I estimate that 90 percent of U.S. companies doing business in or with China have intellectual property requiring protection from China. Therefore, it is always a surprise to me how many of these companies seem to 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 I am talking about when I use the term “intellectual property.” IP is not patents, trademarks, copyrights, etc. These are simply tools for protecting intangible assets.
So what is intellectual property?
- A better term is 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.
- For creative industries, IP can include virtually all of the assets of the business:
- 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:
- Industrial processes and know how
- For all businesses, it includes:
- Brand and image
- Business planning and corporate strategy
- Pricing plans
For most modern businesses, intangible property forms a major portion of their value. 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, 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 the Chinese over the past several years has centered 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:
- 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:
- Secrecy and refusal to disclose
- Licensing and trade secrecy agreements
- Trade secrecy and related agreements with employees and joint venture partners
- 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. The fact is that China is currently the most dangerous country in the world with respect to protection of 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 1) you assess the risks in a realistic way, and 2) you 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 four categories in terms of the effectiveness of the system of legal protection:
1. Patent and trademark protections generally work well in China for protection from large scale infringement, though small time infringement is difficult to prevent.
2. 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 my previous Above the Law post on this, entitled Drafting China Contracts that Work.
3. 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.
4. Copyright in creative works. Copyright protection in China has not worked well for protection of creative works in the retail sector. Virtually all movie, film, and music products are available 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 no 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…