This post is part I of what is going to be a multi-part, somewhat irregular series on protecting your IP in China. This part I and tomorrow’s part II, were written by Steve Dickinson, and are based in large part on a talk Steve gave last week in Qingdao. Over the last couple of years, “creative services” have been probably the greatest growth area for our firm and so our intellectual property and licensing work has only continued to grow in importance.

For pretty much all of our creative services clients (these are companies mostly in the software, gaming, entertainment, media, art and film industries) intellectual property makes up the overwhelming bulk of the value of their business. Therefore, it is always a surprise to us how many of them seem to treat their intellectual property in China is an optional or secondary matter when it really should be the first issue they consider when approaching the China market. Though IP is usually of somewhat less importance for our clients not in creative services, they too tend to undervalue its importance. 

This series is intended to emphasize the importance of protecting IP in China and to set out a program for for creating, protecting and monetizing intellectual property. Without a clear program on this issue, disaster is certain to follow in China.

The first step is to get clear what we are talking about when we use the term “intellectual property.” IP is not patents, trademarks, copyright etc. These are simply tools for protecting intangible assets. It is the same for real property: a deed is not land, it is a tool used to establish and protect an ownership interest in land.

So what is intellectual property?

  • A better term is intangible property or intangible assets. This includes everything about your business that has value that cannot be reduced to a physical asset or to a monetary cash flow.
  • For creative industries, IP can include virtually all of the assets of the business:
    • Music
    • Film
    • Books and magazines
    • Research and analysis
    • Design of any kind: interior design, clothing design, product design
    • Architecture and engineering
    • Software of all kinds: industrial, retail, video games, phone “apps”
  • For traditional industrial firms, it includes
    • Inventions
    • Formulas
    • Industrial processes and know how
  • For all businesses, it includes:
    • Brand and image
    • Business planning and corporate strategy
    • Pricing plans

For most modern businesses, intangible property forms a major portion of their value. For many businesses, such as those in creative services, it forms the core of the value of the company. Consider the stars of the modern business world: Apple, Microsoft, IBM, Boeing, Siemens, Nestle, General Electric, Dow Chemical, Starbucks, Amazon, SAP. Is their value in their real estate holdings? In their factories and office buildings? No, the value of these companies is almost entirely in their intangible assets.

However, even for hard asset, resource based companies, IP is still a major component in their company value. Take the mining companies that have dealt with China for the past ten years. A major portion of their value lies in their pricing plans, their internal data on their resources, their techniques of extraction and transport, their future exploitation plans and the like. This explains why the primary battle between these companies and the Chinese over the past several years has centered on the attempts of both sides to acquire data to aid in the struggle over control of the market.

The message is obvious: active and careful cultivation of your intangible assets is mandatory to survive in the modern business world. This means taking the steps necessary to secure the rights, to protect the rights, and then to secure the rights for your own use or to package those rights for monetization.

Most businesses are constrained by the traditional categories for intellectual property and do not effectively consider the tools that available to protect intangible assets. There is much more to IP protection than the traditional IP tools.

The traditional intellectual property tools are:

  1. Patents
  2. Trademarks
  3. Copyrights
  4. Trade Secrets

Though these tools are essential in the IP world, there is a far wider set of techniques that can be used, including the following:

  1. Secrecy and refusal to disclose
  2. Licensing and trade secrecy agreements: limited and controlled disclosure
  3. Trade secrecy and related agreements with employees and joint venture partners
  4. Physical techniques such as encryption and related data protection techniques

Many companies believe that since they have done what is necessary to secure their rights in North America and Europe, there is nothing special they need to do in China. This is a mistake.

The key concept is that all IP protection is local. You cannot rely on what you have done elsewhere. You must deal with your IP by making use of the Chinese system. You must act within China for both creation of rights, enforcement of rights and monetary exploitation of rights. You must deal with China the way it is, rather than hoping to rely on a perhaps more perfect system that simply does not exist in China.

Since all IP protection is based on local law and practice, you must adopt an effective and realistic protection program for the country in which you are operating. If you are in China, you must consider the situation in China. The fact is that China is currently the most dangerous country in the world with respect to protection of intangible assets does not mean you can afford to throw up your hands and do nothing. China’s IP risks can be managed, if 1) you assess the risks in a realistic way and 2) you take practical steps for protection.

Tomorrow, we discuss specifics.