Had a great discussion with a bunch of our China lawyers the other day regarding how so many of our clients are expanding in Asia beyond China and of how so many of them have an Asia strategy, of which China is just one large part and usually initial part.

We then talked of how this has changed the work we do as their lawyers, especially in IP.

Five years ago, our typical manufacturing client would call us for legal help in starting a factory in China or for outsourcing their product manufacturing to a Chinese factory. With the former, we would help them set up a Chinese entity (either a WFOE or a Joint Venture) and with the later, we would draft an OEM Agreement. In both cases, we would discuss their intellectual property and typically help them file for a trademark or a patent in China, occasionally a copyright. Most of these companies were new to Asia, though some had operations in Europe.

Things are very different these days.

Many of our manufacturing clients have been making product in China for years and they are now calling us to add some other Asian country (usually Vietnam or Indonesia) to their manufacturing mix or because they now want to sell their China-manufactured product in China and/or somewhere else in Asia. These companies either have an Asia strategy or are seeking our help in formulating one. Whereas five years ago, a common question for us was “Shenzhen or Suzhou,” today we equally often hear “Hanoi or Jakarta?” Five years ago, we would get asked what we knew about “exotic” places like Yantai. Today it is exotic places like Da Nang.

Needless to say, it is not just manufacturing companies that need to guard their IP in China. Software companies, gaming companies, food and beverage companies, and consumer goods companies are registering their IP in Asia at what feels like a record pace. Balancing all the talk of a China manufacturing slowdown is the year by year increases in disposable income.

The “China-plus” strategies of our clients means that our IP discussions need to go well beyond China to include pretty much all of Asia. Five years ago, only around twenty percent of our clients needed to consider trademark or patent or copyright registrations in a country other than China. They were new to doing business in China and so they needed IP protection there. We would ask about their IP needs for the US and for Europe, but they had been in both places for so long that they were invariably covered.

Today, about half of our clients need IP protection in an Asian country other than China. Fortunately, most Asian countries (Japan, Korea, Vietnam included) have IP regimes quite similar to China’s. The real key for foreign companies expanding beyond China with their products is to be sure to recognize that whatever IP you registered in China probably provides you with little to no protection outside of China. In other words, in most cases, you must register your IP in whatever Asian country in which you are doing business. Also note that in your IP analysis, you must treat Macau and Taiwan and Hong Kong as countries completely separate from the PRC.

Got it?

Just came across an interesting post with a not so interesting title on the China IPR Blog: IP Developments in Beijing.  The post starts out discussing how “due to the rapid increase in IP cases in the Beijing Number 1 Intermediate Court, particularly IP cases involving patent and trademark validity, the Beijing Intermediate Court will split its Intellectual Property Tribunal in two” with the number one IP Tribunal hearing mostly trademark and unfair competition cases and the number two IP tribunal hearing mostly patent and copyright cases.

The post then notes that the Beijing court (which hears about 10% of all China IP cases) has seen its case load increase from “4,748 cases in 2008 to 11,305 in 2012, an increase of nearly 150%,” with copyright cases representing about half the total.

This is important for foreign companies doing business in China and here’s why.

  1. Rational human beings do not generally spend money on something that is not going to bring them any benefit.
  2. Bringing a lawsuit in China always costs money (China court filing fees tend to be fairly high), oftentimes a relatively large amount of money.
  3. Chinese businesses tend to be made up of rational human beings who understand the value of an RMB.
  4. Chinese businesses must believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not pursue the lawsuits.
  5. Chinese businesses must, in increasingly large numbers, believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not be increasing the number of IP lawsuits they are pursuing.
  6. Chinese businesses are almost certainly correct in their belief that suing before the Beijing IP court will give them redress.
  7. If Chinese businesses are correct in their belief (and they almost certainly are, see number 6 above), that means that IP enforcement, at least through China’s courts is improving.

Independently of the above, you would have a tough time finding a China lawyer who does not also believe that IP enforcement in China is improving, particularly with respect to trademarks.

IP enforcement/IP protection is improving in China for two main reasons.  First, Chinese companies and foreign companies alike are now realizing that it makes sense for them to register their trademarks, copyrights and patents in China so that they have an opportunity at being able to protect them (in the courts, among other places).  And two, China’s courts are increasingly realizing the importance of protecting IP in China, largely because Chinese companies increasingly want them to grant IP protections.

What this all means for those of you doing business in China is that you too should be jumping on the IP registration bandwagon.  For more on protecting your IP in China, check out the following:

  • How To Protect Your IP From China. Part 2. What we, as China lawyers, look at in trying to protect our clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

What are you seeing out there?

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.

When we first started this blog way back in 2006, we would constantly tout how if you want to protect your IP in China, you have to register your IP in China.  Our thesis was (and is) that if you don’t bother registering your IP in China, you really have no right to complain about someone using “your” IP in China.  For a representative article with these thesis, check out, China Trademarks — Do You Feel Lucky? Do You? The flip side of this thesis is that if you do register your IP in China (i.e., your trademark, copyright or patent), your chances of protecting it will go up exponentially.

Back in 2006 and 2007, the media was constantly writing about U.S. companies with IP problems in China. The amazing thing about virtually all of those articles, however (especially the ones in the local press) was that they never mentioned one way or the other whether the complaining American company actually had any legal basis for its complaints. In other words, they were completely silent as to whether the American company had actually registered its IP in China. I must have called at least a half a dozen reporters behind stories like those and in every single instance, they admitted it had simply never occurred to them to ask whether the subject of their stories had actually registered its IP in China or not. It had never occurred to them because, without even thinking about it, they had just assumed that what is good in the United States is good for the world; if you have a trade name in Peoria, that alone ought to be enough to prevent anyone in Timbuktu or Tianjin from using it. WRONG.

What virtually all of these articles had in common though was that they would quote the “offended” American company as though it were spouting gospel and blame the Chinese company as though it was solely responsible for the American company’s problems.

I thought of those good/bad old days today after reading an excellent post over at the Learn China Business Blog, entitled, “Are Chinese Copycats Convenient Scapegoats for Poor Preparation?” The post is about a USA Today article, entitled, “Chinese copycats challenge U.S. small businesses.” The article highlights a U.S. recreational camper trailer company called SylvanSport. SylvanSport professed “shock” at learning that a product very similar to its own was being made in China and sold in Korea and Japan, two countries where SylvanSport had been seeing strong sales.  Syvlan’s owner seems to see SylvanSport’s legal problems as a political matter:

“Our politicians, when they describe the companies that are necessary for the economic recovery, (they are talking about) companies like ours,” he says. But because of SylvanSport’s lost sales, “There’s a very real chance that the Chinese company could be the survivor here and we could go out of business.”

The USA Today article does NOT make the mistake of failing to investigate the IP protections secured by its subject company and, in fact, it flat out notes that SylvanSports did not file for a China patent and that its Chinese competitor, Wuyi Tiandi, did:

Wuyi Tiandi received a patent on its camper in China in November, according to Tang. SylvanSport received various U.S. patents for its product between 2008 and 2010, Dempsey says.

While Wuyi Tiandi might not be able to sell its products in the U.S. because of SylvanSport’s patents, Tang says, “We can still sell our trailer everywhere else.”

The article goes on to describe SylvanSport’s case as a “cautionary tale about small businesses’ need to protect their intellectual property” and notes that “only 15% of small companies that do business overseas realize that U.S. patents and trademarks protect them only within the U.S., according to the U.S. Patent and Trademark Office.” The article rightly points out the need for US companies to “file patents and trademarks in countries where their products will be made and sold, as well as where they’re based.”

Sylvan’s owner never contests his lack of legal standing, but instead puts forth the vague notion that things ought to be different:

While Dempsey realizes the limits of U.S. patents, he says that Wuyi Tiandi should not be able to get a patent in China based on his product.

I’m sorry, but color me skeptical and indifferent.  Heck, I’ll even go a step further than that and flat out blame the “victim” here and say that whatever SylvanSport is going through is its own fault.

I deal with companies like SylvanSport every day and here is how my conversations with those companies often go:

Company: I have a great product and I am not sure what sort of IP protection I am going to need for it.

Me: Where are you making this product and where will you be selling it?

Company: I am making it in the United States, but I am selling it throughout the world.

Me: Do you have any patents or trademarks or copyrights related to the product?

Company: Yes.  I just filed for a patent here in the United States and I also have registered trademarks here too. One for my company name, one for the product name and our logo.

Me:  Good.  Ummmmmm. Okay. Let’s talk about your sales. You say you are selling your product all over the world, but can you break that out for me a bit more.

Company: Yes. Right now, about 70% of our sales are in the U.S., 10% are in Canada, 5% are in Australia, 5% in England, and maybe 5% in France, Belgium and Germany combined.

Me:  Okay, you said “right now.” Do you anticipate those numbers changing?

Company:  Yes.  We have been getting a lot of interest from Japan and Korea and we are about to sign a deal with companies in both of those countries to distribute our product there.

Me:  Okay. So here is how I see it. If you were an Apple or a Microsoft, this would be easy. I would just tell you to register your trademark and your patent in pretty much every country in the world, including South Sudan and Afghanistan, figuring your product will eventually go everywhere and figuring you can afford it. But that doesn’t make sense here.  So here is what I tentatively suggest, subject to our talking further and our getting back to you on registration pricing for each country.

What will probably make sense is for us to look into the most cost effective way to get you trademark and patent protection in the United States (where it sounds like you are probably already completely covered), Canada, Australia, England, France, Belgium, Germany, Japan and Korea. It will probably end up making sense for you to do an EU filing to cover all of the EU countries, not just those we have already discussed.  Do you have any plans to manufacture your product outside the United States?

Company:  No immediate plans, but I as this thing really takes off, I could see us looking at China, Vietnam or maybe even Indonesia for manufacturing.

Me: Okay. Well then we should get back to you with pricing on those countries as well. By the way, who did your United States patent work?  I ask this because I will want to talk with them about exactly when your patent was filed and what sort of filing was undertaken because that will impact whether or not you are too late to file patents on your product in any other countries. We don’t do patent work, but we can recommend patent lawyers to you in the relevant countries, though I am guessing that your patent lawyer can probably do so as well and we find it generally makes sense to have your US patent lawyer head up and oversee your foreign patent filings as well.

The point of my setting out the above is to show the basics of what companies typically go through in determining what to do to protect their IP around the world. SylvanSport should have gone through the same sort of thing with its lawyers and if it did and then chose not to register its patent in Korea or Japan (where it is now complaining of lost sales) or in China (where it is now complaining of a copied product), it made its own choice. If SylvanSport was advised on what it needed to do to protect its IP and then chose not to spend to do so in China, Korea or Japan, then it appears it made a cost-benefit analysis that it now regrets. If Sylvan was never advised on what it needed to do to protect its IP around the world, then it made the decision not to bring in counsel capable of assisting it with this issue.  Either way, it was SylvanSport’s choice not to spend the money it needed to spend to secure the IP protection it now seems to wish it had.

One more thing about the article that struck me. SylvanSport might be right to complain about how Wuyu Tiandi should not have been granted a Chinese patent. Patents in China require, among other things, “novelty” and if something has already been patented, it probably is not novel. Invention patents in China are substantively examined but utility patents are not. If SylvanSport is concerned about Wuyu Tiandi having a Chinese patent, SylvanSport should retain a Chinese lawyer versed in China patent litigation to figure out whether it has grounds to challenge Wuyu Tiandi’s patent and invalidate it. It is probably too late for SylvanSport to secure its own patent in China but invalidating Wuyu Tiandi’s patent would at least allow SylvanSport to manufacture and sell in China some day, if it so wishes.

Learn China Business raises THE important question: “In SylanSport’s case, how can they feel victim to any Chinese company selling a product similar to theirs without coming to the table with a Chinese patent protecting their ownership interests?” I’d like to know the same thing.

Yesterday, we did a post on the importance of protecting your intellectual property in China. That post, entitled, “Protecting Your Intellectual Property In China, Part I,” was based largely on a recent talk co-blogger Steve Dickinson gave in Qingdao. That post talked of the importance intellectual property/intangible assets holds for companies today, particularly those in creative services. 

in today’s post, Steve focuses on some of the ways to protect your intellectual property in China.

China IP protection can be divided into four categories in terms of the effectiveness of the system of legal protection:

1. Patent and trademark protections work well in China for protection from large scale infringement.

  • For both patent and trademark, small time infringement is difficult to prevent. It is also unclear how well the trademark system works for famous consumer brands.
  • Patent and trademark are effective in preventing large scale infringers of non-consumer products.

2. Contractual measures work in China if properly implemented.

  • Trade secrecy agreements.
  • Licensing agreement.
  • Know how and technology transfer agreements.
  • These are contracts, and therefore must be drafted properly.
  • The contract should be enforceable in China by litigation or arbitration
  • Provide for specific monetary damages rather than injunctive remedies

3. Software copyright. China has a specific regime for software protection by copyright. The system is effective for commercial software. The system has had limited success in protecting retail software.

4. Copyright in creative works.

Copyright protection in China has not worked well for protection of creative works in the retail sector. Virtually all movie, film and music products are available on a wide scale in pirated form. On the other hand, copyright is effective in China for specific violations of copyright in a business to business setting. However, effective protection of copyright requires careful attention to the Chinese registration regulations. It does no good to rely on the general right of copyright for creative works.

Businesses must focus on the realistic risks within China. The risks vary depending on the type of intellectual property. The general situation is as follows:

1. If your IP has value, and if it can be copied with minimum effort, it will be copied. The result is certain. There are no exceptions. You must therefore prepare for this reality in advance. What kinds of assets are subject to this risk?

  • Trademarks, trade names and logos.
  • Exterior product design (design patent and copyright).
  • Books, photos, reports, drawings/plans any other medium that can be photocopied and reproduced.
  • Any material that can be copied in digital form: music, film, CAD drawings.

2. The Chinese seldom put much effort into independent copying of inventions and other technical IP that cannot be copied easily. If intangible assets cannot easily be copied, the Chinese will usually wait to be trained by the foreign business. They will seldom appropriate foreign technology on their own initiative. As a result, the motivation of most Chinese companies that work with foreign businesses is a desire to acquire technology, trade secrets and know-how via training from the owner of the IP. This occurs in virtually any area where Chinese companies work with foreign businesses:

  • Technology licensing projects.
  • Joint venture manufacturing or services.
  • OEM manufacturing
  • Product design and development agreements
  • Employee training
  • Distribution and sales agreements

Most technology, know-how and trade secrets are lost in China to parties who have been trained by the foreign owner of the intangible asset. Usually this loss could have been prevented with proper agreements and business practices.

Many foreign companies make the mistake of seeking perfection in China. When they cannot achieve perfection, they often abandon the IP creation/protection/exploitation process. This is a mistake. No protection in China will be perfect. However, China can provide many second best methods and second best protection is better than no protection at all.

Foreign owners of technology will often discover that their preferred and customary method of technology protection is not available in China:

  • Patent protection is often not available because of the one year rule.
  • Copyright is often not effective for easily copied digital media.

Faced with this, many foreign companies simply give up and operate in China with no protection at all. This virtually always leads to disaster in China. The correct approach is to work to find an alternative form of protection. This can be achieved in many ways:

  • Licensing agreements.
  • Secrecy and non-use agreements.
  • Technical controls, such as encryption.
  • Direct manufacture rather than OEM or joint venture.

Many foreign businesses fall into the trap of thinking that 1) China has no laws and 2) Chinese companies do not file lawsuits. This is a mistake. Chinese companies are very adept at using the Chienese IP system to their own benefit.

This can occur in two ways:

1. If the foreign side fails to register its intellectual property in China, a Chinese entity will register the IP in its own name. In this way, the Chinese company cuts the foreign company out of the foreign company’s own market. This happens regularly with trademarks, patents and commercial copyrights.

2. Many foreign companies mistakenly believe that China does not have a developed IP protection system. They therefore do not adequately investigate to ensure that they are not infringing the rights of others in their operations in China. This is especially of concern when the foreign company hires a Chinese contractor to perform services or engages in cooperative design or manufacturing operations with a Chinese company. The foreign company only learns later that it has infringed on the IP of another. The resulting damages can be quite significant.

Bottom Line: There is IP protection in China and it behooves you to figure out how best to protect your intangible assets. 

A couple weeks ago, I did a post entitled, No IP Enforcement In China. That Cannot Be True, in which I talked about how it is just not true that Chinese courts will not enforce a foreign company’s intellectual property rights against a Chinese defendant.

I then discussed a recent high profile and high damage case won by a British tea kettle company, ,and concluded that post by saying that the “next time someone says China never enforces patent rights held by foreigners, you tell them that cannot be true.

Seems I am not the only one who thinks so as the Wall Street Journal just ran an by Jones Day attorney Benjamin Bai, entitled, “Yes, China Does Protect Intellectual Property: Multinational companies just need to take better advantage of opportunities to defend their patents.

The article notes that “the picture isn’t as bleak as you might think” and that [t]he key is for foreign businesses to understand how IP protection works in China and to take better advantage of the protections that exist.” It then notes how patent applications in China grew to 947,000 in 2009 from 252,000 in 2002, making the Chinese Patent Office the third-busiest patent authority in the world, after Japan and the United States. China also is now the most litigious country in the world for IP disputes—with 24,406 suits filed as compared to about 8,000 in the U.S.

Foreigners have been slower to embrace Chinese patents and Bai thinks this is because they wrongly believe they cannot prevail in IP litigation in Chinese courts:

But foreign companies can also win in Chinese courts. Neoplan, a German bus company, won an award of $3 million in January 2009 against two Chinese companies for their infringement of its design patent on buses. This case represents the largest infringement damages award ever obtained by a foreign company in China and compares well to the average patent infringement damages award of less than $50,000. Last month, a Beijing court ordered two Chinese companies to pay a combined $1.3 million in damages to a British manufacturer of electric kettle components.

Anecdotal evidence suggests the recent win rate for multinational companies in IP suits in China has been greater than 50%. In some cities the win rate exceeds 90%. While it may be premature to declare victory based on these statistics, they do suggest that it is a mistake to assume that multinational companies cannot win IP suits in China.

Foreign companies just need to know how to take advantage of these trends. Too many have made the mistake of not applying for patents and trademarks in China. Foreign patents and trademarks are not enforceable in China, just as Chinese patents and trademarks are not enforceable in the United States. Multinationals also should be willing to enforce their Chinese IP rights against infringers. Litigation success requires more than a mere willingness to sue. An in-depth understanding of the Chinese judicial system and relevant legal doctrines and an ability to maneuver through the intricacies of law and politics in China are essential for foreign companies enforcing IP rights there.

I agree.

With the recent U.S. filing in the WTO accusing China of failing to provide adequate protection of foreign Intellectual Property Rights, we are headed for another China/U.S. disinformation campaign on an important issue. Many foreign companies doing business in China get caught up in the confusion of the political rhetoric and conclude there is no hope for protection of their IP rights in China.

This is a mistake because China actually provides effective intellectual property protection in the patent, trademark and trade secrecy areas. These are the areas that are relevant to the vast majority of foreign businesses in China. The problem addressed by the U.S. WTO filing concerns pirated DVDs and media downloads. This is still a major problem in China, but it is not relevant to the IP issues that confront most foreign businesses in the country.

Many foreign businesses mistakenly conclude IP protection is hopeless in China. As a result, many do not come to China, and others who do fail to take any measures to protect themselves because they feel the process is futile and a waste of time and money.

I have been arguing for years that the IPR protection situation in China has substantially improved. However, when I make these statements, I am often challenged. In addition to the negative press and government reports, my clients often point to the situation on the ground. Take Shanghai for example. Within five minutes of the door to my apartment there are five pushcarts doing a brisk business in pirated DVDs and software. When I get off the subway on Nan Jing Road to walk to my office, I am immediately accosted by vendors selling pirated watches, bags and pens. My clients say: Isn’t this proof that China is ‘flooded with pirated products’ as the U.S. reports state? If giant foreign companies cannot protect their product from such pirating, what hope is there for a small or medium size foreign firm? Isn’t despair at a solution the only reasonable conclusion?

These surface impressions are completely irrelevant and misleading to the vast majority of foreign businesses operating in China. China has done an excellent job in establishing laws and creating an enforcement system for IPR protection. Largely for reasons of market structure and the technology of distribution, in the areas of patent, trademark and trade secret protection, the protection system has made substantial progress. Though there is substantial infringement in these areas in China, much progress is being made in combating such infringement and the registration, court and enforcement system has been reasonably effective.

On the other hand, in the area of protection of media distributed on DVDs and downloadable on the internet, progress in China has not been good at all. Again, largely for reasons of market structure and the technology of distribution, there has been little measurable impact on reducing infringement in this area.

Now, let’s go back to our scene on the streets of Shanghai. Why do I say that this obvious IPR piracy is not an issue for the vast majority of foreign businesses? What about all those folks who are selling pirated foreign brands (other than DVDs) on the street. First of all, these pirates have been driven from the retail outlets and are forced to sell their products on the street. They are not even permitted to operate pushcarts. Second, look carefully at to whom they are selling. They never approach a Chinese citizen. They only approach foreigners. This is because only foreigners are willing to purchase their inferior products. Chinese consumers are not that gullible. If you travel to Qingdao or Guangzhou or other cities with a low number of Western expats and tourists, you will find that street vendors selling pirated goods do not exist. This is because there are not enough foreign customers who want the product. It simply is not true that China is “awash in pirated goods.” In fact, this is a problem unique to cities with large foreign and expat populations. It therefore is simply irrelevant to foreign businesses operating in China.

Pirated DVDs, however, are available all over China and are purchased regularly by Chinese consumers who would never knowingly purchase a pirated luxury product like a coat or bag. The same stigma concerning prestige and quality simply does not apply to entertainment and software DVDs. Very little progress has been made in preventing the sales of such items over the past several years, in spite of major campaigns by the Chinese government. In this respect, the U.S. presentation of the situation on the ground is actually quite accurate. However, the vast majority of foreign companies are not selling a product in China that can be reduced to a DVD or internet download. Therefore, even though this issue is a major problem, it is simply not relevant to most companies doing business in China. It is a mistake to assume that China’s poor record in preventing infringement of media and software DVDs extends to the more common IPR areas of patent, trademark and trade secrecy.

For most foreign businesses, their important intellectual property rights (IPR) fall in the areas of patent, trademark and trade secrets. These IP rights can be quite effectively protected in China. However, the Chinese system, like the U.S. system, is a self-help program. Do not expect either the Chinese government or a foreign embassy to do the job for you.  You must do it yourself. This means making the proper filings and entering into the required agreements. It also means investing the time and money to locate infringers and then prosecute them aggressively. This process is a tough one. Unlike many other developing countries, however, aggressive protection of IP rights can succeed in China.

The greatest mistake is to do nothing.

Interesting post over at IP Dragon on an American company’s United States patent infringement lawsuit against a Chinese company.

Here are the facts, as related by this article in the Worcester Telegram [link no longer exists]. US company Diamond Machining Technology (DMT), Inc., is a 30 person Marlboro, Massachusetts company that makes sharpening tools for knives, scissors, skies, and woodworking. I was familiar with the company because my wife swears by their knife sharpening stones. DMT was exhibiting at the National Hardware Show in Las Vegas when its President, Mark Brandon, came upon the booth of Chinese company Jing Yin Lixin [Diamond Tools Factory], selling knockoffs of a couple DMT sharpening products.

Mr. Brandon then asked a worker from one of DMT’s customers to visit the Chinese booth to confirm Jing Yin Lixin would sell the knockoffs in the United States. The article does not say this, but securing this information was presumably necessary because DMT’s patents/trademarks cover only the United States. After DMT’s customer confirmed Jing Lin Lixin was happy to sell the knockoffs into the United States, DMT retained lawyers who drafted a complaint, saw to its service on Jing Yin Lixin on the floor of the trade show, and filed it in Nevada Federal Court.

Jing Yin Lixin put up no legal defense. It failed to retain a lawyer and merely submitted a letter to the court claiming it “knew nothing about a patent and never made or sold the tools, even though it pictured the tools on a brochure.”  The court permanently enjoined Jing Yin Lixin from further infringement.

I was unable to get onto the Nevada court site to see about damages in the case (confession: I always have one of our paralegals do this and it is a Saturday here so that is not possible). The thing is, even if the court did award damages, it is extremely unlikely any Chinese court would enforce such a US judgment.

Damages or not, DMT did the right thing here. Mr. Brandon “wants competitors to know DMT will not tolerate copycats, and he wants customers to feel confident that the product they buy is a true, made-in-the-USA tool.” I would not expect Jing Lin Lixin to sell DMT knockoffs in the United States for quite some time.

What DMT did here is in many ways pretty common in that our China lawyers doing China IP often incorporate attending trade shows as part of our clients’ China IP protection strategy. We often suggest to our clients that they (or we) send someone to the key trade shows simply to keep an eye out for copycats.

Great guest commentary in today’s Wall Street Journal by Thomas Hout, a senior adviser at Boston Consulting Group’s Hong Kong office. It is entitled, Innovation, China Style, and it effectively gives lie to those who believe China will eventually “take over the world.”

According to Mr. Hout, China is having considerable trouble moving from a production economy to an innovation economy. Though the Chinese government is “pouring money into research and development institutes and subsidies for Chinese companies . . . . the kind of innovation China wants can’t be bought — and the kind the country needs to acquire can’t be invented by the government.”

China still spends relatively less on R&D than either the United States or Japan. China spends 1.6% of its GDP on research and development, while the U.S. spends 2.6% and Japan spends 3.2%. Only 12% of all patents awarded to Chinese companies in China “are for genuine inventions” while the corresponding number for foreign companies in China is 80%.” I am not sure how genuine inventions are defined.

Though high-tech exports from China have increased 42% per year since 2000, Chinese companies make up only 12% of those exports and that number is actually falling:

Multinationals account for the other 88%, and are continually building state-of-the-art R&D facilities in China to link up with their laboratories elsewhere, bringing even more innovation into the country. Only one of the top ten Chinese-registered U.S. patent holders in information technology, Huawei, is a domestic company.  The rest are Western, Taiwanese and Japanese companies, most of which were funded by venture capital, not public money.

Chinese innovation tends to be opportunistic and focused on quick payoffs. Technology innovation, on the other hand, typically requires these other characteristics:

Technology based innovation requires cleverly stitching together a set of complementary technologies. The innovator must be big or, as with high-tech start-ups, located within a technology-rich cluster of companies that communicate and share knowledge. Development takes time because lots of things have to happen together. So success is often a long shot.  And while this innovation cannot be directly bought, all its players — big technology companies, start-ups, venture capitalists and research universities — are linked by large flows of money.

China is falling short in technology innovation because most of its companies seem unable to follow up their “good business-model innovation” with “technology-based product innovation.”  Mr. Hout sees the “core problem” as being that “Chinese companies are rarely rewarded for taking the long risks that new technology entails:”

New intellectual property is often at risk, making it difficult for Chinese companies to share information and collaborate.  State-owned companies are paid to keep doing the same things, even in the face of global technology change directly affecting them. A good example is telecommunications and financial services, where Chinese companies have seen their boundaries tightly maintained by government policy to protect other companies.

Too few Chinese companies have a management culture of experimentation, or boast small teams that take responsibility for new ideas. Management buyouts of state-owned companies, which could reward maverick turnaround managers with new ideas, are typically forbidden.

Mr. Hout does see some change having come to China in the form of technology clusters in and around Beijing and Shanghai, but he views most of this as “immature.” For China to generate innovation, it will need the following:

Dense, interacting networks of scientists, engineers, savvy investors and intellectual property attorneys. Entrepreneurs need more venture capital money to launch start-ups and more risk-tolerant IPO investors at the other end to cash out.  The central government needs to enforce intellectual property protection consistently, expose state-owned companies to technological change, and allow scientists to share in the profits of start-ups based on state-funded research. Once all of this is in place, more innovation will follow.

Yeah, and good luck with that. The reality is that China (along with just about everywhere else) presently has very little of what it needs to be another Silicon Valley. And from what I can tell (and just as the article says) the innovation that is happening in China is mostly coming from foreign companies doing business in China, not from Chinese companies in China. I will say though that there are some fine IP attorneys in China, just not many of them yet.

Hout’s understanding of innovation in China is dead on and the next time someone acts as though China is soon going to be the world leader in every product and service, show that person Mr. Hout’s article.  I also urge that you read this thoughtful post, entitled “China’s R&D Spending Controversy,” over at the China Hearsay blog, comparing China’s R&D spending with that of other countries.

According to the Wall Street Journal, Beijing No. 1 Intermediate People’s Court just upheld a Chinese lower court ruling and ordered two Chinese companies to cease selling knockoffs of the impotency drug Viagra and to compensate Pfizer for trademark infringement.

The Intermediate People’s Court ordered Beijing Health New Concept Pharmacy Company and Lianhuan Pharmaceutical Company to stop making little blue pills and ordered Lianhuan to pay Pfizer 300,000 yuan ($38,000) in damages. Pfizer commenced this lawsuit in September 2005.

A Pfizer spokesman stated Pfizer sees this decision as “a strong indication that the Chinese government is moving in the right direction in protecting intellectual property rights for all innovators.”

Earlier this year, the same court ruled in favor of Pfizer by upholding Pfizer’s Viagra patent and overturning the 2004 decision by China’s patent review board that allowed local drug makers to sell generic versions of Viagra in China.

Though I have not read the intermediate court’s decision, it appears it was simply upholding Pfizer’s trademark blue pill look. I often write about how despite China’s bad rap on intellectual property rights (IPR) enforcement (most of which is justified), its courts take trademarks very seriously and those who pursue infringement of their China registered trademarks nearly uniformly do well in China’s courts. See “China’s Trademark Laws — Simple And Effective.”

This case is yet another example of a foreign company registering its trademark in China and then securing court assistance to protect it. The hope is that as companies continue to win such cases in the courts, the counterfeiting going on outside the court will decline.

Bottom Line: If you are a foreign company doing business in China, you should register your trademarks in China. Why? Because it works.