INTELLECTUAL PROPERTY IN CHINA: A SURVIVAL GUIDE
Competing in the Chinese marketplace is a key to economic prosperity for many foreign manufacturers. But as a "Wild West" economic frontier, filled with counterfeiters, infringers and knock-off product versions, it can just as easily lead to disaster. Crafting the right corporate IP protection strategy can make all the difference. By Mark Stephen, managing editor
October 1, 2008 by Canadian Plastics
According to a famous 1970s political slogan, “only President Nixon could go to China,” such was the degree of the country’s isolation. Today, virtually every manufacturer wants in, and they’re being welcomed as never before. The biggest market in the world, China is finally opening its doors to foreign enterprise after decades of self-sufficiency.
Perhaps the biggest single hurdle facing Canadian manufacturers planning to enter this market, however, lies in guaranteeing the protection of their intellectual property (IP) — the innovations, symbols, logos or designs developed and owned by that company. In this venture, the right corporate IT protection strategy, combining both defensive and offensive measures, can make the difference between success and failure.
Traditionally guarded by patents on inventions, trademarks on branding devices and copyrights, IP can be more difficult to protect in China as a result of the country’s relatively recent embrace of the open market. “China has only recently had the restrictions of an earlier era removed, and is still a ‘Wild West’ economy in many ways,” said Paul Jones, principal at the law firm Jones & Co.
Despite the fact that Chinese authorities have worked over the past two decades to create IP laws implementing regulations and judicial interpretations that generally adhere to international standards, procedural barriers and poor enforcement continue to be a problem. Additionally, counterfeiters and infringers in China grow more sophisticated daily, and are finding new ways to infiltrate legitimate distribution networks and developed markets with knock-off versions of products.
Any manufacturer looking to enter the Chinese market should understand certain aspects of the country at the outset, experts warn. A basic understanding of Chinese law — including its strengths and weaknesses — is important, according to Paul Jones. “China is a civil law jurisdiction, like Quebec or Germany. Canadian processors familiar with doing business in those jurisdictions, for example, will find much that is similar in China,” he said.
Jones also noted that China’s legal system is improving, its lawyers becoming more proficient, and that these developments have a positive impact on protecting IP. “There is increasing respect for, and awareness of, IP in China,” he said. An important development occurred on August 1, 2008, when China’s anti-monopoly law came into effect, Jones continued. “This marks a real turning point in China in the appreciation of the seriousness of IP abuse, and is a further sign of the country’s growing maturity,” he said.
Manufacturers should also know the type of IP protection they require. There are three different types of patents available in China. The first is an invention patent, which requires a claim to be examined. “The biggest problem a processor will encounter in obtaining an invention patent in China is that the IP offices are heavily backlogged,” Jones said. “For this reason, the process can take up to five years.” Second is a utility patent, which isn’t examined for requirements and usually takes a few months to obtain, but which offers lesser protection and commands less respect from the courts. Lastly, there is a design patent, intended to cover the non-functional aspects of a product. Regardless which they select, IP rights holders should file applications for both their core and fringe technologies and make certain their patents are properly translated.
For trademarks, meanwhile, companies should register their brands’ English and Chinese names.
A final category, trade secrets, is more problematic. According to Jim Wei, general manager of Superi Inc., an importer of Asian plastic molds, a trade secret in China must be technical or operational information unknown to the public, economically beneficial to the owner, and reasonably protected by the owner. Trade secrets are often difficult to enforce because of the high burden of proof required from the IP rights holder.
Amazingly, despite the notoriety surrounding IP theft in China, many foreign manufacturers still fail to register their products at all. “You’d be surprised how many companies continue to miss this step, despite the availability of many agencies with the experience to assist them,” said Steven Ganster, CEO of market entry and growth strategy consulting firm Technomic Asia. “We advise clients to assume their IP will be at risk, and then try and minimize that risk through a combination of legal and tactical maneuvers. The best way to proceed is to go to a professional for advice.”
To be clear: if a company does not file its patents and trademarks in China, it has no rights in China.
THE BEST DEFENSE
It’s also important, at the outset, for a foreign manufacturer to research the backgrounds of those with whom they’ll be doing business in China. “You have to know and to understand who you’re dealing with, and their level of integrity, especially if you have a strong need to be competitive,” said Steven Ganster. “Ultimately, the contract won’t protect you, the relationship will; and if something goes wrong, it’s easier to deal with someone you know.” If possible, select partners with brand images and reputations of their own to protect.
Regardless of the level of trust, a foreign manufacturer should never to reveal too much about a product to their Chinese suppliers. “One needs to provide limited information to the supplier,” said Jim Wei. “During the quotation stages and supplier selection, provide only essential information, or provide other designs portraying the final product.”
Manufacturers should also be aware of the value of a wholly owned operation. “A wholly owned manufacturing outfit doesn’t guarantee protection against IP theft, but it does minimizes the risk,” said Steven Ganster. “The operation can then work with outside companies to get components and materials, and bring them together in their own facility, which is better managed and protected.”
Protecting and controlling product knowledge may in fact be the most important single weapon against the leading cause of IP theft: the stealing of information by employees. “Probably the biggest problem foreign facing a foreign manufacturer in China is someone working at a company, learning how to make a product, and then leaving and opening their own operation,” Ganster continued. “It’s a dilemma that can make non-compete contracts irrelevant.”
Exercising vigilant governance, and control of the production process, greatly lessens this risk. “Manufacturers need to have managers that are trustworthy, and also run background checks on key hires,” Jim Wei said. “Also, keep vital designs or technologies in the home country, classify information according to IP sensitivity, and compartmentalize the production process so as few people as possible see the finished process.”
A GOOD OFFENSE
Despite the best laid plans, IP theft may still occur — at which point the rights holder has several options.
First, filing a civil suit is a relatively inexpensive method of halting patent, trademark and copyright infringement. The difficulty, however, is that the IP rights holder bears the responsibility of collecting evidence and packaging cases. Also, litigation can take up to two years, and the infringer can halt the civil suit by filing a challenge. And even in the event of successful verdict, enforcement may still be a problem. “If a manufacturer wins a civil judgement, as opposed to a criminal judgement, it’s the manufacturer that has to try and enforce it, not the police,” said Paul Jones. Having a good relationship with local officials can be a deciding factor in getting enforcement of a civil judgement. “If, for example, the mayor of a Chinese city realizes a foreign manufacturer, employing local people and paying taxes, is being unfairly treated by one of the citizens, he may feel compelled to get inv
olved,” Jones said.
A second, less expensive remedy is to file an administrative action with a local office of the country’s Administration for Industry & Commerce (AIC). These are easier and faster than civil suits. “If the AIC agrees to take a case, it saves the foreign manufacturer time, difficulty and money,” Jones continued. “The disadvantage is that AIC involvement often marks the point at which the infringer simply moves to the next province and begins operations there.”
Cases of egregious infringement can be transferred from administrative authorities to the Chinese police. These tend to be much harder to set in motion than civil suits and administrative actions, and the IP rights holder must generally do all of the investigative work and package the case for the police.
ResouRce List Jones & co. (Toronto);
superi inc. (Waterloo, Ont.); www.superi.ca; 519-342-6542
technomic Asia (Chicago, Ill.); www.technomicasia.com; 919-855-5437