China Piracy and Counterfeiting: Do They Even Matter?

Of course they do, but not always and not for every company doing business in China or with China.

Let me explain.

I just read an article on Engadget, entitled EU withheld a study that shows piracy doesn’t hurt sales, and subtitled, “The $430,000 study’s conclusions perhaps didn’t fit what it wanted to hear.” To grossly summarize, the study indicated that of books, movies, music and games, only blockbuster movies were negatively impacted by piracy. The study indicated that game sales may actually be aided by piracy.

I have from time to time been known to question the dollar losses often attributed to counterfeiting as well. The most commonly cited number is that United States companies lose $600 billion a year to counterfeiting. But the problem with this number is that it is based at least in part on an analysis that says every counterfeit purchased gives rise to a dollar lose equivalent to the real item that was counterfeited. This is usually true (especially when the buyer does not realize it is buying a counterfeit), but is this really true when someone buys a fake Rolex watch for $55 or a fake Gucci purse for $15? I don’t think so.

But let me be crystal clear here. I am not in any way condoning piracy or counterfeiting as both of those things are not only economically damaging, they can reduce innovation and be downright dangerous. Do you want fake brakes in your car? How does counterfeit medicine sound to you? No, all I am saying is that the extent and the damages caused by these things — as a whole — is sometimes over-dramatized. And that, as I will explain below, can have real-world business consequences.

Piracy and counterfeiting and the lack of strong IP protection in China are huge issues. They are a huge issue for some companies, a big issue for some companies, an issue for some companies, and really not much of an issue at all for other companies. Nonetheless, for most (not all) companies they are not a valid reason for ignoring China entirely.

Really, only a small percentage of companies need to worry much about IP theft in China. It exists, of course, but how much impact does it really have on your business? With very few exceptions, my firm’s China clients have either not been hit with piracy/counterfeiting or are too focused on making money from their own products to worry about it much. It is not nearly as much of an impediment to profits as believed.

Too often companies are so afraid of being copied that they fail to do things they should be doing. I can tell you that far more of my law firm clients have expressed the wish that they had gone into China to manufacture or sell their products sooner than have suffered negative IP consequences from having done so.

And on the flip side, every few months a company will come to one of our China lawyers overly concerned with their China IP protections after having read our blog. Oftentimes, they will believe they are too late and other times they will give us a long list of the IP protections they are convinced they need, usually including one or more of the following:

1. NNN Agreement
2. Product Development Agreement
3. Contract Manufacturing Agreement
4. Trademark Registration
5. Trademark Registration with China Customs
6. Design Patent Registration
7. Copyright Registration
8. And much more

And maybe 10 percent of the time they are coming to us with an astronomical quote from some other law firm for all of the above contracts and IP registrations. But here’s the kicker. Well under 1 percent of the time does a company need all of the above, and even less than that does it need all of the above immediately. Most of the time, in fact, the typical company doing a typical China deal or transaction usually needs less than half of these. And guess what? Probably 25 percent of the time none of the above makes sense for the company either because none of these things will be effective or because the company is too early (or worse, too late) or because the company would simply be better off spending its money elsewhere, at least in the short term.

So the point of this winding post is simply this: there is no one size fits all when it comes to best practices for protecting your IP from China and you should not let scare tactics and big numbers scare you into believing otherwise. Instead, treat China and China IP protection the way you treat the rest of your business and weigh the costs and the benefits of your IP actions accordingly.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.