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China Company Audit Lawyers

There has been much talk this week about the United States blacklisting Chinese companies that steal IP from doing business in the United States.  Per the Washington Post, the White House (led by China hawk Peter Navarro) has been exploring “the possibility of blacklisting Chinese companies that violate numerous U.S. copyright and patent laws by placing them on the Commerce Department’s ‘entity list’.”

Once on the list the Chinese companies cannot operate in the United States “without obtaining a special license.” The United States already has such an entity list, but it now mostly includes companies that pose a military or terrorist threat to the United States or aids in violating human rights.

Navarro denies he is working on such a list but many sources say that he is. The Washington Post quotes Eric Altbach, a former deputy assistant U.S. Trade Representative focused on China saying that such a list “would put the U.S. government in the position of having to make an assessment of IP claims without a particularly clear process to do it.”

Boy, would it.

My friend Mark Cohen, director of the Berkeley Center for Law and Technology and the blogger behind China IPR has views this plan as “hopelessly stupid,” and he asks “When did Peter Navarro become a federal judge?”

I agree.

As the Washington Post article notes, “in the United States [and in many other countries as well], most patent infringement cases are settled with no one admitting wrongdoing, making it difficult to assess if a firm is a repeat violator or not.”

The WaPo article also writes how “groups like the Information Technology and Innovation Foundation, a think tank, have called for the United States and its allies to at least publish a bad actors list to publicly call out Chinese firms and individuals, even if the list doesn’t have the legal ramifications of being on Commerce’s entity list.”

I think even that could prove troubling and a bit weird, for the following reasons:

  • Not sure it’s the role of the U.S. Government to decide what is a good company and what is a bad company. The role of the U.S. Government is to prosecute and sanction companies that engage in illegal activity and when they do that, what they do is public and that can serve as “the list.”
  • I don’t like the idea of any person or company being publicly tarnished by a government without full due process — essentially either an admission of guilt/liability or a finding of guilt/liability after a fair trial/hearing.
  • What will be the criteria for inclusion on the list? If one U.S. company complains about a Chinese company IP violation will that be enough? Two companies? Three companies? We frequently get comments that mention a “cheating” Chinese company and even requests that we list on our blog all of the Chinese companies we know. We long ago chose not to single out any Chinese company like this unless we have our own independent proof of wrongdoing. Truth is that we have heard from many foreign companies that allege IP theft by Chinese companies when in fact the Chinese company acted perfectly legally and the “theft” occurred because the foreign company just assumed Chinese law would be the same in their home country and so failed to protect themselves. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1 and China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 2.
  • Pretty much every single Chinese company is an IP risk. Pretty much every single Chinese company will steal your IP if their cost-benefit analysis favors their doing that. In other words, those on the list will likely not be much more of an IP risk than those not on the list. I fear such a list might only create a false sense of security. I oftentimes begin my speeches on “How to Protect Your IP from Chinese Companies” with the following:”If you are doing business with or in China, you need 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. (Frankly, I think this is true of most companies in the world, not just in China.) 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 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 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.”

There is one great reason for instituting such a list, but it does not override the problems I list above. It is in many ways a perfect tit-for-tat for China’s new “Company Tracking System” which will give both foreign and domestic Chinese companies based on how well they hew to The Party line. See China’s New Company Tracking System: Comply, Comply, Comply. I fully expect this company tracking system will be unfair, arbitrary and corrupt and maybe the U.S. just threatening to engage in something at least somewhat similar for Chinese companies will moderate China’s company tracking system just a bit, at least as against foreign companies.

What do you think?

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.