Our China intellectual property lawyers spend about 99 percent of their time working on protecting our clients’ intellectual property. The above PowerPoint slide for the most part explains how this is done, with the below three PowerPoint slides going into a bit more detail.
1. Structural protections. Essentially, what can the client do in the real world to protect its IP from China? This involves asking questions like what IP must I take to China? What IP must I reveal to do the deal or get my widgets made or sold? What IP or trade secrets must or should I reveal to my own employees? Have I done enough due diligence on this Chinese company to be comfortable working with them? How should I structure this deal to protect my IP not just now but into the future? The questions here tend to be very much related to the client’s specific transaction, specific business, specific products or services and specific industry.
2. Good contracts. Getting the client a China NNN Agreement before the client reveals anything confidential to anyone is usually the sine qua non of China IP protection. But there are all sorts of other contracts in which provisions regarding IP protection can be essential. China contract manufacturing agreements, China employment contracts (and China Employer Rules and Regulations), China distribution agreements, China joint venture agreements, and China trademark and technology licensing agreements are just some of the China contracts that can implicate your IP and therefore typically require provisions that address IP protection.
3. China IP Registrations. Last, and certainly not least, are the China trademark, China patent, China copyright and China licensing agreement registrations you need to consider undertaking in China to protect your IP from China.
The above are the sorts of things on which our China IP lawyers are always focused. But to a lesser extent they also often need to address the issue of protecting our clients from infringing on someone else’s IP.
By way of a quick example: Ten years ago, when an American or European or Australian company would come to us for a China trademark, our China trademark lawyers would usually not even bother conducting a search to determine whether the desired trademark was already registered to someone else or not. This was because doing a good search took so long (among other things, it entailed going to the China trademark office and manually poring through stacks of books) and, most importantly, because the odds were so slim that the trademark had already been taken. That has radically changed. See this week’s post, China Trademarks: The Hits Just Keep on Coming. So now it is important that you register your company name/brand name/product name/logo in China, it is also important you make sure you are not using someone else’s trademark in China.
The same is true on the patent front where Chinese and foreign companies have gone from having hardly any China patents to having millions and millions of them. Many of our clients — especially those with their own in-house IP lawyers and those whose regular patent counsel or IP counsel retain our China IP lawyers for the China side of things — are aware of the change and explicitly ask for our assistance in protecting their company from infringing on someone else’s China IP. The below is a composite of a number of emails our China IP lawyers have written in response to client requests for assistance on protecting against their own company infringing on someone else’s China IP.
1. You are purchasing a product designed by the Chinese side.
2. This product may infringe on designs/IP held by other Chinese manufacturers.
3. This product may infringe on designs/IP held by entities in the market in which you are selling: the U.S., Canada the E.U., Japan, and Australia.
What can you do to protect yourself from infringement claims from parties in the market in which you sell the product?
The answers are as follows:
1). Most U.S. buyers simply ignore this issue. That is, U.S. buyers generally are so concerned about protecting their own IP, they don’t consider that the product they are buying from their Chinese manufacturer may infringe on the IP of some unrelated third party.
2. Even though our clients don’t normally indicate any concern with the issue, we usually include the following in our China contract manufacturing agreements:
a. A warranty stating that your Chinese supplier owns the IP for the product it will be making and selling to you.
b. A provision stating that the factory will be liable for any losses you suffer from an IP infringement action being brought in the sales market relating to the product. Note though that many of our clients end up asking we remove even this basic provision since many Chinese manufacturers will not sign a manufacturing agreement that includes just this very basic level of IP protection for the buyer.
Under this approach, the infringing product is treated in the same way as the general repair and replace warranty covering defects. An IP infringement is treated like any other defect: you don’t have to pay for the defective product and you obtain a credit for amounts you have paid. In the terms of the contract language, the Chinese side is also liable for your other losses. You could make a claim for those losses against the Chinese factory, but this sort of claim will rarely succeed in China. One reason for this is that Chinese factories oftentimes do not have sufficient assets to pay major claims. So in real life the matter is typically worked out with the repair and replace approach we previously discussed.
3. We do not usually include an elaborate indemnity provision in our contracts that requires the Chinese side defend against all infringement claims because these sort of provisions are not customary for China and because the Chinese side likely cannot or will not perform. And yet if the Chinese side does agree to such a provision, it will probably charge you at least as much for it as it would cost you to secure your own (more effective) insurance in your home country. This means that in most instances, the practical way for you to protect yourself is to secure cover with insurance purchased from your insurance carrier. The same applies to product liability. Western buyers that want coverage against product liability and product recall risks usually should purchase their own comprehensive products liability/IP infringement insurance policy.
If pressed on this IP infringement issue, most Chinese factories will simply refuse to sign an agreement that will put them on the hook for IP infringement. The factories that take the time to consider the issue carefully will usually say something like “We are selling to you at the China price. If you want coverage for IP/products liability issues, what you really need is insurance in the U.S. If you want us to pay the insurance premium, inform us of the amount and we will raise the price of our product to include the cost of the insurance premium. We will load the premium payment onto the initial product purchase deposit.” It is the rare case where it makes sense to pay a Chinese manufacturer 5 cents extra per widget to have a Chinese company try to protect you by securing insurance from a Chinese insurance company in China as opposed to your paying 5 or 6 cents extra per widget to get your own coverage in your own country.
The China price is low for many reasons. One reason is that the risk of IP infringement and product liability claims (both of which are real) are two of many risks that are not included in the price. If foreign buyers insist on loading all these considerable risks onto the Chinese factory the China price would disappear and Chinese manufactured products would become too expensive to be commercially viable. Foreign buyers of Chinese products that operate uninsured are themselves assuming these risks to compete on price. You cannot get rid of the risks with a page in a Chinese contract.