Yesterday, we did a post on the importance of protecting your intellectual property in China. That post, entitled, “Protecting Your Intellectual Property In China, Part I,” was based largely on a recent talk co-blogger Steve Dickinson gave in Qingdao. That post talked of the importance intellectual property/intangible assets holds for companies today, particularly those in creative services. 

in today’s post, Steve focuses on some of the ways to protect your intellectual property in China.

China IP protection can be divided into four categories in terms of the effectiveness of the system of legal protection:

1. Patent and trademark protections work well in China for protection from large scale infringement.

  • For both patent and trademark, small time infringement is difficult to prevent. It is also unclear how well the trademark system works for famous consumer brands.
  • Patent and trademark are effective in preventing large scale infringers of non-consumer products.

2. Contractual measures work in China if properly implemented.

  • Trade secrecy agreements.
  • Licensing agreement.
  • Know how and technology transfer agreements.
  • These are contracts, and therefore must be drafted properly.
  • The contract should be enforceable in China by litigation or arbitration
  • Provide for specific monetary damages rather than injunctive remedies

3. Software copyright. China has a specific regime for software protection by copyright. The system is effective for commercial software. The system has had limited success in protecting retail software.

4. Copyright in creative works.

Copyright protection in China has not worked well for protection of creative works in the retail sector. Virtually all movie, film and music products are available on a wide scale in pirated form. On the other hand, copyright is effective in China for specific violations of copyright in a business to business setting. However, effective protection of copyright requires careful attention to the Chinese registration regulations. It does no good to rely on the general right of copyright for creative works.

Businesses must focus on the realistic risks within China. The risks vary depending on the type of intellectual property. The general situation is as follows:

1. If your IP has value, and if it can be copied with minimum effort, it will be copied. The result is certain. There are no exceptions. You must therefore prepare for this reality in advance. What kinds of assets are subject to this risk?

  • Trademarks, trade names and logos.
  • Exterior product design (design patent and copyright).
  • Books, photos, reports, drawings/plans any other medium that can be photocopied and reproduced.
  • Any material that can be copied in digital form: music, film, CAD drawings.

2. The Chinese seldom put much effort into independent copying of inventions and other technical IP that cannot be copied easily. If intangible assets cannot easily be copied, the Chinese will usually wait to be trained by the foreign business. They will seldom appropriate foreign technology on their own initiative. As a result, the motivation of most Chinese companies that work with foreign businesses is a desire to acquire technology, trade secrets and know-how via training from the owner of the IP. This occurs in virtually any area where Chinese companies work with foreign businesses:

  • Technology licensing projects.
  • Joint venture manufacturing or services.
  • OEM manufacturing
  • Product design and development agreements
  • Employee training
  • Distribution and sales agreements

Most technology, know-how and trade secrets are lost in China to parties who have been trained by the foreign owner of the intangible asset. Usually this loss could have been prevented with proper agreements and business practices.

Many foreign companies make the mistake of seeking perfection in China. When they cannot achieve perfection, they often abandon the IP creation/protection/exploitation process. This is a mistake. No protection in China will be perfect. However, China can provide many second best methods and second best protection is better than no protection at all.

Foreign owners of technology will often discover that their preferred and customary method of technology protection is not available in China:

  • Patent protection is often not available because of the one year rule.
  • Copyright is often not effective for easily copied digital media.

Faced with this, many foreign companies simply give up and operate in China with no protection at all. This virtually always leads to disaster in China. The correct approach is to work to find an alternative form of protection. This can be achieved in many ways:

  • Licensing agreements.
  • Secrecy and non-use agreements.
  • Technical controls, such as encryption.
  • Direct manufacture rather than OEM or joint venture.

Many foreign businesses fall into the trap of thinking that 1) China has no laws and 2) Chinese companies do not file lawsuits. This is a mistake. Chinese companies are very adept at using the Chienese IP system to their own benefit.

This can occur in two ways:

1. If the foreign side fails to register its intellectual property in China, a Chinese entity will register the IP in its own name. In this way, the Chinese company cuts the foreign company out of the foreign company’s own market. This happens regularly with trademarks, patents and commercial copyrights.

2. Many foreign companies mistakenly believe that China does not have a developed IP protection system. They therefore do not adequately investigate to ensure that they are not infringing the rights of others in their operations in China. This is especially of concern when the foreign company hires a Chinese contractor to perform services or engages in cooperative design or manufacturing operations with a Chinese company. The foreign company only learns later that it has infringed on the IP of another. The resulting damages can be quite significant.

Bottom Line: There is IP protection in China and it behooves you to figure out how best to protect your intangible assets.