Just about every month I give a talk on how to protect IP from China and just about every speech I start off with something like the following:

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.

In the last few weeks, I received two calls involving companies whose excessive trust led to their getting burned in China. The first call went something like the following:

Caller:  My husband is very trusting. He met the seller and looked him in the eye and the guy spoke really good English and my husband just knew that he could be trusted. They had dinner together two days in a row. We sent him $60,000 and now he is not even responding to our emails. My husband has found another supplier and I am wondering if there isn’t something we can do to make sure that he does not do the same thing. My husband insists this guy is also honest.

Me: Reminds me of what Bush said about Putin and look what Putin has been up to lately. I much prefer the Ronald Reagan’s  “trust but verify.” Here’s the thing. My law firm’s China lawyers get at least one call or email pretty much every week from someone who got ripped off or cheated or maybe just shortchanged by someone in China. And probably 99% of those cases, the people calling or emailing us started out trusting their Chinese counter-party. In fact, I don’t remember a single instance where the caller or the emailer told us that they knew from the get go that they were doing business with a crook.

There are a lot of things we can and should be doing to verify that your potential supplier is legitimate. Let’s talk….

The second call was from a company that had spent hundreds of thousands of dollars setting up a subsidiary in China, hiring employees, and hunting down business, only to have its entire team leave the company to form their own.  That conversation went something like this [by the way, I secured approval from both parties to discuss their situations here — in fact, both encouraged that we do so]:

Caller: But I set them up. I gave them good jobs. They owed me. They were my friends.

Me: Did you have a formal written employment agreement with them that set out trade secret protections? Did you have a non-compete agreement with any of them?

Caller: No, because I had worked with all of them for years before I started my China company.

People, I really hate to sound cynical here, but the reality is that if you are doing business in China (or anywhere else in the world for that matter) the most likely people to do you wrong are those whom you trust. The people you do not trust are usually not going to get access to your money or your secrets.

So, yes, you do need contractual protections against even those you trust. Check out Chinese Contracts. Because They Really Do Make A Huge Difference.

What do you think?

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Photo of Dan Harris Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

  • Devin Petty

    An extension of the conversation: I asked myself how the last scenario could have been prevented.

    I completely understand the actions of the employees and have no compassion for the “victim”.

    One of the reasons you should “take” a job is to learn industry skills, make contacts and enhance your employability or better yet, the marketability of your own creations. What developed nation employee doesn’t think; “I can do this a better way.”

    What did the victim do to “give” his “friends” a reason not to leave them by the wayside? Did they share the wealth of the business? Were his friends made an offer they couldn’t refuse, were they made co-owners or did they stay at-will workers for pay?

    This is business, not a family wedding of a friend. Act like money and success matter first, not what gift you brought to the occasion. Frankly I believe jobs are a lot like spouses. What are the compelling reasons to stay or go?

    More relevant to this context; how can businesses in China with Chinese nationals entice human assets to dance on the rug before they decide to pull it out from under you? Case in point they are what make or break your success.

  • Yunwei Liang

    As a Chinese person, I feel sorry when I hear about this kind of phenomenon. Before I came to the US, I thought Americans probably are better in setting up contracts to confirm rights and obligations, and I thought Americans just had more legal sense than Chinese. After I came to the states, I came to realize that Americans really trust people, in a huge extent and in many ways. As for contractual protections, I agree with Dan, that wherever you go in this world, always “trust and verify”, never intend to trick a business counter-party, but always be prepared that someone might trick you.

  • On the Corner

    Very accurate post and nothing cynical at all about it. Realists are often viewed as cynics right up until their cautious warning are proven correct. Then those same people are not suppose to give the “I told you so” look….

  • Arlington

    As a westerner running a factory in Dong Guan I find this post to be spot on. I basically expect any worthwhile innovation we make to be copied within a month or two by either internal leak, outsource suppliers, marketing, or quite commonly through the encouragement of my customers. And I have not talked to anyone here who finds this strange. I don’t think I am being cynical to say that its so common as to be the norm…

  • Ward Chartier

    Someplace, there must be schools giving classes or maybe even degree programs in naiveté. Some of the stories I read in this website, situations I have witnessed, and cheating I have prevented beggar belief. Critical thinking skills need a prominent place in the entire educational system.