China IP lawyersOn an almost weekly basis, our China IP lawyers field inquiries from foreign companies that have discovered their Chinese manufacturer has registered one or more of their trademarks. The Chinese manufacturer’s rationale for registering these marks ranges from the altruistic (to prevent trademark squatters from doing so first) to the malevolent (to sell counterfeit goods in China), but usually falls somewhere in between The manufacturer always claims its intentions were pure as the driven snow, but this explanation is hard to accept when, as is almost always the case, the manufacturer never told the foreign company what they were doing. Deep down, the manufacturer knows that owning the trademarks gives it leverage in future negotiations.

The best manufacturers operate with full transparency: they ask their foreign company clients if they have already filed for trademarks in China, and if they haven’t, they explain the importance of doing so as soon as possible. See 8 Reasons to Register Your Trademarks in China. If the foreign company then says it can’t or won’t file trademark applications in China, then—and only then—will the manufacturers file trademark applications for the brand owner’s marks, and with the clear understanding that it will assign ownership of the marks to the foreign company upon registration. But again, this almost never happens.

Back to the usual case of manufacturers filing trademark applications unbeknownst to its foreign company client. Once the Chinese manufacturer has been found out, many will claim that they are legally or logistically prevented from transferring ownership of the registrations to the foreign company. We have heard many excuses, including the following:

  1. Only Chinese entities can own a Chinese trademark.
  2. The only way to transfer ownership of a Chinese trademark is for the manufacturer to abandon the mark and then for the foreign company to file a new application, but this is dangerous because third parties might file an application in the time in between.
  3. It is not possible to transfer ownership of a trademark application that is under examination.
  4. In order to assign a trademark, each party must submit a Certificate of Good Standing or a business license that has either been issued by the Chinese government or authenticated by the Chinese Embassy, and the latter process will take several weeks.

Full points for creativity, but none of the above is correct.

  1. Foreign entities can own Chinese trademarks. In fact, foreign companies own millions of Chinese trademarks.
  2. The way to transfer ownership of a Chinese trademark is by filing an assignment statement with the Chinese Trademark Office. It is possible to “transfer” ownership by abandoning a mark and then having a third party file a separate application, but that is costly, inefficient, and risky.
  3. It is possible to transfer ownership of a trademark application that is under examination. That said, if the trademark is ultimately rejected, then the new trademark owner will not own anything at all.
  4. You do need to submit proof of both the assignor’s and assignee’s identities, but nothing needs to be authenticated. The documents required should be readily accessible.

When you find out that your Chinese manufacturer has registered your trademarks, you may need to negotiate the terms under which they will assign the marks to you – and that may take some time. But the actual assignment process is easy and relatively inexpensive and don’t believe anyone who tells you otherwise.

China trademark law firmNobody disputes that Chinese factories that make OEM products for American and European companies are increasingly looking to make their own products for selling directly to consumers. Nobody disputes that online marketplaces have made this much easier.

And yet….

And yet, without fail and probably at least twice a week, we get emails from stunned companies reporting to us that they have just learned that their Chinese factory has registered “my trademark” or “my patent” in China and is selling our product for 25-75% less. We have gotten more such emails/calls in the last year from companies whose China factories are now directly competing with them than in the three years prior combined. And yet we also still get emails from companies that tell us that they “like” or “trust” their China supplier so much that it does not even make sense for them to spend money trying to stop this company from competing with them or that even asking their trusted China partner to sign anything would be viewed as an insult.

WRONG.

When companies tell me no contract is necessary I usually simply wish them the best of luck. When companies tell me that they are worried about asking their Chinese company to sign anything, I tell them that Chinese manufacturers expect to sign contracts these days and they view foreign companies that do not require them to do so as suckers. But what I want to tell the companies that are planning to rely on their good and trusted relationship with their Chinese suppliers is that pretty much all business relationships start with trust because who goes into a relationship with someone they either hate or know to be dishonest? You want a contract to memorialize your good relationship. You want a contract when you are in agreement and therefore have something to put on paper in the form of a contract. Contracts cannot be written if the two sides cannot agree.

With online selling having become so easy for Chinese factories, your product has never been more at risk for competition by the very same factory to whom you provide your molds and your know-how and your technology. Chinese factories know this and many are agreeing to manufacture products at money-losing prices simply to acquire the knowledge that will allow them to sell those same products directly themselves.

Some of these Chinese factories will not create duplicates of your products for their foreign buyers — be they your competitors or your customers. They instead take what they have learned from manufacturing for you and use that information to compete directly with you. Since you will essentially be educating your Chinese manufacturer on how to compete with you, you need contracts and IP registrations that will at least limit what it can do when it does.

Chinese factories are becoming increasingly confident about selling their own products online and therefore more willing to risk losing their foreign OEM product customers to do so. Add to this that nearly all of the online retail platforms are focusing on helping Chinese manufacturers sell directly and you should be able to see exactly where all of this is leading.

What though can you do to stop this? The better question is what can you do to slow down and reduce this sort of competition? I suggest you read the following:

Despite the need to have a contract (or multiple contracts) with your Chinese supplier and despite the need to always be alert to what your Chinese supplier is doing with your product and in your product marketplace, there is still room for a good relationship and having such a relationship is important. Think of the contract as a way to bolster your good relationship with your supplier by reducing the issues on which there will be disagreements.

Trust yet verify.

What are you seeing out there?

Doing Business in China EventI will be speaking at an international business event in Milwaukee, Wisconsin, on May 9, entitled, Unlocking Global Opportunities. For more information, go here.

Who should attend? Any business operating internationally or hoping to do so.

Why attend?

  • Grow your international sales
  • Develop a strategic global plan
  • Network with hundreds of people from manufacturing, service & logistics industries
  • Keep current on the latest international trade issues with industry experts
  • Hear high-caliber speakers discuss their experiences in international markets
  • Leave with new ideas.

What will go on there?

The agenda will include the following:

  • Governor’s Export Award Winners
  • Luncheon Keynote Speaker (invited)- Elizabeth Erin Walsh – Assistant Secretary for Global Markets and Director General of the U.S. & Foreign Commercial Service; U.S. Department of Commerce International Trade Administration
  • International Café – Roundtable discussions with peers & subject matter experts
  • 5 Breakout Sessions:
    –     Unlocking the Tax Code
    –     Global E-Commerce: The Great Equalizer
    –     Compliance
    –     Transportation: Enhancing Wisconsin’s Competitive Advantage
    –     International Growth Strategies
  • Networking Reception

More specifically, the event will consist of the following:

7:30 a.m. to 5:00 p.m.   Networking

8:00 a.m. to 9:15 a.m.  Breakfast

9:15 a.m. to 9:45 a.m.  Networking Break

9:45 a.m. to 11:15 a.m. International Cafe — Roundtable Sessions with International Experts.  This session to give business owners and managers an opportunity to discuss specific issues and challenges of selling internationally with subject matter experts. A total of 6 roundtables will focus on multiple functional areas of interest. During these 90-minute sessions, the roundtables will turn every 25 minutes, allowing individuals to participate in 3 discussions. The roundtable topics will be as follows:

9:45 to 11:15  Federal Tax Code Changes and Your International Business.  The following speakers will help you make sense of the recent tax code changes as they relate to your international business, including how the new federal tax code can spur economic growth for your company.

9:45 a.m. to 11:15 a.m.  Global E-Commerce: The Great Equalizer.  In this session, John Worthington and Samantha Soffici of IBT Online, will give you an opportunity to learn from E-Commerce experts and international company leaders who have built substantial business revenue through global E-Commerce sales, both B2B and B2C. Take away tactical tips and learn how to execute your E-commerce strategy, from global demand generation, to website localization, to the platforms best suited to your products and customer base.

  • The Global E-Commerce Marketplace: Successfully penetrating E-Commerce in China and E-Commerce platform for SMEs
  • International Online Marketing & Website Localization: How do websites help exporters? A Look at selecting a web address, SEO, web hosting and localization and Informational vs. transactional websites.
  • E-Commerce: A WI Company Perspective Best practices for an International on-line strategy, Issues/obstacles vs. success/growth and Business Impact of E-commerce

11:15 a.m. to 11:45 a.m. Networking Break

11:45 a.m. to 1:30 p.m. Lunch — Growing and Protecting Wisconsin Companies Globally – Keynote Speaker: Elizabeth Erin Walsh – Assistant Secretary for Global Markets and Director General of the U.S. & Foreign Commercial Service; U.S. Department of Commerce International Trade Administration

1:30 p.m. to 1:45 p.m. Networking Break

1:45 p.m. to 3:15 p.m. Compliance.  In this session you will hear from both the legal and the manufacturer’s perspective regarding the staples of trade compliance, including the hottest and most current topics. Together with practical examples and time for Q&A, this session is relevant for new and experienced exporters. The speakers for this session will be the following:

1:45 p.m. to 3:15 p.m. Transportation: Enhancing Wisconsin’s Competitive Advantage. This session will examine strategies to improve the logistics of Wisconsin’s exports. Using case studies, panelists will discuss alternatives and best practices in food, beverage and agricultural transportation. Attendees will gain an understanding of how food companies can better transport product to market – whether through cold chain, leveraging rail, and/or maximizing value. The speakers will be the following:

1:45 p.m. to 3:15 p.m. Creative Growth Strategies. Whether you rely on distributors, manufacturers reps, licensing agreements, franchise agreements, or you do it all yourself, doing business internationally requires due diligence, formal agreements, and IP protections. I will be speaking at this session, along with the following people who will discuss their specific strategies to enter new international markets.

3:15 p.m. to 5:00 p.m. Networking Reception.  


Sounds great, what do I need to do to go? 
Go here for full details and to sign up.

See you in Milwaukee on May 9!

China trademark lawyersOne of the reasons we are always harping on the need to register your trademark in China is that in addition to being a first-to-file jurisdiction, China does a lousy job policing bad-faith trademark registrations. As a result, trademark squatting has been a profitable and low-risk activity in China for several years.

Those who are unfamiliar with Chinese trademark practice might think the problem is China’s trademark law. Not so. China’s Trademark Law has a number of provisions that could easily be invoked to combat trademark squatting, including the following:

Article 10.7 prohibits any trademark “in the nature of fraud in advertising that easily confuses the public with the quality or other characteristics or origins of the goods, or the place of origin of the goods.”

Article 10.8 prohibits any trademark “detrimental to socialist morals or customs, or having other unhealthy influences.”

Article 13 states that registration shall be denied and use prohibited for any mark that is a “reproduction, imitation, or translation of a third party’s famous trademark which has not been registered in China and where the goods are identical or similar, which may cause public confusion and damage the interests of the registrant of the famous mark.”

Article 15 states that “Where an agent or representative, without the authorization of the principal, seeks to register in the agent’s name the principal’s trademark and where the principal objects, registration shall be refused and the use of the mark shall be prohibited.”

Article 32 states that “No trademark application shall infringe upon another party’s existing prior rights. Nor shall an applicant rush to register in an unfair manner a mark that is already in use by another party and enjoys substantial influence.”

The problem is that the Chinese Trademark Office (CTMO) does not interpret the Trademark Law in a way that constrains trademark squatters. As a practical matter, the only time aggrieved IP owners have a good chance to prevail in an opposition on the first try is if (1) the trademark squatter is an obvious and well-known squatter with hundreds of applications for other people’s trademarks or (2) the trademark squatter has (or had) a business relationship with the “real” owner.

The former can be shown by printing out the search results from the CTMO database along with a few annotations (and even then it’s basically a coin toss). The latter depends on the facts of the situation; the better the facts, the better the odds. In an ideal situation, the Chinese party would have executed (using their chop) a formal agreement in which they agreed not to register or otherwise interfere with any of their partner’s IP. Such an agreement could be used both as evidence for a trademark opposition and as the basis for a lawsuit. But the ideal is rarely attained, in large part because Chinese parties who execute formal agreements don’t go out and register their business partners’ trademarks – and if they do they are willing to assign them.

Most of the time, a trademark opposition against a former business partner is instead supported by a sheaf of circumstantial evidence demonstrating the business relationship. The best circumstantial evidence consists of documents issued by the Chinese side and bearing their company chop (like an invitation from them for purposes of a business visa), or documents issued by a third party clearly identifying both the foreign buyer and the Chinese party (like shipping or customs documents). But even those are often hard to track down. Many business relationships – even with millions of dollars of product exchanging hands – are based on generic purchase orders that could easily be forged and are exchanged with a factory owner’s personal email account. Add to that the fact that orders are often placed with or shipped by another entity, and it’s no surprise that the dots are often quite difficult to connect.

Over the years, our China trademark lawyers have included the following sorts of documents as evidence in trademark oppositions:

  1. The business card of the Chinese side.
  2. The Chinese side’s business license
  3. Emails from the Chinese side
  4. The Chinese side’s passport.
  5. Purchase orders from the foreign buyer
  6. Invoices from the Chinese side
  7. Bank receipts from the Chinese side’s bank showing payment from the foreign buyer.
  8. Bank receipts from the foreign buyer showing payment to the Chinese side
  9. Shipping documents showing the Chinese side as the exporter of record and/or the foreign buyer as the consignee.
  10. The foreign buyer’s corporate Certificate of Good Standing
  11. Photographs of the foreign buyer visiting the Chinese party, or vice versa
  12. Visa invitation letters from the Chinese party to the foreign buyer, or vice versa.

With a circumstantial case, you never know what is going to turn the tide with the CTMO examiner, so it’s usually best to err on the side of excess. The more evidence the better.

But it’s even better to register your trademarks first so you don’t have to deal with this situation at all.

China trademarks and IP protections I will be speaking today (April 25) in Barcelona at a Red Points event on international and China IP protection. The event will be on the eve of World International IP Day and it will be to celebrate Red Points’ launching of its online brand and trademark platform that will offer free lessons on detecting, validating and enforcing intellectual property rights across the internet.

This event will be live-streamed on April 25th as well, at 9:00 AM PST, 12:00 PM EST, 6:00 PM CEST. For more information, go here and to register go here.

It’s all FREE and there will be an hour or so of networking after the talks, which will include substantial time for questions. I will be focusing on how education is so important in this space, mostly by highlighting real life worse case scenarios that have been created because companies simply did not know what they needed to do to protect their intellectual property from China. The key point: Many (most?) Chinese manufacturers are no longer content just making products for foreign companies. They now want to make AND sell their own products. This means you need to do various things to prevent Chinese manufacturers — especially your own Chinese manufacturer — from registering “your” trademark in China and then copying and selling your product worldwide.

To avoid your company being part of my next China trademark mistakes speech you should both attend this event (either live or via live streaming) and you should check out the following:

I hope to see you there.

 

 

China trademark registration
       Same same but different

One of the annoying quirks (or endearing features) of the Chinese trademark system is that the Chinese Trademark Office (CTMO) and the Chinese court system have different standards for what makes one trademark “confusingly similar” to another, which is the statutory basis for determining whether one trademark conflicts with another. To make things even more confusing, neither the CTMO nor the Chinese court system has a uniform, clearly articulated standard.

That being said, experienced practitioners know CTMO examiners are generally more strict than Chinese judges. As discussed in these pages before, the CTMO continues to hire vast numbers of inexperienced trademark examiners who are under tremendous time pressure to crank through a mind-blowing number of trademark applications. They’re following a playbook, just like an offshore customer service representative, and they aren’t rewarded for making appropriate judgment calls. I haven’t been to one of their training sessions, but I have to believe the mantra drilled into new recruits is “When in doubt, reject.”

None of the CTMO examiners are native English speakers and many don’t speak English particularly well. They are trained to look for similarities in phonetics, pronunciation, appearance, and meaning, which can lead to absurd results for English-language marks that superficially appear similar. For instance, “Big Work” and “Big Dork” might well be considered confusingly similar brand names by the CTMO even though there isn’t a single native English speaker who would ever confuse the two. In fact, the CTMO would probably consider “Work Big” and “Big Dork” to be confusingly similar. At a very high level, you can see why: the order of the words is flipped and one letter is different, but otherwise they are identical.

It’s possible to rationalize the CTMO’s unsophisticated approach to English-language trademarks by noting that many Chinese consumers have limited English-language skills and might indeed think that “Work Big” and “Big Dork” brands were produced by the same company. But this argument doesn’t hold up under further scrutiny, because the CTMO examiners take the same approach with logos (that are not in any particular language).

The Trademark Review and Adjudication Board (TRAB) hears appeals of trademark rejections, and they have a more objective and sensible approach to the “confusingly similar” standard. But they, too, are overworked and understaffed, and far more often than you might expect, they will uphold a ridiculous CTMO decision. So it is entirely possible that in real life, an existing registration for “Work Big” would block an application for “Big Dork.”

Meanwhile, the Chinese court system would almost certainly not find that the “Big Dork” brand infringed upon the “Work Big” registration. The owner of “Work Big” could not get an injunction or damages, and would be hard pressed to take any action at customs. Frankly, it probably wouldn’t even occur to them because the marks are so different.

So where does that leave the owner of the “Big Dork” brand? They are unable to secure a trademark registration in China, but they can’t be sued for infringement either. Effectively, they’re in the same position as anyone using a descriptive trademark: nobody can stop them from using it, but they can’t stop anyone else from using it either.

Whether this is acceptable to the “Big Dork” brand owner largely depends on what they want to do in China. If all they want to do in China is manufacture goods and be assured that their goods will not be seized at Customs for alleged trademark infringement, they should feel reasonably confident. It’s not ideal, though, since CTMO’s decisions are not binding and if a trademark squatter files an application a couple years down the line and gets a CTMO examiner with a more relaxed standard, that squatter might be able to secure a registration after all. The best decision would be to use a trademark that they could definitely register in China, whether by appealing the CTMO’s rejection or by picking a new trademark. Better safe than sorry.

And if they plan to sell goods in China, they absolutely need to find another trademark, because it’s guaranteed that someone else would copy the “Big Dork” brand name and they wouldn’t be able to do a thing about it. See Make China Trademarks a Priority.

China sourcing contractsOne of the first things our China lawyers do when working with a company having products made in China is figure out the contracts and IP registrations that will ensure our client’s intellectual property and other rights will be protected as against its Chinese manufacturer and the rest of the world. In doing so, our China attorneys typically choose from the following manufacturing related agreements and IP registrations:

1. NNN Agreement. NNN Agreements are basic agreements that protect the confidentiality of your products and prevent your Chinese manufacturer from competing with you or circumventing you by going directly to your customers (non-disclosure, non-compete and non-circumvent. Their highest and best use is usually before you chose your specific Chinese manufacturer. Oftentimes an NNN Agreement is not needed because it makes better sense to put the substantive provisions from the NNN Agreement into a Product Manufacturing Agreement, described below. NNN Agreements normally are relatively simple agreements but for one to work with China it must be done correctly and using an off-the-shelf American or European NDA Agreements will not work for China. See Why Your NDA is WORSE Than Nothing for China

2. Mold/Tooling Protection Agreement. This agreement makes clear that the molds/tooling you are having made for you will actually belong to you and cannot be used to make products for anyone but you. Without such an agreement, when you seek to move your production to a new manufacturer, your old manufacturer will very likely keep your molds/tooling. Without this agreement there is also a good chance your old (or even your present) manufacturer will use “your” molds/tooling to make “your” products and compete with you. Just as is true with China NNN Agreements, it often makes sense to skip this agreement and put its substantive provisions into the Product Manufacturing Agreement. For more on these agreements, check out Manufacturing in China: Control Your Molds (Part 1), Manufacturing in China: Control Your Molds (Part 2) and Manufacturing in China: Control Your Molds (Part 3).

3. Product Ownership Agreement. This agreement makes clear the product you are co-developing with your Chinese manufacturer or having made by your Chinese manufacturer belongs to you. This makes sure you have something in writing and enforceable in both China and in any other country in which your product is going to be sold. Without this agreement, your Chinese manufacturer may be able to claim ownership to the IP rights in “your” product and register a patent in “your” product in China and in other countries. See China and The Internet of Things and How to Destroy Your Own Company. This agreement is rarely needed because a Product Development Agreement or a Product Manufacturing Agreement usually can cover the product ownership issues.

4. Product Development Agreement. This complicated agreement should set out the terms of your product development relationship with your Chinese manufacturer, In particular, it should specify who will own what of the finished product and who will pay for what to develop the finished product. These agreement should make clear what you will be paying in product development costs and it should set out the various milestones your Chinese product manufacturer must meet to get paid. At minimum it should address (1) the product to be developed, (2) the technology the foreign company and the Chinese manufacturer will contribute to develop the product, (3) who will provide the product specifications and in what form, and (4) who will own the IP rights to the final product.

5. China Manufacturing Agreement. This agreement is often called a Product Sourcing Agreement or OEM Agreement. These complicated agreements should clarify pretty much everything between you and your Chinese manufacturer and unless you are spending small amounts on your product purchases, you need a China Manufacturing Agreement. Among other things, this agreement usually should — at minimum — address the following:

Quality

Timeliness

IP ownership

Mold and/or Tooling ownership

Non-compete, non-circumvention, non disclosure See NNN Agreements above

Sub-supplier/sub-contractors

Liquidated damages for breaches

6. China Trademarks. If you are having your product made in China you should secure a trademark for whatever brand name (and probably whatever logo) you are putting on your product or its packaging. If you don’t do this, someone else probably will and then they will use their trademark to stop your product from leaving China. You also should secure trademarks in the countries in which you will be selling your product because trademarks do NOT cross borders. Getting a China trademark is nearly always essential.  See China: Do Just ONE Thing: Register Your Trademarks.

7. China Patents. If your product is innovative or distinctive in its function or its design you should consider securing a China invention or design patent. These patents can be valuable/necessary to protect your product against copying and to prevent someone else from registering a patent on your product in China and then using that patent to stop you from manufacturing your product in China or from leaving China’s ports. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents.

The thing we as lawyers always need to focus on is maximizing value/protection for our clients will minimizing costs. This involves choosing the right agreement(s) and the right registration(s) at the right time(s) and doing everything correctly. See China Contracts: Make Them Enforceable Or Don’t Bother and China OEM Agreements. Why Ours Are In Chinese. Flat Out.

Easy-peasy, right?

China gaming lawyersChina presents a wealth of opportunities for foreign gaming companies, but (and this is true of pretty much every IP-laden industry), it also presents substantial risks. See Gaming the System? Foreign Access to China’s Online Gaming Industry.

This post sets out the basics on how online gaming companies can protect their IP in China via China IP registrations. Though our law firm represents a host (sort-of-pun intended) of online gaming companies, we have been hesitant to write specifically about largely because it is not all that legally different from other industries. But because we have lately been getting emails requesting we do so, we will. Starting now.

The big thing to know about China IP laws as they relate to online gaming is that there really are no IP laws specific to online gaming. China’s IP laws relevant to online gaming are the same trademark and copyright and patent and IP licensing and trade secret and unfair competition laws we constantly write about on here. But though the laws are the same, how best to apply them to the particular product/industry — online gaming — differs. Our China IP lawyers generally view the IP work we do for our gaming company clients as similar to what we do for our movie and music and software and publishing (especially comic books) and toy company (especially dolls and character figures) clients.

China Online Gaming Copyright Protections. Copyright laws usually come into play when you are talking about “content” and when you are talking about online gaming, you are essentially talking about content. Online games are typically rife with copyrightable content, including the characters in the game, the music, the speaking, the story-line, and the animation. Oh, and of course the code

Registering copyrights for online games in China is very much like doing so in the United States and in Europe. Because of this, when we do such registrations, we usually just track what has already been done in the U.S. or in Europe. Registering video game source code in China typically consists of registering the source code using China’s special software registration rules. When it comes to registering the artwork in games, our normal strategy is to treat each character as a work of art. If there are special locations, these are also treated as a work of art. All the artwork is usually then collected into a bundle and is registered in one filing. The exact physical item that is sent to the registration authority depends on the nature of the work. Registration is not expensive and it is better to register too much rather than too little.

China Online Gaming Trademark Protections. As regular readers of this blog well know, we are huge fans of registering China trademarks. It is bad enough if someone copies your game but if they can legally give it and its characters the same names you gave them, it becomes nearly impossible for you to distinguish your game from the copy. Enforcing trademark rights in China is generally easier than enforcing a copyright rights and that’s why trademarks should always be considered for the name of the game and the names of the characters. The key thing you should know about China trademarks is that they usually take around a year to secure. This means you should file for your China trademarks as soon as you have an idea of what you will be calling your game and/or its characters.

China Online Gaming Patent Protections. Patents are still pretty uncommon in China for online games, but there will be instances where securing one will make sense. It really just depends.

Protecting your gaming IP requires you think ahead and act ahead. And as is true for pretty much all industries in China, the biggest benefit in your securing China trademarks and copyrights and patents will likely not so much to give you the ability to prevail in a lawsuit against an infringer, but to make potential infringers think twice before copying you. If given the choice (and to a certain extent infringers are given this choice) between copying your game that is loaded with registered China IP protections or copying a game with few or no China IP protections, the infringer more likely to pass your game by, which is exactly what you want.

 

China IP lawyers and artificial intelligenceI have received a number of emails in response to my recent post on China’s artificial intelligence plan. Many who wrote me seek to reduce China’s plan to the following simple, three step process:

  • Catch up in AI by 2020.
  • Learn to make some basic products by 2025.
  • Lead the world by 2030.

This does not accurately summarize the plan, though it is how much of the English language media describe it. The full PRC AI plan is set out in 35 pages of dense, jargon heavy, Chinese bureaucratic prose. I will be doing a series of blog posts seeking to explain the full plan. My first post, China’s Artificial Intelligence Plan — Stage 1, dealt only with stage one, and as you can see from that post, stage one is not written as “catch up.” Stage one is a full-on plan to continue developing technologies with which Chinese companies are already working. I note also that manufacturing automation robotics is not featured. On the robotics side, the emphasis is on service robots.

Note also that the Chinese companies are already way ahead of this plan. They are not waiting around for guidance from the government on their AI projects; they are moving ahead full speed. In general, Chinese companies are succeeding most with the software/network based applications of AI. This is the focus of the Baidu research center in Silicon Valley. They are not doing as well with mechanical devices such as robotics and smart vehicles and sensor based IoT devices. However, they know that and they are making strong efforts to advances in these areas. We touch on this a bit in China IP Challenges for Automotive Suppliers. One of the areas on which many Chinese companies are focusing is on human/AI interaction and they are having good success with that in the field of medical imaging and diagnosis.

There is little doubt that part of China’s AI strategy involves acquiring technology and then selling in back into the developed market from which it came. This has been and still is the strategy of businesses in pretty much every developing country. The U.S. followed this approach during the entire 19th and early 20th centuries. Japan and Korea and Taiwan did it with great success in the post WWII era. China and India are now moving into that phase. That is how technical progress is made and we write about to guard against this sort of IP appropriation nearly every week. See How To Give Away Your IP In China, How to Give Away Your IP in China Without Realizing It and China and the Internet of Things and How to Destroy Your Own Company.

The real question is whether this strategy will work in the AI era  In general, Chinese companies are not good at working on their own to appropriate foreign technology. They prefer to enter into a manufacturing or joint venture arrangement where they convince the foreign entity to teach them how to use the technology. See China Joint Ventures: Keeping Your Friends Close and Your IP Closer. Then, later, they appropriate the technology and sell the cheaper product back into the same market. This is what Chinese companies did with high speed rail and with the Russian designed fighter jet and this is what they are trying to do it now with commercial aircraft. They will undoubtedly seek to do the same thing with AI and robotics. See China-US Trade Wars and the IP Elephant in the Room.

Will China succeed it purloining AI IP? It depends on a couple of factors. First, if the technology is protected by patent and copyright and trade secrecy, then they cannot sell into the markets where those IP protections exist. This would mean that North America and the EU would be closed to them, at least during the period where the IP protections are in place. Second, can Chinese companies master the technology to point where they can really compete? Normally, the Chinese companies simply clone the product and then seek to compete solely on the basis of price. For some products, this works. For more sophisticated IoT, AI, “smart” products, the success rate of the Chinese companies has been low. How many U.S. consumers get excited about the purchase of a Lenovo computer or a Xiaomi cell phone? How many U.S. customers are interested in buying PRC knock offs of virtual reality headsets? Not many. Price is not the significant issue for these more technically sophisticated products. When Chinese companies cannot compete on price, they traditionally don’t know what to do. There are many programs in place in China focused on changing this “price is the only issue” mindset. So far, progress has been sporadic at best.

However, without regard to whether China can succeed with its AI program, it is clear that appropriating foreign AI technology is the goal of most Chinese companies operating in this sector. For that reason, foreign entities that work with Chinese companies need to be aware of the significant risk and take the necessary steps to protect themselves. There are many ways to do this, using a mix of IP registrations and carefully drafted agreements. See China Contracts: Make Them Enforceable or Don’t Bother. This is what the China lawyers at my firm focus on and this is the issue we discuss most often on this blog. Stay tuned.

China Joint VenturesUnited States media has recently been frequently writing of how China forces foreign companies to relinquish their intellectual property to Chinese companies to be able to do business in China. This issue has been getting a ton of press lately because this is one of the justifications President Trump has been using to increase import tariffs on imports from China. It really isn’t this simple though. Many stories make it seem foreign companies must always relinquish their IP or at least must always do a joint venture to do business in China and doing a joint venture will mean losing your intellectual property.

Truth is that for most industries doing a joint venture is 100% voluntary on the part of the foreign party and truth also is that doing a joint venture need not include relinquishing your intellectual property. Much of the time foreign companies lose their IP to Chinese companies by falling prey to what the China lawyers in my firm call “the joint venture scam.” This scam is quite old — old enough for many Chinese companies to have thoroughly mastered it by now — and it usually works as follows:

  • The foreign company seeks to sell its complex and expensive technology to a Chinese company on a standard technology licensing basis.
  • After much discussion, the Chinese company asserts that the price is too high for an untested technology. The Chinese company then offers to establish a China joint venture company with the foreign company owning a percentage of the China Joint Venture.
  • The foreign company contributes its technical system in exchange for its ownership interest in the China Joint Venture and the China company contributes the rest. The IP contribution by the foreign company means the China JV now owns the technology for China. The China JV agrees to purchase more technology from the foreign company at full prices after the Joint Venture is up and running.
  • The foreign company then delivers and fully trains the Chinese side in how to operate the foreign company’s technology.
  • The China JV never purchases anything from the foreign company claiming that the foreign company’s technology does not work properly or as claimed. The foreign company eventually discovers that its technology has been cloned and is being used by a facially unrelated company in China. Since the China JV owns the technology, this unauthorized use probably infringes on the Joint Venture’s intellectual property rights, but so what? The JV must sue to defend its rights but because it is  controlled by the Chinese company its management refuses to take any legal action.
  • The JV then disappears, sometimes with the Chinese side buying out the foreign company at a substantial discount.

This system in various forms is still being actively used in China. And foreign companies still sometimes fall for it, but not you. Right?

For more on China Joint Ventures, check out China Joint Ventures, the 101.