China intellectual property

This definitely holds true for China copyrights takedowns.
This definitely holds true for China copyright takedowns.

 

This is the fourth in a series about online copyright takedowns. Copyright Takedowns in China was a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. Copyright Takedowns in China Part II: Searching, Linking or Storing? looked at how providers of storage space encounter more liabilities than those merely providing searching or linking services. The application of the takedown regulations to cloud service providers was covered in Copyright Takedowns in China Part III: Audiovisual and Sound Recordings in the Cloud.

Our China lawyers are handling more and more takedown work these days and one thing is very clear: if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance. The reason for this is simple. If you attempt to invoke China’s notice and takedown system the internet service provider will put you to proof. If you don’t have a Chinese copyright registration certificate ready to go you will need to prove your copyright ownership. Though Chinese network service providers all have their own requirements for this, all of them will require you to provide a bunch of chain of title documents that have been translated into Chinese. These documents will be essentially the same as those required to obtain a registration anyway. Once you have proven your ownership to a network service provider, you will have nothing to show for all the work, except, we would hope, the taking down of the infringing content in one instance. You will need to repeat the exercise again and again if numerous sites are involved or if your content goes back up again on a site from which it was taken down.

So speed up the takedown process, and have something to show for your work, by registering your copyrights in China. If you have your chain of title ducks in a row it will be quick and inexpensive to get a registration. You will then be ready to strike.

I am going to be speaking at USC this weekend and in poring over old PowerPoints (to create a new PowerPoint for my talk), I came across one with a fairly extensive China law bibliography of some of our most helpful posts.  This bibliography is definitely slanted towards the legal issues that confront foreign companies doing business in China.

Here it is:

CHINA CONTRACTS

CHINA LICENSING AGREEMENTS/CHINA DISTRIBUTOR AGREEMENTS/CUSTOMS

CHINA COMPANY FORMATION/CHINA WFOE FORMATION/CHINA JOINT VENTURES

NEGOTIATING WITH CHINA

CHINA —INTELLECTUAL PROPERTY

I have to admit that one of the things I love about both China and Russia is that they take various international days seriously, that nobody even knows about in the United States.  I suspect that is due to communism and/or its remnants.  Anyway, as part of today’s World Intellectual Property Rights Day (how many of you knew there was such a thing and how many of you knew it was today?) I was interviewed about the past, present and future of China intellectual property law and intellectual property protections in China.  Here is that interview between Zheng Chenguang (ZC) and me (DH).

 

ZC: First, from the international scene we speak to Dan Harris, founding member of Asia-focused commercial law firm, Harris Bricken, based in Seattle, in the US Mr. Harris, welcome to the program.

DH: Thank you.

 

ZC: Friday marks World Intellectual Property Rights Day.  How do you look at the level of IPR protection today, how better are we compared with the situation, say like five years ago, and do you see IPR protection as mainly a challenge facing the developing countries, rather than the developed countries.

DH: No, I do not. I see it as a challenge for any company that does business anywhere in the world.

 

ZC: Why would you say that?

DH: Because certainly developing countries tend to have a poorer record at IP protection than developed countries, but at the same time, developed countries have all sorts of issues as well.  You’re not going to find a company with more than 100 employees in the United States that hasn’t had a problem with an employee leaving with trade secrets or an employee leaving to compete when they shouldn’t have or with a rival using their design. It goes on everywhere.

 

ZC: In your mind, what is the key to protecting IP rights?  Is it more important to make more or stronger laws, or is it more important to solve the problems related to implementation of the existing laws?

DH: Well are you asking about China or are you asking about anywhere?

 

ZC: How about the situation in China?

DH: China’s laws are actually just fine.  It’s not a question of the laws. It’s really a question of implementation. And a lot of times it’s a question of implementation not even so much by the Chinese government, but by companies that are doing business in China.  Meaning, a lot of times foreign companies complain about IP in China, when in reality it was the foreign company that made the mistake when it went into China of not sufficiently protecting its IP. But one thing I want to clarify, and that is when I talk about IP, I always like to divide it up into three, sometimes even four areas: trademarks, copyrights, patents, and you can throw in trade secrets as the fourth item. And the reason I like to divide this up is because in some of those areas, China is actually quite good, while in other of those areas it’s quite poor, and so it’s really unfair to talk about China IP in general without breaking it up.

 

ZC: You’ve divided IP intro three categories. In what category do you think China has done the best job, and which leaves a lot to be desired?

DH: Trade secrets—China’s excellent. They borrowed the laws from the United States and they tend to enforce them. Trademarks—China’s fine. Their laws are very similar to France, to Sweden, to much of the world, and enforcement is pretty good as well. When it comes to patents, China’s patent laws are not as tough as those in the United States, but those in the United States are tougher than those in Europe, and that’s just the way China wants it … its enforcement isn’t bad. Where China does poorly is in copyrights. And that hurts China’s reputation because so many people ascribe China’s handling of IP based entirely on China’s handling of copyrights. And copyrights involve, generally speaking, content—books, movies, software.   Everybody knows you can buy a DVD of just about any movie on the street in China for about two dollars. That’s a problem.

 

ZC: Chinese Intellectual Property laws, there are origins in Deng Xiaoping’s 1978 reform and opening up policy. During the past decade or so, especially after China’s accession into the World Trade Organization, IP protection has been brought to the fore, since China wants to dock with international standard and adopt international practices. How did China’s accession into the World Trade Organization influence intellectual property rights in China? And how better are we compared to with, say, ten years ago?

DH: China is a lot better compared to ten years ago. I think very little of that has to do with the WTO. I think that China is better because China is getting wealthier, and because Chinese companies are starting to care more about IP. I am of the view that countries start doing well with IP when its own powerful companies really start caring about it. And I’ve seen this progression happen in Japan, I’ve seen this progression happen in Korea, I’ve read about how this progression happened in the United States. The reality is nobody is going to be able to force China to improve its IP from the outside, but big companies within China like Haier, like Huawei, like Lenovo — companies that care about their own IP — are going to be able to force China to improve. That’s what’s happening. And as more big companies come to the fore in China, China’s IP is going to continue to improve. And there’s not much that can be done to rush it. In fact, if anything China’s IP is improving nicely. Meaning, it’s improving at least as fast as Korea’s did, at least as fast as Japan’s did, and probably as fast as the US’s did, but the US was a long time ago.

 

ZC: As the founding member of an international law firm which has operations both in US and in China, what kind of advice do you want to give to say, Chinese investors, who want to do business in the US, and vice versa, what kind of advice do you want to give to US companies making a foray into the Chinese market?

DH: Okay, I’ll start with the US first, US companies doing business with China, because that’s easier for me because I talk about that every day with our clients. The advice I always give is twofold: number one, know what your IP is and know how to protect it yourself. And what I mean by that is look at your own IP and figure out how you can protect it outside of the law. One of the ways you can protect it is don’t bring it over to China, or just bring over part of it.  Or have a good partner in China — one who is not going to steal your IP. These are things called structural IP protection; it’s what companies can do outside of the law. The second thing, register your IP in China. Don’t complain if your IP is taken in China and you haven’t registered it, because if you haven’t registered it in China, it’s not your IP. On the flip side for Chinese companies coming to the United States, our IP system is different from China’s and you better recognize that and you better take it seriously. Interestingly enough, in my experience, Chinese companies that come to the United States take IP protection more seriously than American companies that go over to China. I think a lot of the reason for that is because in the United States certain IP protections are automatic without even needing to file for them. So when Chinese come over here they’re prepared to file, whereas when Americans go over to China, oftentimes they neglect filing.

 

ZC: We understand that China is now trying to effect a transition in its growth model, focusing more on the quality of the growth side, commercial and technological innovation and a so-called knowledge economy would be important factors for China’s economic growth. To what extent will technological innovation play in China’s economic future? Will the roles of intellectual property laws increase their influence in the future?

DH: Yes. And that goes to what I said earlier, that as domestic companies view intellectual property protection as becoming more important, then the country will as well. And so, as China develops more companies with their own intellectual property, China’s intellectual property laws will improve. More importantly, enforcement will improve as well. China is developing sophisticated pharmaceutical companies, sophisticated technology companies. Those companies are not going to let China fall behind in terms of intellectual property protection. They’re going to be fighting for it. So yes, as China’s economy goes more and more towards the high end, I’m virtually certain its intellectual property enforcement will follow right along with it. It has to. And if it doesn’t, that will temper innovation and a knowledge-based economy in China. The two have to go together.

 

ZC: Lastly, Mr. Harris, one of the most controversial and polarizing debates regarding intellectual property law in the modern world seems to be IP law as it applies to the pharmaceutical industries in the developing world. And this year the Indian Supreme Court came down with a ruling against the patent claims by Swiss pharmaceutical company Novartis. Speaking from a broad perspective, what do you think about the debate of availability versus innovation regarding pharmaceuticals and the developing world?

DH: It’s a tough debate. It’s a really tough debate. I think that China has played that hand better than India. When India makes a ruling like it did, all sorts of companies say “I’m not going to India, I’m too afraid.” Yes, India is going to get some medication because of the that ruling, but, in the end, my guess is dollar-wise they probably hurt themselves a lot more than they help themselves. Because companies see — or I should say hear — about rulings like that, and it really scares them. And that’s not what India should be wanting right now. And not just pharmaceutical companies. People hear about a ruling like that and, non-lawyers, by the time it reaches them, they don’t understand that it’s a complicated patent issue/accessibility issue.  All they hear is, “Wow, India doesn’t protect western intellectual property rights. I’m not going to take my widget factory there.”

 

ZC: Right. That was Dan Harris, founding member of the Asia-focused commercial law firm, Harris Bricken, talking about intellectual property rights protection in China. Mr. Harris, thank you very much indeed for your insights.

DH: Thank you very much for having me.

This is the final part of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In How To Protect Your IP From China. Part 3, I looked at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

In How To Protect Your IP From China. Part 4, I wrote on the basics of what goes into Chinese contracts, particularly those related to protecting your intellectual property.

In this part 5, I discuss some of the most common situations companies face where they must focus on protecting their IP.

  • Employees

Confidentiality agreements. In China, unlike in the United States, it is the norm to have a written employment contract with all employees. This is because not having a written agreement can lead to having to pay a year or more in salary to anyone you terminate.  You should use the written contract to your advantage by putting in a confidentiality provision that sets out your company information that must be kept confidential. Confidentiality agreements can protect company information that may not rise to the level of a trade secret, but they cannot be so broad as to protect everything.  China actually has very sophisticated trade secret laws — they come the US’s Uniform Trade Secrets Act — and the courts there are not bad at all in ruling favorably in favor of employers on confidentiality and trade secret cases.  But for you to be able to prevail, just as in the United States, the information you are seeking to keep confidential must have commercial value and you must make a reasonable effort to keep it away from the public.

Non Compete Agreements – These generally work in China only with very high level employees.  Very high level. And even then, they are enforceable only if they are: (1) not too long in duration and no longer than two years; (2) not too large in terms of geographic scope: and (3) do not restrain too much the employee’s opportunity to pursue his or her occupation.  Now here’s the real kicker on these:  you must pay your employee for the non-compete after his or her termination.  Limited to two years.  Typically, you must pay 20 to 50% of the employee’s salary, with the amount depending on the location in China.

Nonsolicitation agreements. Nonsolicitation agreements prevent employees from soliciting customers, former co-workers and/or agents upon separation from the company. These are usually enforced by China’s courts so long as they only prevent solicitation of the employer’s customers or accounts that existed at the time the employee left and so long as they are limited in duration and in geographic area.

It can be critical — especially for your employees doing R&D — that your employee contracts set forth who owns any intellectual property your employees help develop. You want a provision in your contract making clear that all IP developed by your employees belongs to the company and you want that because in China you run the real risk of your employees claiming ownership of what they developed. We also like to see a provision in the employee manual saying that any IP developed by company employees belongs to the company.

Contracts with your Chinese Distributers, Manufacturers, Joint Venture Partners, and Licensees should include the same sort of provisions relating to non-compete, non-solicition, and non-disclosure and they also should be clear about who owns what with respect to any IP.

 

  • Licensing Contracts

Three things you should be thinking about if you are licensing your IP to a Chinese company.

  1. Be careful about getting paid based on sales, unless you have some really good way of knowing what the sales really are.
  2. Get what you need to do the deal before you relinquish the technology.  Figure that the Chinese company will stop paying you after it has secured your technology.
  3. Register your licensing agreement with the proper governmental agency.  If you don’t, you run the risk of not being able to sue on it.
  • IP Registrations 

Just as in the US, you should register your IP in China to protect it.  There is no way can I go into great detail on what you can and should do to protect your IP in China through registration, but what I can tell you is that it almost always makes sense to do something.  Earlier I talked about how bad China is on IP and that is true, but if you have not done the proper registrations, you pretty much have zero chance of protecting your IP.  If you have done the proper registration, your chances are considerably better.

China’s IP registration and protection system is in many ways not all that different from that in the US.  Just as is the case here, China has patents, trademarks and copyrights.

Patents. China has invention patents, utility patents and design patents.  Invention patents are thoroughly reviewed before they are granted and so they can take quite a while.  Because of this, many companies will secure a quicker utility or design patent while waiting until their invention patent comes through.  Couple things you need to know about patents in China. First, if you do not file for your patent in China within a year of filing for it in the United States, you will be too late. China is a signatory of the Patent Cooperation Treaty and the Paris Convention, but Chinese patent lawyers tell me that it is better to file your patent in China.

China has had compulsory licensing of patents since 2001, but earlier this year the Chinese government came out with detailed criteria for the granting of compulsory licenses and that threw many into a panic, believing that the government was instituting compulsory licensing for the first time. These new rules really did not change much of anything and as far as I know, China has not in the last ten years required any company to compulsorily license its IP.

Trademarks are unique names, symbols, or logos. Can include colors. We trademarked a particular color of screws for a client. Don’t underrate trademarks in China. These work in China. China is a first to file country, not a first to use country, so generally, whoever files first for a trademark gets it. Trademarks cannot be place names. This is a bigger problem than you might initially think.  Another problem is that the people at China’s trademark office usually view acronyms as images and so if your company name is something like EVO and someone else has already registered the company name ECO, there is a very good chance your EVO name will be rejected as conflicting with ECO, because to someone who cannot read English, the two names look too much alike.  What this means is that if you have a two or three letter company or brand name, you had better try to register it now because it will only get tougher.  We used to get these approved all the time, but in the last year, we are succeeding only around 50 percent of the time.

Copyrights.  A lot cheaper and easier to obtain than patents and they last a lot longer. Very similar to the US. You do not need to file for a copyright in China to have a China copyright, as they arise automatically upon creation of a work created or first published in China, but you do need to have a registered copyright to sue on it and that’s the catch. In China, it takes so long to secure the registration of a copyright that if you are going to want to protect your copyright in China, you should file for it right away, because if you wait until you have a problem to file for the copyright, you may have a one-year lag before you can do much about it. Just like in the US, you don’t have to reveal all of your material in the copyright filing.  This is particularly important for something like computer code.

Stopping IP Theft.  If you have registered IP, and someone in China tries to use it without authorization, you can seek an administrative remedy by trying to get the Chinese government to do something about it or you can sue for damages. You also can try to get Chinese customs to stop any violating goods from leaving the country and, if you have your IP registered here, you can try to get US customs to stop it from entering into the US.

 

This is part four of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In How To Protect Your IP From China. Part 3, I looked at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

In this, part 4, of this How to Protect Your IP from China series, I set out the basics regarding contracts with China.  At this point, it become particularly important that I emphasize that this post is coming from a speech. It is of particular importance here because for much of the following I used PowerPoint slides and then orally expounded on them.

Here are the keys to just about all contracts with Chinese companies.
  •     In writing  – oral doesn’t cut it.
  •     One language  — Two languages just doubles the arguments and thereby increases your attorneys fees.  Usually Chinese if Chinese court.
  •     Use excruciating detail
  •     Liquidated damages are a good thing
  •     Attorneys’ fees.  Sometimes makes sense, sometimes doesn’t.
  •     Dispute resolution.  Absolutely critical, particularly in cases involving IP.  US court is oftentimes the worst choice.
  •     Sealed.  If you don’t get the Chinese company’s seal on the contract, you can be sure they will argue that whoever signed it was not authorized to do so.  They probably won’t win on the argument, but it will slow down your case and increase your legal fees.
For more on what should go into a Chinese contract, check out How To Write A Chinese Contract That Works and How To Write A Chinese Contract That Works. Part II.  
Your contract should specify how disputes will be resolved:
  • Where?  US as typical no-go. Vancouver, Toronto, Singapore, Hong Kong.  Beijing, Shanghai.
  • What law?
  • Institutional or ad hoc?
  • Fees?
  • Language?
  • Arbitrators’nationality?

Arbitration in China is not as bad as you think, particularly if you tailor the arbitration clause to your situation:

  • Specify English language
  • Specify non-Chinese arbitrator(s)
  • Discovery?
  • Injunctive relief?
  • Third parties?
  • Notice?

This is part three of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In this post, “How to Protect Your IP From China. Part 3,” I look at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

When it comes to contracts, the field is so broad and so varied there is no way I can get into much depth regarding any particular type of transaction — which is probably just as well for all of you out there who are not lawyers.  But I can and will highlight certain stress points and mistakes I commonly see across the board in dealing with Chinese companies, and I will provide some tips for helping to ensure the efficacy of your various China contracts.

But before I talk about what should go into your China contracts, I will talk a bit about a few basic things you should know about negotiating contracts with Chinese companies.  This is new for me to talk about in a speech like this, but I think it is too important to simply ignore, particularly when it comes to protecting IP.  Most American companies have little idea about Chinese company negotiating tactics and this lack of knowledge is working against them.

Chinese companies are, almost without exception, world-class negotiators.  I am convinced that every Chinese businessperson has read Sun-Tzu’s Art of War and you should too.  If you go to any airport in China, you will see all the top books from various countries on how to negotiate – and guess what, most of these books violate China’s own copyright laws.

Chinese companies have more patience than you do, particularly if you are in China for only a week.  And they know this and they will take advantage of this.

So what tactics will Chinese companies employ? Here are a few of the more common ones:

  • The Chinese side will tell you something has to be done a particular way because it is the law in China.  They do this all the time to try to get you to assign over your IP.  Our response to this is to ask them to cite to the law.  We have asked this at least twenty times and not once has the Chinese company ever come up with a real cite. Sometimes they come back with an English language version of what they say is the law, but isn’t.  Sometimes they say there’s no point in giving us a cite because we can’t read Chinese.  When we say that we can, they tell us that we cannot understand it because we are not Chinese lawyers.  When we tell them that we will have our Chinese lawyers look at it, they go silent.  My favorites though are when they respond by saying it’s an “unwritten” law law or that “this is just the way it’s done in China.”
  • The Chinese side will say “this is always how things are done in China” or that “this is never done this way in China.” Rarely if ever is this true.
  • Anything you say you might consider doing once the relationship is established, the Chinese side will say that you promised them and it needs to go into the contract to be done right away.  So be parsimonious with what you say.  You can rest assured that your Chinese counter-parties are.
  • One of my firm’s lawyers [Steve Dickinson] used to teach International Law at the University of Washington law school and he’d do an international negotiating class each year for the LLM program, which was made up mostly of international students.  This is an advanced degree program for students who already have a law degree. He told me that the Chinese students would always fail the negotiating exercise because they would start out by staking out an extreme position, never move from it, and never even explain their goals or make any effort to compromise.  Probably the most famous panda in China is named Win-Win and so when referring to Chinese negotiating tactics, there is the joke that Win-win is only a panda in China.  It is not a negotiating method — that’s for sure.
  • Chinese companies often will use a young employee with good English to negotiate with you to the point where you think you have a deal. At that point, the person who actually holds power will step in and start negotiating with you again.  This tactic works especially well if you are in a situation where you are thinking, “I can’t go back to the United States and tell everyone I failed to reach a deal.”
  • Chinese companies will create a fairly arbitrary deadline at some point in negotiating with you. Then when you try to insist on a provision in the contract for protecting your IP rights or anything else, you will be assailed for putting the deal at risk by running up against a pretty much artificial deadline.  The goal of this tactic is to panic those employees at the American company with the greatest stake in seeing the deal get done and then get those employees to push the deal through as is.

One of the consistently best defenses against all of these negotiating tactics is to figure out early on your fail-safe position on various issues and then establish the proper expectations among all of your own key people by making clear what you will require before you will be willing to put your IP at risk. You need to avoid a situation where the Chinese company can make headway against you by dividing and conquering.

Last month I gave a speech at a leading biotechnology conference in Washington DC on how to protect your IP from China.  Over the next few days, I am going to re-print that speech (in parts) here on this blog.  This is part 2 of that series.  Part 1 can be found here.  Please recognize that this is a speech, not a paper. Please also recognize that a PowerPoint originally accompanied this, but I am going to modify this speech so that ought not to matter.

Let’s say you have made the decision to do business with china, what can you do to reduce your IP risks?  As we lawyers so love to say, that is going to depend to a large extent on your particular factual situation.

Biotech companies generally get involved with China in one of five ways.

  1. They set up their own manufacturing in China or they have someone already there manufacture product for them.
  2. They conduct R&D in China.
  3. They enter into a China Joint Venture
  4. They license their technology to China
  5. They set up their own company in China for sales or they sell through a distributer

Though there are, of course, particular protections you can and should employ depending on what you are doing in China, it will almost always make sense for you do to do the following four things.

  • Do business with the right people in China. Companies with nothing to lose are far more likely to take your IP than those with established businesses and reputations and incentives for not getting sued.
  • Think about what you have that needs protecting. What do you have that others want? What do you have that your competitors would love to get their hands on? Is it your technology?  Your customers?  Your brand?
  • Figure out how you (not your lawyer) can protect what needs protecting. Can you break into subparts whatever it is that you want to protect so that nobody in China gets access to the full thing? Can you get away with sending an older version to China? Can you lock it down in your building in China or on one computer such that your employees cannot leave with it? Can you keep the key portions on a server in the US?  These sorts of protections are usually called structural protections and they can be absolutely critical.
  • Consult with your lawyer on the legal steps you can take to protect your IP.  Oh, and this should go without saying, but – unfortunately, the frenzied phone calls I get at least once a month after the horse has been let out of the barn tell me that it does require saying – talk with your lawyers early on in the process, not when it is too late.

I am going to focus today on the legal aspects of protecting your China IP.  In trying to figure out what can be done to protect IP as a lawyer, I am always thinking about the following:

  • What can get stolen
  • How something can get stolen
  • Who is likely steal it, and
  • What can be done by to protect it

You should be constantly thinking about these things as well.

With these various things in mind, I look at the nature of the transaction itself to see if there might be a better way to structure it.  For example, because I see joint venture deals as inherently risky for American companies — and not just for their IP risks — whenever a company comes to me wanting to do a China Joint Venture, I typically discuss with them other ways they might structure their deal while still accomplishing their goals. Might the US Company licensing its technology to the proposed Chinese joint venture partner make better sense?  Can the US Company go it alone in China? A lot of analysis goes into determining whether a joint venture makes sense, particularly for biotech companies who often need to establish close relationships with Chinese companies that can help them secure Chinese regulatory approval and market their products in China.

In any deal, I always try to figure out what can be done to incentivize the Chinese company not to take the foreign IP and run. What can go into the deal and the contract that will make the Chinese company believe that it will make more money by sticking with its American partner and than by jettisoning it? Should the American company promise future IP if certain goals or quotas are met?  Should the American company promise monetary bonuses in future years if all goes well?  What can keep the relationship between the American company and the Chinese company alive so as to decrease the IP risks.

It then comes down to two things on the legal side. One, properly drafted contracts with the proper people.  And two, proper IP registrations in China.

The contracts are to protect against those with whom you are directly doing business – in other words, against the Chinese companies that sign them. The IP registrations are to protect you against those same people and against everyone else as well.

When it comes to contracts, the field is so broad and so varied there is no way I can get into much depth regarding any particular type of transaction — which is probably just as well for all of you out there who are not lawyers.  But I can and will highlight certain stress points and mistakes I commonly see across the board in dealing with Chinese companies, and I will provide some tips for helping to ensure the efficacy of your various China contracts.

Last month I gave a speech at a leading biotechnology conference in Washington DC on how to protect your IP from China.  Over the next few days, I am going to re-print that speech (in parts) here on this blog.  As you have probably already guessed, this is part 1.  Please recognize that this is a speech, not a paper. Please also recognize that a PowerPoint originally accompanied this, but I am going to modify this speech so that ought not to matter.

If you are doing business with or in China, you have to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.

I am NOT saying that every Chinese company will try to take your IP all the time, but I am saying that if it is in the best interests of a Chinese company to take your IP, it almost certainly will try to do so.  And the Chinese government to a large extent just goes along with this. As recently as 2010, the Chinese Academy of Sciences’ annual report essentially said that because China is not so good at innovating it needs to do what it can to get our technology from others.  In 2006, China’s Medium and Long-Term Plan for Science and Technology Development stated that if foreign companies want to compete for government contracts they must transfer their IP to their Chinese partners. International outcry eventually led to this policy being cancelled, but so what?  The Chinese government’s desire to see Chinese companies secure foreign technology and its favoritism towards Chinese companies remains.

China’s courts are not particularly good venues for pursuing IP theft.  They are reluctant to award lost profits (this is true for both domestic and foreign companies) and they tend not to be comfortable with large damages claims.  On top of this, the damages available for IP theft are somewhat limited in that they are usually confined to the amount of lost sales in China, not worldwide.  I remember a big victory for NIKE in an IP case a few years ago against someone who had been making huge amounts of fake NIKEs.  I think the damage award was something like $75,000.  It is also extremely difficult to get a Chinese court to order someone to stop using your IP unless and until you prevail at trial.  And if you are in a court outside Shanghai or Beijing or a few other cities, you should count on home-town favoritism operating against you.

Some of you have no doubt heard that IP protection is getting better in China. And it is. A bit.  But again so what?  You are still at major risk and you have to operate accordingly.  Even if you think I am being too harsh in my assessment of IP in China or even if you think I am just flat out wrong, it still behooves you to at least act as though every Chinese company is a mortal threat to your IP.

So what can you do to ensure that your IP does not get taken by a Chinese company?  The easy answer is to never take your IP to China and to never do business with a Chinese company.  That IS the easy answer. IT is also oftentimes the WRONG answer. Because Chinese companies can take your IP even if you never leave the United States.  Chinese companies can buy your product in the US and take your IP that way. Many times, Chinese companies don’t even need to buy your product to copy from you.  Sometimes all they need to do is go to your company’s website and start copying.  One of the foremost experts on China counterfeiting talks of how more than half of all Chinese counterfeits are done simply by copying a design straight off a company’s own web site.  Believe it or not, going into China can sometimes be the best way to put a damper on counterfeiting.  Sometimes counterfeiting thrives only until the real thing arrives.

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

Who should go into China and who shouldn’t?  Companies that constantly roll out new products or new versions of existing products are better able to handle China IP risks. Having a super-strong brand name also helps, as does having enough size and money to be able to lobby in China and to fight against any and all infringers. On the flip side, if by going into China you are putting your IP at risk worldwide – not just in China — than you may not be such a good candidate for China expansion. Or if you are a small company and IP theft is an existential threat to your business, you had better think long and hard before you head over there.

But let’s say you have made the decision to do business with china, what can you do to reduce your IP risks?  As we lawyers so love to say, that is going to depend to a large extent on your particular factual situation.

More to come….

Last week, co-blogger Steve Dickinson and I spoke at the Foreign Correspondents Club in Beijing. From our perspective, the best part of our talk were the excellent questions posed to us by the reporters in attendance.  There was one question I pretty much punted on and though I have thought much about it since, I still do not have a good answer. In fact, I have determined it is not a question for a lawyer, but rather for a business.  Here’s the question, as best as I remember it (I believe it came from a Wall Street Journal reporter):

“What do you tell your clients about how Chinese companies are taking foreign company intellectual property and then using that intellectual property to market their own products outside China?”

As I recall, my response was something along the following:

“Good question.In the ‘old days’ we used to warn our clients about the risks of Chinese companies taking our clients’ intellectual property and using that intellectual property to compete in China but you are right that Chinese companies are now using foreign company intellectual property to compete worldwide, not just in China. I guess we just warn our clients of this possibility and then they need to figure out whether it is worth it to them to take the risk.”

Steve then talked of how much of the intellectual property that is being taken by Chinese companies is not the type that can be registered as a patent, copyright or trademark and therefore its protection requires contractual solutions. Steve then went on to talk about how in many instances when he and our clients have expressed a desire to the Chinese “partner” about protecting intellectual property, the Chinese company makes clear that one of their chief reasons for wanting to do the deal is to garner the intellectual property and, if they cannot do so, they will not go forward with the deal.

So about the best advice we can give is that if you are opening up your intellectual property to a Chinese company, you had better think long and hard about what the repercussions will be to your company if that Chinese company takes your IP (as it almost certainly will) and then uses it to compete with you not just in China, but in all of your existing and planned markets.

I fear there is no good solution here.  What do you think?

Update: Today’s (1-18-2011) New York Times has an article, entitled, “G.E. to Share Jet Technology With China in New Joint Venture,” that nicely illustrates this dilemma.

Stan Abrams over at China Hearsay just did an excellent how-to post entitled, “Pirates Beware! Gearing Up for the China IP Enforcement Lecture.” The post does a great job explaining how to handle a China IP problem, though the steps it sets out would pretty much work fine for just about any legal issue needing resolution. As Stan puts it, a China IP problem is, at least from a lawyer’s perspective, “just another problem to solve, and not unlike a typical foreign investment case, or a trade dispute, or a commercial transaction.”  

Stan advocates the following seven step method for dealing with a China IP problems: 

  1. Identify the actual problem.  Slightly more complicated than it sounds. Yes, in most cases, we are dealing with IP infringement. But you have to drill down to determine the actual facts, not what your staff/suppliers/distributors tell you is going on out there in the marketplace. Sometimes this involves getting professional investigation help. After a little more digging, you might be surprised to learn that the good, or bad, news obviates the need for a full-blown enforcement action.
  2. Determine the goals of the IP owner. This has to be done quite early, but after the pertinent facts are learned. Some client goals are based on faulty intelligence or unrealistic expectations. Usually here we are talking about a combination of “stop the infringement” and “get compensation,” but others are possible, including moving the parties towards a transaction like a license, assignment, or acquisition. Needless to say, you not only need to learn about goals, but to at least do a quick and dirty hierarchical list of what is desired, acceptable, tolerable, and unacceptable.
  3. Identify and evaluate the IP. Sometimes that “IP infringement” is non-actionable unfair competition, meaning that one firm is copying something of another firm, but there is no IP involved that can be protected, and the facts are insufficient to back up an unfair competition theory. Unless you know what you own, you’ve got nothing. That being said, this knowledge can lead to some mitigation work, such as registration of IP. However, based on my experience, if you learn at this stage that your “IP” is actually nothing, you’re pretty much screwed.
  4. Know your enemy. Again, probably time to find an investigator. Depending on who the infringer(s) is(are), your case might be dead on arrival. And by the way, I am not necessarily talking about facing a huge, powerful State-owned Enterprise; you might have even more trouble with a bunch of tiny, fly by night operators that are difficult to track down. Either way, no one needs to waste time and money tilting at windmills, so figuring out as early as possible whether your opponent is vulnerable (from a legal perspective) is key.
  5. Isolate your legal options. At this point, one should be able to cross quite a few options off the list, both in terms of legal theory (e.g. unfair competition, trademark infringement) and dispute resolution. As with other points along the way, sometimes the answer is that there is no viable winning strategy. If that’s the case, hopefully you will not have to deal with a client in denial who insists on the “just do something” futility gambit. Stay away from those guys.
  6. Formulate strategy. Based on the available options, a strategy has to be put into place with fallback options, if possible; note that the plan might include parallel actions. This strategy, along with its (realistic) budget, needs to be signed off on by all the stakeholders, preferably by senior management like a Board of Directors. The last thing you want is to have your marching orders yanked away just when you’re getting somewhere.
  7. Implementation. In practice, implementation usually means getting experts involved, including (yes, again) investigators, local IP agents, local government, etc. If you’re a foreign lawyer, you always have to get local experts involved, since you are legally not allowed to go into court, apply for an administrative action, etc.

I completely agree with every item on this list and would like to expound a bit more on some of them.

What I find interesting about this list is how well Stan has broken down the various elements. Had I written it, I might very well have conflated 1-5 by describing them as figuring out what is going on, figuring out what you want to accomplish, and figuring out what you can do to achieve what you want to accomplish. Do you have a strong case and one that is worth pursuing? 

The “know your enemy” step is of far greater importance than I think many people realize as that can have a tremendous impact on how you choose to proceed. When companies have learned of IP infringement, their initial reaction is usually “let’s make them stop and sue the bastards for millions of dollars for what they have already done and let’s let the world know that we are not a company to be messed with.” And they usually say this as though these goals all fit together perfectly and can be achieved in a few months time. They don’t and they can’t.

If the company that “stole” your IP is a “fly by night operator” there usually is simply no point in suing that company for millions of dollars that it does not have. There oftentimes is simply no point in suing the legitimate company either, particularly where your case is marginal. If you sue the legitimate company on a marginal case, it may decide it needs to fight you really hard to show the public that it was not violating any IP laws and to show that it too is “not a company to be messed with.” I have actually had shockingly good success by writing a quasi- cease and desist letter, pointing out what we believe to be the errors of the legitimate company’s ways, giving them a “chance to explain,” and seeking to convince them that they would be better off changing things so there can be no questions regarding their conduct. Most of the time, they write back saying that they didn’t know of our company’s IP, that they do not think they have engaged in any IP violation, but that they will do such and such to make sure there are no future issues. 

How do you handle such your China IP infringement matters?