Mistake #4- Intellectual Property Protection
It is no secret that piracy is common in the People’s Republic of China (PRC or China), and the enforcement of intellectual property (“IP”) rights a daunting challenge. However, IP infringement is not just an issue for the RPC government. Most foreign companies have done little to protect their IP rights in China, leaving their product susceptible to infringement. While the old saying “an ounce of prevention is worth a pound of cure” still rings true, much more than an ounce of prevention is necessary to protect your IP rights in China.
Before you do business in China, first ask yourself if your IP is vital to your China business. If it is, you may need to seriously assess whether or not you wish to introduce your technology in China and if you decide to do so, you need to ascertain, as part of a comprehensive marketing plan, how long you are likely to have control of your IP before infringers start to erode your market share.
You need to secure your key IP assets in the U.S., regardless of what happens in China. Registering US trademarks, copyrights, and patents is a prerequisite to taking legal action against a distributor of “knockoffs” that originate in China, and is a good first step.
Recording registered trademarks and copyrights with U.S. Customs and Border Protection can also help stop pirated goods at the border, before they enter the stream of commerce in the US.
Registration of your IP in China is necessary, although not sufficient, to protect your IP rights in China. If you don’t file your IP in China, you have no rights in China. Therefore, you must register your IP in China before introducing it to the Chinese market place.
Trademarks are protected on a first-to-file basis, with an exception for well-known trademarks. Do not rely on the “well-known” exception, however (unless you are Coca-Cola), because whether a particular trademark is “well-known” or not is a time-consuming argument that keeps IP lawyers in business all over the world. If a trademark uses words, the closest Chinese language equivalent and their variants should also be registered.
Patents are also granted on a first-to-file basis. In China there is a hole in the registration procedure for patents, which requires they be registered with the State Intellectual Property Office (“SIPO”) and placed on public file for assessment prior to the patent being recognized as your IP, even if the first public disclosure or use of the IP is in the U.S. As a result, many Chinese entrepreneurs monitor all patent applications specifically to steal IP and immediately produce products containing the IP while the patent pending process is ongoing.
You can challenge patent decisions made by the Patent Reexamination Board (PRB) of SIPO by using the process of judicial review. The judicial review of PRB decisions covers decisions made during reexamination and invalidation proceedings. The judicial review of PRB decisions is an important – but underused- patent protection mechanism in China. As of June 2006, 497 PRB decisions have been brought to courts for judicial review, only 11% of which were brought by non-mainland parties. In particular, only six were brought by US parties. Foreign parties often seem to believe that they cannot win in Chinese courts and agencies. Pfizer’s success in wining the Viagra patent case (though an appeal is pending) and the fact that non-mainland parties have lower losing rates than their counterparts in mainland China suggest the need to reconsider this belief.
China started drafting the third amendment to the Patent law in January 2006 and the amendment is expected to be completed in 2008. Under the third amendment, when an invention is “completed” in China, the patent application must be filed first in China unless the applicant obtains prior approval from SIPO for foreign filing. This new rule will apply regardless of citizenship and will, in effect, prevent a foreign parent company from choosing where the patent application is to be filed first.
Early registration of copyright rights, while not required, is also advisable. Registration serves as useful evidence of ownership of a copyrighted work, but it is not a legal precondition to enforcement.
There is no registration system for trade secrets, so protection is a matter of taking practical and legal measures to maintain confidentiality, including the use of confidentiality agreements. The best way to protect trade secrets is simply to limit their disclosure to employees or business partners in China. When disclosure is necessary, first establish a relationship of trust with your Chinese business partners.
What else should you or can you do even if you have your IP registered in China?
First: Control your production processes. You can segment your manufacturing processes which will make it difficult for counterfeiters to successfully infringe on your IP. By establishing a wholly foreign-owned enterprise structure, rather than a joint venture, you can retain control over both the technology and the manufacturing process. By retaining control over the assembly phase of the operation, you can ensure that no other manufacturer has access to your complete manufacturing process. Sourcing key components from several manufacturers will prevent any one of them from being able to manufacture the complete product.
Second: Strengthen your workplace security. Investigate the reputation and trustworthiness of all applicants for sensitive positions during the recruitment process. Include non-compete and non-disclosure agreements in labor contracts. Create a “plumbing” system to control IP leakage in the workplace. IP systems and any hard copies of IP should be kept in an access-restricted, secure location. Confidential information should be distributed on a strictly “need to know” basis. It is also good policy to separate engineers who possess knowledge of your production process from the sales force who have access to your clients.
Third: Carefully select your partners in China. It is important to have a trustworthy business partner in China. Each prospective business partner should be carefully checked for their track record in IP protection and for their financial and business experience. Research their networks and identify weak points through which counterfeit products could enter the distribution network.
Fourth: Aggressively prosecute infringers and defend your IP rights. Protecting your IP assets in China is all about vigilance in detecting infringement and in pursuing infringers. Your legal rights mean little in China unless you choose to protect them. Invest appropriate resources in anticounterfeiting efforts, paying particular attention to the investigation and identification of the main players. You can choose from several routes to enforce you IP rights, including civil, administrative, and criminal actions. Don’t be afraid to take legal action in China. Although the Chinese legal system is not perfect, it does function. In 2005, the success rate for foreign IP owners was over 90%. This statistic alone should courage you to use the court system to resolve any IP related dispute in China.
Take-away lessons:1) Register your IP in the USA; 2) Register your IP in China; 3) develop and implement a multi-pronged strategy to protect your IP rights in China; and (4) if you have evidence of infringement, aggressively defend your IP rights.
