if they are: (1) not too long in duration and no longer than two years; (2) not too large in terms of geographic scope: and (3) do not restrain too much the employee’s opportunity to pursue his or her occupation.  Now here’s the real kicker on these:  you must pay your employee for the non-compete after his or her termination.  Limited to two years.  Typically, you must pay 20 to 50% of the employee’s salary, with the amount depending on the location in China.

Nonsolicitation agreements. Nonsolicitation agreements prevent employees from soliciting customers, former co-workers and/or agents upon separation from the company. These are usually enforced by China’s courts so long as they only prevent solicitation of the employer’s customers or accounts that existed at the time the employee left and so long as they are limited in duration and in geographic area.

It can be critical — especially for your employees doing R&D — that your employee contracts set forth who owns any intellectual property your employees help develop. You want a provision in your contract making clear that all IP developed by your employees belongs to the company and you want that because in China you run the real risk of your employees claiming ownership of what they developed. We also like to see a provision in the employee manual saying that any IP developed by company employees belongs to the company.

Contracts with your Chinese Distributers, Manufacturers, Joint Venture Partners, and Licensees should include the same sort of provisions relating to non-compete, non-solicition, and non-disclosure and they also should be clear about who owns what with respect to any IP.

 

  • Licensing Contracts

Three things you should be thinking about if you are licensing your IP to a Chinese company.

  1. Be careful about getting paid based on sales, unless you have some really good way of knowing what the sales really are.
  2. Get what you need to do the deal before you relinquish the technology.  Figure that the Chinese company will stop paying you after it has secured your technology.
  3. Register your licensing agreement with the proper governmental agency.  If you don’t, you run the risk of not being able to sue on it.
  • IP Registrations 

Just as in the US, you should register your IP in China to protect it.  There is no way can I go into great detail on what you can and should do to protect your IP in China through registration, but what I can tell you is that it almost always makes sense to do something.  Earlier I talked about how bad China is on IP and that is true, but if you have not done the proper registrations, you pretty much have zero chance of protecting your IP.  If you have done the proper registration, your chances are considerably better.

China’s IP registration and protection system is in many ways not all that different from that in the US.  Just as is the case here, China has patents, trademarks and copyrights.

Patents. China has invention patents, utility patents and design patents.  Invention patents are thoroughly reviewed before they are granted and so they can take quite a while.  Because of this, many companies will secure a quicker utility or design patent while waiting until their invention patent comes through.  Couple things you need to know about patents in China. First, if you do not file for your patent in China within a year of filing for it in the United States, you will be too late. China is a signatory of the Patent Cooperation Treaty and the Paris Convention, but Chinese patent lawyers tell me that it is better to file your patent in China.

China has had compulsory licensing of patents since 2001, but earlier this year the Chinese government came out with detailed criteria for the granting of compulsory licenses and that threw many into a panic, believing that the government was instituting compulsory licensing for the first time. These new rules really did not change much of anything and as far as I know, China has not in the last ten years required any company to compulsorily license its IP.

Trademarks are unique names, symbols, or logos. Can include colors. We trademarked a particular color of screws for a client. Don’t underrate trademarks in China. These work in China. China is a first to file country, not a first to use country, so generally, whoever files first for a trademark gets it. Trademarks cannot be place names. This is a bigger problem than you might initially think.  Another problem is that the people at China’s trademark office usually view acronyms as images and so if your company name is something like EVO and someone else has already registered the company name ECO, there is a very good chance your EVO name will be rejected as conflicting with ECO, because to someone who cannot read English, the two names look too much alike.  What this means is that if you have a two or three letter company or brand name, you had better try to register it now because it will only get tougher.  We used to get these approved all the time, but in the last year, we are succeeding only around 50 percent of the time.

Copyrights.  A lot cheaper and easier to obtain than patents and they last a lot longer. Very similar to the US. You do not need to file for a copyright in China to have a China copyright, as they arise automatically upon creation of a work created or first published in China, but you do need to have a registered copyright to sue on it and that’s the catch. In China, it takes so long to secure the registration of a copyright that if you are going to want to protect your copyright in China, you should file for it right away, because if you wait until you have a problem to file for the copyright, you may have a one-year lag before you can do much about it. Just like in the US, you don’t have to reveal all of your material in the copyright filing.  This is particularly important for something like computer code.

Stopping IP Theft.  If you have registered IP, and someone in China tries to use it without authorization, you can seek an administrative remedy by trying to get the Chinese government to do something about it or you can sue for damages. You also can try to get Chinese customs to stop any violating goods from leaving the country and, if you have your IP registered here, you can try to get US customs to stop it from entering into the US.

 

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.

Last month I gave a speech at a leading biotechnology conference in Washington DC on how to protect your IP from China.  Over the next few days, I am going to re-print that speech (in parts) here on this blog.  This is part 2 of that series.  Part 1 can be found here.  Please recognize that this is a speech, not a paper. Please also recognize that a PowerPoint originally accompanied this, but I am going to modify this speech so that ought not to matter.

Let’s say you have made the decision to do business with china, what can you do to reduce your IP risks?  As we lawyers so love to say, that is going to depend to a large extent on your particular factual situation.

Biotech companies generally get involved with China in one of five ways.

  1. They set up their own manufacturing in China or they have someone already there manufacture product for them.
  2. They conduct R&D in China.
  3. They enter into a China Joint Venture
  4. They license their technology to China
  5. They set up their own company in China for sales or they sell through a distributer

Though there are, of course, particular protections you can and should employ depending on what you are doing in China, it will almost always make sense for you do to do the following four things.

  • Do business with the right people in China. Companies with nothing to lose are far more likely to take your IP than those with established businesses and reputations and incentives for not getting sued.
  • Think about what you have that needs protecting. What do you have that others want? What do you have that your competitors would love to get their hands on? Is it your technology?  Your customers?  Your brand?
  • Figure out how you (not your lawyer) can protect what needs protecting. Can you break into subparts whatever it is that you want to protect so that nobody in China gets access to the full thing? Can you get away with sending an older version to China? Can you lock it down in your building in China or on one computer such that your employees cannot leave with it? Can you keep the key portions on a server in the US?  These sorts of protections are usually called structural protections and they can be absolutely critical.
  • Consult with your lawyer on the legal steps you can take to protect your IP.  Oh, and this should go without saying, but – unfortunately, the frenzied phone calls I get at least once a month after the horse has been let out of the barn tell me that it does require saying – talk with your lawyers early on in the process, not when it is too late.

I am going to focus today on the legal aspects of protecting your China IP.  In trying to figure out what can be done to protect IP as a lawyer, I am always thinking about the following:

  • What can get stolen
  • How something can get stolen
  • Who is likely steal it, and
  • What can be done by to protect it

You should be constantly thinking about these things as well.

With these various things in mind, I look at the nature of the transaction itself to see if there might be a better way to structure it.  For example, because I see joint venture deals as inherently risky for American companies — and not just for their IP risks — whenever a company comes to me wanting to do a China Joint Venture, I typically discuss with them other ways they might structure their deal while still accomplishing their goals. Might the US Company licensing its technology to the proposed Chinese joint venture partner make better sense?  Can the US Company go it alone in China? A lot of analysis goes into determining whether a joint venture makes sense, particularly for biotech companies who often need to establish close relationships with Chinese companies that can help them secure Chinese regulatory approval and market their products in China.

In any deal, I always try to figure out what can be done to incentivize the Chinese company not to take the foreign IP and run. What can go into the deal and the contract that will make the Chinese company believe that it will make more money by sticking with its American partner and than by jettisoning it? Should the American company promise future IP if certain goals or quotas are met?  Should the American company promise monetary bonuses in future years if all goes well?  What can keep the relationship between the American company and the Chinese company alive so as to decrease the IP risks.

It then comes down to two things on the legal side. One, properly drafted contracts with the proper people.  And two, proper IP registrations in China.

The contracts are to protect against those with whom you are directly doing business – in other words, against the Chinese companies that sign them. The IP registrations are to protect you against those same people and against everyone else as well.

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.

Last month I gave a speech at a leading biotechnology conference in Washington DC on how to protect your IP from China.  Over the next few days, I am going to re-print that speech (in parts) here on this blog.  As you have probably already guessed, this is part 1.  Please recognize that this is a speech, not a paper. Please also recognize that a PowerPoint originally accompanied this, but I am going to modify this speech so that ought not to matter.

If you are doing business with or in China, you have to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.

I am NOT saying that every Chinese company will try to take your IP all the time, but I am saying that if it is in the best interests of a Chinese company to take your IP, it almost certainly will try to do so.  And the Chinese government to a large extent just goes along with this. As recently as 2010, the Chinese Academy of Sciences’ annual report essentially said that because China is not so good at innovating it needs to do what it can to get our technology from others.  In 2006, China’s Medium and Long-Term Plan for Science and Technology Development stated that if foreign companies want to compete for government contracts they must transfer their IP to their Chinese partners. International outcry eventually led to this policy being cancelled, but so what?  The Chinese government’s desire to see Chinese companies secure foreign technology and its favoritism towards Chinese companies remains.

China’s courts are not particularly good venues for pursuing IP theft.  They are reluctant to award lost profits (this is true for both domestic and foreign companies) and they tend not to be comfortable with large damages claims.  On top of this, the damages available for IP theft are somewhat limited in that they are usually confined to the amount of lost sales in China, not worldwide.  I remember a big victory for NIKE in an IP case a few years ago against someone who had been making huge amounts of fake NIKEs.  I think the damage award was something like $75,000.  It is also extremely difficult to get a Chinese court to order someone to stop using your IP unless and until you prevail at trial.  And if you are in a court outside Shanghai or Beijing or a few other cities, you should count on home-town favoritism operating against you.

Some of you have no doubt heard that IP protection is getting better in China. And it is. A bit.  But again so what?  You are still at major risk and you have to operate accordingly.  Even if you think I am being too harsh in my assessment of IP in China or even if you think I am just flat out wrong, it still behooves you to at least act as though every Chinese company is a mortal threat to your IP.

So what can you do to ensure that your IP does not get taken by a Chinese company?  The easy answer is to never take your IP to China and to never do business with a Chinese company.  That IS the easy answer. IT is also oftentimes the WRONG answer. Because Chinese companies can take your IP even if you never leave the United States.  Chinese companies can buy your product in the US and take your IP that way. Many times, Chinese companies don’t even need to buy your product to copy from you.  Sometimes all they need to do is go to your company’s website and start copying.  One of the foremost experts on China counterfeiting talks of how more than half of all Chinese counterfeits are done simply by copying a design straight off a company’s own web site.  Believe it or not, going into China can sometimes be the best way to put a damper on counterfeiting.  Sometimes counterfeiting thrives only until the real thing arrives.

But there are of course circumstances where not going into China DOES greatly increase your chances of avoiding China IP theft.  In those situations, should you avoid China?  Not necessarily.  In those situations you should do a cost-benefit analysis, or as I am always telling my clients, you should “keep your eyes on the prize.” Your company is in business to make money, and as important as IP is to your company – and no doubt for many companies, especially biotech companies, IP can be everything — your end goal is to maximize profits. There will be plenty of times where you can make more than enough money in China to justify putting your IP at risk.

Who should go into China and who shouldn’t?  Companies that constantly roll out new products or new versions of existing products are better able to handle China IP risks. Having a super-strong brand name also helps, as does having enough size and money to be able to lobby in China and to fight against any and all infringers. On the flip side, if by going into China you are putting your IP at risk worldwide – not just in China — than you may not be such a good candidate for China expansion. Or if you are a small company and IP theft is an existential threat to your business, you had better think long and hard before you head over there.

But let’s say you have made the decision to do business with china, what can you do to reduce your IP risks?  As we lawyers so love to say, that is going to depend to a large extent on your particular factual situation.

More to come….

By: Steve Dickinson

As I mentioned, my first post on Myanmar, “Myanmar Foreign Investment. Initial Impressions Are That It Is China’s Opposite.” was heavily theoretical. Dan and I did have a chance to travel and to meet with local lawyers and business people. This gave us the chance to find a little of the reality behind the statements of aspiration expressed by government officials at the Summit. I will provide my observations below, organized in accord with the three stages of development described in my first post.

1.   Political reform.

 I saw a remarkable change in the openness of the society. Some of the changes are quite striking. Some of these changes are:

  • The Internet seems to be completely open, at least for English language web sources. All news sites that I accessed were unblocked. There was no attempt to filter news from unblocked sites. Information on the situation in Rohinga and on Aung San Suu Kyi were all available. Karen and Kachin separatist sites were accessible. Facebook, YouTube and Twitter were all available. Internet cafes were open and were well attended. No one blocked my access to the Internet at such locations. This is a complete change from even one year ago when the entire Internet was blocked.
  • Cell phones are generally available and the people have taken to using cell phones actively. One lawyer told us that right now less than 5% of the people in Myanmar have cell phones but that more than 50% will have them within two years. Right or wrong, this shows the kind of optimism we were hearing.
  • Newspapers and magazines are generally available. The situation in Rohinga was openly discussed. Aung Sang Su Kyi was widely quoted. Criticism of government corruption and bureaucratic incompetence was widely published.
  • Book publishing activity is exploding and I found a large number of well-stocked bookstores throughout the downtown area. Though technical books prevailed in numbers, there seemed to be no real restriction on book topics.

Though all of these are just surface observations, they do show a remarkable opening up of civil society when compared to the closed system that prevailed only a year ago. The contrast with China is striking. After I left Yangon I went to Beijing where even at our five star hotel, Google news and Bloomberg news were not accessible. Facebook, YouTube and Twitter also were not available. Foreign news magazines were not available on the street and book topics were highly restricted.  The contrast was dramatic and telling.

 2.   Banking and Foreign Exchange.

In the old Myanmar, the visitor noticed three things about money. First, much of the economy ran on U.S. dollars or the Euro and many services simply were not available in local currency. Second, there was a big difference between the official exchange rate and the unofficial or black market exchange rate. The first task for every traveler was to find a black market money-changer to obtain a reasonable rate of exchange. Third, the banks were primitive and positively hostile to foreigners.

On this trip, all this had changed. Everywhere I went accepted payment in local currency (kyat). Though many prices were quoted in dollars, no one insisted on payment in dollars. The new, unified official exchange rate was working, and most people I met were exchanging their currency at the local banks rather than with the black market moneychangers. The moneychangers offered a rate that was only slightly better than the banks, so most tourists (and us) did not want to take the risk. Finally, banks were open, efficient and quite friendly in their money changing operations.

Though these small changes in the treatment of visitors mean little regarding the overall modernization of the banking system, the contrast from the former system was a great surprise to me. In fact, the impact of the changes extends to larger issues. With a stable exchange rate system that seems to be accepted by the business sector, the purchasing of import goods can now be conducted with efficiency in Myanmar. This will have a major impact as Myanmar opens to economic contact with the outside world.

3. Foreign Investment.

As I mentioned in my earlier post, the commitment of the Myanmar government towards foreign investment seems half-hearted at best.  Many obstacles to foreign investment remain:

  • The sudden opening of the economy has lead to a sharp increase in land prices in Yangon. Rumors at the Summit were that 30-year lease rights for prime land in central Yangon had risen to $1000 per square foot. If true, this would make the price of land in Yangon the highest in Asia. There is a general lack of good existing real estate in Yangon: hotels, office space and condominiums are all in short supply. This means that in the near future, the cost of all real estate will rise dramatically, making Yangon and the rest of Myanmar extremely expensive. In terms of land prices, the government seems unwilling to allow for any price reduction that would make investment more attractive to foreign interests. In fact, government officials made it clear at the Summit that they intend to exercise the right to approve all land prices for foreign investment projects. Their goal is to prevent local governments or private persons from offering low land prices as an inducement to foreign investment. This situation makes foreign investment in hotel and office real estate difficult at best. It also makes investment difficult for manufacturers, since the cost of building and renting factory space is prohibitively high. We were in Yangon working with a large manufacturer and when we left, they were still looking for appropriate space.
  • Electricity is extremely expensive and in short supply. Blackouts and brownouts are common. Virtually every major project is required to include a back-up generator as part of the project design. Diesel and electric fuel is also expensive, so operating generators can be a significant cost.
  • The road system is not developed and overland transport remains difficult and expensive. As a result, export oriented manufacturing must be located close to the major ports. For now, this means primarily in the Yangon area. Concentration in Yangon will then further exacerbate the high land prices and energy shortage issues.
  • At the Summit, Myanmar government officials acknowledged these three obstacles, but offered no plan for dealing with them. This then reflects two larger, more fundamental problems with the foreign investment program. First, there is a general lack of planning for the development of the economy and there is therefore no real plan at all for the role of foreign investment in that development. Second, Myanmar government officials know little or nothing about private business. They are therefore unable to design programs that are actually attractive to foreign investors. Government officials actually seemed hostile to the concept of foreign investors actually earning a profit in Myanmar. These officials seemed to equate foreign profits with exploitation of the Myanmar people. Thus, rather than encourage profit, they seem to want to discourage it.  A Myanmar businessperson made clear to us that the government officials have a long way to go before they can be viewed as on the side of foreign investment.
  • Government officials feel that they need to protect the Myanmar people from exploitation by foreigners. They therefore require that all foreign investment decisions be approved by the central government. They are not willing to delegate to local officials or to private individuals. This involvement in every decision by government officials who have no understanding of business is a serious obstacle to foreign investment. For example, government officials proudly stated at the Summit that they will approve projects within two weeks. However, local lawyers informed us that the actual approval time is six months or more. As interest in Myanmar grows, delays are expected to grow worse rather than better.
  • To date, foreign investment in Myanmar has centered on oil and gas, minerals, timber (teak) and power generation (dams and coal fired power plants). The government wants to shift this focus to manufacturing, services and agriculture. However, at the Summit, light manufacturing and services were not even discussed, and the discussion of agriculture merely highlighted how unattractive the investments would be. Myanmar is not going to develop a strong economy by relying exclusively on extraction of its non-renewable natural resources. Though the government officials indicate that they understand this, no programs are yet in place to make investment outside of the traditional areas attractive. In fact, the only discussion was about new measures in oil and gas and minerals that will make future investment in those areas less attractive than they are now. As a result, even the traditional sources of foreign investment may decline rather than increase if the new foreign investment policies are implemented. When confronted with these issues, government officials expressed indifference. Their attitude was essentially that if you do not like our policies, go home.
  • Local lawyers and business people are aware of the obstacles to foreign investment that I note above and they are already working aggressively to design legal structures that will avoid the obvious defects of official government policy. Let me give one example. Under the official policy, a foreign owned company cannot lease a building for longer than one year. For major projects, the foreign owned company is expected to lease raw land and then build the factory, warehouse, hotel or office building at its own expense. To make the situation worse, land cannot be owned but only leased. To obtain the lease, the foreign company has to pay an initial lease fee and then pay annual rent. The lease fee is set at the discretion of the government. To top it all off, the government reserves the right to adjust the rent every five years. To say that these terms are unattractive is an understatement.

Locals understand this. Their solution is to build the factory or warehouse and then rent it to the foreign company on a monthly rental basis. They then roll the rental every month with no set term. The idea is that they will roll in perpetuity. This approach avoids the problems with the government approach. The building can be rented, no premium needs to be paid, and the government does not raise the rent every five years. The problem is that the foreign investor has absolutely no certainty with respect to the lease, since the lease is on a monthly rental basis. The locals’ response to the concerns of such an arrangement are to say, “Of course we would not take advantage of the foreigner by raising rent or by offering the building to a party who is willing to pay more.” Thus, even though local Myanmar business people are working on ways to avoid the worst of the government policies, these ad hoc methods are not likely to be attractive to most larger and more sophisticated foreign investors.

To summarize, my response to the situation in Myanmar is mixed. The political and financial system changes are encouraging. Will the changes continue? Is the government sincere? Who knows? These are all concerns about the future that do not recognize the remarkable changes that have already occurred. I encourage the skeptics to go take a look for themselves. On the other hand, there seems to be little real effort being made towards making foreign investment in Myanmar attractive. Many of our clients are looking to Myanmar as a new base for their export oriented manufacturing operations, but I would expect most of them will be taking their time to go in. The company we went to Myanmar with is in a special situation as it is more focused on being in a large number of countries than it is on low costs.

My view at this time is that Myanmar is only suited to well capitalized investors with a capacity to deal with uncertainty and risk. For those brave souls who do go to Myanmar, a permanent and substantial commitment to personnel on the ground in Myanmar will be required. No Myanmar operation will run itself; substantial supervision by the foreign investor is required. Most important is that the costs of operating in Myanmar must be carefully assessed. Low wages are countered by high land and energy costs.

Though the obstacles to investment in Myanmar are currently high, there is also the prospect of rapid improvement. In this area, the encouraging point is that the local private business people fully understand the need to change and the need to work around governmental dictates. Given the rapid changes taking place in Myanmar, it is entirely possible that the locals will develop attractive alternatives to the current policies. The real question is whether the government will be willing to get out of the way and let business people make their own decisions. We will continue to follow developments in that direction.

Dan’s Addendum: I hate to get all corny here, but Steve has failed to talk about Myanmar as a place to go and so I am going to step in and do a bit of that. This was my first time in Myanmar and I found it absolutely fascinating. There were cool looking religious buildings (mosques, churches, Buddhist temples, Hindi temples, even a synagogue), everywhere).  There is a China-town and an India-town and the people on the street are about as diverse as anywhere.  Yangon is full of big and beautiful (and mostly decrepit) buildings and big and Soviet style (and mostly decrepit) buildings as well.  Though hotter than hell and subject to random torrential downpours (with massive winds at any time), Yangon is a great walking city.  Nobody bothers you on the street and the cars don’t seem to be out to run anyone over.  The food is also really good and varied.  They even have half-way decent domestic beer and wine.  And the Shwedagon Pagoda is downright incredible.  Go there (as a tourist) if you can.

Update: Just read an article reflecting yet another difficult in doing business in Myanmar: the rents. There is such a dearth of office space in Yangon, rates are higher there than in New York.