Protecting intellectual property in the booming Chinese market
October 2010
by Dr. Ralph Nack, attorney at Noerr LLP, Munich, Germany
China holds bright prospects for mechanical and systems engineering. At the same time, however, product piracy can be troublesome in the People’s Republic. In actual fact, German industry itself makes a significant contribution to the problem by neither undertaking adequate legal preparation nor implementing appropriate organizational precautions. Companies operating on an international scale would do well to take a proactive approach to the customs and rules prevailing in Chinese business.
There are additional challenges hidden behind the frequently discussed topic of piracy. Chinese companies submit massive numbers of applications for intellectual property protection and these can exert pressure on foreign competitors. At the same time, cash-rich Chinese companies use their financial resources to acquire majority holdings in German technology companies and thus gain access to key technologies. Many companies outside China continue to view the country simply as a low-cost production location and do not develop strategies for dealing with local challenges. Many potential problems can be averted by developing a forward-looking, multidimensional intellectual property protection strategy. Such a strategy should include legal, technical, organizational and political aspects.
The cardinal rule: register your rights
The simplest rule for protecting intellectual property is at the same time the one most frequently disregarded: Legal protection is possible in China only if patents, designs and trademarks are registered consistently and comprehensively. If intellectual property protection has not been granted in China, then imitating technology and trademarks is entirely legal. The distributors’ and buyers’ structures often make it impossible to enforce one’s legal rights and defend against such imports. In contrast to prevailing opinion, enforcing intellectual property rights in China can be done both effectively and economically.
The most important rule here is to file suit at a renowned and reliable court and not in a provincial court or even in the town where the company being sued is headquartered. The quality of the courts in China varies about as widely as is the case for courts in Europe. In Europe no one would ever consider filing suit in an important patent violation issue somewhere in the boondocks. Often sorely underestimated are the powers vested in public authorities to discipline companies that infringe upon trademark or design rights. That’s something quite peculiar to Chinese law. Actions such as these are comparable with those undertaken by the German customs authorities at trade fairs and at the borders to foil violators. In such cases the Chinese authorities act quickly, cost-effectively and without a lot of red tape.
Effective protection is possible
As is true all over the world, foremost among the technical aspects in a defense strategy is physically protecting the plant against industrial spying. The basic requirements are no different in China than in other countries. Access control and graduated access entitlements should be a simple matter of course. Highly sensitive data should be stored only in secure networks. The prime objective in regard to operational organization is to make industrial spying difficult. Plant tours for third parties should be well planned and organized in order to thwart objectionable activities. And the following ought to be considered in regard to one’s own Chinese employees. Constant personnel turnover will automatically result in knowledge leaking out of the company. This can be avoided by implementing employee loyalty programs. These might include company-provided housing, health care or performance bonuses.
In contrast to customs in Germany, in China it is important to establish and maintain good relationships to political functionaries and government authorities. Particularly in situations where time is critical, the quality of such relationships can be decisive for the success of activities to enforce one’s rights. With a view toward the industrial property rights held by Chinese companies, it is urgently recommended that the patent register be used to systematically monitor filings by Chinese competitors. If these efforts identify applications that are a potential threat to your own firm, then legal countermeasures should be examined without delay.
As in Germany, it is difficult in China, or even impossible, to defend against a charge of violation by filing an objection that the particular property right itself is invalid. The considerable interest expressed by Chinese investors in German mechanical and systems engineering companies is quite opportune for many German firms since this is a source of acutely needed capital. In order to ensure sustained and uninterrupted corporate development it is possible, for instance, to transfer intellectual property rights to a third company. Those rights are then licensed back to the takeover candidate in order not to relinquish control of the technology.
In some instances the legal means and approaches differ significantly from those known in Germany and Europe. Guests in China will have to adapt in a classical instance of, “When in Rome, do as the Romans do”. Following this time-tested maxim makes it possible to achieve effective protection of intellectual property in China.
Author:
Dr. Ralph Nack, counselor-at-law, expert on legal questions associated with intellectual property, Noerr LLP, Munich
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