While capitalizing on the numerous business opportunities, companies often overlook the pitfalls that may come along with the investment – intellectual property loss.
According to AmCham-China’s 2011 Business Climate Survey, there was a rise in the percentage of members who rank intellectual-property rights (IPR) infringement among the top-five business challenges, from 19% in 2010 to 24% in 2011. The results highlight the imperative for intellectual-property protection among companies doing business in China. Since securing IPR enables companies to prevent their brands or innovation from being illegally copied, it is therefore crucial for companies to stay informed on the latest IPR developments in China.
What is the current situation?
As many companies will have observed, the problem of IPR infringement is widespread in emerging nations. Statistics from the US embassy in Beijing show that, over the past few years, China has topped the rankings as the main source of counterfeit products seized at the US border. With counterfeit products accounting for on average 20% of all consumer products in the market, China’s piracy rate continues to remain one of the highest in the world.
In actual fact, since joining the World Trade Organization (WTO) in 2001, China has strengthened its legal framework and amended its IPR-related laws and regulations in compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). China has now established a list of IPR-related laws and regulations to address IPR enforcement. Key laws include a Patent Law, Trademark Law, Copyright Law and Anti-unfair Competition Law.
In recent years, the Chinese government has continued to show interest in bolstering IPR and improving IPR enforcement. It backed this up by organizing a national IPR enforcement campaign during 2010 and 2011. The government’s efforts in addressing IPR issues were also reflected at the recent 23rd Session of China-U.S. Joint Commission on Commerce and Trade (JCCT), held in Washington D.C., which concluded in December 2012 and where visiting Chinese vice-premier Wang Qishan agreed to strengthen enforcement of intellectual-property laws.
IPR can be a big problem, even for giant corporations like McDonald’s. The world fast-food leader lost a law case in 2011 on logo infringement, but this was not the first case the corporation had been involved in, and would not be the last.
What are the main problems?
Despite China’s unrivaled cost-saving potential as a global sourcing hub as well as its increasing efforts to protect IPR, companies should be aware of the possible problems and risks they may encounter and take every precaution against IPR infringement.
As opposed to the situation in Western countries, a solid concept of IPR has been lacking in China. This lack of IP consciousness leads to the differences between Western businesses and their Chinese counterparts on this important issue. Thus it has become commonplace to have Chinese suppliers producing off-branded items with patented designs and technologies, which has resulted in a large number of IPR disputes.
The complicated question of jurisdiction in China also requires close attention. Many companies find the laws and regulations in China confusing, a factor which is an obstacle that hinders companies from securing proper IPR protection. Companies have to understand that China is a ‘first-to-file jurisdiction’, and that anyone who registers first will own the rights, regardless of who is the creator of the IP. Therefore, to protect your IP assets, it is wise to always register your trademarks, patents, designs, slogans or domain names before you start any business activities in China to avoid contention as to ownership and the subsequent litigation.
In addition to the question of jurisdiction, it should be noted that IPR issues are handled by different legal bodies and agencies in China, depending on the type of property concerned. Companies are therefore advised to register their trademarks or patents with the appropriate agencies and offices to protect their IP from theft. Based on China’s Copyright Law, copyrighted works do not require registration but companies may also register to establish evidence of ownership, which may be helpful in enforcement actions.
Needless to say, language is one of the biggest barriers foreign businesses will face when doing business in China. Although Chinese Putonghua (Mandarin) is the country’s sole official language, numerous dialects are spoken by Chinese people from different places. It might be easy to find good interpreters in major cities but this becomes tricky across the nation as very few local people possess English of a sufficiently high standard to qualify as an interpreter. A huge difference in terms of business culture and etiquette also creates potential minefields.
What do we do now?
Failure to address the potential risks of IPR infringement not only poses a threat to your business interests, but may also drag you into complicated, time-consuming and expensive legal procedures that lead to greater damage. As the old saying goes, “Prevention is better than cure.” So, maintain eternal vigilance and shield your valuable assets from infringers.
Since many find it a headache to understand China’s complex legal system, companies are recommended to seek professional legal advice from legal consultancies or law firms to ensure their full compliance with local laws. It is also helpful to hire a legal representative to coordinate at different locations in China and who can also act as an intermediary to ease communication problems. In some cases, it is even a legal requirement to use a lawyer or legal representative to handle infringement cases.
To best protect your IP assets requires a comprehensive IPR strategy. A clear and well-established mechanism should be in place. Legal documents are the key whenever disputes arise. A well-drafted legally binding contract that specifies each party’s duties and obligations is extremely important in safeguarding a sustainable, harmonious partnership. In the contract, liability for defect of products should be made clear and that the buyer has the right to exercise constant control over the quality of products.
Your IPR strategy should also include non-disclosure agreements. Companies are advised not to share information with any parties unless non-disclosure agreements are in place. When sensitive information is involved, ensure the presence or involvement of a third party witness.
Collaboration with a reliable supplier is the most fundamental way minimizing the risk of IPR infringement. For most foreign businesses, identifying a reliable supplier in China is a major challenge. Companies may seek assistance from consulting agencies that help foreign companies find suitable suppliers while, to reduce risks, auditing is another effective measure for verifying a supplier’s reputation and reliability.
Even if you have identified a reliable supplier, ongoing inspection procedures remain necessary. Companies should keep a close watch on their supply chains to prevent IP leaks and constantly monitor the quality of the products. Do ask for external help to better utilize internal resources and take advantage of a third party’s expertise.
Regardless of the government’s continuous efforts in alleviating rampant counterfeiting, the situation remains problematic. Foreign businesses already in the market or planning to enter should act cautiously and stay alert to plug all actual and potential infringement loopholes. Nevertheless, the soaring number of patent applications in China is likely an indication of the increasing recognition of IPR in this huge market and of a more IPR-friendly environment.