China manufacturing lawyers

This worry is leading many Chinese manufacturers to view their foreign buyers as likely to eventually leave them and that makes them less interested in doing what it takes to maintain a good long term relationship. For purposes of this post, it also makes Chinese manufacturers a lot more likely now than even a year ago to as quickly as possible purloin whatever they can from their Western buyer so as to be able to as quickly as possible compete with the Western buyer with the Western buyer’s own product.

The China lawyers at my firm have a front row seat to all this because we get emails from many Western companies whose products are being copied weeks after they first meet with a Chinese manufacturer. In the old days (of about a year ago), it usually took years and a deteriorating relationship between buyer and manufacturer before the manufacturer would start directly competing. In other words, Chines manufacturers used to wait until they believed they could make more money selling YOUR product than they could making your product for you before they would compete. Today, many Chinese companies have made the calculation that they can make more money selling your product starting on day one.

What’s all this got to do with mold ownership agreements? A lot.

One of the best ways to stop or slow your Chinese manufacturer from competing with you is by legally blocking it from using your molds for anything other than making products for you. There are a lot of ways to accomplish this, but oftentimes the best way is with a relatively simple mold ownership agreement that makes clear the molds belong to you, your manufacturer cannot use them for anything other than making product for you, and your manufacturer cannot hold on to them once you seek their return. For more on the benefits of protecting your molds (and tooling as well) from China, check out the following:

There are a whole host of other things you can and in many cases should be doing to protect against your own China manufacturer, but a mold agreement is oftentimes a good and relatively cheap start. See Protecting Your Product From China: The 101. 

What are you seeing out there?

 

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.

One of the questions both our China lawyers our China lawyers have been getting frequently of late — especially from the media — is whether it is possible too protect your IP from China.

To which I always start out with a lawyer answer: yes, maybe and no.

Yes, if you are making a product that the Chinese government does not care about, such as toys, furniture, clothing, most electronics, etc. But if you are making something the Chinese government really does care about, like high speed rail, or cutting edge semiconductors or cutting edge energy technology, the answer is maybe/no. Let’s just say that our China IP lawyers generally drafting contracts and doing China IP registrations for an IoT company than for a semiconductor company simply because we have a lot more confidence in the results we can achieve for the IoT company than for the semiconductor company and we tell our clients that. Nonetheless, even the semiconductor companies must do what they can (both legally and via their own protective systems) to protect against IP theft, otherwise, if that theft happens, they will have no legal arguments against it. See How to Protect Your IP from China.

 

China trademark registrations cheap

I love when a reader sends me a link to an old blog post and asks whether “it is still true.” I got one of those today about a post we wrote way back in 2006, entitled, Protecting Your China Intellectual Property: China IP Registrations are the “Bare Minimum.

It was a super-short post that essentially said that if you want to have any hope at all of protecting your IP in China and from China you need to register that IP in China:

Just came across this excellent McKinsey Quarterly article, “Protecting intellectual property in China: Litigation is no substitute for strategy.” [link no longer exists] The article is on China Intellectual Property (IP) protection strategies.

I like how this article stresses that legal tactics (such as registering and enforcing your IP and contracting to secure your trade secrets) are the “bare minimum of what companies involved with China must do to protect their Intellectual Property Rights (IPR).” The article states that companies should also factor IP protection into their strategic and operational decisions and it gives good examples on how to do this. It even has a nice pyramidal graph, grouping by importance what companies should do to protect their IP in China. My firm’s China IP lawyers love the graph and they’ve been sharing it lately with clients!

I often find myself saying essentially the same thing to companies doing business in China or with China. My shortest spiel on protecting your IP from China usually goes something like this:

China is not a terribly good country when it comes to intellectual property protections, but most of those who lose their IP to China do so not because China is so terrible at protecting IP but because they themselves were so terrible at protecting their own IP. If you choose a good Chinese partner, if you have the right (China-centric) contracts in place, and if you register your IP in China, the odds are overwhelming (but definitely not 100%) you will be fine there. Choosing the right partner is key because if you are going to do business with a thief, the other two things will not protect you much. So this is the absolutely bare minimum. Beyond that, I always say that it’s critical that you register your company name/brand name/product name in China (even if you are just manufacturing there) because it will be really bad if a Chinese company rips off your product and starts selling it for half of what you charge (especially if the Chinese company that does that is your China partner) but it will be a lot worse if it can legally sell your product with “your” name on it for half. When that happens, it’s usually lights out for the business. And yet China trademarks are really quite cheap.

And now that so many of our clients are having their products made in Asia outside of China (Vietnam, Thailand, Korea, Cambodia, etc.), I should note that all of the above holds true with equal force pretty much throughout Asia.

Do you agree?

 

China trademarkA couple weeks ago, the online Chinese magazine Sixth Tone ran a story titled “China Founds Trademark Office to Protect Domestic Brands.” The gist of the story is that on Oct. 17, 2018, a new trademark office was established in Shanghai for the sole purpose of helping Chinese companies protect their intellectual property overseas:

The Shanghai Trademark Overseas Protection Office will support Chinese companies in international copyright disputes by providing guidance, training, and legal services. It will also create a think tank of experts to share their professional suggestions with businesses.

Though China is rife with bootleg DVDs, shoes with backward Nike swoosh logos, and countless imitations of other foreign products, its own time-honored brands fall victim to copycats too, according to the State Administration for Industry and Commerce.

The piece goes on to note that “on more than 80 occasions since 2004, well-known domestic [Chinese] brands have filed trademark infringement cases against foreign companies.”

Really? China is forming a new trademark office because of 80 instances of infringement in 14 years? Upon reading this story, I checked the calendar to see if it was April Fool’s Day. Not even close. I then checked with some trademark lawyers in China and they were unaware of this story, skeptical that the office actually existed, and unclear what would be achieved even if it did.

It goes on. The story received scant coverage in the Chinese press, and didn’t even rate a mention on the Chinese Trademark Office’s website – which is not surprising, because this purported office seems to have no connection with the Chinese Trademark Office. It appears to be a project solely of some subset of the Shanghai Administration of Industry and Commerce, ostensibly to demonstrate Shanghai’s prominence as a defender of Chinese intellectual property. It’s also a useful bit of propaganda, countering the prevailing narrative of China as a country that lets its companies steal foreign IP with impunity and without consequences. The old “let he who is without sin cast the first stone” strategy!

I have no doubt that some Chinese brands have had to deal with infringement overseas. I also have no doubt that the relative scale and dollar value of such infringement is miniscule as compared to the infringement of foreign brands in China. Moreover, when Chinese brands are ripped off overseas, they can pursue meaningful, robust remedies – at least in large markets like the U.S., Canada, Australia, and the EU.

And who, exactly, is infringing Chinese trademarks overseas? My sense is that few Chinese brands have cachet overseas, except among the overseas Chinese community, which suggests that foreign IP infringement is mostly (if not wholly) driven by Chinese entities. I don’t know if this is actually true, but would love to see a study. If only there was a think tank that could address these issues…

I hope I’m wrong about the Shanghai Trademark Overseas Protection Office and that it’s more than just a propaganda talking point. Because the truth is that Chinese companies do need help protecting their IP overseas, and it makes complete sense to have a China-based resource (like the EU’s uniformly fantastic IPR helpdesks). I can’t tell you how many times we see Chinese companies enter the U.S. market and do just about everything wrong, whether it be corporate formation or employee management or IP protection. And then it takes twice as long and costs five times as much to clean things up instead of just doing it right the first time.

China Vietnam Thailand Malaysia contracts As regular readers of our blog know well, we constantly emphasize the need for a China-specific NNN Agreement to protect your intellectual property. See Why Your NDA is WORSE Than Nothing for China and China NNN Agreements: Do Them Correctly or Walk Away.

To put it another way….

Earlier this week I was cc’ed on an email from one of our China IP lawyers to a client, very briefly explaining to our client the differences between the China NNN Agreements we draft and a Western-style NDA agreement. I found it very clear and helpful and so I am running it below (with some minor changes to be sure to hide any client information) for the edification of our readers

Attached please find an English language/Chinese language PRC NNN Agreement and an English language/Chinese language draft Hong Kong NNN Agreement. For the reasons we previously discussed, the Chinese language will be the official language for the PRC NNN Agreement and the English language will be the official language for the Hong Kong NNN Agreement. Please note the following:

1. These are not traditional NDA agreements. A traditional NDA agreement relies on the concept of trade secrecy. Under this sort of an agreement only something that qualifies now and later as a trade secret is entitled to protection. As a practical matter, the information you will be disclosing will almost never meet the technical legal standard for trade secrecy. Our NNN takes a different and more effective approach. We write these to prevent your Chinese and your HK counter-parties from using the information you give them in competition with you.

2. The agreements hold the Chinese and HK receiving parties liable for any damages caused by a company/person related in any way to the receiving parties as if the act were committed by the receiving party. This is critical as one of the most common ways confidential information gets “lost in China” is when the Chinese recipient discloses that information to another entity owned by a relative or a business associate. For this reason, we are very careful in this area. In principal, at the NNN stage, there is no reason for a Chinese company to disclose your confidential information to subcontractors. However, if this happens, our approach makes the Chinese company that signs the NNN Agreement liable for any violations of the agreement by a related party or by a subcontractor. 

3. Our NNN agreements also provide for contract damages in a specific monetary amount for every act of breach. This provision provides the following primary benefits. First, it makes clear to the Chinese party that it will face real and quantifiable consequences if it breaches the NNN agreement. For the PRC, a specific monetary amount also provides for a specific minimum level of damages and this sum certain amount then provides a Chinese court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing assets greatly increases the likelihood of the Chinese company abiding by your NNN agreement. Please let me know if you wish to adjust this amount: note though, this amount needs to be a reasonable pre-estimate of your damages as a result of the receiving party’s violation of the NNN. If you wish to read more on China contract damages (more commonly referred to as liquidated damages under Western country legal systems) I urge you to read On the Importance of Contract Damages in China Contracts.

4. These NNN Agreements have no set term. This means the receiving parties (those to whom you turn over your confidential information) can NEVER use your confidential information. It is a permanent obligation.

5. Seeing as how the receiving parties have orally accepted the terms of theses agreement, you should go first by signing and dating these agreements and then sending them to the receiving parties in the PRC and in Hong Kong. You should wait until you get these agreements back, fully executed, before you send them any confidential information.

6. The NNN Agreements we will be drafting for Vietnam, Thailand and Malaysia will be very similar to these, though in different languages. Please let me know when you want to discuss those in greater depth.

 

the risks of doing business in China

As China governmental power continues to expand and continues to get more concerned about its slowing economy and how it is viewed by its citizens, it continues to get tough on foreign businesses. China is right now in one of its perpetual crackdowns on foreign companies doing business in China. This makes now a good time for foreign companies doing business in China or with China to determine their China risks. The following ten sets of questions are a good starting point for making that calculation.

1. How does the Chinese government view your industry? If your China business is in an industry in which foreigners are restricted (such as mining or publishing or education) or one in which China’s citizenry has major concerns (food and medicine are classic examples), your risk is likely to be high. If your China business is in an industry that requires you joint venture with a Chinese entity, your risk is also high. If your business is in an industry the Chinese government views as its own province, such as SAAS, cloud computing, the internet, or telecom, your risk is high. On the flip side, there are certain businesses (like the Internet of Things or IoT) China wants to encourage and so if your business comes within that sort of category, your risks will be reduced.

2. Are you in an industry the Chinese people consider to be their government’s responsibility, such as health care or education or environmental protection or food? A number of companies in these areas have been subject to government scrutiny for activities that probably would have been ignored in other industries.

3. Is your company primarily making money from China or spending money in China? If it is the former, you are at increased risk. Does your company have 20 foreign employees for every one Chinese employee? Your risk is high. Does your company have 300 Chinese employees for every one foreign employee? Your risk just went down.

4. Is your company based in the United States or exporting products to the United States? Your risk just went up. China is not particularly happy with the United States right now thanks to the US-China trade war. Equally important, you now need to make sure that any products you send to the United States truly come from the country from which you say they come. United States custom is checking almost everything coming from Asia these days and failing to properly label the products you are sending to the United States can bring huge penalties and jail time. See China Tariffs and What to do Now, Part 1 and China Tariffs and What to do Now, Part 2. See also China or Vietnam for Product Sourcing?

5. Are your China contracts written in Chinese for China? If so, your risks are lower. Or are you using English language template contracts written for a Western legal system (like the United States, Canada, Australia, or the EU)? If so, your risks are higher. See China Contracts: Make Them Enforceable Or Don’t Bother.

6. Do you know what your Chinese staff are doing? Chinese staff often fail to realize foreign companies are treated considerably differently in China than domestic companies, and they fail to act accordingly. Your Chinese staff will usually want to do things the “China way,” but the Chinese government and courts will be judged against the “foreign standard.” See China Compliance: Don’t Rely On Your China Staff. Do you think you can do whatever your Chinese competitors are doing? Your risk just went up. Do you believe that as a foreign company you will be more closely scrutinized and that the laws will be likely be enforced against you? Your risk just went down.

7. Are your China employment contracts and your employer rules and regulations in both Chinese and in English? If you answered yes, good for you; you have lowered your risks. See The Top Six Warning Signs of Impending China Employee Problems. Do you constantly update and audit your employment documents and procedures to make sure you are complying with all national and local employment laws and regulations? If so, you’ve greatly lowered your risks.

8. What have you done to protect your intellectual property from being lost in and to China? If you have the right contracts and the right IP registrations, you have reduced your risks. If you do not, you have increased your risks. See Protect Your IP from China Now not Later. Do you sometimes show your trade secrets to a Chinese company without first making the Chinese company sign a China-specific NNN Agreement? If you do, your IP is probably already gone.

9. What is the culture of your China business? If you are relying on “strategic” relationships to work around the letter or the intent of China’s laws, you are at greater risk. If you do not know well those with whom you are doing business, you are at greater risk. If things are happening that make you uncomfortable, you are at greater risk. If you believe things are happening at your company behind your back, you are at greater risk. If you know your company did not pay every RMB it should have paid in China taxes, you are at great risk. See China Tax Audits: The Day The Music Died.

10. Are you doing business in China without a Chinese legal entity, such as a WFOE, a Joint Venture or even a Representative Office? If you are, you are so off the charts on risk that you and your other personnel should leave China today or tomorrow. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.

China’s government is surprisingly tolerant of problems a foreign company has already fixed, and even of problems a foreign company is truly trying to fix. But the Chinese government rarely tolerates a problem it discovers and about which the foreign company has done nothing. If you check out clean for the above list, congratulations. But if you do not, start making changes now.

China trademark movies

In the entertainment industry, documenting a film’s chain of title is extremely important. It’s how you show that the putative owners of the film rights do in fact own those rights, and it is essential to securing “errors and omissions,” or E&O insurance. And because a film is comprised of a number of elements, a number of things must be documented, such as: (1) that the underlying rights to the source material were validly acquired, whether the source material be a book or a play or a song or an original screenplay or otherwise; (2) that all the people who appeared in or worked on the film did so as a work for hire; (3) that all the music, still images, and film clips in the motion picture were purchased or appropriately licensed; (4) that the ownership of the completed film was clear and undisputed; and (5) that any entity with a right to derive revenue from the film, or make a substantive decision regarding the film has been identified and documented.

The last thing a producer, financier, or anyone exploiting the film in any way wants is for some third party to come out of the woodwork on the eve of release, asserting heretofore unknown rights and threatening interfere with the release of the film. Timing is crucial for film projects, and a last-minute delay (e.g., via injunction) can spell the difference between success and failure.

Most chain-of-title analyses focus, appropriately, on the copyright to the film (and any elements thereto). Because of the Berne Convention, for practical purposes, copyrights are international and technically do not need to be registered to be effective. As we have written, though, registration is often highly advisable in order to enforce a copyright, particularly in China. See China Copyright Law: We Need to Talk.

Most chain of title analyses will include a title report, which will include a list of trademarks that are identical and/or similar. But making sure that your title doesn’t run afoul of any trademarks is not the same as actually registering trademarks, and many film producers never register their title as a trademark. For most films, the title does not serve the purpose of a trademark, i.e., a way to identify the source of goods. (The main exception to this is with film franchises.) And in the U.S., you don’t need to register a film’s title as a trademark in order to exploit the film. Looking at the top 10 films in the U.S. from the past weekend, only Goosebumps had a trademark registration. None of the following had film-related trademark registrations or pending applications before the USPTO: Halloween, Venom, A Star Is Born, First Man, The Hate U Give, Smallfoot, Night School, Bad Times at the El Royale, The Old Man & The Gun.

Unlike copyrights, trademarks are country-by-country, so what is true in the U.S. is irrelevant in China. Could a trademark squatter register a trademark for a film and prevent it from being released in China? I don’t know that anyone has tried yet, not least because by the time a film’s title is announced, there’s usually not enough time to secure a trademark registration in China. But that may not always be true, and from my perspective, falls into the “why risk it?” category.

Having your film prevented from being exhibited in China is the worst outcome, but it’s not the only risk. The film’s title could also be registered by a third party attempting to capitalize on the film’s popularity by selling branded consumer products. If the film is at all popular, this is almost certain to happen — and we have seen it more than once. And although this may not affect the film release directly, it could certainly affect merchandising or other ancillary revenues. Instead of making money from consumer products, film producers could find themselves having to spend money in the hopes of squelching counterfeit lunchboxes.

If you’re releasing a film in China, it’s cheap insurance to register the film’s title as a trademark, and also to have the registration cover all of the goods that you either want to release yourself, or don’t want to see someone else release using the title as a brand name.

Last but not least, you’ll need to register both the English and Chinese versions of the film title.

China trademark registrationLast week, the Foshan Intermediate People’s Court awarded RMB 10 million (nearly $1.5 million) in damages to the well-known British luxury goods brand Alfred Dunhill, finding Chinese copycat brand Danhuoli liable for trademark infringement and unfair competition.

The press coverage (which apparently took its cue from the PR release) trumpeted the size of the award and the groundbreaking nature of the victory. To an observer unfamiliar with China trademark practice, both of these claims might seem odd in that the infringement was obvious, outrageous, and longstanding. The infringing company selected a name (“Danhuoli”) similar to Dunhill and then mimicked the elongated vertical lines and lower-case lettering of the Dunhill logo to create a copycat brand identity. And they were apparently successful at it, with more than 200 low-budget clothing stores (franchises, according to the South China Morning Post) in more than 61 cities across China. And just in case there was any doubt about their intent, the infringing company also created a Hong Kong parent company called Dunhill Group.

In the U.S. this kind of nonsense would last about as long as it took to file a TRO, but in China the road to enforcing trademark rights is long and frustrating. Chinese judges are reluctant to find trademark infringement unless the marks are identical, and even then it’s not guaranteed. Chinese judges are also reluctant to award high monetary damages because of the speculative nature of anything that can’t be proven with written evidence. So Dunhill is absolutely justified in feeling vindicated by the verdict.

But a landmark? I beg to differ. A landmark verdict is one that signals a change in the way cases are being decided. But this decision is no landmark, or if it is, it is too early to tell. Nor does this decision show that China is really serious about enforcing IP rights, because this decision is still the exception, not the rule. Check back in a year and let me know if every other decision since this one followed the same logic and came out in favor of the trademark owner.

Still, one detail about the Dunhill decision bears repeating: both companies had registered trademarks, but Dunhill’s was registered first (by decades). That fact alone signifies that Dunhill has had an active and forward-thinking trademark strategy for years. And they would never have emerged victorious in the latest dispute without superior trademark rights. See 8 Reasons to Register Your Trademarks in China.

A quick search of the CTMO database reveals that Danhuoli, whose entire business model is based on ripping off Dunhill’s trademark, is itself the subject of trademark squatting. It seems karmically appropriate.

China contract lawyerOne of the things I love about my work is the different sort of clients we get. Some of our clients care little to not at all about the rationale behind what we as lawyers do. Other of our clients prefer an explanation for everything. The other day, one of our China lawyers cc’ed me on an email she sent to a client who wanted to know more about the contract damages provisions (a/k/a liquidated damages) we had put into a number of contracts we had just drafted for this client. I am running that e-mail below (modified slightly) because it is relevant to most China contracts and therefore relevant for just about anyone doing business with China or doing business in China.

The PRC Supreme Court has ruled that contract damages are always subject to being adjusted to actual damages. Adjustment can be up or down, based on the facts. That is why we never provide for a contract damage amount that is high. We always draft  our contract damage provisions to comply strictly with the actual and foreseeable damages standard.

For the following reasons, we nearly always provide for contract damages (subject, of course, to the Chinese company on the other side going along with them):

1). Injunctive relief is extremely difficult to get in China.

2. One of the best ways to stop a Chinese company from infringing on your intellectual property rights (IPR) is with a prejudgment writ of attachment. But to to get that you need a reasonable standard for the amount of damage that will set the amount of the writ. Contract damages provides that reasonable standard. Though it may be adjusted later we draft them very carefully and conservatively and clearly so that is likely not to happen. The amount we specify in our contract damages provisions is both clear and fair and because of that it serves as a good basis for a prejudgment write of attachment motion.

3. Under PRC Supreme Court interpretations, contract damages is not a replacement for actual damages as proved at trial or as the basis for a final judgment. This renders the contract damages provision weak, but it does not render it meaningless because it provides the basis for the court decision on the damage amount. If the contract damage provision is reasonable and is based on a specific method of calculation that is ultimately based on an external fact (how many infringing items sold and their value), then it will be very unusual for a defendant to be able to convince a court to reduce the amount. On the other hand, if the contract damages is based on nothing or is clearly a penalty amount, the court will simply ignore it. When a court ignores the contract damages amount set forth in your contract, your having had such a provision does you more harm than good. See China Contract Damages: More Art Than Science.

For more on the benefits of contract damages provisions and how to draft such provisions, check out the following:

China IP lawyer

Time for another entry in what has become a running series of posts about wine in China. Thus far, the series includes:

  1. China, Wine and Tariffs
  2. China Trademarks: Wine Labels in China
  3. China Trademarks – The (Mis)Classification of Wine

I’ve written previously about the rampant counterfeiting of foreign wine in China, especially with well-known brands like Château Lafite, Château Latour, and Screaming Eagle. Because counterfeiting only comes to light when it is discovered by authorities (or brand owners), the data is sketchy on the actual amount of counterfeit wine on the market – it’s either anecdotal or extrapolated, which leads to widely divergent conclusions. Maureen Downey, often cited as the leading expert on wine fraud, said back in 2014 that the majority of counterfeits were limited to a few vintages of a few labels, and that the top 16 counterfeit wines were all European. Meanwhile, another wine fraud investigator stated last year that 20% of all wine in the world is counterfeit, which would mean approximately 6 billion bottles of counterfeit wine are sold each year – a lot more than a few vintages of a few labels.

For many wineries, the design of the label — that is, in addition to the name of the winery – is also an indication of the source of goods. A bottle of Château Lafite doesn’t just bear the name “Lafite”; it also has a picture of the château. The obvious way to protect the wine label from infringement is via a trademark registration for the label design (or at least the graphic elements common to each label). But almost every wine label would also be considered a creative work in fixed form, and therefore eligible for copyright protection.

As we wrote in China Copyright Law: We Need to Talk:

Copyright is an essential part of any substantive IP protection plan in China, but many companies fail to take an extremely important step: registering their copyrights in China. One of the most common misconceptions our China IP lawyers hear is that copyright registration in China is optional, because you do not have to file anything to have a valid copyright in China.

The moral of that post is just as true for wineries as for any other company – the best way to enforce your copyright in China is to register it. Counterfeiters are creative in their own way, and I’ve seen some fakes that combine one winery’s label design with a new (often fake) winery name. A trademark registration for your label may be sufficient to stop such a fake, but why not give yourself more ammunition?

As with any business decision, wineries should conduct a cost-benefit analysis before registering a copyright in China. If you are a small winery and/or don’t sell wine in China and never expect to, I wouldn’t bother registering any IP in China, let alone a copyright. But if you’re big enough to export wine to China, you’re big enough to protect your IP. And that means trademarks for your name and your label, and also a copyright for the label.