I recently wrote about how the China attorneys at my firm often hear something like the following from our clients:
“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:
- “The owner and I are great friends.”
- “I trust the owner implicitly.”
- “There is no way they [the Chinese company] would do this because it would destroy their business.”
I went on to write how I like to start one of my “how to protect your IP from China” speeches with the following:
“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies and SOEs in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”
I then wrote how our response to our clients who say these things is not to question the strength of their relationship with the Chinese factory or the honesty of the factory’s owner, but to say that even if all they are saying about their Chinese counterparty is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counterparty or the economics of the situation.
After I wrote this piece I was reminded of a specific situation we had with a European company that had a 20+ year “great” relationship with its Chinese factory before it learned that this factory was selling the European company’s products around the world for half of what the European company was charging. And when the European company confronted the Chinese company about this, the Chinese company lectured the European company about how it had every moral and legal right to do what it was doing and how sick it was of Chinese companies being exploited by European companies and that it barely made any money at all from this European company.
The Chinese company then proceeded to tell the European company that it would not only continue making and selling the European company’s product wherever it could do so, it would stop making anything for the European company, including the product the European company had already paid for and not yet received. Oh, and just to top it off, it turns out that the Chinese company registered all of the European company’s trademarks in China seven years earlier and it warned the European company that if the European company made its own products in China under the European company’s own name, the Chinese company would have those products seized for violating the Chinese company’s trademarks. The European company ended up shifting its production out of China entirely both because it pretty much had to do so and because it pretty much wanted to do so.
As stark as it is, this story about the European company is not the usual way problems with “trusted” Chinese companies ordinarily arise.
We are always pointing out to our clients that just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.
The problems usually stem not from the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:
- Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
- Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
- Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
- Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.
It is for these reasons (and more) that my firm’s China lawyers (and pretty much every other China attorney we know) constantly stress the benefit of having an enforceable contract that covers ownership changes and employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.
Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business.