China confidentiality agreements trade secret agreementsAs part of our China company formation work, our China lawyers help our clients with their employment matters that arise before, during and after their China entity (usually a WFOE) is formed. Among other things, we draft the employment documents needed for a newly established WFOE. When a WFOE is up and running, it needs employee agreements in place for all its employees and we usually recommend what we call an “Initial Employment Package,” which includes the following for each employee:

  1. Employment Contracts
  2. Rules and Regulations
  3. Trade Secrecy and Intellectual Property Protection Agreements and
  4. Sign Off Agreements (acknowledging each employee’s receipt of the Rules and Regulations)

These China employment packages also often include Non-compete Agreements and Education/Training Reimbursement Agreements as well.

One of the common questions we get from both existing and prospective clients is why they need their employees to sign a trade secrecy agreement at all and in this post I briefly explain why our China employment lawyers always recommend having such an agreement.

Consider this scenario. A China employer hires an employee and gives the employee access to some or all of the company’s trade secrets. The employee then leaves employment and takes the material with her. What can the employer do? Suppose the employee never signed either a trade secrecy agreement or a non-competition agreement.

Since the theft of trade secrets is a both a crime in China and gives rise to a civil claim, the lack of a signed trade secrecy agreement does not bar the employer from suing the employee and/or reporting her to the police. But to succeed on either front there must be clear evidence that the employee took something and that what the employee took was in fact a trade secret. And that is where things can get difficult. Very difficult. For information to qualify as a trade secret in China, all of the following must be true:

1. The information is technical or business information unknown to the public.

2. The information must have economic value.

3. The owner of the trade secret undertook reasonable measures to maintain its confidentiality.

Are you certain you will be able to prove all of the above about everything you do not want your employees taking with them? In our experience, this usually ranges from difficult to impossible simply because most companies are not terribly careful about preserving their secrets.

Though it is possible to bring a trade secret lawsuit in the absence of an agreement protecting confidential information, a trade secrecy agreement almost invariably makes that lawsuit faster, cheaper and — most importantly — better. This is because if your trade secrecy agreement says not to steal X, Y and Z and an employee steals X, Y or Z, you can sue that employee for what should be a relatively clearcut breach of contract, rather than having to prove out everything related to trade secrets, as mentioned above. You will not need to prove that what was taken was a trade secret because your trade secrecy agreement with your employee will make clear what the employee can and cannot use outside your company, regardless of whether it is or is not a trade secret.

Trade secrecy agreements also make clear to your employees what is okay and what isn’t and they let your employee know that you can sue and win if they violate it. And by doing so, they greatly decrease the risk of an employee walking out the door with your trade secrets — as defined by you, not by complicated regulations and a random Chinese court.

One of the things our employer audits consistently reveal is that even companies that require trade secrecy agreements often (like about 90 percent of the time) fail to get all of their employees to sign these. We have learned this from our employer audits and we have learned this from companies that come to us after one of their employees has taken their trade secrets and joined a competitor or started their own competing business.

China employers should also have a clearly documented secrecy/confidentiality policy that sets forth how they handle and protect their confidential information. This coupled with a trade secrecy agreement will give the employer the maximum legal benefits and protections.

Bottom line: Make sure all your employees execute an English/Chinese trade secrecy agreement at the beginning of their employment and make sure your rules and regulations deal appropriately with your trade secrets as well.

 

 

 

Alibaba Counterfeit Lawyer

I got an email yesterday from a company called Vintage Industrial, out of Phoenix, Arizona. Vintage Industrial makes gorgeous retro furniture pretty much entirely by hand, using old-school techniques. I am not sure why I got this email at my law firm email address. I say this because the email (as I read it) had two purposes. One, to get me to buy furniture from Vintage Industrial.  And two, to tell me about how knock-offs of its furniture are being sold on Alibaba. It accomplished the second of the two purposes by prominently including a New York Times article on its China counterfeiting problems, entitled, A Small Table Maker Takes On Alibaba’s Flood of Fakes.

Not being in the market for furniture (we just last month ordered new conference room tables for two of our U.S. offices!), I went straight to reading the article. The article essentially says the following:

  1. Many companies have knock offs of their products sold on Alibaba.
  2. These knock offs can negatively impact sales of the real thing.
  3. It is really difficult to get Alibaba to remove the knock offs and pretty much as soon as they do, a fresh round of knock offs start up again and keeping knock offs off Alibaba is like whack-a-mole

All true.

Our China IP lawyers are constantly contacted by American and European companies regarding counterfeits of their products being sold on Chinese e-commerce sites, mostly Alibaba (Taobao, Tmall, Alibaba, AliExpress, 1688.com, etc.). These sites have formal internal procedures for removing product listings that infringe a third party’s IP rights. The procedures are actually relatively easy to follow if you are fluent in either Chinese or Chinglish. But because you must follow these procedures to the letter, for most companies, removing counterfeits is usually no easy or fast task. The New York Times article talks about the owner of Vintage Industrial sometimes spending 12 hours a day on counterfeit removal. Among other things, you usually must provide documentation proving (1) you and your company exist and you are the IP owner and you as the IP owner still have the rights to the IP in question. Only after you have submitted these documents and had them verified by the e-commerce site can you even submit a takedown request.

If you do all this and the removal happens, great, but oftentimes things do not go so well with the Chinese e-commerce site and then it is nearly essential to have someone who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website with which you are having the problem. This person’s job then becomes getting to the high-level employees at the Chinese e-commerce site to explain to them why the listing does in fact violate your IP. The NYT Times spoke with an “Alibaba spokesman [who] said that suggestions that small businesses do not get its attention are “false” and that they can qualify for the streamlined process if their submissions prove reliable. If your company has not built up its own reliability with Alibaba, using a law firm whose Alibaba submissions have been proven reliable will usually be the fastest and best way to get counterfeits of your products taken down.

Our China IP lawyers have succeeded with nearly every takedown request seeking removal of products that infringe our client’s trademarks or copyrights. But about half the time, we tell the potential client they should not bother retaining our law firm for their product removal because there is such a small likelihood of success or because the gain from removal will not be worth the cost — more on that later.  The below summary of an email from one of our China IP lawyers who regularly works on takedown matters across multiple websites (both in China and elsewhere) explains:

Each Chinese website has its own takedown protocols and following those protocols is key to getting counterfeit products removed. We do not advise suing anyone or writing anyone other than the website unless and until we do not succeed in getting your products taken down. Lawsuits are expensive and based on our track record in securing takedowns, the odds are overwhelming that we will never need to file one on your behalf. Writing directly to the seller has a much lower success rate than going to the website and doing that can cause major blowback.

Only the copyright or trademark owner or its authorized representative can make takedown requests. However, sites vary as to the sort of authentication they require for Powers of Attorney. The major Chinese e-commerce sites know our lawyers well enough that they rarely even require we provide them with a formal Power of Attorney to achieve a takedown.

It is usually necessary that we be able prove you have registered your IP (your trademark or your copyright) somewhere. Some Chinese sites sometimes will take down products with foreign IP (i.e., non-China) registrations, but China registrations are always better. Technically, China is obligated to recognize copyrights registered in any Berne Convention signatory nation, but explaining China’s WTO obligations to a 21-year-old customer service representative seldom works. And as you can probably imagine, securing the removal of copyrighted IP for which a copyright has never been registered anywhere is even more difficult.

The more sophisticated/well-heeled the website, the more likely they have a formal takedown procedure. For the smaller websites, we generally have to contact someone directly by telephone. But unless the website is a pirate site (which is rare), it will not want to be sued for hosting counterfeit or pirated items and so long as we do all the work for them, they are usually quite willing to take down rogue products and content.

Once the whole takedown process begins, it pretty much continues forever because the pirates and counterfeiters do jot just go away after their first upload is taken down. Even after we stop one or two of the counterfeiters, you should expect more to pop up. This is why companies hire us to monitor and report and after we remove the existing counterfeits, we should discuss what sort of future programs make sense for your company. We recommend you have us try to figure out who is doing the counterfeiting and what we can do to try to stop it or at least slow it down. Oftentimes it is your own factory or distributor.

Our law firm has an Alibaba account that makes us eligible to seek removal of links that infringe our clients’ IP. We do this by providing the following to Alibaba: (i) our client’s “business license,” (ii) any formal IP registration documents and (iii) (sometimes) a power of attorney signed by the client, authorizing us to file the complaint on its behalf. We also submit the following information: the IP registration number(s), the title of the IP, the name of the IP owner, the type of IP, the country of registration, the time period during which the IP registration is effective, and the period during which the IP owner wishes to protect its IP rights. We translate these documents into Chinese to make things easier on the Chinese website company and to greatly speed things up.

Once Alibaba verifies the above information, we provide the infringing links and removal nearly always occurs very soon after that. For complaints concerning patent rights, we usually need to provide proof of the connection between the infringing material and the IP being infringed. Alibaba normally then sends our complaint to the infringing party. If the infringing party does not respond to our complaint within three working days of receipt — by deleting the infringing link or by filing a cross-complaint — Alibaba will delete the infringing link. Absent prior written permission from Alibaba, the infringing party would then be prohibited from posting the same information on Alibaba again. If the infringing party files a cross-complaint, we will need to deny the cross-complaint, and then Alibaba handles the “dispute.” Alibaba normally resolves such disputes within a few days. Counterfeiters rarely file cross-complaints; they typically just slink away. But they seem to be filing them more often now so as to buy time and to force the foreign company to retain a Chinese-speaking lawyer.

If your IP (especially your trademark or your copyright) is registered in China, securing removal of counterfeit products from Chinese websites is usually relatively fast and easy. If your IP is registered in a country other than China, securing the removal of counterfeit products from Chinese websites will be more difficult. If your IP is not registered in any country, your best strategy for securing removal of infringing products is usually (but not always) to register it first (typically wherever it can be done fastest and cheapest) and then seek removal, rather than to seek removal first.  If you want to protect your products from counterfeits popping up on the web (and then staying there), plan now with your IP filings for takedowns later. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

Early in this post, I said there are times where “we tell the potential client they should not bother retaining our law firm for their product removal because the gain from removal will not be worth the cost” and promised more on this later, which is now. So I read the New York Times article from beginning to end and I looked at a ton of the Vintage Industrial products on its website and, like I said above, they make great stuff by hand. Great furniture plus hand-made in the United States using old-school methods is not cheap.

Please allow me to digress a bit. Actually, please allow me to digress a lot.

Many years ago I went to an art gallery in Hanoi and saw a painting I loved, going for around USD$4500. I loved it because its colors pop, its brush strokes are emphatic and incredible, and the eyes of the woman in the painting are mesmerizing.  It was a work of art. Later that day I saw copies/counterfeits of that painting all around Hanoi going for around $50. I ended up waiting a couple of days and then buying the original. It now hangs on a wall in my office — it’s the painting above! Here’s the thing: I never once considered buying the copy because the copy lacked everything the original had. The brush strokes were nothing special. The colors looked tired. And the eyes of the woman were off-kilter. I wanted a beautiful and well-done piece of art, not the equivalent of what hangs in the rooms at a Holiday Inn Express. They are not at all the same product and they don’t appeal to the same customer.

Those who buy a $15 knock-off Gucci purse would not pay $4650 for the real thing if there were no knock-offs; they would buy a $14 no-name purse somewhere else.

Way back in 2012, in How To Protect Your IP From China. Part 1, I wrote talked how it is important to keep your eye on the prize when dealing with your IP in China:

But there are of course circumstances where not going into China DOES greatly increase your chances of avoiding China IP theft. In those situations, should you avoid China? Not necessarily. In those situations you should do a cost-benefit analysis, or as I am always telling my clients, you should “keep your eyes on the prize.” Your company is in business to make money, and as important as IP is to your company – and no doubt for many companies, especially biotech companies, IP can be everything — your end goal is to maximize profits. There will be plenty of times where you can make more than enough money in China to justify putting your IP at risk.

Where I am going with all this is that companies that see knock-offs of their products immediately get all up in arms — and rightly so –and too often want to do “anything and everything’ to stop it. But that is not always going to be the best use of their time or their money. It generally (but not always) will not be worth it for a company to spend money trying to stop knock-offs in a country in which they are making no sales and have no future plans to sell to. It also is often not worth it for a company to spend a lot of time or money trying to stop knock-offs with which it is not competing.

So read the New York Times article and then ask yourself what it’s really about. Is it about Chinese counterfeiting? Is it about how American companies are impacted by Chinese counterfeiting? Is it about how American companies are economically harmed by Chinese counterfeiting. Is it about how American companies need to find a balance between advancing their company’s profits and fighting off Chinese counterfeiting? I think it is about all these things.

What do you think?

Allow me to now pile on from a legal perspective and talk about how our international IP lawyers far too often have to deal with the remnants of companies that have had their IP “stolen by China” before they even made their first product. Protecting your IP before you go on Kickstarter is critical and far too few companies do this. This also costs money, but almost always less than $5,000, even for companies with steep IP requirements.

The Titoma article recognizes how consistently and ruthlessly and quickly Chinese companies are to make Kickstarter projects their own and beat

As a soon as a project is starting to get some good traction on the internet you can rest assured there are factories in China working on a lower cost version. This means the market window to establish yourself as the actual leader of the segment you’re creating shrinks rapidly with every month delay.

I can and will top this by describing what our lawyers see Chinese companies do with Kickstarter products. Now don’t get me wrong, our international manufacturing lawyers love Kickstarter. We’ve had clients start from nothing and raise hundreds of thousands of dollars from Kickstarter and then use that proof of concept to raise hundreds of thousands (even millions more). We’ve also had companies come to us after going up in flames due to Kickstarter. In Kickstarter And China Manufacturing. You Are So Wrong On Your China Risks, we talked about a typical kickstarter China conversation:

Company with product:  We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.

Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.

Company with product:  We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.

Me: Who drafted your NDA, an attorney with China experience?

Company with product:  No, we did it ourselves. It really just needs a quick review.

Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers.  Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.

Company with product:  Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.

Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. Why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product? And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.

Company with product:  Yeah, well, I’ll talk all of this over with my partners.

If you are going to do just one thing to protect your company and your product before you go on Kickstarter, register your brand name as a China trademark. In China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, I talk about why this is so important:

When it comes to the need to secure the appropriate trademarks in China, I am blunt. Anyone who doesn’t do it is making a big mistake:

I tell them how if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for their filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that, with very few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ  trademark, that company has every right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.

I had a similar discussion the other day with a company that told me that they will soon be listing on Kickstarter. I very strongly suggested they register their brand name as a trademark before they go on Kickstarter and sent them some blog link as to why. They responded as follows:

Thanks Dan – a good read… so, ok here are my questions/responses.

1)  It seems like you keep seeing the same pattern over and over (i.e. ignoring your good and  prudent advice) – so what is the common root cause of the theme? Said in another way, why do so many smart/rational folks decide to act  less smart/irrational by not doing IP/Trademark in China? I am sure a balanced analysis may show they are, at minimum, acting rationally, but tough choices are being made. My guess is that the cost seems prohibitive or there is no “on ramp” to an effective  China IP  highway. The feeling is overwhelming and akin to going from 0-65 mph in 3.5 seconds and asking everyone to drive a Ferrari because it has the 0-65 speed you need.

2)   I see trademark as something worth reviewing, possibly an “on ramp” strategy – what is the cost?

I am probably not too dissimilar to those other startups. All things considered, if I have a choice between using limited/scarce funds to allocate between textbook perfect China IP vs getting to a revenue state, most will chose allocating towards revenue.

I responded as follows:

They think the world is the United States. The problem is it isn’t. They’ve been trained to go to market and then build the foundation. That works for the United States, but not for China. In the United States, the first to use a brand name gets the trademark and to get a trademark you must use it. This leads American companies not to worry much about trademarks. In China, it’s the first to register who gets it and use is irrelevant (except if you go three years without using your registered trademark, you can lose it). There is no trademark via use.

American companies also ignore that just manufacturing in China requires a trademark because if someone registers your brand name as a trademark they get it and then they can stop your product from leaving China.

And here’s the big thing. As soon as any product goes up on Kickstarter, a ton of people in China will review it and if they like it they will register the product’s brand name as their own China trademark and then start making it. Oftentimes the company that makes it will be the same one you are talking to about having your product made and they will keep talking to you just to stall you. In the meantime they will beat you to market with your product and then be able to block your product from leaving China because it violates their trademark. And all this just keeps getting worse. See China Trademark Theft. It’s Baaaaaack in a Big Way. And it is mostly American companies that pay for this because the EU trademark system is more like China and so they get it. In fact, many Western European countries so get this that their governments will pay for their start-up companies to secure their IP in China early. Because of this we have represented a ton of Swedish and other European start-up product companies.

Also, Americans love patents and underestimate the value of trademarks. See China and Worldwide: Trademarks Good, Patents Bad for more on this. Patents are expensive and difficult to enforce and they rarely help you get something taken down off an online marketplace. Trademarks are cheap and easy and surprisingly powerful.

So for the thousandth time, register your brand name as a China trademark. EARLY — before anyone in China knows what it is and can beat you to it.

 

China’s new e-commerce law, which took effect January 1, 2019, threatens to upend the entire daigou business model. As we’ve written previouslydaigou are individual shoppers who purchase goods overseas and then bring them back in their luggage for resale in China. Estimates of the value of goods brought into China this way each year ranges from about $6 billion to upwards of $100 billion.

The new e-commerce law requires anyone who sells products online to (1) register in China and in the country where they purchase goods and (2) pay all required taxes. If the law is strictly implemented and enforced, this would be the end of daigou, because the vast majority of daigou sales are online, and with few exceptions the daigou business model requires tax evasion.

Most of the articles about daigou refer to their wares as grey market goods. This is, at best, misleading. The term “grey market” suggests the existence of a legal loophole or ambiguity. But China’s rules on import tariffs, sales tax, and consumption taxes are quite clear: if you import goods into China, they are subject to tariffs. If you resell goods in China, they are subject to tax. If daigou paid the proper duties and taxes, they would have no business because they could not compete on price with legitimate importers. The major exception would be for goods that were difficult or impossible to buy directly in China.

It’s true that from a trademark standpoint, China has no per se prohibition on parallel imports. See China Trademarks: Counterfeit Goods and Parallel Imports. But this is irrelevant to the question of tax fraud.

As we have noted previously:

China has attempted to crack down on illegal grey market importation through a number of means, including (1) higher taxes on goods brought in by travelers as part of their luggage, (2) lower taxes on goods imported through legitimate channels; and (3) increased penalties for those caught falsifying customs declarations.

Will this new attempt be more successful? Early indications are that it has teeth. Customs officials began cracking down on the import side last fall with enhanced inspections of luggage at airports. Rumors began flying on social media, and then, after LVMH informed investors of such inspections in a conference call last October, luxury goods companies’ stock prices slumped across the board, falling somewhere between 3 and 10 percent later that day.

How and when the e-commerce sites will implement the new law is yet to be seen. Many daigou are already migrating away from “classic” e-commerce and into social media or instant messaging, where they describe their products using code words. You would think this, plus the increased scrutiny at the border, would marginalize daigou as a viable sales option – if you make something difficult enough, only the true believers will remain. But I have learned not to be surprised by the ability of Chinese entrepreneurs (and consumers) to turn on a dime in response to changing market/regulatory conditions – to say nothing of their willingness to ignore tax laws.

It may be more difficult for luxury brands to adapt. I had previously posited that although manufacturers might not be concerned about relying on daigou sales, they should be.

It boggles the mind why any company – let alone a major luxury brand – would have a market entry plan dependent on third parties successfully committing tax evasion. See Grey Market Goods and China, Part Two. But that’s exactly what some brands did, and now they’re scrambling to put together a “real” China strategy. Just for the record, my firm’s China lawyers have always advised against relying on this strategy.

Meanwhile, the trade war lurks as subtext. Right now products brought in by daigou are unofficial in every sense. If they are reported and taxed, then China would reduce its trade imbalance by a significant amount AND increase tax revenues. Easier said than done, even in China. But the trend is clear.

Huawei indictments for IP theftThe re-opening of the U.S. government has brought with it a renewed assault on Chinese telecoms manufacturer Huawei and its U.S. subsidiary. On January 28, the U.S. Department of Justice unsealed two indictments against Huawei. The first indictment concerns ongoing claims against Huawei and its CFO, Meng Wanzhou, for allegedly violating U.S. sanctions against Iran. This indictment can be found here.

The second and more interesting indictment concerns alleged trade secret theft conducted by Huawei’s U.S. subsidiary under the direction of Huawei China. The trade secrets indictment can be found here. 

The factual portion of both indictments makes for interesting reading. In particular, the trade secrets indictment should be read by any company that engages in technology based business relations with China. This is because the practices described in the indictment do not apply solely to Huawei. If you want a primer on “how they do IP theft” this is where to start. Note that if Chinese companies do in the United States what is described in this indictment consider what Chinese companies do in China.

Let’s say you have set up a WFOE in China to manufacture a critical chemical. The composition of the chemical and its method of manufacture are trade secrets. You have resisted the demands of your Chinese customers to set up a joint venture in China. You have resisted the demands of your Chinese customers to license your technology to a Chinese entity. The only Chinese persons with access to your technology are your Chinese employees. Since those employees are insiders, not outsiders, your technology is safe. Right? Unfortunately, the answer is no.

What can happen to the Chinese employees of your WFOE in China is exactly what allegedly happened to the Chinese employees of Huawei’s U.S. subsidiary. The local Chinese government will give your employees a detailed list of exactly what your employees must take from the WFOE and the timeframe in which they must complete the task. Though your Chinese employees may formally work for your WFOE, the Chinese government is essentially their ultimate “boss,” in the same way Huawei China is alleged to have been the ultimate boss of the employees of their U.S. subsidiary.

What though if your WFOE employee is an honest person and resists following the local government’s instructions? Or perhaps the employee is not so honest but resists simply because he or she does not want to risk losing his or her job if caught. The local government responds: your spouse works as a nurse in the local hospital and it would be too bad if she lost her job. Your father lives on a pension from the local government and it would be too bad if he lost his pension. Your daughter is applying for admission to the local high school and it would be too bad if she is denied entry. On the other hand, if you provide what we [the local government] have requested, we will ensure none of this happens. Moreover, you and your family will receive benefits. If you lose your job, we will find you another job. Don’t worry about it. Just do what you are told and help YOUR country. The pressure to comply is overwhelming and your Chinese employee complies. Your employee really has no choice.

This is the practice in China. Most WFOE managers in IP sensitive industries with whom I have worked in China understand this and so they do not even try to control their employees on IP because they know who is their real boss. They instead set up a costly system in which none of their Chinese employees is given  access to the WFOE’s IP sensitive information. This makes operations difficult and oftentimes the system’s rules are violated and access to IP is granted. When that happens, the technology gets taken because the pressure from the government never stops, in the same way the pressure from Huawei China is alleged to have never stopped against Huawei’s . U.S. employees. This is what is often meant by “forced technology transfer.”

What then should companies that do business in China or with China take away from these two Huawei indictments? Note first of all that neither focus on security issues related to the Huawei equipment that has led the United States and other countries to ban Huawei 5G telecom equipment. That claim is specific to Huawei and the type of equipment it manufactures.

These indictments are focused on how Huawei conducts business. The U.S. Department of Justice (DOJ) is claiming is Huawei intentionally and as a matter of company policy violated U.S. law. For example, in the trade secrets indictment, the DOJ claims Huawei China directed its U.S. employees to steal trade secrets from T-Mobile and when the U.S. employees did not succeed at doing this, Huawei China dispatched a Chinese based engineer to complete the job. The indictment goes on to allege that when Huawei got caught taking T-Mobile’s IP, Huawei submitted an internal report lying about what happened. Huawei’s technology theft is alleged to have been part of a Huawei China program that paid its employees bonuses for stealing intellectual property.

The DOJ claims Huawei stole T-Mobile trade secrets and violated the Iran sanctions and by doing so it overturned the underpinnings of the U.S. legal system and the world legal order. The DOJ’s press release on the trade secrets case makes this clear:

“The charges unsealed today clearly allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace,” said FBI Director Wray. “To the detriment of American ingenuity, Huawei continually disregarded the laws of the United States in the hopes of gaining an unfair economic advantage. As the volume of these charges prove, the FBI will not tolerate corrupt businesses that violate the laws that allow American companies and the United States to thrive.”

“This indictment shines a bright light on Huawei’s flagrant abuse of the law – especially its efforts to steal valuable intellectual property . . . to gain unfair advantage in the global marketplace . . .”

The U.S. charges are directed at the impact Huawei’s actions have had on both the United States and the rest of the world. The U.S. seeks to expand its claims against Huawei to go beyond the device security concern to a more general concern with how Huawei (and other Chinese businesses and, most importantly, China itself) violates the laws and regulations underpinning the modern free trade system. This is an ambitious goal that will extend beyond Huawei as a company and even beyond IP enforcement as a specific issue. The trade secret indictment complains of actions that go beyond U.S. jurisdiction. The indictments against Huawei read as a global campaign against how Huawei and China do business.

We should therefore expect additional DOJ enforcement actions against Chinese companies. Ms. Meng’s arrest in Canada should not be seen as an isolated case. Worldwide arrests and extradition proceedings and civil and criminal litigation against Chinese companies and their executives will become more common and not just in the United States. We also will see such actions brought by Canada and Germany and Japan and Australia and Spain and England and others as well. The DOJ and the FBI and governments and private companies from around the world will work together to implement this program. These enforcement and litigation programs will extend to various other Chinese companies. The charges against Huawei should be seen as the first, not the last.

Most U.S. companies previously were reluctant to take this sort of aggressive action against China IP theft because of concerns doing so would impact their business in China. They feared a “tit for tat” response by the Chinese government. With the deterioration of US-China relations, this concern seems to be melting away and decades of pent-up resentment against China’s IP practices could well spill out in a cascade of claims from the US and the EU and others.

Welcome to the New Normal.

UPDATE: It took less than 24 hours to prove out the above. See FBI charges second Apple employee with stealing autonomous car secrets.

China IP Lawyers
Photo by Ina Centaur

Barely a day goes by without one of our China IP lawyers getting contacted by an American or European company telling us that its products are being counterfeited and would we please get so and so (usually the alleged counterfeiter or the online site on which the counterfeit products are posted) — to remove the offending items immediately. If only it were that simple. Our lawyers have a near 100% success rate at getting counterfeit products removed from Chinese e-commerce websites like Tmall and Taobao and the same holds true for American e-commerce sites. But our success rate depends largely on the advertised product truly being a counterfeit, as that term is commonly defined by lawyers not businesspeople.

All of the big American and Chinese e-commerce sites, including the Alibaba family of sites (Taobao, Tmall, Alibaba, AliExpress, 1688.com, etc.), have formal internal procedures for removing product listings that infringe a third party’s IP rights. To secure the removal of infringing listings, you must follow their procedures to the letter. Among other things, you must provide documentation proving (1) that you exist and you are the IP owner and (2) that you as the IP owner still have the rights to the IP in question. Only after you have submitted these documents and had them verified by the e-commerce site can you even submit a takedown request.

When you do submit your takedown request (assuming everything goes well), most e-commerce sites will remove the counterfeit products within a week or so. When things don’t go well with a Chinese e-commerce site (which judging from the volume of phone calls and emails is rather frequently) it is vital to have a person on your side who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website posting the counterfeits of your products. This person is necessary to get to higher-level employees at the Chinese e-commerce site to explain to them why the listing does in fact violate your IP. Sometimes it seems we get products taken down simply by constantly pushing the problem to higher and higher levels at the Chinese e-commerce company, all the while making clear that things will go easier for them if they take it down than if they do not.

To date, our China IP lawyers have succeeded with nearly every takedown request seeking removal of products that infringe our client’s trademarks or copyrights. But about half the time, we have to tell the potential client that they should not bother retaining our law firm for their product removal because there is such a small likelihood of success. The below email from one of our China IP lawyers who regularly works on takedown matters across multiple websites (both in China and elsewhere) explains in the below email summary why this is the case:

Every Chinese website has its own takedown protocols and following that protocol to the letter is the key to getting a product removed. You mention wanting to sue these websites. We emphatically do not advise that unless and until we have sought to get your products taken down and failed. Lawsuits are expensive and based on our track record in securing takedowns, the odds are overwhelming that we will never need to file one on your behalf.

Note that  only the copyright or trademark owner or its authorized representative can make takedown requests. However, sites vary as to the sort of authentication they require for Powers of Attorney and most of the sites know our lawyers well enough that they almost never require we provide them with a formal Power of Attorney to achieve a takedown.

It is critical we can prove you have registered your IP (your trademark or your copyright) somewhere. Some Chinese sites sometimes will take down products with foreign IP (i.e., non-China) registrations, but China registrations are always much better. Technically, China is obligated to recognize copyrights registered in any Berne Convention signatory nation, but explaining China’s WTO obligations to a 21-year-old customer service representative seldom works. And as you can probably imagine, securing the removal of copyrighted IP for which a copyright has never been registered anywhere is even more difficult.

The more sophisticated/well-heeled the website, the more likely it is that they have a formal takedown procedure. For the smaller websites, we generally have to contact someone directly (usually by telephone) because there are no instructions on the website or the instructions that are there either make no sense or simply do not work. But unless the website is a pirate site (which is rarely the case), it does not want to be sued for hosting counterfeit or pirated items and so long as we do all the work for them, they’ll be happy to take down rogue products and content.

Once the whole takedown process begins, it pretty much continues forever. because the pirates and counterfeiters don’t just give up after their first upload is taken down. Even after we stop one or two of the counterfeiters, we should expect more to pop up. This is why companies hire us to monitor and report and after we remove the existing counterfeits, we should discuss what sort of future programs make sense for your company and your situation.. One of the things we should do is try to figure out who is doing the counterfeiting, how they are doing it, and what we can do — if anything — to try to stop it or slow it down. Oftentimes it can be your own factory or distributor.

Our law firm has an Alibaba account that makes us eligible to seek removal of links that infringe our clients’ IP. We do this by submitting proof of identification and authorization, as well as information regarding the IP being infringed upon. We do this by providing the following to Alibaba: (i) our client’s “business license,” (ii) any formal IP registration documents and (iii) (sometimes) a power of attorney signed by the client, authorizing us to file the complaint on its behalf. We also submit the following information: the IP registration number(s), the title of the IP, the name of the IP owner, the type of IP, the country of registration, the time period during which the IP registration is effective, and the period during which the IP owner wishes to protect its IP rights. We translate these documents into Chinese to make things easier on the Chinese website company and because doing so greatly speeds things up.

Once Alibaba verifies the above information, we provide the infringing links and removal nearly always occurs quite quickly after that. For complaints concerning patent rights, we also need to provide proof of the connection between the infringing material and the IP being infringed. Alibaba normally then sends our complaint to the infringing party. If the infringing party does not respond to our complaint within three working days of receipt — either by deleting the infringing link or by filing a cross-complaint — Alibaba will delete the infringing link. Absent prior written permission from Alibaba, the infringing party would then be prohibited from posting the same information on Alibaba again. If the infringing party files a cross-complaint, we would then need to deny the cross-complaint, and then Alibaba would handle the “dispute.” Alibaba normally resolves such disputes within a few days. As you would probably imagine, counterfeiters almost never file cross-complaints; they typically just slink away.

We have achieved similar results with China’s other leading and legitimate online marketplaces. But as you would expect, China’s smaller and sketchier marketplaces are more difficult when it comes to IP protection.

If your IP (especially your trademark or your copyright) is registered in China, securing removal of counterfeit products from Chinese websites is usually relatively fast and easy. If your IP is registered in a country other than China, securing the removal of counterfeit products from Chinese websites is definitely possible, but less certain. If your IP (your unregistered U.S. trademark, for instance, or your unregistered copyright) is not registered anywhere, your best strategy for securing removal of infringing products is usually (but not always) to register it first (typically wherever it can be done fastest and cheapest) and then seek removal, rather than to seek removal first. The same generally holds true for US websites, but US websites are much less likely to remove products that infringe on your patent rights than are Chinese websites. US websites typically take the position that you need a US court order stating that the product or products infringe on your patent for a removal based on patent infringement.

If you want to protect your products from counterfeits popping up on the web (and then staying there), plan now with your IP filings for takedowns later. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

China trade war

The trade war with China continues. The U.S. declared a 90 day truce which ends on March 1. Negotiators from the two sides will meet in Beijing on January 7. Many are looking for a “sign” from the Chinese government on the position China will take in the negotiations.

As stated in the U.S. Section 301 complaint, the United States’ position is that China must make major changes in the fundamentals of the Chinese economic system. So the question is whether such a major change is likely? Or will the Chinese side simply offer the same old thing? To date, no formal proposals from the Chinese government have been revealed to the public. So we are required to look for other indicators.

Normally, the strongest indicator would come from the CCP Central Committee meeting held each November. However, no meeting was held in 2018. This is in itself big news because major reform proposals are usually unveiled at this meeting. See The biggest story in Chinese politics right now — silence over Communist Party’s autumn meeting. The absence of a Central Committee meeting then logically suggests no reforms of the Chinese system are planned for 2019. So if the U.S. plan is designed to precipitate a series of reforms in China, this is not likely to happen.

This conclusion is supported by Chairman Xi Jinping’s recent speech at the meeting commemorating the 40th year of China’s reform and opening-up program. The content of that talk is generally taken as the definitive statement of the Chinese government program for 2019. A copy of the full speech (in Chinese) can be found here.  Foreign response to the speech has not been positive. See Xi’s Scary Interpretation of the Last 40 Years of Chinese History.

What did Xi actually say? He started by listing the obvious achievements of the Chinese economy over the past 40 years. This remarkable economic progress was initiated with the announcement of the reform program at the 3rd Plenum of the 11th Party Congress convened on December 18, 1978. There are two initial points to note. First, the reform and opening up program was initiated at exactly the type of meeting that was cancelled for 2018. This suggests we can expect no such reform for 2019. Second, the achievements listed by Xi are entirely economic. Nothing else counts.

In the talk, Xi concludes that Communist Party guidance was entirely responsible for the success of the 40 year economic development program. No other factor is of any significance. Assuming this conclusion is correct, Xi then quite reasonably concludes that the future of China and the fate of the CCP depends on two things. First, the CCP must remain in absolute control of China. Second, the standard for evaluating the success of the CCP depends entirely on the continued economic development of the Chinese economy.

On this basis, Xi then lists the following nine standards the Chinese government will follow for the near future:

1. The CCP will remain in complete control of the government, military and civil society.

2. The sole measure of CCP success is the living standards of the Chinese people.

3. Marxism will remain the core guiding ideology. That is, input from Harvard trained economists and MBAs will mostly be ignored.

4. China will continue to hew closely to socialism with Chinese characteristics. This recognizes that China’s Marxism does not exactly correspond to the works of Marx or Engels.

5. China will follow on and improve the institutions of socialism with Chinese characteristics. No new institutions will be introduced.

6. Economic development is the top priority.

7. China will remain “open” to the rest of the world but it will not accept attempts by other countries to meddle in its internal affairs and it will oppose attempts by any foreign country to impose its will on China. This has to be read as referring to demands from the U.S. and many other countries that China comply with its treaty obligations and follow the rules of international trade and and international relations. China is only obligated to comply with rules that benefit China.

8. The only authority with power to regulate the CCP is the CCP itself. In other words, single party rule outside the constitution and the legal system will continue.

9. Dialectical materialism and historical materialism will be the standards for planning and control of the reform process. Once again, this means no Wharton business school graduates need apply as advisors to the Chinese government.

This set of nine standards is China’s plan for the near future and it should dash the hopes of U.S. analysts pining for a return to the policies of Deng Xiaoping and Zhu Rongji. What does this mean for the U.S.-China trade war and the meetings for next week? It means that if the only solution for the U.S. is for China to fundamentally overhaul its basic economic and trade policies, there will likely be no solution.

However, this rigid view is not the only possible outcome. The truth is that from the standpoint of economic development, China needs the U.S. and the U.S. needs China. Xi’s talk places economic development at the center of Chinese government policy. There is no question the U.S side also sees economic development as a core objective. Given the alignment in those core objectives, it is not unlikely the two sides will put aside ideology and come to some form of agreement. However, that agreement would almost certainly need to be quite different from what is currently being demanded by the U.S. trade representative. What it will look like is anyone’s guess.

China Trademark

Like most countries, China has a use requirement for trademarks: to remain valid, a trademark must be used in commerce at least once every three years. But as we wrote in China Trademarks: When (and How) to Prove Use of a Mark in Commerce:

Unlike the United States, China does not have an affirmative requirement to prove that a trademark is being used in commerce. You do not have to prove use for a trademark application to proceed to registration, and once a trademark is registered you do not have to prove you are still using it to maintain or renew the registration.

China does require proof of use in certain circumstances. The most well-known circumstance is when a trademark is challenged for non-use; at that point a trademark owner has two months to provide evidence of use in the three years prior to the non-use cancellation being filed. (You can’t start using the mark after receiving the notice.) Another circumstance is when a trademark owner is suing a third party for trademark infringement and trying to prove damages. If you can’t show that you have been using the trademark yourself, it’s difficult to convince a Chinese court that you lost money due to another party’s infringement.

In my previous post, I outlined the general sorts of documents that could be used as evidence of trademark use. The Chinese Trademark Office (CTMO) has recently released a document that categorizes acceptable and unacceptable forms of evidence of trademark use in China, helpfully titled Explanations on Submission of Evidence of Trademark Use (提供商标使用证据的相关说明).

Acceptable trademark use on goods includes:

  1. on goods or their packaging/labeling, or including the mark on product tags, manuals, brochures, or price lists;
  2. in documents relating to the sale of goods, such as contracts, invoices, bills, receipts, import/export documents, inspection/quarantine certificates, and customs clearance documents;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

Acceptable trademark use on services includes:

  1. on the premises where services are offered, including on service brochures, signboards, decorations, staff attire, posters, menus, price lists, coupons, office stationery, letterheads, and other articles related to the services;
  2. on documents associated with the services, e.g., invoices, remittance advice, service agreements, repair and maintenance certificates;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

The above is not an exhaustive list, but for good measure the Explanations note that the following does not constitute acceptable trademark use:

  1. documents relating to a trademark’s registration, including any statements by the trademark owner about its exclusive rights to such mark;
  2. use in private commerce (i.e., not openly);
  3. use on complimentary items;
  4. assignment or licensing of the trademark without actual use by the licensee; and
  5. de minimis use of the trademark merely for the purpose of maintaining the registration of the trademark.

The last item is perhaps the most controversial and subjective, because trademark squatters have been known to make a single Taobao sale of an item to themselves (or to a relative) so they have evidence of use in China. In the past, such use, which to most rational people would be considered both de minimis and in bad faith, has sometimes been deemed acceptable by the CTMO. That being said, such lax rules have also redounded to the benefit of legitimate trademark owners who have not been scrupulous about keeping records and find themselves in need of last-minute evidence of use. But the trend now is for the CTMO to be stricter about de minimis use, and not consider it sufficient proof to maintain trademark rights.

All of the above evidence must come from China, which almost always means the evidence must be in Chinese and be capable of authentication by the issuing entity. This makes sense: to prove use in China, you need evidence from China. A purchase order from a US company (even if it includes the trademark) is unacceptable. An invoice from a Chinese company that specifies the goods but does not mention the trademark is similarly unacceptable.

Most companies selling products in China have no problem providing the necessary evidence. It’s the companies that only manufacture in China that have problems, because they often have no acceptable documentation from China that includes the trademark. Don’t be one of those companies. Think about how you can best gather up your evidence and do so. Now.

international lawyerA startup U.S. consumer product company with an ultra-hot new product line wrote one of my law firm’s international lawyers asking what they needed to do to sell their product through a Chinese company that had expressed interest in being the U.S. company’s “China representative.” After a few emails on various different legal subjects, our international lawyer wrote the following email (modified a bit) that provides such good and basic business advice that I wanted to share it here. It deals with the basics on what to do when you are approached by a foreign company wanting to sell your products in another country.

I am now about to provide you with some business advice, not legal advice.

You are going to get many companies from foreign countries that are interested in selling your products. Most of those companies will not be worth more than ten minutes of your time, either because they are not equipped to do what you do or because their countries are too risky/too small.  Going international can be a great thing but it should be done in a way that suits your business and your plans and not according to who just happens to contact you. I do not purport to be an expert on your product, but I would say that for a company like yours, Mexico, Canada and the EU make the most sense, simply because they are relatively easy, relatively safe, and relatively large. I doubt any one company in any one country has sufficient contacts to sell within the entire EU, so you probably will need to tackle EU sales country by country or at least region by region.

If I were in your shoes I would do the following first:

1. Figure out where selling your product makes sense.

2. Figure out whether those who have contacted you from the countries/regions that make sense are the right people/companies to be selling your products.

3. One of the most important things you need to do if you are going to be going international is to protect your brand name in those countries where your product will be sold. When you decide where it makes sense to sell your products, you should apply for a trademark in those countries. Note that you can get one trademark for the entire EU and that usually (but not always) makes sense.

4. As far as you needing an NNN Agreement before you show your products to potential distributers, that will depend on your exact situation. If you are going to send product samples to companies that could not just buy them somewhere else (to copy), then you should have a signed NNN Agreement in place before you do so. But if those products are already readily available, an NNN Agreement probably will not help you much if at all. If you are going to be discussing anything with these potential distributors that you wish to keep secret (who manufactures your products or your costs, for instance), you should have a signed NNN Agreement in place before you do so. But the safest protection would be for you not to provide samples until you absolutely must do so. You at least want to make sure you have some idea of with whom you are dealing before you reveal much of anything, NNN or no NNN.

The big question is going to be how you will want your relationship with these companies to be structured. Will you want them to be your distributor such that you have a contract with them? See this for what distribution contracts often involve. Or do you just want a situation where you sell to these companies at a reduced price, along with an agreement making clear they are not allowed to re-sell anywhere other than in their own country? We should discuss the pros and cons of these (and other) methods.

China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I gave a long interview last night with a Canadian reporter regarding China. The focus was mostly on what the international lawyers at my firm were seeing with China in light of the Trump tariffs. At one point though, I was asked one of the most common questions I get asked by reporters and it went something like this: “What about intellectual property in China. Is that a risk for foreign companies that do business in China? Are things getting any better on that score?”

My initial answer was something like this: “I am going to give the same answer I have given for at least a decade. Things are not as bad for intellectual property in China as most believe and the intellectual property risks faced by companies that do business in China have declined every year for at least the last 15 or so years.”

But then all of a sudden (like right after I heard what I had said), I realized that my knee-jerk response (conditioned by the last 15 or so years) was no longer true. I then said something like the following:

Wait a second. I take that back. What I said was true but it stopped being true maybe 3-5 months ago. When a Western company goes to a Chinese manufacturer to have a new product made, that Chinese manufacturer looks at the new product and wonders whether it can make more from that product by “stealing” it and making it for itself or by making it for the Western company for the next five years. Most of the time, after conducting that cost benefit analysis, the Chinese manufacturer would choose to make the product for the Western company for the next five years.

But now, what with so many Western companies having moved their manufacturing outside China and so many more looking to do so (See e.g. Would the Last Company Manufacturing in China Please Turn Off the Lights and Doing Business Outside China: It’s Thailand’s Time), the calculus for Chinese manufacturers has changed. The Chinese government’s increasing antipathy towards private enterprise does not help either. All this means the new analysis for Chinese manufacturers seems to be whether they can make more by making the product for the Western company for the next year or so than they can by stealing it right now. So what we are seeing is Chinese companies stealing products immediately, rather than waiting until it has become somewhat clear that the Western company for which it is making the product will be moving to another manufacturer.

So yes, the intellectual property risks for Western companies doing business with China or in China are higher now than they were because the relative benefits to Chinese companies stealing your IP have gone up.