Last month I gave a speech at a leading biotechnology conference in Washington DC on how to protect your IP from China.  Over the next few days, I am going to re-print that speech (in parts) here on this blog.  As you have probably already guessed, this is part 1.  Please recognize that this is a speech, not a paper. Please also recognize that a PowerPoint originally accompanied this, but I am going to modify this speech so that ought not to matter.

If you are doing business with or in China, you have to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.

I am NOT saying that every Chinese company will try to take your IP all the time, but I am saying that if it is in the best interests of a Chinese company to take your IP, it almost certainly will try to do so.  And the Chinese government to a large extent just goes along with this. As recently as 2010, the Chinese Academy of Sciences’ annual report essentially said that because China is not so good at innovating it needs to do what it can to get our technology from others.  In 2006, China’s Medium and Long-Term Plan for Science and Technology Development stated that if foreign companies want to compete for government contracts they must transfer their IP to their Chinese partners. International outcry eventually led to this policy being cancelled, but so what?  The Chinese government’s desire to see Chinese companies secure foreign technology and its favoritism towards Chinese companies remains.

China’s courts are not particularly good venues for pursuing IP theft.  They are reluctant to award lost profits (this is true for both domestic and foreign companies) and they tend not to be comfortable with large damages claims.  On top of this, the damages available for IP theft are somewhat limited in that they are usually confined to the amount of lost sales in China, not worldwide.  I remember a big victory for NIKE in an IP case a few years ago against someone who had been making huge amounts of fake NIKEs.  I think the damage award was something like $75,000.  It is also extremely difficult to get a Chinese court to order someone to stop using your IP unless and until you prevail at trial.  And if you are in a court outside Shanghai or Beijing or a few other cities, you should count on home-town favoritism operating against you.

Some of you have no doubt heard that IP protection is getting better in China. And it is. A bit.  But again so what?  You are still at major risk and you have to operate accordingly.  Even if you think I am being too harsh in my assessment of IP in China or even if you think I am just flat out wrong, it still behooves you to at least act as though every Chinese company is a mortal threat to your IP.

So what can you do to ensure that your IP does not get taken by a Chinese company?  The easy answer is to never take your IP to China and to never do business with a Chinese company.  That IS the easy answer. IT is also oftentimes the WRONG answer. Because Chinese companies can take your IP even if you never leave the United States.  Chinese companies can buy your product in the US and take your IP that way. Many times, Chinese companies don’t even need to buy your product to copy from you.  Sometimes all they need to do is go to your company’s website and start copying.  One of the foremost experts on China counterfeiting talks of how more than half of all Chinese counterfeits are done simply by copying a design straight off a company’s own web site.  Believe it or not, going into China can sometimes be the best way to put a damper on counterfeiting.  Sometimes counterfeiting thrives only until the real thing arrives.

But there are of course circumstances where not going into China DOES greatly increase your chances of avoiding China IP theft.  In those situations, should you avoid China?  Not necessarily.  In those situations you should do a cost-benefit analysis, or as I am always telling my clients, you should “keep your eyes on the prize.” Your company is in business to make money, and as important as IP is to your company – and no doubt for many companies, especially biotech companies, IP can be everything — your end goal is to maximize profits. There will be plenty of times where you can make more than enough money in China to justify putting your IP at risk.

Who should go into China and who shouldn’t?  Companies that constantly roll out new products or new versions of existing products are better able to handle China IP risks. Having a super-strong brand name also helps, as does having enough size and money to be able to lobby in China and to fight against any and all infringers. On the flip side, if by going into China you are putting your IP at risk worldwide – not just in China — than you may not be such a good candidate for China expansion. Or if you are a small company and IP theft is an existential threat to your business, you had better think long and hard before you head over there.

But let’s say you have made the decision to do business with china, what can you do to reduce your IP risks?  As we lawyers so love to say, that is going to depend to a large extent on your particular factual situation.

More to come….