Five Tips for Protecting Your IP from China

I was recently interviewed by Tyler LeMasters on The Far East Podcast on IP protection in China. We had a great chat and I encourage you to listen to it and check out some of the other content produced by this DC-based Spokanite.

My conversation with Tyler gave me a chance to share my Five Favorite IP Tips for China (and for pretty much all other countries as well). Actually time constraints limited me to only four of these on the podcast, but I’ve added the fifth one below.

1. Register Your IP—in China

This could well be the Carthago delenda est of the China Law Blog—and for good reason. First, if your trademarks and patents are not registered in China (it’s a bit different with copyrights), there may be very little, if anything, you (or we) can do to protect them against counterfeiting or other infringement. This is because trademarks and patents not registered in China are not protected under Chinese law, except in the case of a “well-known” trademark, which you almost certainly do not have.

There are other risks as well. As we put it last year in China Trademark Theft. It’s Baaaaaack in a Big Way:

There are actually a number of people in China who make a living (and a good one at that) by usurping foreign trademarks and then selling a license to that trademark to the original, foreign, license holder. Once one comes to grip with the fact that China, like most of the rest of the world is a “first to file” country, one can understand how easy this usurpation is, and also, how easy it is to prevent it.

A few years ago I represented a European company that ended up having to pay more than $200,000 to buy its “own” trademark so as not to miss out on the Chinese market entirely. But even if you don’t plan to sell your products in China, failing to register your IP can create major problems., as we explained:

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China. That’s right, they can stop your goods from leaving because they own the trademark, not you.

Given that the costs associated with registering trademarks and other IP in China are modest, failing to do so could well be one of the worst possible business decisions your company could make.

Oh, and don’t forget to record your IP with Customs once you register it. This is essentially your way of letting Customs know that you are facing a counterfeiting problem and asking them to keep an eye out for fakes.

2. Engage with local law enforcement

There are two aspects to working with local law enforcement. First, you should give law enforcement a helping hand by conducting your own investigations and providing them with actionable intelligence. Second, if law enforcement requests assistance, provide it.

This second point might seem an obvious one but supporting IP enforcement activity can become onerous for a company, especially if it doesn’t have dedicated brand protection staff. If the quantity of goods seized during a raid is low, it may not seem worthwhile to pursue the matter. However, if you don’t help local law enforcement officers close their cases, they will conclude that you and your brand are not worth the trouble and they will be a lot less likely to help you the next time around.

3. Sue the Infringer/Counterfeiter 

Having worked on more than my fair share of IP litigation matters in Chinese courts, I can confirm that those can be an extremely frustrating experience. In my interview with Tyler, I talked about what should have been a slam-dunk case where the judge refused to award damages out of concern for the financial situation of the pregnant defendant. This reflects the fact that in reaching their decisions, Chinese judges often consider the “legal effect, social effect and political effect.”  In this particular case, though it would have made legal sense to compel the defendant to return some of the money she had earned from . selling counterfeits, the Chinese judge decided that favoring a U.S. based multinational over a pregnant local resident would not be a good social and political look.

Thankfully, cases such as this tend to be the exception not the norm and I have handled many cases in which Chinese courts handed down decisions in favor of my foreign clients, imposing considerable damage awards. I also have had many cases where the threat of an IP lawsuit has led the Chinese counter-party to pay money in settlement to my foreign clients.  Admittedly though, China damage awards and settlements seem low to foreign companies, even when they understood the amounts are a big deal for the average Chinese citizen.

Your willingness to go to court in China is nonetheless important to show that you mean business, not just to would-be counterfeiters, but also to law enforcement. When I worked in China, I did a lot of anti-counterfeiting work for Premier League teams and after a successful warehouse or shop raid, we would usually find jerseys and other gear for teams other than our clients. Most of the time, the police would leave that other stuff behind—they knew which teams would play ball (pun intended) and which wouldn’t. Pursuing counterfeiters also sends a powerful message to your customers, showing them that you truly believe your products are valuable.

4. Protect your house

What this means is that you should do all you can to identify and thwart internal threats from within your own organization and from your own suppliers and distributers. As I mentioned in How to Move Your Manufacturing from China AND Protect Your IP:

[I]n the face of a reduced ability to rely on the legal system for protection, savvy businesses need to do all they can to protect themselves—and protection starts at home. Through preventive efforts at their manufacturing facilities, businesses can go a long way towards minimizing IP and related risks. What sort of prevention are we talking about? Obviously, you want to guard against unauthorized (i.e., third shift) production by your suppliers. You will also want to prevent sensitive prototypes from being photographed or extracted, as well as digital files with design specs from being leaked. You will also want to exercise strict controls over any materials that could help criminals improve the quality of their counterfeits, such as genuine accessories.

Clear, comprehensive guidelines are a cornerstone of product security in China and everywhere else. If you have experienced professionals on your payroll, they can draft those guidelines, but you should not wing it…

Having established guidelines, the next step is to ensure staff actually comply with them. Though some factories do a pretty job monitoring themselves, most don’t. This is why you need specialized compliance audits, by professionals who understand the underlying risks…

And oftentimes most importantly, your contractual framework with your supplier must include product-security considerations, such as your right to audit facilities and provide remedies for IP-related breaches. You almost certainly will also need country-specific NNN Agreements and Manufacturing Contracts for each new country in which you are having your products made. See China NNN ≠ Foreign NDA and Overseas Manufacturing Contracts (OEM, CM and ODM). You may also need a Product Development Agreement, a Product Ownership Agreement, and a contract protecting your molds and tooling. With all the tariffs and duties coming (and even occasionally going), it also makes sense to have your manufacturing contract delineate who will ultimately be responsible for paying what.

5. Educate the consumer

The final tip is the one companies typically find to be the most gratifying. Tell your story to your customers. Tell them why they should be getting the genuine article and not some cheap knockoff. Be creative in this regard. Take some of those seized samples you get from your raids and put them on display at your store. Let customers see, touch, and smell the low-grade pirated crap that’s out there. If you’re selling makeup, show them a video of the clandestine labs where they make counterfeit lipstick and mascara—and contrast it with your own, clean facilities. Talk about the risks.

One of our China lawyers loves to tell the following story, which graphically illustrates why buying the real thing matters:

This lawyer was in Shanghai and his favorite uncle was also in Shanghai and he met his uncle and a couple of his friends at a restaurant there. One of the friends talked about having bought a set of “Ping” golf clubs for only $350. The lawyer told this person that there was no way the clubs were real Pings. The friend responded by saying that “even if they are not, I still got a fine set of clubs for only $350.” Two weeks later the uncle called our lawyer to tell him that he’d been golfing with his friend and on the second hole, the friend hit a ball off the tee using his fake Ping driver and the driver head flew off in his backswing and just missed hitting someone in the head who was walking behind the tee at the time. The friend right then and there walked to the clubhouse, tossed his entire set of fake Pings in the garbage and bought a real set of Pings right then and there. 

It also usually makes sense for you to provide information to allow the public to identify fakes through the use of security features and/or by pointing out common flaws found on counterfeits.

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.