China IP protection is possible

by Dan Harris

Virtually every U.S. company doing business in or with China has intellectual property requiring protection from China. Yet far too many of these companies treat their intellectual property in China as an optional or secondary matter when it really should be one of the first issues they consider when approaching the China market.

Let’s first get clear what we mean by “intellectual property.” IP is not patents, trademarks, copyrights, etc. These are simply tools for protecting intellectual property

So what is intellectual property?

• A better term might be intangible property or intangible assets. This includes everything about your business that has value that cannot be reduced to a physical asset or to a monetary cash flow, with the exception of things like Goodwill or reputation.

• For creative industries, IP can include virtually all of the assets of the business:
  • Music
  • Film
  • Books and magazines
  • Research and analysis
  • Design of any kind: interior design, clothing design, product design
  • Architecture and engineering
  • Software of all kinds: industrial, retail, video games, phone “apps”

• For traditional industrial firms, it includes:
  • Inventions
  • Formulas
  • Industrial processes and know how

• For all businesses, it includes:
  • Brand and image
  • Business planning and corporate strategy
  • Pricing plans

IP is a substantial portion of the value of most modern businesses.. For many businesses, such as those in creative services, it forms the core of the value of the company. Consider the stars of the modern business world: Apple, BMW, Microsoft, IBM, Boeing, Siemens, Nestle, General Electric, Dow Chemical, Starbucks, Amazon, and SAP. Huge portions of their value is in their intangible assets.

However, even for hard asset, resource-based companies, IP is still a major component in their company value. Take the mining companies that have dealt with China for the past ten years. A major portion of their value lies in their pricing plans, their internal data on their resources, their techniques of extraction and transport, their future exploitation plans and the like. This explains why the primary battle between these companies and their Chinese competitors centers on the attempts of both sides to acquire data to aid in the struggle over control of the market.

Active and careful cultivation of intangible assets is mandatory to survive in the modern business world. There is much more to protecting intangible assets than the traditional IP tools.

The traditional intellectual property tools are:

1. Patents
2. Trademarks
3. Copyrights
4. Trade Secrets

Though these tools are essential in the IP world, there is a far wider set of techniques that can be used, including the following:

1. Secrecy and refusal to disclose
2. Licensing and trade secrecy agreements
3. Trade secrecy and related agreements with employees and joint venture partners
4. Physical techniques such as encryption and related data protection techniques

Many companies believe that since they have done what is necessary to secure their rights in North America and Europe, there is nothing special they need to do in China. This is a mistake.

The key concept is that IP protection is local. Since all IP protection is based on local law and practice, you must adopt an effective and realistic protection program for the country in which you are operating. If you are in China, you must consider the situation in China. China is currently the most dangerous country in the world when it comes to protecting intangible assets, but that does not mean you can afford to throw up your hands and do nothing. China’s IP risks can be managed, if you realistically assess the risks and take practical steps for protection.

To protect your IP in China you must make use of the Chinese system. You must act within China for creation of rights, enforcement of rights, and monetary exploitation of rights. You must deal with China the way it is, rather than hoping to rely on a perhaps more perfect system that simply does not exist in China.

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

• Patent and trademark protections generally work well in China for protecting against large scale infringement, though small time infringement is difficult to prevent.

• Contractual measures (such as trade secrecy agreements, non-disclosure agreements, licensing agreements, and technology transfer agreements) work in China if — and only if — properly implemented. For what should go into a China contract, check out Drafting China Contracts that Work.

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

• Copyright in creative works. Copyright protection in China has not worked well at protecting creative works in the retail sector. Virtually all movie, film, and music products are cheaply available in China 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 little 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 minimal effort, it will be copied and you should prepare for this . The following assets are particularly susceptible to copying in China:

• 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 many Chinese companies that work with foreign businesses is 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; and
• Distribution and sales agreements.

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

No protection in China will be perfect and American companies 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 China rule requiring that China patents must be filed within one year of the patent having been filed elsewhere.
• Copyright protection is often not effective for easily copied digital media.

Faced with this, many American 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, including the following:

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

Many American businesses think China has no IP laws and that Chinese companies do not file lawsuits. This is a mistake. Chinese companies actually tend to be quite adept at using the Chinese IP system to their own benefit, including employing the following tactics:

• If the American 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 American company out of the American company’s own market. This happens regularly with trademarks, patents, and commercial copyrights.

• Many American 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 American company hires a Chinese contractor to perform services or engages in cooperative design or manufacturing operations with a Chinese company. The American company only learns later that it has infringed on the IP of another. The resulting damages can be significant. For how this can play out on the trademark front, check out When To Register Your China Trademark? Ask Tesla.

There is IP protection in China and if you are going to be doing business in or with China, it behooves you to figure out how best to protect your intangible assets.

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.