Stan Abrams has a thought pondering post up on his China Hearsay blog, entitled, “DMAX: This is What Happens to Foreign Technology Companies in China.” The post is on a Chinese rival to IMAX, called DMAX and Stan concludes his post by saying he expects “to see this written up as a case study for some business or law school out there. Looks textbook.”

I agree and I disagree. I agree that it looks textbook and that’s because what is going on here happens pretty much every day in China. But because this sort of thing happens pretty much every day in China, I’m less certain that this particular example will make the textbooks. That being the case, I will do the case analysis right here and now.

Factual Background (as taken from this China Daily article): 

DMAX, a large film screen made with Chinese independent technology, on Monday was put into commercial use in a cinema in the eastern province of Anhui, as developers hope to break the IMAX monopoly in China’s booming film market.

According to Yang Xuepei, head of the institute, while embodying the country’s independent core technology of big screen motion pictures production and image optimization, DMAX is also compatible with the most advanced technology overseas. Its 2D and 3D screening quality are as good as large screens of foreign brands.

Factual Issues:  Does IMAX have any patents in China? They have a whole slew of them in the United States.  Is DMAX violating any IMAX patents? Did IMAX register its name as a trademark in China? I am guessing that it did. If IMAX registered its name in China, does the name “DMAX” violate IMAX’s China trademark?  I am thinking that it does. Did DMAX improperly receive any IMAX trade secrets? What are DMAX’s plans?  Just China or the rest of the world too?  What is the pricing difference between the two technologies?  What about quality and service?

Legal Issues: If DMAX is using any IMAX patents or trade secrets, we should expect IMAX to sue DMAX in China. I would expect IMAX will be suing DMAX in China for trademark infringement.

I wish I could claim the above as original scholarship, but my analysis pretty much tracks Stan’s:

A lot of questions here, but we’ve got a booming domestic market and a foreign company that is pretty much in a monopoly position because of its superior technology. Sound familiar?

Yes, this sort of situation has occurred over and over in China. What usually happens is that a domestic competitor emerges that (at first) competes on price. I’m wondering whether IMAX has patent protection over its tech and whether DMAX will be looking at any infringement suits in the future. If not, were there trade secrets involved? I’m speculating, of course. It’s possible that there are no IP issues here at all and that DMAX is a solid citizen. And if there are IP problems, I wouldn’t want to be IMAX — the owners of DMAX seem to be heavy hitters (e.g. “China Film Co.” — part of China Film Group?).

At the very least, though, there’s got to be a trademark issue here, yeah? After all, “IMAX” and “DMAX” are 75% identical. I might do a quick trademark search tomorrow and see what I can find on these guys.

If IMAX did not protect its IP by registering it in China, the lesson is that it should have, if it could have. The problem with patents in China is that one must register one’s patent in China within one year of having registered it elsewhere. So if some IMAX’s US patents are, let’s say, ten years old, and it never even really considered China until a few years ago, it would not have been able to register at least some of its patents in China at all. That is not the case with trademarks and if IMAX did register its name in China, it probably does have some recourse against DMAX.  I say “probably” though because DMAX will probably argue that the max portion of the name is fairly generic and so it is not infringing at all.  IMAX will argue that it is no coincidence that DMAX’s name is only one letter of its own and they are selling the same product. At minimum, a company should — if it can — register its patents in China and its trademarks as well. Chinese law is actually pretty good at protecting trade secrets and so if IMAX can show that DMAX secured its technology from IMAX improperly, it may make sense for IMAX to sue for trade secret theft.

But maybe DMAX did not violate any laws or infringe on any registrations. If that is the case, IMAX’s only recourse would be to outshine DMAX on quality and/or service because it is not likely going to be able to beat DMAX on price.

Is there a lesson to be learned here?  There has to be, but it is not quite clear yet exactly what it is. In the meantime, about all we can tell you is that if you have patents or trademarks that you want protected in China, register them right away. And if you have trade secrets you want to keep secret, make sure you have systems in place to maximize the likelihood of that happening. Chinese companies are constantly on the lookout for the next big thing and they are a lot more likely to find it at your company than by their own innovation. You should assume copying of your product is going to occur in China and you should prepare accordingly.