Read an interesting Linkedin post today, entitled, Does your business have ‘dirty’ IP? The post is by an Intellectual Property (IP) and branding specialist and it emphasizes the importance of domestic companies cleaning making sure their IP is clean. But what it says about domestic companies applies with equal force to foreign companies doing business in China.
The post starts out talking about a meeting the author, Alicia Mayer Beverly, had with “a fast-growing cosmetic brand that was already being carried in major department stores and generating a lot of buzz in the industry.” The author then talks of how it would be only a “matter of time” before this cosmetics brand would get scooped up for millions by a far bigger cosmetics industry player, but only if its IP checks out:
I suggested that well before a major corporation came sniffing around it would be sensible to conduct an IP audit and do a stocktake of the IP her business had created, but most importantly make sure it was all nailed down. No sophisticated company, with high priced lawyers and millions to spend on an acquisition, would buy anything if their due diligence revealed IP ownership issues. At a moment like that, it would be a nasty surprise if it turned out she had IP risks and not a single asset. The reality is, though, I had certainly seen that before.
Ms. Beverly did the audit and its results were as follows:
Her business was built on what I call “dirty” IP – that is IP that for whatever reason your business simply does not have full title to. And what sophisticated purchaser wants that headache? It would be like buying a house only to find the party who sold it to you doesn’t even own it themselves.
So my friend was at a turning point. Should she approach each and every 3rd party – the web designer, the packaging designer, the cosmetic chemist, the graphic designer, etc? The risks were they might say no or, realizing they had her over a barrel, they could ask for a significant sum of money over and above what she had already paid.
But the even larger risk was that she had a business that relied on the IP they had created, but which she did not currently have full title to. Keeping the house analogy: she was only squatting in a house she thought she owned.
Ms. Beverly’s client was able to secure assignments of the IP the “business grew dramatically in value almost overnight,” leaving it “bursting with valuable IP assets, and not a hint of dirty IP in sight.”
Our China IP lawyers constantly have to deal with similar issues, including securing assignments of IP from Chinese companies (distributers, JV partners, etc.) that have gone off and registered our client’s IP in China. Sometimes these registrations by the Chinese companies are wholly in good faith for the benefit of a foreign company that did not understand the need to do its own registrations, but other times, these registrations have been done to gain leverage against the foreign company.
ABC News recently did a story, entitled, Businesses urged to protect products in China after brand theft. This story focuses on a skincare company whose “brand was stolen ion China” and then had to buy it back.
Natraganics had to buy back its brand Avado after a former Chinese distributor secretly registered it.
Natraganics owner Tammy Fenner is spending tens of thousands of dollars getting back the Avado brand.
Ms Fenner said she became aware her first distributor in China had registered her brand there only when she took on a new Chinese partner.
After success in the Hong Kong market, she had struck a deal in 2010 with a Chinese distributor and sent a shipment of Avado organic skincare products to be sold in China.
Two years later when a new Chinese partner tried to register the brand, she found out they had been beaten to it.
“The fact that [the original distributor] registered our brand and trademarked our brand name in China meant that we could not trade with that particular brand in China,” she said.
It meant we couldn’t go into the Chinese market full stop, it was pretty horrific, said Tammy Fenner, Natraganics owner.
“We were quite devastated… it meant we couldn’t go into the Chinese market full stop, it was pretty horrific.”
She said she was left with no option but to buy back her own brand if she wanted to continue selling the skin care products into China.
ABC News also did a story about a start-up dairy business that had its “trademark stolen in China even before it has begun producing any products”:
Tori Best spent months creating her Farmer Brown’s label with the intention of selling dairy products in Australian and Chinese supermarkets.
She registered the trademark in Australia but when she tried to register it with the China Trademark Office, she found the name and her flying cow logo had already been registered by a Chinese company.
“It was identical. They were so fast,” Ms Best said.
“We had it designed by an in-house studio in Melbourne, a well-known production company, and they came up with the cow and the way it looks.”
Further research revealed a Chinese website, Fujian Province AuMake, was already selling ice cream with the identical Farmer Brown’s logo and claimed to be made from 100 per cent Australian milk.
Ms Best believed the brand was leaked after her husband sent it to a business associate for advice.
“It wasn’t advertised in the public domain so it was within the networks John had established, not someone he deals with directly,” she said.
“We were going to look at exporting milk and ice cream products to China. The push was to align ourselves with manufacturers in Australia.”
How can you prevent the above sort of problems from happening to you? Your doing the following two very basic things should help:
- Do not reveal your trade name, your brand name, your product name or your logo design to anyone you do not completely trust unless and until you have filed your trademark registration papers with any and all countries relevant to your business — especially China. For more on why this is so critical, check out Register Your Trademark in China. Now.
- Make sure that all of your IP is protected in China to the fullest extent necessary. Have someone who understands China IP law conduct an IP audit on your business. Even if (actually, especially if) you are confident that you have no problems on this front, Check out So You Think You Have A China WFOE Or Joint Venture Or Trademark. What Makes You So Sure?
The beginning of the year is a great time to do an IP assessment.