We have been handling way more than the usual number of disputes between our clients and Chinese companies. In a number of these cases, our clients paid money to Chinese factories with whom they had been doing business for years and the Chinese factories simply refused to send over any product. These Chinese companies claimed that our clients owed money for previous deliveries (in which the costs supposedly went up) or for Chinese taxes/duties for which our client is supposedly responsible. These cases (and others like it) are no doubt due to the increasing number of Chinese factories facing economic difficulties. In none of these cases did our client have a good OEM Agreement in place, which gave the Chinese companies at least some basis for their claims.

Be that as it may, the Chinese companies (pretty much without exception) threatened to sue our clients and one of them threatened to freeze our client’s China trademarks, copyrights and/or patents and then take that IP once they prevail. In the case with the IP threat, our client’s only China asset was its registered intellectual property so the risk was very real.

A recent Chinese case allowed a Chinese plaintiff to “freeze” a Chinese trademark belonging to a foreign company, Castel. The Re:Marks on Copyright and Trademark Blog wrote of this case in a post entitled, “French CASTEL (卡斯代尔) Company Frozen out of China?” and noted the following risk stemming from this case:

[T]he decision is of particular note for foreign entities who do not have significant assets in China.  Typically, such entities may have considered themselves insulated from the risk of litigation in China due to a lack of assets in China.  However, even foreign entities without significant assets in China very often have trademarks in China.  Those trademarks are now in the firing line if the foreign entity ever gets sued, whether for trademark infringement or for other causes of action, particularly where the foreign entity has limited assets in China.  Of course, this equally applies to foreign plaintiffs who seek to recover damages against Chinese defendants.

How can you prevent your Chinese IP from being taken from you? Probably the best way is not to put your China IP in the name of a company that does business in or with China. Instead, you should think about creating a new company (it can be based in the United States or anywhere else) to own “your” IP in China. In turn, that new special purpose company can then license its China IP to your company that does business in or with China. That way, one of your companies will still own the IP in China, but if your company that does business in or with China encounters legal problems with a Chinese company, the Chinese company will not be able to just seize that company’s China-based IP.

If your IP is already in the name of a company that does business in or with China, you should consider assigning that IP to another company and then licensing it back. Doing this is not going to be without its complications and costs, but it beats losing your China IP.

What do you think?

  • China Jim

    You or someone else still needs to register the IP in China for it to be legally effective there. Plus of course there’s the Chinese language aspect which can’t be registered in the US. If you don’t register your IP in China then what about the guy who does?

  • Dan

    @China Jim,
    You have misread our post. We are absolutely NOT saying not to register your IP in China. We are saying you should register it, but you should also think about registering it in a shell company or a special purpose company, not in your main company’s name.

  • LH

    I’m a little surprised at the notion that such a thin disguise on ownership of the IP is sufficient to prevent it from being frozen by a Chinese court. I’m just thinking of the situation in reverse; suppose there is a Chinese company operating in the U.S. that has licensed a trademark from a shell company whose only asset is that trademark and whose only business is licensing that trademark to the operating company. That would be sufficient protection to prevent a court in the U.S. from doing something like invalidating the trademark? Well, you know better than I do, but I’m surprised…

  • Dan

    You raise a good point. If the arrangement is done badly, it will provide a lot less protection than if done well. Badly would involve ABC shell company licensing the trademark to ABC company with no written agreement and at no cost. In that situation, one could expect a piercing of the corporate veil. Done right though, you have XYZ shell company license the trademark to ABC company and you have XYZ company have at least somewhat different owners than ABC company and you have a bona fide written licensing agreement that involves real payments that are made. Sometimes just doing this is enough to hide the asset from creditors of ABC company and even when found can be enough to dissuade them from bothering to pursue it.
    I had a client whose business went bad and owed a bank a lot of money personally. He, totally on his own accord, sold his cars and then took out a 5 year lease on an ultra-high end luxury car with the proceeds from his car sales. He paid for his five year lease entirely upfront so at that point he had the right to use this great car for five years, payment free. He made no misrepresentations to the bank but the bank never bothered trying to seize the lease/car because all they saw was that the car was leased and so the bank just assumed they did not want the car because the payments would come with it. I use this as an example of how just a little planning can dissuade a creditor.
    I am not saying that the licensing arrangement is going to be fool-proof, but I am saying that it will greatly increase one’s odds.

  • Jason

    There’s no real benefit I can see to any of this, if they’re going to sue you and want assets they’ll know the brand anyways.

  • London Lawyer

    What are the procedures to own china IP, why is it so necessary, and which lawyers are best suited for this type of matter?

  • Tina

    Dan, what about instead of a shell company, the IP is registered to an individual who licenses the trademarks to the company? Could that work and would that individual then not be able to be part owner in the company?