The China Economic Review just came out with a column by Andrew Hupert, entitled, “Schroedinger’s copyright: Negotiating with Chinese about IP and brands requires quantum thinking” [link no longer exists]. It is on a completely different topic than I initially expected and so I will first cover the article and then I will cover the expected topic.
Hupert’s article is on “Westerners negotiating with Chinese counter-parties about designs, brands, unique services or any other type of intellectual property (IP)” possessed by the Westerners. I thought it would be the other way around.
Hupert sees the difficulty in “selling” IP to Chinese companies arising from the fact that for Western companies “to demonstrate and monetize their IP, they must risk revealing the inner workings to the very people from whom they need to keep it secret.” More specifically:
The moment you explain your idea or demonstrate your intellectual property, it ceases to have value because it is no longer exclusively yours. Thus in China your IP can be valued at zero and an infinitely high price simultaneously.
China has good laws on the books for protecting IP, “but the lack of punitive damages and the intricacies of the legal system make it a poor first line of defense.” Therefore, to succeed in “negotiating the best value for your IP in China, you must convince your local counter-party of two things”:
• Your next idea will be even bigger, better and more attractive.
• His [your Chinese counterparty’s] share in this as-yet-undelivered IP will be even more profitable than the deal he has a share in now.
Hupert sees Westerners as taking comfort from “the track record” of what a brand has previously produced, but Chinese “view brands as powerful because of their promise.” Therefore, Westerners “selling IP and services in China are mistaken to base their valuation on what the Chinese can hold in their hands today – they are much better off tying value to the ineffable shape of things yet to come.”
Or, in other words, “Don’t praise the cat – sell the kittens.”
I have seen what Hupert describes, though I have seen it differently: less philosophically and more in terms of what must be done. My firm has been involved in countless IP licensing agreements over the years where foreign companies have licensed their IP (be it a patent, trademark or copyright) to Chinese companies.
One of the things we cannot help but noticing with these agreements is the tendency of the Chinese company to stop paying the licensing fee as the licensing contract starts nearing its end date. By then, the Chinese company has made good use of the IP and the Western company has made a good chuck of money from the agreement.
I have always seen this as simply a cost-benefit analysis by the Chinese company. It has paid the Western company, let’s say, USD $3 million for the IP and it simply does not believe the Western company will sue it in China over the remaining $200,000 due. So it just stops paying. At that point, we typically send a demand letter to the Chinese company, reminding it of its obligations, reminding it of exactly how the contract favors us if we sue, and telling it that it had better pay the $200,000 immediately or we will sue.
At that point the negotiations begin and a settlement usually follows.
Because of the above, our advice to our clients who license their IP to China is three-fold:
1. Base your pricing on the assumption that you will not get full payment on your final payments.
2. Do whatever you can to make sure the Chinese company still needs you at the end of the deal so that the Chinese company has no choice but to keep paying you.
3. Put in some killer provisions in your contract that deal with a situation where the Chinese company stops paying at the end.
Now for the topic on which I thought Andrew was going to write, based on the title: Western companies trying to secure IP from a Chinese company. Where I have been seeing a lot of this situation of late is Western companies seeking to register their trade name in China, only to discover it has already been taken by a Chinese company.
In China, generally, the first to register (not use) a trade name or trademark gets it. For more on this, check out “Trademark Registration in China.” Years ago, in registering trademarks, we almost never encountered a situation where the trademark was “taken.” However, with the massive proliferation of trademark registrations in China over the last few years, we are more and more often going to register a trade name or a trademark and finding it taken.
Many times though, the already registered trademark is owned by a company that has never used it. In China, it is possible, though difficult to take away someone’s trademark for lack of use.
In these situations, our plan is usually to try to buy the trademark from the Chinese company that is not already using it. The last thing we are going to do though is have one of my firm’s lawyers call the Chinese company to ask about buying the trademark. I can only imagine how high the Chinese company would price the trademark for an American lawyer.
We do not even have Chinese lawyers make this call because we know that too will greatly inflate the price. We have trusted Chinese non-lawyers make the call and they never mention they are working on behalf of a foreign company. Despite all this, the initial prices we get from the Chinese companies for the trademark have always been (without exception) completely ridiculous.
We then try to explain how the trademark is worth way less than the amount they are seeking and how if they want to have any shot at all of our continuing to try to buy it, they are going to have to lower their price drastically. In the end, our clients end up getting the IP (remember now, the Chinese company is not usually using the IP at all) well under half the time.
On the flip side, I remember many years ago my firm being called in by a Chinese company seeking to purchase a trademark from a United States bankruptcy sale. The Chinese company had been manufacturing this well known product with a well known brand name when the United States company that sold the product at the wholesale level went bankrupt. It made complete sense for the Chinese company to buy the trademark had greater value for the Chinese company (because it was already making the product) than for anyone else.
The Chinese company desperately wanted the trademark but it did not know what to pay for it. So it asked me how much it should bid at the auction. The Chinese company needed to come up with an amount before the auction because it would need to wire my firm those funds so we could purchase cashier’s checks from a United States bank because the auction required that form of payment.
I told the Chinese company that I had no idea what the trademark was worth and that it was much better positioned to know its value because it had been in “the business” itself for so many years. The Chinese company not only had been manufacturing this item for this now bankrupt United States company, it also was manufacturing this item for other foreign companies and it also was making this product for its own sales.
My answer greatly frustrated the Chinese company and when I strongly suggested they retain and pay a trademark valuation expert to help determine the value, the Chinese company became even more frustrated. In the end, the Chinese company failed to give us enough money and two other companies rapidly outbid us. When we went back and told the Chinese company about what had happened, they told us that they would gladly have paid the price for which the trademark sold, but they had no idea it would go for so much!
What have you seen out there?