China Software as  Service SaaSThe market for software has shifted to the cloud. Using the Internet cloud, software products are no longer delivered as compiled programs installed on physical devices. The software is delivered online as an Internet-based service. This is known as Software as a Service (SaaS).

SaaS works fine when confined to the Internet of a single country or region such as North America or the European Union. The core concept of SaaS is that an open Internet exists on which SaaS can be built and delivered. But what happens when companies attempt to deliver SaaS into a closed Internet system?

That is the ultimate issue in providing an SaaS product in China. SaaS products not approved by the Chinese regulators are either blocked or in danger of being blocked. Gmail, Google Docs, Dropbox, and GitHub are all examples of SaaS products that are always at risk of being blocked in China. For SaaS products housed on servers located outside China, Chinese regulation makes active commercial exploitation difficult.

This applies to new SaaS products. Both IBM and HP are planning to roll out SaaS-based blockchain products. HP even calls their new offering “Blockchain as a Service.” Almost by definition, the blockchain system is intended to be global. But what happens when that service hits the closed Internet of China?

There is essentially only one way to deliver SaaS in China. The system must be housed on a server located in China and be licensed to a Chinese owned entity that has direct contact with Chinese customers.

The China server/China licensee model works like this:

1. The SaaS software is housed on a server located in China. This means the Chinese government will at all times have the right to access the server and inspect the contents of the software and all related data and information.

2. The SaaS service typically must be provided by a Chinese owned entity even though the regulations suggest this entity may be a Sino-Foreign joint venture.

3. The SaaS service is licensed to the Chinese entity in accordance with a very expensive and restrictive set of minimal requirements.

4. The SaaS software/platform has received the required approvals.

It has been difficult for many foreign SaaS developers to accept that the China server/China license model is in most cases the only way to sell SaaS products to Chinese consumers but the major SaaS players have already figured this out.

For example, the developers of video games have always been plagued by pirating in China. Game developers moved to the online model and developed the Massive Multiplayer Online Game model (MMOG), which is a form of SaaS. All of the major U.S. MOOG game developers now deliver their product in China using the China license model:

  • Valve Software’s Dota 2 is provided in China by Perfect World.
  • Blizzard Entertainment’s World of Warcraft is provided in China by Netease.
  • Riot Game’s League of Legends is provided in China by Tencent.

In the field of business software, Microsoft provides its Office 360 and Azure cloud service in China through a license with 21 Vianet.

Having accepted that a license in China is required, the real difficulties begin. The Internet infrastructure in China is quite advanced and due to the work of 21 Vianet and others, there is plenty of server space and bandwidth available for effective delivery of even the most complex SaaS products. The success of MOOG products in China is proof of this.

The real problem in China is in finding an appropriate partner/licensee. For the Chinese entity, operating as a licensee is expensive and technically demanding. So the real challenge in China is to find a licensee that is a) willing to take on the burden, b) has the technical capability to do the work, and c) the financial ability to take on the burden of ICP licensing, obtaining and maintaining approvals and then operating the complex server and software systems. Finding a willing licensee is oftentimes difficult for small SaaS systems and start-up products with no existing base of customers to provide immediate cash flow for the licensee.

For large, established SaaS providers, the issues are different but still significant. In this setting, due to the advanced technical requirements, the licensee will often be a direct competitor. So the challenge for large SaaS developers comes from managing the business in China, in protecting IP, and in dealing with the development and marketing of spin-off products. For many SaaS developers, these spin-off products are where the real value is generated.

In trying to evade the rules to avoid the China server/China licensee requirement, foreign SaaS developers are missing their opportunity to access the Chinese market. The real challenge is in finding ways to work within the China system in a way so the foreign SaaS developer both remains in control and earns a profit from China.

So resistance to China’s system for foreign involvement in SaaS is futile, but success is possible, so long as you get clear on what needs to be done.

China Trademark Squatting

We are on record (and then some) about the importance of registering your trademark in China. In spite of our efforts — or perhaps because of them — nearly every week someone contacts us after discovering someone else has registered “their” trademarks in China.

Most people lump all such third party registrants together under the common rubric of “trademark squatters,” but in fact, the registrants can be separated into five distinct categories, and the appropriate response (and the likelihood of success) depends on the category in which category they fall.

 

Category One – The Extortionist

China’s laissez-faire attitude towards bad-faith trademark registrations has created a cottage industry for numerous “entrepreneurs”: individuals who register brand names belonging to foreign companies and then hold those brand names for ransom. Anyone who deals with China trademarks has run into this sort of trademark squatter. They have filed hundreds of applications, for a wide variety of brand names and in a wide range of Nice classes. The registrations may be for different sorts of goods or services than what the brand is known for. The trademark squatter has no connection to any of the brands, and no intention of ever using them in commerce. They are a classic non-practicing entity, and their sole intent is to monetize the trademark registration by selling it to the highest bidder. They will sometimes approach the trademark owner, or they may sell the trademark to another third party on one of China’s trademark clearinghouse websites. The prices can vary but US$10,000/registration is a common starting bid.

Such registrations are the very definition of bad-faith, and you would think they would be easy to invalidate. Not so. China is slowly getting better at dealing with these situations, but even in egregious cases, it’s far from a slam dunk. The typical route involves an invalidation proceeding and an appeal and then maybe another appeal. All of this can take years and cost thousands of dollars, and there’s no guarantee of success. It’s easy to see why many foreign brand owners just pay the money and move on, as with a nuisance lawsuit. Alternately, some brand owners will wait three years and file a non-use cancellation. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Category Two – The Counterfeiter

Companies find the first category of trademark squatter exasperating, but they find the second category infuriating. These squatters have registered foreign companies’ trademarks not to hold them for ransom, but to use them in commerce. Indeed, these squatters’ business model is to produce counterfeit goods they can sell in China (and in any other country where the foreign company has not registered its trademark) without fear of reprisal from the true brand owner – because the squatter legally owns the trademark in China! Sometimes they will sell the same kinds of goods as the true brand owner, sometimes not – it all depends on how well-known the brand is, and what the squatter thinks will generate more money for them. Oftentimes you’ll see these squatters register several foreign brand names in China, all in the same classes of goods. If one foreign brand is good, four are better.

It is usually more expensive for the true brand owners to purchase these registrations because the registrations are worth more to the trademark squatter. Moreover, a non-use cancellation will not succeed, because the marks are actually being used in commerce. It is sometimes possible to succeed with a bad-faith invalidation, but this will largely turn on whether the mark was well-known in China, which is a difficult thing to prove. For many years the de facto Chinese position has been that if foreign brand owners cared about their marks in China, they should have registered them there. Here, the alleged trademark squatter is using the mark in commerce and probably also employing people and paying taxes on its income. That looks a lot better to Chinese authorities than a sole-proprietor non-practicing entity who lives with his parents in Kunming or Kansas.

 

Category Three – The Stiff-Arm Competitor

The third category of squatter looks a lot like the second category – they file trademarks covering a certain, fairly narrow set of goods. But this type of squatter isn’t a counterfeiter and has no plans to use the marks in commerce. Rather, this squatter is your competitor, and their goal is to prevent you from entering the Chinese market (at least under your preferred brand name). The more specialized the market, the more likely this is to occur because everyone knows all of the other players. More than once I’ve seen a Chinese manufacturer in a specialized industry register the trademarks of all its European and American competitors. They then offer the competitors a Hobson’s choice: buy the trademark at a grossly inflated price (upwards of $250,000K) AND designate the competitor their exclusive distributor in China, or say goodbye to their brands in China.

The stiff-arm competitor often also oftentimes will threaten to block products manufactured with its trademark by anyone else from leaving China. In other words, they may threaten to effectively shut down your entire business worldwide by choking off your sole production point.

Brands that are actually well-known in China may have some success in wresting trademark registrations from such registrants, but as noted above that rarely happens. Most foreign brand owners in this position are out of luck. The argument that these trademark squatters gamed the system is not going to get much traction.

 

Category Four – The “Helpful” Supplier

Sometimes companies will find that their brand names have been registered by a familiar entity – their own supplier or distributor in China. If the supplier or distributor is still producing or distributing goods for the company, the proffered explanation is usually benign: the supplier or distributor registered the mark to prevent any rapscallion squatters from doing so first. This may be true, but the brand owner should wonder why the supplier/distributor didn’t inform them first and/or ask if the brand owner wanted to register the mark itself. Nonetheless, if the relationship is still positive, it is a relatively straightforward process for the supplier/distributor to assign the mark to the brand owner. Some suppliers/distributors will attempt to retain ownership of the trademark but this should be resisted.

If the relationship has turned ugly, which is usually the case when the trademark owner is a former supplier/distributor, a simple assignment may be difficult to procure. But this situation is the easiest one in which to prove a bad-faith registration. So long as you can prove the existence of a business relationship with the supplier or distributor (e.g., through purchase orders, contracts, and other documentation), it is quite likely the squatter will be forced to give up the registrations. Needless to say, the process is a lot easier if you have a signed, chopped manufacturing agreement or distributor in which the supplier specifically agrees not to register your IP. See China Trademarks and Your Chinese Distributor.

 

Category Five – The Coincidental Copycat

The last category isn’t really a traditional trademark squatter and arguably shouldn’t even be part of this list. Occasionally, someone in China registers “your” trademark because they came up with it on their own independently. This only happens with word marks – it is highly improbable two applicants would come up with the same logo by blind chance. In these cases, the trademark owner may be willing to sell the trademark, but if they’re not, there’s little you can do about it. The registrant simply followed the dictates of China’s Trademark Law: they were the first to file (not you), and so they get to keep the mark.

In sum: if you find that your brand has been taken by a trademark squatter in China, first determine the category they fit in, and then plot your strategy accordingly. Better yet, register your trademark right away and prevent having to strategize at all.

 

 

China Design Patents
China Design Patents

Design patents are increasingly becoming an essential component of our clients’ China IP portfolios. They’re reasonably priced, don’t take that long to acquire, and provide pretty good protection.

That said, it’s important to understand the limitations of a design patent. A design patent does not provide protection for a product’s functionality or inner workings. It does not protect a product’s manufacturing process. It does not even protect the materials or components used in a product. The only thing a design patent protects is the external appearance of a product. For this reason, the application for a design patent is short and sweet, with the substantive parts limited to orthographic drawings of the design and a brief description.

The main reason design patents can be acquired with relative ease in China is that they are not substantively examined. China’s State Intellectual Property Office (SIPO) only examines design patent applications to confirm that the drawings and description meet formal requirements, i.e., adequately describe the design. SIPO does not search to see if the design is the same as or similar to prior art. That sort of examination only takes place if the design patent is challenged.

Like other patents, design patents in China have a requirement of absolute novelty. If you have already disclosed or commercialized a product anywhere in the world, it is not eligible for design patent protection in China. This is a marked difference from trademarks, which can be registered at any time regardless of when use actually began. To be sure, it’s almost always a good idea to file a trademark as soon as possible, even before use. – it’s just not legally required. Design patents are also different from copyrights, which are protected at the time of creation even if they’re never registered. This disjunction can be confusing, especially when aspects of a design could (theoretically) be covered by multiple forms of IP. For certain products, the appearance of the product itself may be protectable under trademark, copyright, and patent regimes. That is rare, but it can happen and it lulls some of our clients into forgetting that though they are legally allowed to wait on filing a trademark or copyright (no matter how often we tell them not to wait) if they wait too long to file a patent they may be legally barred.

Once our clients are ready to move forward with a design patent application, we send a list of questions pretty much as follows:

  1. Please provide the name and passport number (if not a PRC citizen) or national ID number (if a PRC citizen) of the person who designed the product. If you commissioned a design firm, then the name should be that of the person at the design firm.
  2. Please provide the priority date, if relevant. You would only have a priority date if you had filed a patent application in the US (or some other jurisdiction) for this design in the past 6 months.
  3. If you have filed a previous application in another jurisdiction, we will need a copy of the filing documents.
  4. Please provide a set of formal drawings for the design. Assuming that you want the design patent to cover all sides of the product, then we’d need an orthographic projection of all sides (usually 6 sides: top, bottom, left, right, front, back). The drawings cannot contain dotted or dashed lines, or shading to indicate perspective.
  5. Please provide a brief (one-paragraph) description of the name and use of the product incorporating the design and the essential features of the design.

Like I said, short and sweet.

China e-commerce law
Earlier this week, in China E-Commerce: Resistance is Futile, we set out what will likely be the new rules for foreign.

I could not have scripted better responses to that post as I personally received emails from what I would describe as “both ends of the spectrum.”

The first email is from a European businessperson I know who has been doing business with China for 25+ years and living in China for at least a decade. He has become pretty cynical about China and the focus of his email was on how China is setting everything up to “screw us foreigners”: Here is his email:

Great post as usual. It nicely encapsulates what I see happening here with everything. China is re-writing its laws to make its own companies rich and to screw us foreigners.

On the flip side, I got the following email from a very experienced China lawyer essentially saying nearly the opposite:

Exactly. The intelligent way to approach China is to figure out what is their plan and then work that plan to your advantage. Fighting against the plan is futile. Working with the plan can result in a lot of money. Google decided to fight, and they are gone. Microsoft finally decided to go with the plan and they are still in the middle of the China system.

When I say these sorts of things I get accused of being too negative and I would bet you will get that reaction to this post. But I do not view it negatively at all. It outlines a clear plan to success in China. It’s just that the plan follows a basic path outlined by the PRC government and Alibaba and the other rules of the PRC Internet. There is lots of money to be made and there are many things to be done to make the deals and to protect IP and similar.

That was our exact point with the post. There are great opportunities to make money on China e-commerce but to do so you must follow China’s rules. You can complain about those rules all you like, but the real issue is whether you are going to jump in and seize the opportunity (flawed though it is) or not. What’s your answer?

Earlier this year, I attended Alibaba’s Gateway ’17. The theme of that event was that there is easy money to be made by Western companies selling their products on Tmall and on Taobao. There is most definitely a lot of money to be made but it is debatable how easy it is to make it. I don’t know about you, but I doubt that any of our long list of clients who are making money in or from China — be it via China e-commerce or otherwise — would ever claim it to have been easy. And yet, I also doubt that any of them would say that it has been so difficult as to not be worth it.

The bottom line is that selling your products to China consumers via e-commerce will not be as easy or as cheap as selling your products to U.S. or EU consumers. But is that enough to stop you? In our next post, we will talk about what you should do to protect your IP before you start selling online to China.

 

China trademark registration lawyersLabbrand, a leading Chinese brand consultancy, recently published an article discussing the naming work they’d done on behalf of Haribo, the German confectionery. (For those who don’t know, Haribo is the first and best manufacturer of gummi candies: all gummi candies in the world are derived from Haribo Gold-Bears, the ur-gummi.) I have been a huge fan of Haribo since I was a kid, and was interested to read how Labbrand had adapted Haribo’s brand names for China. I’m excerpting their descriptions below, interspersed with my own commentary.

Since 2012, Labbrand has been working closely with HARIBO to validate and create over 20 Chinese names for its brand and products, as well as for the tagline and Jingle of the Haribo brand. Chinese names 萌桃仔 [méng táo zǎi] for Peaches, 趣缤纷 [qù bīn fēn] for Supa Mix and 甜莓狂想 [tián méi kuáng xiǎng] for Berry Dream were amongst the first new releases from the brand.

The verbs in the first sentence are essential: Haribo’s Chinese brand names were not just created but also validated. Brand creation without brand protection is meaningless. As I wrote back in 2015, “If you care about your brand in China, it’s not enough just to register your English-language brand. You also need to select a Chinese name and register that as a trademark in China. Otherwise, you will forfeit not only the right to use your Chinese brand name, but the ability to choose it in the first place.” See Don’t Be Like Mike: Register Trademarks In CHINESE.

I did a quick check of the Chinese Trademark Office (CTMO) database and am happy to report that the three brand names cited above are all registered already or will be soon. (Had the results been otherwise, this would have been a short blog post!)

The three new products launched are:

Peaches, a peach flavor two-toned, sugar-dusted gummi. The Chinese name 萌桃仔 [méng táo zǎi] (cute/ peach/ young) personalizes the sweets as a cute little person by putting 仔 [zǎi] at the end. Originated from cyber language, 萌 [méng] conveys a cute and lovely feeling.

Supa Mix, a mixed collection of fruity gummies. The name 趣缤纷 [qù bīn fēn] (interesting/ colorful) brings fun and joy at the same time translating the ‘mix’ concept.

Berry Dream, a collection of berry-flavored sweets. The unique, eye-catching Chinese name 甜莓狂想 [tián méi kuáng xiǎng] (sweet/ berry/ fantasy) triggers curiosity and imagination with a good fit with product and brand attributes.

I won’t comment on the above names, except to note that they are thoughtful combinations of literal translations and characters with positive and appropriate connotations. This is the value of hiring branding professionals. Sometimes clients will come to us with a Chinese name derived from Google Translate and ask us to opine, which always brings out my inner DeForest Kelley: I’m a lawyer, not a branding specialist. Still, you don’t need to be a brand specialist to know when a machine translation goes wrong, which is often enough.

Besides the product names, Labbrand also created the Chinese tagline of HARIBO’s signature jingles – “Kids and grown-ups love it so, the happy world of HARIBO” – to help the brand better communicate with its Chinese audience. The Chinese brand tagline 大人小孩都说好, 快乐品尝哈瑞宝 [dà rén xiǎo hái dōu shuō hǎo, kuài lè pǐn cháng hā ruì bǎo]” can be translated as “grownups and kids all say it’s good, and happily enjoy HARIBO”, which is straight-forward, rhythmic, as well as easy to read and remember. The two-part structure, each ending with the same rhyming syllable [ǎo], makes the tagline melodic, attractive and unforgettable. The simple and memorable Chinese tagline stays true to the original English jingles.

I find it funny that Labbrand worked so hard to capture the rhythms and meaning of the original English tagline: “Kids and grown-ups love it so, the happy world of HARIBO.” I had always found the latter a bit stilted, and assumed it was the result of a decades-old translation from German that had over time become memorable, even cute. That’s what a phenomenally popular product can do – make the uncool cool.

Sometimes the best brands are the ones that happen by chance. Haribo was founded by Hans Riegel in Bonn, Germany in 1920, and the name Haribo is simply a portmanteau of the first two letters of HAns, RIegel, and BOnn. Now Haribo is an internationally known trademark, with registrations in multiple classes all over the world.

One final note: the official Chinese name for “Haribo” is the sound-alike “哈瑞宝” (hā ruì bǎo). Haribo has duly registered this name as a trademark in China, but they have also applied for a number of similar-sounding Chinese-language trademarks, including 嗨乐宝, 哈莱宝, and 好乐纷. Not because Haribo intends to use these marks, but because they want to prevent third party trademark squatters from doing so. Sometimes the best offense is a good defense. See “Chinese Brand Names, Copycats, and Soundalikes.”

China IP lawyersI had essentially the same call recently involving European IoT start-up companies that might at this point better be termed “wind-down” companies.

Their stories are an old one and one we have covered and warned about at least a dozen times on here, including in a post directed specifically at Internet of Things companies, entitled,  China and The Internet of Things and How to Destroy Your Own Company. These two companies either did not read that post or they failed to take it seriously. To make a long story short, these two companies were working with Chinese companies to produce two internet of things devices and both companies eventually succeeded. Problem is that when they did, the Chinese companies essentially told them “adios” (I am right now in the Madrid airport on my way to Lisbon for a big lawyer conference) and left these two European companies with pretty much nothing at all.

To make a long story short, these two companies were working with Chinese companies to produce IoT devices and both companies eventually succeeded with their products. Sort of. The problem is that when they wrapped up development on the IoT products, the Chinese companies with which they were working essentially told them “adios” and left these two European companies with pretty much nothing at all.

I am going to digress a bit here, so please bear with me. One of my favorite poems is called “beware:” do not read this poem, by Ishmael Reed and that poem nicely encapsulates what happened with these two European companies. Here is that poem and below that, I explain the connections. Enjoy.

tonite, thriller was
abt an ol woman , so vain she
surrounded herself w/
many mirrors
it got so bad that finally she
locked herself indoors & her
whole life became the
mirrors
one day the villagers broke
into her house , but she was too
swift for them . she disappeared
into a mirror
each tenant who bought the house
after that , lost a loved one to
the ol woman in the mirror :
first a little girl
then a young woman
then the young woman/s husband
the hunger of this poem is legendary
it has taken in many victims
back off from this poem
it has drawn in yr feet
back off from this poem
it has drawn in yr legs
back off from this poem
it is a greedy mirror
you are into the poem . from
the waist down
nobody can hear you can they ?
this poem has had you up to here
belch
this poem aint got no manners
you cant call out frm this poem
relax now & go w/ this poem
move & roll on to this poem
do not resist this poem
this poem has yr eyes
this poem has his head
this poem has his arms
this poem has his fingers
this poem has his fingertips
this poem is the reader & the
reader this poem
statistic : the us bureau of missing persons re-
ports that in 1968 over 100,000 people
disappeared leaving no solid clues
nor trace     only
a space     in the lives of their friends
I cite to this poem because I am desperate to get people to stop essentially losing their companies to their Chinese counterparts and I figure listing out a full poem and then analyzing it will help people remember. I will admit to being desperate here and just plain tired of having to pass on horrible news to what once were up-and-coming start-up companies.
Just as the woman in the poem gets so enamored with herself that she loses her existence, these two companies became so enamored with their technology and their work on their technology, they too lost their existence. The woman was swallowed by the poem and the European companies were swallowed by the Chinese companies with which they worked. Neither the woman nor the European companies really think about what they are doing until it is too late. Not until the Chinese company had taken
the European companies figurative head, arms, fingers, and fingertips did it think about what it had done, but by that point they had essentially ceased to exist.
The final paragraph of the poem describes what happens every day to tech companies that go into China unprepared and all willy-nilly. Their attempts to fuel their dreams destroy their reality. They disappear, “leaving no solid clues nor trace only a space in the lives of their friends.”
Let us now return to the facts and discuss some relatively easy solutions.
Both these European companies had what they saw as great ideas and they both started working with Chinese companies to realize those ideas. One company worked with its Chinese “partner” for more than a year. The other for about a year. Both companies seem to be (have been?) made up of 2-4 people who had dedicated the last year or so of their lives to getting their devices off the ground and to market. Yet right before their products became ready to launch, their Chinese factories jettisoned them and chose to go it alone with the European companies’ devices.
The European companies wanted to know whether the China lawyers at my firm could help. I told them that was “both doubtful AND expensive.”

Technology companies dealing with China tend to make more and bigger mistakes than companies in other industries. The ethos of tech companies is to focus on building things (be it software or hardware or some combination of both) as quickly as possible, and not worry much about anything else. In an effort to preserve oftentimes limited funds, tech companies tend to be reluctant to spend money on anything (including legal fees) that does not directly help them develop their product and get it to market. I completely understand this, including how this usually makes sense when operating purely domestically in the United States and in Europe. But this way of doing business can and too often is disastrous when dealing with China, where it is usually impossible to “fill in” a legal foundation later.

Internet of Things companies are the new poster children for how to operate incorrectly when doing business with China.

I say this with regret because our China attorneys LOVE Internet of Things companies. We love IoT companies because we so often love and use their products and because the work we do for them is typically so cutting-edge and interesting. IoT companies looking to manufacture in China often require assistance with the following:

If you need more proof on how much our China lawyers love IoT companies, check out China and the Internet of Things: A Love Story. The best thing (for us anyway) is that just about all IoT products are being made in China — more particularly, in Shenzhen.

But back to the sad part. What is so terrible is that IoT companies seem to relinquish their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other China lawyers) have seen. Ever, and by a stunningly wide margin. And the thing is, it is not as though these are big companies with a whole host of other products or IP they can turn to in a storm. No. Most of these IoT companies shrivel up and die after their IP goes “poof” in China.

In describing IoT companies and their problems to others, The following interaction, taken from at least a half-dozen real-life examples in just the last few months (and the last few months before that and the last few months before that and the last few….) should be at least somewhat instructive:

IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.

One of our China Lawyers: Great. Where are you right now with China?

IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.

China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?

IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They told us they would enter into a contract with us whenever we are ready.

China Lawyer: Can you please send us the MOU? Have you talked about what your contract with the Chinese company will actually say?

IoT Company: Sure, we can send the MOU. It’s one page. We haven’t really talked much about the contract beyond the obvious and what we need to do to get the product completed.

China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.

Then, a few days later a conversation like the following ensues:

China Lawyer: We looked at your “MOU” and we think there is a good chance a Chinese court would view that MOU as a contract. For why we say this, check out Beware Of Being Burned By The China MOU/LOI. And the Chinese language portion of the MOU (which is all a Chinese court will consider) is different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So as things now stand, there is a good chance the Chinese company owns your IP, at least in China. Therefore, there is no point in our writing a Product Development Agreement because your Chinese manufacturer will almost certainly not sign that.

IoT Company: I’m not worried. I think you have it wrong. I’m sure they will sign such an agreement because we orally agreed on this before we even started the project. (We get some sort of variation on this response at least 90 percent of the time).

China Lawyer: That’s fine, but I still think it makes sense for you to first make sure the Chinese company will sign a new contract making clear the IP associated with your product belongs to you, because if they won’t sign something saying that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.

So far not a single such IoT company has come back to us saying their Chinese manufacturer will sign such an agreement. Not one.

The situation with the two European companies has also become par for the course. In this situation, the IoT company is farther along in its product development and actually ready to sell what it perceives to be its product. This situation is exemplified by the email below, which is an amalgamation of various emails received by my firm’s China attorneys:I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

We do not have any contracts in place with our current manufacturer. We started our relationship with our current manufacturer a year ago. He told us that POs are contracts in China and our lawyer confirmed that. We sent our Chinese contract our design and we paid for the molds and he shipped us the products. We recently learned that he has been using our product pictures as marketing material on Alibaba and selling our products all over the world. I also just learned that he has filed for a design patent for our design in China.

When I confronted him about this he basically admitted to everything but essentially said he had no intention of changing and if we go to a new factory to try to make our product, he will shut that down.

We’re filing design patents in the US. If we continue to work with him during this period, which agreement would help us get the best protection?

Since he already claimed our designs in China, will that prevent us from working with a new manufacturer? Do you advise we work with a new manufacturer at this point?

Our response is usually something like the following:

A PO is not really a contract in China; it is the placing of an order. Unless your PO speaks to IP (which would be unusual), it probably will not help us much. On top of this, some Chinese courts do not see POs as a contract at all and some Chinese courts will not even look at a document not in Chinese. The ideal is a Chinese language contract sealed by the Chinese company.

Our biggest concern is that this manufacturer has filed for a design patent for your product. This will no doubt pose problems for you and for any new Chinese manufacturer you might seek to use. Depending on how far along your present manufacturer is in the patent process, it may be able to sue you and your Chinese manufacturer for patent infringement damages and to force production of your product to cease. At a minimum, your Chinese manufacturer will be able to cause you all sorts of problems unless you can stop or invalidate his design patent. There is a good chance this Chinese manufacturer “owns” your product in China and it can use that ownership to control what you do there.

If you seek to go to a new manufacturer you can be pretty sure your old manufacturer will NOT give you the molds you think you bought from it and it will use its design patent to try to block your products from leaving China. It also very well may sue you for patent infringement in a Chinese court. In the meantime, making your product in China will be a high-risk proposition.

Did you register your company or brand name or logo as China trademarks? If not, there is a good chance your Chinese manufacturer registered those as well, but for various reasons under the name of what appears to be an unrelated company. If it did that, it will probably be able to stop anyone from making your products in China with “your” company, brand name or logo on them or on its packaging. No matter what else you do, you should consider retaining us right away to see whether it is not too late for us to secure key China trademarks for you. I urge you to read this on China trademarks.

We usually (but certainly not always!) end up advising these IoT companies to seek to do some combination of the following, none of which are great ways to go and some of which do not work at all for some companies:

  1. Leave China entirely and start manufacturing in some other country.
  2. Seek to block or invalidate the Chinese manufacturer’s design patent.
  3. Try to strike some sort of deal with the Chinese manufacturer whereby the Chinese manufacturer assigns the patent(s) and trademarks to our client who in return agrees to keep using that Chinese manufacturer to make x amount of product for x number of years.
  4. Try to get the Chinese manufacturer to sign a contract that makes clear what IP belongs to our client and makes clear the Chinese manufacturer’s limitations on using our client’s IP. We typically do this with a China-centric OEM Agreement.
  5. Go to a new manufacturer in China. If you do this, you almost certainly will not have your molds and there is a good chance your existing manufacturer will cause you a lot of trouble by suing or threatening the new manufacturer.

Don’t let the above happen to you. For more on how you can prevent this, you should, at a minimum, read and heed China NNN Agreements and China Product Development Agreements. NOW!

 

How to stop counterfeit products from China
Wall out counterfeits of your products

When American and European and Australian companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting that trademark could take more than a year. We would then say that until they actually get their Chinese trademark we would be pretty much powerless to stop companies in China from using their brand name. Most didn’t bat an eye at this

E-commerce has changed that, such that now when one of our China trademark lawyers tells a client that securing their China trademark will take a year, those who are selling their product online (which these days is almost everybody) push back and want to know what to do in the meantime to protect against copycats.

Our response, simplified a bit, is to say that they need to focus on “building IP walls outside China.” So for example, if they are selling their product in the United States and in Spain (where I am right now, having just attended a conference put on by our Barcelona lawyers) they should focus on protecting those two countries. The way to do this is to, among other things, secure trademarks in those two countries as quickly as possible.

Though a U.S. and a Spain trademark will not, technically, do a thing in terms of trademark protection in China, it can still be valuable in getting offending ads taken down off Chinese websites such as Alibaba. If “your” product shows up on Alibaba and you have no registered IP, the odds of your getting Alibaba to take it down from an Alibaba website are slim. If your product shows up on Alibaba and you have a registered Chinese trademark that is being infringed by something on an Alibaba website, the odds of your getting that offending ad taken down from Alibaba are good. If you have a Spain trademark and there is an ad on Alibaba clearly targeted at Spain that infringes on your Spain trademark, your odds of getting that ad taken down from Alibaba are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a United States trademark on your product you can use that trademark to try to keep the offending product from China from reaching the United States. You can do this by working with US Customs and Border Protection, which is authorized to block, detain and seize incoming products that violate U.S. intellectual property rights. The EU and Spain have similar procedures.

One of the best ways to get US Customs on your side to block incoming infringing goods is to secure a registered US trademark and then record that trademark with US Customs and Border Protection. If you record your trademark with US Customs, it will go into its database and if US Customs spots incoming product that infringes on a trademark in its database, it will usually not allow the offending product to go through customs and it will alert you to its arrival. The notice to you from US customs will usually include the names and addresses of the manufacturer, exporter and importer.

And all this for the low low cost of around $200. Once you get your China trademark, you should consider registering that with China Customs to get that government agency working for you on the China side to help prevent infringing product from leaving China in the first place. See How To Register Your China Trademark With China Customs.

For effective IP protection, think 360°.

China IP lawyers

I am not a big fan of filing Madrid Protocol applications for China. In certain situations, they can work well, but when they don’t work (which is fairly often, especially when applications are filed without forethought) the trademark registration process takes longer and costs more than just filing a national application. See China Trademarks. Register Them In China Not Madrid.

Filing a priority application in China is another matter. As part of the IP modernization begun under Deng Xiaoping’s leadership, China acceded to the Paris Convention in 1984. Under the Convention, if you file a trademark application in one Paris Convention country, and then file an application on a priority basis in another Paris Convention country within 6 months of the date of the original application, you can claim the first filing date as the date for your subsequent applications as well. For example, if you filed a trademark application in the United States on May 1, 2017, you would have until November 1, 2017 to file a trademark application for the same goods/services in China and still be able to claim the May 1, 2017 filing date for your China trademark application.

The vast majority of countries in the world are signatories to the Paris Convention, so the convention has wide-ranging effect. Priority filing is particularly important in first-to-file countries – most notably China – where there often truly is a race to the trademark office between legitimate IP owners and unsavory trademark squatters. See Register Your China Trademark or Go Home.

Priority filing can be an extremely useful tool for China trademark protection, but there are a couple common misconceptions about it. First, priority filing will not improve your odds of registration. The only thing priority filing does in China is establish an earlier filing date. An application filed on a priority basis is considered a national application, and once it is submitted it goes through the same examination process as any other national application. In other words, if you have priority filing for a brand name or a logo that has already been registered as a trademark in China, you will not succeed in getting your brand name or your logo registered in China.

Second, priority filing is not the only option for filing in China. Sometimes clients will contact our China IP lawyers in a frantic rush because they have received notice that they have only a few days before the priority filing window closes on their trademark, and they believe that once that window closes they will not be able to file a trademark application in China at all. Not so! The only effect of the priority window closing is that you cannot claim an earlier filing date. Going back to the earlier example, if you filed a trademark application in the United States on May 1, 2017, and then filed an application in China for the same goods/services after November 1, 2017, the deemed filing date in China would be the actual filing date for China. Priority filing changes the deemed filing date, nothing else.

Another important point regarding priority filing is that priority filings are limited to the same goods/services as in the original application. In this way, priority filing is similar to Madrid Protocol filing, and often not well suited to filing in China. But if the application only covers a narrow range of clearly stated goods/services, and those are the only goods/services that you care about protecting in China, it will work just fine. Priority filing cannot be used for the “Starbucks strategy” of covering all goods/services. But if you use it to establish a beachhead and cover the most important goods/services, it will usually dissuade the first wave of squatters.

Because the description of goods and services for trademarks in the United States (and for many other countries as well) is often quite different than the description of goods and services for China trademarks, for clients interested in filing in both countries I generally recommend filing concurrent applications without regard to priority. But for clients who first file in the United States (or some other Western country) and then realize belatedly that they ought to protect their IP in China as well, a priority filing can be ideal. More than once, a priority application has meant the difference between securing a China trademark registration and having to deal with a trademark squatter with superior rights.

China AttorneysBecause 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 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 super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I speak often on China IP before all sorts of groups and companies and after I give my spiel on the topic, I always (if at all possible) open the floor up for questions. Both live and via webinar, the one question I am nearly always asked is some variant of when I think China will “start improving its protection of IP.”

My answer is usually something like the following:

First off, China is already improving on its IP protection and it has been doing so for at least the last decade, slowly but surely. China’s trademark protection is already pretty good and its protection of copyrights and patents has consistently improved. But what do you mean by IP protection? Do you mean government enforcement against counterfeiters? Do you mean the laws as written that allow a private party to sue for infringement? Because China’s IP laws as written have been pretty good for quite some time? When I say China’s IP enforcement has been consistently improving, I am usually referring to the whole package in terms of what a foreign company can do against a Chinese company that has been violating the foreign company’s IP rights.

What I said long ago is that when China’s powerful companies start caring about their IP rights will be when China as a whole will really accelerate in its caring about IP rights. And here’s the thing. There are plenty of powerful companies in China that now do care about IP rights and that number just keeps rising and for that reason alone I expect IP protections to improve substantially in China over the next 2-5 years.

Your thoughts?

China IP protectionOf course they do, but not always and not for every company doing business in China or with China.

Let me explain.

I just read an article on Engadget, entitled EU withheld a study that shows piracy doesn’t hurt sales, and subtitled, “The $430,000 study’s conclusions perhaps didn’t fit what it wanted to hear.” To grossly summarize, the study indicated that of books, movies, music and games, only blockbuster movies were negatively impacted by piracy. The study indicated that game sales may actually be aided by piracy.

I have from time to time been known to question the dollar losses often attributed to counterfeiting as well. The most commonly cited number is that United States companies lose $600 billion a year to counterfeiting. But the problem with this number is that it is based at least in part on an analysis that says every counterfeit purchased gives rise to a dollar lose equivalent to the real item that was counterfeited. This is usually true (especially when the buyer does not realize it is buying a counterfeit), but is this really true when someone buys a fake Rolex watch for $55 or a fake Gucci purse for $15? I don’t think so.

But let me be crystal clear here. I am not in any way condoning piracy or counterfeiting as both of those things are not only economically damaging, they can reduce innovation and be downright dangerous. Do you want fake brakes in your car? How does counterfeit medicine sound to you? No, all I am saying is that the extent and the damages caused by these things — as a whole — is sometimes over-dramatized. And that, as I will explain below, can have real-world business consequences.

Piracy and counterfeiting and the lack of strong IP protection in China are huge issues. They are a huge issue for some companies, a big issue for some companies, an issue for some companies, and really not much of an issue at all for other companies. Nonetheless, for most (not all) companies they are not a valid reason for ignoring China entirely.

Really, only a small percentage of companies need to worry much about IP theft in China. It exists, of course, but how much impact does it really have on your business? With very few exceptions, my firm’s China clients have either not been hit with piracy/counterfeiting or are too focused on making money from their own products to worry about it much. It is not nearly as much of an impediment to profits as believed.

Too often companies are so afraid of being copied that they fail to do things they should be doing. I can tell you that far more of my law firm clients have expressed the wish that they had gone into China to manufacture or sell their products sooner than have suffered negative IP consequences from having done so.

And on the flip side, every few months a company will come to one of our China lawyers overly concerned with their China IP protections after having read our blog. Oftentimes, they will believe they are too late and other times they will give us a long list of the IP protections they are convinced they need, usually including one or more of the following:

  1. NNN Agreement
  2. Product Development Agreement
  3. Contract Manufacturing Agreement
  4. Trademark Registration
  5. Trademark Registration with China Customs
  6. Design Patent Registration
  7. Copyright Registration
  8. And much more

And maybe 10 percent of the time they are coming to us with an astronomical quote from some other law firm for all of the above contracts and IP registrations. But here’s the kicker. Well under 1 percent of the time does a company need all of the above, and even less than that does it need all of the above immediately. Most of the time, in fact, the typical company doing a typical China deal or transaction usually needs less than half of these. And guess what? Probably 25 percent of the time none of the above makes sense for the company either because none of these things will be effective or because the company is too early (or worse, too late) or because the company would simply be better off spending its money elsewhere, at least in the short term.

So the point of this winding post is simply this: there is no one size fits all when it comes to best practices for protecting your IP from China and you should not let scare tactics and big numbers scare you into believing otherwise. Instead, treat China and China IP protection the way you treat the rest of your business and weigh the costs and the benefits of your IP actions accordingly.