Articles / 06.16.2016

Doing Business in the Peoples Republic of China

by David R. Posteraro, KJK and Baolu MA, HHP Attorneys-At-Law, Shanghai, China

Foreign threats to domestic American IP are ubiquitous. From counterfeit watches to pirated software, IP violations go beyond products and borders. Nowhere is the threat to IP more critical than in the quotidian experience of doing business in China. Successful IP protection in China requires deliberate defensive and proactive practices.

Identify the risk and develop a strategy.

Too often, companies enter the Chinese market without clarity about their objectives. Strategic clarity involves identifying specific IP and the operational, management and fulfillment challenges to implementation. Technology transfer should be circumscribed to attain specific goals. Too often companies bring too much IP to China defenselessly or share it too broadly without limitation.

The many Chinas.

Just as doing business in Massachusetts is different from doing business in Texas, executives and managers must develop a knowledge about the particular Chinese operating environment prior to entry. There are many different Chinas and no one way of dealing with intellectual property protection everywhere. Doing business in China involves managing a complex set of relationships among officials, customers, employees, communities, partners and others.

The legal basics.

China’s patent, copyright, and trademark laws protect most IP rights in China. Additionally, the PRC Anti-unfair Competition Law protects trade secrets, packaging and the trade dress of well-known products, as well as company names. Throughout the entire IP protection system of China, companies should register (or record) eligible IP in China as early as possible. File patents applications with the State Intellectual Property Office (SIPO) for IP that is valuable to the core business. Register trademarks with the China Trademark Office as broadly as possible, including the English name, Chinese character name, and Chinese pinyin name for core brands. Because of China’s first to file system of trademark protection, registration is particularly critical for companies manufacturing trademarked products for export from China. Local competitors (or squatters) can register a similar trademark and threaten to use local government enforcement to shut down the business of a foreign manufacturer. Certain IP may be registered with China Customs affording proactive protection when exporting or importing goods. Although copyright registration is not required, consider registering works with the National Copyright Administration, since registration provides a public record and can serve as useful evidence in copyright disputes. Similarly, stamping documents as “Confidential” and establishing password protection or limiting the access to documents may be valuable when asserting rights to trade secrets.

The legal risks.

Although formal patent and trademark registrations are important, they can unfortunately pose a threat of their own. China’s patent and trademark systems are based on the “first-to-file” principle and detailed patent applications are published within a relatively short time period after filing. As a result, filing for a patent in China can offer a counterfeiting opportunity for would-be imitators.

Adopt defensive measures to protect IP.

A realistic assessment of the business risks and benefits of transferring IP to China may mean withholding vital designs and latest-generation technologies. Contractual protective measures play an essential role in the IP protection of China. Technology transfer and licensing contracts should address royalty rates, scope of license, limitation on use and IP registration rights and ownership of improvements. Confidentiality agreements should contain non-circumvention provisions. Register technology transfer or licensing contracts and acquire the import or export permit as required under the Ministry of Commerce’s Technology Import and Export Administrative Regulations. For the maximum protection, it is also advisable to have trademark and patent licensing agreements filed with local authorities. Simple controls such as mandatory bag checks, dual sign for IP-critical access, and regular management presence in manufacturing facilities can also serve to discourage IP theft.

Segregate IP.

Physically separating manufacturing and R&D processes, disaggregating proprietary components, and isolating critical know-how can be effective tools for IP protection in China. This is particularly true where patent protection is unavailable or undesired.

Cultural engagement.

Be engaged in the local culture and local institutions. Building personal ties to local partners and employees encourages communication and loyalty.

Conclusion.

Doing business in China begins with an IP strategy and an appreciation of the culture and its rules. With that basis, and the assistance of sound legal counsel, businesses are better able to protect your valuable intellectual property.

Through our Meritas® affiliation, KJK works closely with HHP Attorneys-at-Law in Shanghai, China. All HHP lawyers are graduated from prestigious Chinese law schools with an abundance of experience in their respective areas, including intellectual property protection.