Just read a very practical article in Legal Times, entitled, “When Your IP is Far Away,” written by Bruce F. Metge, an attorney with East Coast mega-firm Mintz Levin.  The article is appropriately subtitled, “To safeguard IP assets in an outsourcing deal, develop a strong contract and an even stronger business relationship.”

Nothing revelatory here, but good basic information that applies everywhere, including China.  Mr. Metge puts forth the following seven items “companies should consider” when “establishing any outsourcing arrangement that does or might involve valuable IP assets” (my comments are in italics):

  1. “Document the intellectual property.”   Keep records of your trade secrets, trademarks, copyrights and patents. Register where appropriate. 
  2. “Deal with reputable and reliable parties.”  “Spend the money for the level of inspection warranted by the value of the intellectual property at risk.” 
  3. If possible, learn whether and how much your vendor can be trusted before providing it with your critical Intellectual property.
  4. “Identify in your contract the specific intellectual property that will be shared in the outsourcing arrangement and identify who owns the property.” Metge recommends playing “out the ‘what if’ situations.  Establish rules for what happens to improvements and modifications to the intellectual property as the relationship progresses. Specify what happens to the property and related records in the event of a breakup.”  Because China’s laws on ownership to IP improvements are not at all intuitive and are very different from those in the United States and the EU, I strongly recommend using an attorney familiar with China’s laws in this area. 
  5. “Be aware of the intricacies of international law.  The laws of other countries do not always play well with the laws of the United States [or the EU].”   Yes.  See number 4 above. 
  6. “Consider a mandatory arbitration clause in the contract.” With respect to China,  we often seek Canada, Hong Kong, or Singapore arbitration for our clients, but we generally consider CIETAC (China International Economic and Trade Arbitration Commission) arbitration in Shanghai or Beijing as well. I would also note that sometimes the best solution (believe it or not) is the Chinese courts because they often best-positioned to stop IP theft quickly. Be aware, however, that without a separate provision in the contract allowing for injunctive relief either through arbitration or the courts, mandatory arbitration may make it more difficult to secure injunctive relief to stop your vendor from improperly using your intellectual property.
  7. “Last but not least, Make sure that the company’s intellectual property will not be made available to your competitors.  Diligence as to the employees of a future business partner, and its employment agreements and controls, are a part of this exercise. After the company’s property has left the building in the hands of a business partner’s disgruntled employee, even a successful suit for breach of contract may be small solace.” The person most likely to steal your intellectual property owns or works for your vendor.   

In summation, companies outsourcing to China can best protect their IP by choosing their partner wisely, having a good contract, registering their IP, and, whenever possible, minimizing situations where their IP might be appropriated.  Good advice.