Just read a CNN article entitled, China offers big risk, bigger reward.  The article quotes me and a nice range of other attorneys on what it takes for foreign companies to succeed in doing business in China — from a legal perspective.  I really like the article, but I have a beef with its title.

If I had written the title, it would have been something really like, “China offers big opportunities, but hey, it’s gonna be difficult and it isn’t nearly as cheap as it used to be.”  I am just not sure China is all that risky for foreign companies.  I say this because my “sense” is that well over 90 percent of my law firm’s clients that do business in China or with China succeed at it and because every AmCham survey I can remember essentially says that American companies in China are thriving.  Is it difficult doing business in China?  Of course it is.  Just the mere fact that it is a foreign country (make that a very foreign country) with a different business culture, language, and laws guarantees that will be the case.  Is it risky?  Well, yes, in that it is a foreign country with a different business culture, language and laws, all of which increases the likelihood of something going wrong.  But is it physically dangerous?  No.  Are foreign countries at any real risk of having their assets appropriated by the government?  No.

You want risky?  Let me tell you about risky.  Many years ago, a very good client of ours was offered the shrimp farming concession in a small African country.  THE shrimp farming concession.  Like for the entire country, which meant a huge amount of easily caught shrimp. We worked with our client on various aspects of the deal and the most conservative numbers showed that the return on the investment would be astronomical. Like about 300% starting in the first year.  One big problem though was that none of the last three foreign companies that had been given the same concession had lasted even one year without the government taking everything and unceremoniously booting them out.  The government sought to assure us that it had good reason all three times but in the end, our client deemed the deal too risky.

Bad things do happen to good foreign business in China, but as compared to many other emerging markets, China is relatively tame.

But the article itself does an excellent job setting out the core legal issues foreign companies face in China and conveying that dealing with those issues is not going to be easy or cheap.  It starts out talking about a young entrepreneur who found it difficult forming a WFOE because, among other things, he had to first prove that he had office space and a commercial address.  The article said this first meant that this entrepreneur had to make a “significant upfront investment, with no  guarantee of [WFOE] approval.”  This is only sort of true in that many landlords in China these days will agree to what we call a tentative lease.  Under such a lease (which we do literally all the time for our clients), the foreign putative tenant need only start paying if the WFOE is approved.  Landlords typically agree to this and we have never had a WFOE rejected because of this.

It then quotes me as saying that “many” wait for a year to have the paperwork approved.  This too is only sort of true.  We have never had a situation where it has taken anywhere close to a year for our WFOE paperwork to get approved; but we have had situations where it has taken our clients a year or so to complete the WFOE registration process because the foreign company seeking the WFOE was simply not well prepared from a business side to do everything it would take.  For instance, a typical slowdown is when the foreign company has trouble finding an appropriate space to lease.  For more on the issue of leasing space for a WFOE in formation, check out the following:

For more on how to form a WFOE in China, check out the following:

The article then rightly notes that “hiring staff, conducting training, avoiding corruption and protecting intellectual property are some of the biggest challenges they face.”  I completely agree with this, in that probably 80 percent of what we do for foreign companies that are already in China relates to one of these items.

It then talks about the need to find the right hire/right partner — someone , who “can bridge West with East, and East with West.”  This is so true.  In fact, I went to lunch with a good friend/client yesterday and much of the conversation was him telling me how difficult it was going to be for him to find the right general manager for a new business he has been working on in China.  Like everyone else, he seeks someone who understands both the China side and the Western side and can deal with the people on both sides and actually knows the specific business.  Those people are always going to be few and far between.  Janet Carmosky just wrote an excellent article for the China Business Review on this issue, entitled, What a China Team Needs.

The article then (quite wisely) notes how “business in some industries — media, banking and energy, for example — can only be done through a joint venture with a local Chinese partner.”  In other words, these businesses cannot be 100% foreign owned and therefore they cannot be done as a WFOE; foreign companies therefore typically get involved in these industries in China via a joint venture.

The article then relays how “corruption carries some of the biggest risks for businesses looking to break into China” and how it is “common practice” in some industries “for firms to give generous gifts and entertain business partners with lavish meals, and companies may lose an edge if they don’t follow suit.”  Unfortunately, this is true and as a foreign company you will need to decide whether you are going to risk jail time for yourself and your employees by violating the law. Needless to say, our advice is always not to do it and to do everything you possibly can to make sure that ethos is made clear and enforced throughout your company. We constantly are working with our clients to help them avoid corruption.

The article then addresses the importance of protecting intellectual property and rightly suggests that foreign companies “register trademarks or patents before entering China.”  It also mentions some non legal steps for protecting IP, such as “setting up offices or plants in different locations, and only taking the most essential core technology overseas.”  For more on registering trademarks in China and the timing of that, check out the following:

For more on how to protect your IP from China, check out the following five part blog post series:
The article then concludes by talking about how “despite the ups and downs” and despite China not being an easy place to do business, it can be a very profitable one.  I can agree with that.
And in that end, that is what matters most, is it not?  What do you think?  Is China worth it for foreign businesses?

On February 20 at 2:00 p.m. Eastern, I will be co-presenting a China law webinar, along with Andrea Charters, Vice President and Associate General Counsel of Rosetta Stone Inc. LexisNexis is sponsorig this webinar and, incredibly enough, it is entirely free.

We will be gearing our presentations towards in house counsel and together we will be addressing the following issues, with a view towards protecting IP and providing some basic legal information for those doing business in China:

  • Choosing a Chinese partner
  • Identifying what you need to protect
  • Structuring your deal or contract
  • Writing an arbitration clause
  • Understanding the China International & Arbitration Trade Commission
  • Executing key elements in employee contracts
  • IP registrations: trademarks, patents, copyrights and licensing agreements

Click here for more information and to sign up.

Had a telephone conversation with a client today (yes I am working today) regarding the steps it should be taking to protect its trade secrets in China.  Client is an American company that has been doing business in China for nearly a decade but is “for the first time being forced by its competition to bring over its good stuff to China.”

Strangely enough, this was the first time a client has asked me this question, at least in this form.  I am often asked to draft a contract that contains a trade secret provision and we are constantly drafting Non Disclosure Agreements designed to protect trade secrets.  But this question went beyond that.  The question was directed at all of the methods, both legal and non-legal, this client should employ to protect its trade secrets.

I thought for a while (and checked the notes from a speech I recently gave on protecting IP from China) and eventually spewed forth with the following five keys to China trade secret protection (or something fairly close):

1.  First thing you must do is figure out what you want to protect.

2.  Second thing you must do is figure out how your trade secrets can be taken and what you can do to protect them.  This involves answering a number of questions.  Does it make sense to have your suppliers/vendors sign a code of conduct or a contract making clear that they recognize and will protect your trade secrets?  What operational structures can you put in place (anywhere along the chain) to protect your trade secrets?

3.  Make sure your contracts provide trade secret protection.  In particular, look at your employment and sub-contracting agreements.  Make sure that these contracts safeguard your trade secrets both during the business relationship and after the relationship terminates — you would be surprised at how many contracts seem to end with the termination of the business relationship.

4.  Make sure that all of your people understand the importance of protecting your trade secrets. I don’t have any hard numbers on this, but if I had to guess, I would say that well over half of all trade secret thefts come from your own people and well over half of those come from sloppiness.  It is your job to make sure that you are employing the right personnel, and using the right physical and technical security measures to prevent leakage of trade secrets.  Do the same thing with your suppliers and anyone else that has access to your trade secrets.  Make sure to do whatever you can to ensure that your trade secrets remain a secret even after your business relationships end.  Go ahead and remind your former business partners and employees of the requirement to maintain your trade secrets.

5.  Don’t be afraid to sue to protect your trade secrets.

Did I miss anything?

What do you think?


I will be one of the speakers at the 2007 E&S Loss Control Executive Forum in Orlando, Florida tomorrow. For more on the event, go here. The forum is limited to higher level risk executives only and I will be speaking on how to minimize risk when doing business with China. My focus will be on protecting IP and on preventing bad quality product.

I also got called by CNBC regarding my speaking on the same topic live on air tomorrow. I have my suit and tie with me this time so I said yes.  Rumor is I will be on there with some lawyer out of Philly who views China manufacturers as evil.

We will see.

Updates to follow.

Just came across a great article on protecting your IP in China. It is by Godfrey Firth, who is with the Business Advisory Services at the US-China Business Council in Shanghai and it is entitled, “The best offense is a good defense—and vice versa.” [link no longer exists The article outlines virtually all of the basic strategies applicable to protecting various types of intellectual property in China, while at the same time, it provides a broad overview for the layperson.

Firth’s thesis is that a “successful China IP protection strategy needs to encompass both offensive and defensive elements.”

Firth sets forth “some practical measures” foreign companies doing business in China need to take to protect their IP in China, rightfully noting that the “specific measures a company adopts will vary depending on the company’s industry and level of involvement in the China market.”

Firth calls on companies to make protecting their IP in China a responsibility of everyone in the company, not just the lawyers. He suggests companies communicate and enforce a clear IP protection strategy throughout the company by “communicating the value of protecting IP to all employees, business partners, and customers” and by “instilling a sense of ‘ownership’ of company IP in staff.”

He then lists measures companies can use to protect their IP. He notes that since China is a “first to file,” not a “first to use” country, companies must register their IP in China as soon as possible. For trademarks, he suggests companies register their brands in both English and Chinese and carefully select the categories and subcategories in which they file. For patents, he notes china offers design, invention, and utility model patents and he suggests companies should generally file “both utility and invention patents for the same item, since utility patents receive little substantive review and are usually easier to acquire. Once an invention patent is granted, the utility patent can generally be dropped, as utility patents last only for 10 years from the date of application, compared to 20 years for invention patents.” Though registration of copyrights is not required to secure protection, companies should nonetheless “consider registering their works with the National Copyright Administration (NCA), since registration provides a public record and serves as useful evidence in court.” He correctly notes that registering software copyrights “may be quite sensitive, since it may require providing some source code to NCA.” Lastly, he states that companies should consider trade secret agreements as an additional means of protecting their IP

Firth then lists the following non-legal means for protecting IP:

  • Design your product so it is difficult to copy and “compartmentalize the production process so that no single unit can produce a complete product.” Outsource different parts “to different companies to minimize the risk of inadvertently creating a new competitor.” If possible, keep your “key technologies and procedures” and “vital designs or latest-generation technologies” in your home country.
  • Know who you are hiring and make your employees sign non-compete and non-disclosure agreements (NDA).
  • Conduct due diligence on your potential and current suppliers and distributors. Research their networks and identify weak points through which counterfeit products can enter distribution. Select partners with reputations of their own to protect. Include IP protection clauses in your contracts with them.
  • Keep a close eye on competitors by, among other things, monitoring the patents and trademarks they seek. This can help “prevent the registration of copycat trademarks and patents.” Firms should be especially alert to design and utility patents filed for infringing products.

The article concludes with the admonition that even after doing all of the above, “companies must devote time and resources to detecting violations and taking legal action; a company’s legal rights mean little in China unless the company chooses to protect them.” Firth details some of the various administrative, civil, criminal and even political actions, companies can take if they discover their IP has been compromised in China.

What I find so interesting about this article is that so much of what Mr. Firth prescribes for protecting IP applies to doing business in China beyond IP. I am in the process of preparing a speech on how companies can protect themselves from bad Chinese products and much of Firth’s advice regarding IP applies to bad product protection as well. With both IP and product issues, it is important to cover yourself with good contracts, but it is of at least equal importance to engage in due diligence regarding those with whom you are dealing and to monitor constantly your Chinese partners once a relationship is established.

Bottom Line:  Getting your legal and operational house in order will obviously not prevent all China problems, but it is a necessary start.

On Thursday, April 19, China time, China Law Blog’s own China lawyer, Steve Dickinson, will be appearing on CCTV International’s Dialogue program to discuss China intellectual property protection (trademarks, copyrights, patents, and trade secrets). The focus of the show will be on China’s current regime for protecting IP and, in particular, its impact on foreign companies doing business in China.

Dialogue is hosted by Yang Rui and Tian Wei. Wikipedia refers to it as “formatted similar to Larry King Live and Imus in the Morning, in which the talks are generally political in nature.” CCTV describes Dialogue as follows:

Dialogue is one of the most acclaimed and influential programs on CCTV International. This 30 minute current affairs news magazine is an authoritative talk show designed to inform and educate viewers worldwide and influence decision makers in governments, businesses and academia.

Dialogue provides fair and comprehensive analysis of current affairs within the framework of cross-cultural and multi-disciplinary comparisons. Chinese and foreign guests openly express their opinions on issues making headlines in China and around the world. Through frank discussions, and sometimes heated debates, viewers are encouraged to reach their own conclusions. 

The taping of the show will be on Tuesday and we think Steve will appear on air on Thursday, April 19, at 7:30am, 1:00 pm and on Friday at 1:30am. If you want to learn more about protecting your IP from China, please stay tuned as we will update you as soon as we learn more.

Alicia Beverly, Chief IP (intellectual property) strategist with IP Wealth, an Australian company, “based on the Gold Coast in Queensland, [that] specializes in identifying, protecting, managing and monitoring intellectual property assets for clients around Australia and overseas,” wrote a helpful article entitled “Protecting and Enforcing Your IP Rights In China.”

The article starts out with a couple of fairly typical China IP horror stories involving Australian companies. The first is of a manufacturer of pub dispensing equipment who went to China to investigate manufacturing a product there, only to discover it was already being produced “in the thousands, with the IP rights applied for by the rogue manufacturer.”  The second is of another manufacturer who discovered his ex-manager had set up his own rival operation that sold the same product right down to the trademark.

Forgive me for yawning, but both of these stories more likely reflect carelessness on the part of the Australian company than any shortcomings in Chinese law.  In the first story, the Australian company could have prevented the problem simply by filing its trademark in China.  In the second story, the Australian company should have had its manager sign non-compete and trade secret agreements.

The article then goes through a strange history of improving Chinese IP protection and wrongfully predicts the 2008 Olympics in China “will have the most impact on routing out IP thieves and dramatically improving intellectual property enforcement.”  Though I wish it were otherwise, I do not see the 2008 Olympics having anything more than the most marginal impact on improving Chinese IP enforcement.

But when it comes to explaining what to do to protect IP in China, Ms. Beverly’s recommendations are all right on.  She prescribes the following:

  • China is not a DYI [Do It Yourself] country – Get Professional Help.
  • Contracts must also be translated into Chinese, cannot be common law centric [The United States, England, Canada, and Australia are all common law countries] and must cover everything because anything omitted is fair game.
  • China is a “first to file” country with no recognition given to use or ownership by other parties.  It is therefore essential that you file for your rights — trade marks, patents and designs —  before you enter China.  Failure to do so is an invitation to the manufacturer or distributor you are working with to do it themselves.
  • Investigate whether your current trademark is useful for the Chinese market, conduct searches, and then protect several versions of your trade mark — the English version, the Chinese translation, and even a phonetic version of the English.
  • Design products that are harder to imitate and commit to continuous innovation to keep one step ahead.
  • Consider splitting up elements of your production in different locations.

Nothing new here, but all very solid advice.   In discussing the need to have contracts in Chinese, because we are talking about protecting IP, I assume she is talking about contracts that aid in IP protection.  On that score, it often makes sense to require those with whom you are dealing in China to sign a trade secret contract, requiring them not to divulge your trade secrets and/or non-compete agreement, whereby they agree not to compete with you within certain geographic and temporal limits.

If Ms. Beverly is advocating for companies always securing a China trademark in English, Chinese, and even “a phonetic version of the English,” I disagree.  In many instances, just the English is enough and I am of the view that these determinations should be made on a case by case basis.  Registering additional trademarks is not terribly expensive, yet it still makes economic sense to register only those that are necessary for the business.

For more on protecting your IP in China, check out “China’s Trademark Laws, Simple and Effective,” which talks about how Chinese trademarks are indeed good protection, and When Your IP Is In China …. and “Nike On China IP Protection: Just Do It With Green Tea,” both of which contain a number of additional good suggestions for protecting your intellectual property in China.

By:  Steve Dickinson

The Chinese government recently announced its 2006 Action Plan for intellectual property protection in China. This comprehensive plan is intended to completely overhaul China’s IP protection system.  The action plan focuses on every important area of IP law: trademark, copyright, patent and import/export.  The Plan further provides for improvement in virtually every area of IP law: statutes, judicial interpretation, civil and criminal litigation, trade shows and exhibitions, and public and private education.   Full details of the 2006 Action Plan can be found at the official Chinese government website here and here.  The Chinese government created its intellectual protection rights (IPR) website as part of the education component of the Action Plan.  It is a useful general introduction to China’s IPR system.

Many Western observers see Chinese campaigns like this as a merely cosmetic response to Western complaints about Chinese piracy of non-Chinese intellectual property rights.  In large part, this is not true.  As the Chinese economy becomes more sophisticated, domestic intellectual property violations have become a major issue within China.  Take the example of movie piracy through sales of pirated DVDs and illegal downloading of films on the Internet.  It is estimated that over 90% of the DVDs sold in China are pirated copies and virtually 100% of the Internet downloads are illegal.  Within China, the impact of this piracy falls almost exclusively on China’s domestic film industry.

A major portion of the Action Plan focuses on combating such “audio-visual” piracy, through the following:

  1. Identifying and shutting down illegal CD/DVD copying factories.
  2. Identifying and shutting down illegal movie download sites.
  3. Working with legitimate wholesale and retail outlets for CDs and DVDs to eliminate pirated DVD and CD sales from their businesses.
  4. Showcasing Jiangsu province’s successes in combating audio visual piracy.

Significantly, the Action Plan identifies local protectionism as a major factor in the persistence of audio-visual piracy.  The Action Plan bluntly states that the “State Procurators Office will investigate into and prosecute those crimes involving the abuse of power by government officials behind the IPR infringing crimes in a stringent manner, resolutely rooting out such “umbrellas of protection.”  This focus on trying to end local government support of illegal activity is consistent with a renewed central government focus on forcing local governments to comply with central government regulatory authority, as recently reported by the The China Confidential Blog in its post entitled “Beijing Plans to Cut Local Leaders Down to Size.

Beijing’s desire to achieve success in this high profile program is clear. The question, however, is will it work?  Recent research by the U.S. based Motion Picture Association of America (MPAA) suggests the domestic Chinese film industry is quite skeptical.  Just last week, the MPAA issued a report, documenting the negative impact piracy in China has had on the Chinese film industry and on the Chinese film industry’s views of government enforcement efforts.  Though MPAA raw statistics should be viewed with some caution the MPAA report very likely does present an accurate picture of the general situation within China.

The MPAA report indicates that at least 80% of the optical disks produced by registered optical disk production facilities are sold as illegal pirated copies.  When combined with unlicensed production and Internet downloads, this supports the MPAA’s claim that over 93% of the potential market in China for films is lost due to all forms of piracy.

The more surprising finding from the MPAA study is the attitude of Chinese domestic film companies towards the likelihood of success of government efforts to combat audio-visual piracy.  The Chinese film companies indicated a generally positive attitude towards government efforts to combat piracy, but 61% of companies indicated they believe piracy will increase over the next year and 39% indicated the level would remain even.  Not one company believed the level of film piracy in China will decrease over the next year.  In other words, China’s domestic film industry believes Beijing’s high profile 2006 Action Plan will be a total failure in dealing with the piracy issues affecting the domestic film industry in China.  Why?

Many Westerners believe piracy continues in China because the central government in Beijing is not really interested in combating it.  I believe the central government authorities are quite serious about combating audio-visual piracy, yet are unable to stop it.  My own experience in China causes me to agree with the domestic film industry’s pessimistic view on future film piracy in China. I have two main reasons for this belief:

  1. Unlike the United States, China does not have a strong film industry group like the MPAA that takes independent action to identify and take legal action against piracy.  The tendency in China, both for domestic and foreign businesses, is to rely on government criminal and administrative enforcement actions. Civil litigation against the major pirates in China is rare. This reliance on government has strong historical roots in the Chinese system, but when it comes to piracy, it is mistaken.  The Chinese government is a large and inefficient bureaucracy and it cannot be relied on to combat commercial issues which do not threaten state security. China has a sophisticated legal system for dealing with IPR issues.  Private businesses must take action on their own to make use of these tools.  Waiting for the government to do it on their behalf will result in a very long wait.
  2. China’s central government does not have effective control over the local governments where optical disk piracy occurs.  The vast majority of pirated DVDs are produced in Guangdong province, in China’s far south, in the region between Guangzhou and Shenzhen.  The central government has been quite successful in identifying many of the businesses, individuals and government officials engaging in piracy, but it simply lacks the power to close these operations down. It is not a question of intent or desire; it is a question of power.  This suggests that until the central government takes effective control of the Southern Guangdong region, optical disk piracy will continue relatively unabated.

The Beijing government has embarked on a high profile campaign to resolve the piracy issue within the next year.  China’s domestic film industry is quite sure resolution will not occur.  If the domestic industry is proven correct, the weakness of the central government in controlling local action in Guangdong will become brutally obvious.

The Tianjin High Court ruled last week in favor of Italian Chocolatier, Ferrero Rocher, in a case against a Zhangjiagang Food company involving copycat chocolates.  The court ordered the local company to immediately stop producing the copycat chocolates and to pay $87,000 in damages.

This actually prompted the Voice of America to remark that “[s]everal Western multinationals have won copyright piracy cases against Chinese companies in recent weeks.”

We see this decision as additional proof the Chinese courts (at least the higher level ones) will enforce properly registered IP rights, even on behalf of Western companies against Chinese companies.  Though some may question the low amount of damages, Ferrero Rocher has to be quite happy with the court’s cessation of production order. The fact this decision came out of Tianjin (as opposed to Shanghai or Beijing) is further proof Chinese courts are beginning to take seriously their role in protecting IP rights.