#1. Trade Secret Theft

• Company insiders and other parties including employees and trading partners who have access to confidential business data and trade secrets pose a threat of economic espionage of a company due to illegal acquisition of the intellectual property and technologies of a company.
• According to a report by the Department of Defense’s Defense Innovation Unit Experimental, law enforcement against trade secret misappropriation is hard to fight, partly because companies may be unaware of the theft and partly because some companies may not be ready to report such incidences because of fear of advance consequences that could follow.
• Besides, for a foreign company to be able to effectively litigate IP cases in China, there is a need for the IP owner to provide concrete evidence. The burden of proof solely lies in the hands of the plaintiff making it impossible for companies to successfully litigate IP cases in the country.

Overcoming the Challenge

• A company needs to track all sensitive data flows as well as employee file transfers including both paper and electronic transfers.
• Additionally, it is also imperative for a company to establish proper IT infrastructure that limits employees access to sensitive information such as through the use of specialized passwords or unique computer terminals.
• A company should also ensure it develops and implements policies that monitor and control how employees handle sensitive information.

#2. Online Piracy and Counterfeiting

•  Online piracy is a common practice that faces most foreign companies that become successful in China. It involves cyber-enabled espionage that seeks to infiltrate companies with the primary purpose of stealing IP and technologies.
• Additionally, counterfeiting is also rampant in China whereby local companies produce unauthorized fake products that are a replica of the copyrighted products.
• While in recent years China has enacted laws against counterfeiting, some unscrupulous businessmen have found a way around that through reverse engineering.
• This entails, the process of disassembling the products and analyzing it to manufacture something similar without obtaining authorization from the IP holder.

Overcoming the Challenge

• The challenge of counterfeiting of products can be addressed through compartmentalizing all critical steps that are involved in the "design and production processes for IP-intensive products", as well as the equipment used in the production process. This helps in limiting the access of a single employee to the entire information used in the production.
• A company should also seek to use process techniques and technologies that are hard to copy such as unique labels, chemicals, stamps, and papers.
• Foreign companies should also send their representatives regularly to trade fairs and shows to look for counterfeits.

#3. Adverse IP Transfer Requirements

• China has an industrial policy that seeks to force foreign companies to transfer IP assets and technologies to Chinese companies in exchange for access to the local Chinese market.
• This is mainly achieved through coercive joint ventures and partnerships between foreign companies and Chinese companies as well as through adverse licensing procedures and administrative approvals.
• While JVs and partnerships force foreign companies to share their IP assets with foreign companies, adverse administrative approvals and licensing procedures may force companies to disclose their technologies and IP information to get approved.

Overcoming the Challenge

• A foreign company needs to conduct an assessment of any business risk versus the benefits obtained in transferring its IP to China.
• It is also critical for a foreign company to negotiate any clause in the IP transfer of licensing contracts as it seeks to advance its interests in royalty rates as well as ownership of improvements.
• Therefore, for a company to fully leverage these factors, it should understand the IP infrastructure of China and how the legal framework impacts IP ownership over improvement.
• Besides, a foreign company should ensure that it has duly registered its technology licensing contracts before entering into any JVs or partnerships.

#4. Research and Development Localization Requirements

• China usually compels foreign companies involved in R&D activities to localize their data. They force companies to store business data and information in servers located within China.
• China's data localization policies has a very broad definition that includes the clause “critical information infrastructure.” that seeks to broaden the scope that the government can regulate local data.
• The clause gives room for unrestricted data access by the Chinese government that could result in misappropriation of IP.

Overcoming this Challenge

• Foreign companies involved in R&D activities in China should evaluate the business risks posed by localizing their data in China. Therefore, a company should analyze and determine the business information that supports its business in China and localize it while maintaining critical designs and technologies overseas where it is more secure.

#5. In Bad-faith Trademark Registrations

• Foreign companies seeking to establish a presence in China are usually discouraged by in bad-faith trademark registration that entails the registration of trademarks that identical or similar to a company's trademark to gain profit from unauthorized IP assets.

Overcoming the Challenge

• A foreign company should conduct comprehensive due diligence on all suppliers and distributors before entering into any business agreements. It is also critical to investigate how these partnering companies perceive IP assets, "including IP they access through business partnerships and their own IP".
• Companies are also advised to work with local IP enforcement bodies in taking legal action against in bad-faith trademark registration. However, the foreign company should ensure that its trademark has been registered before commencing business.
• It is worthwhile to send cease and desist letters to infringers because it is cost-effective especially for "briefcase" infringers.

Having to Reveal Secrets to JV Partners

• Because outside companies have to partner with local companies, many secrets and other intellectual property have to be exchanged in order to do business.
• There have been reports of companies stealing valuable commercial information and then forcing the foreign partner out of the joint venture in order to make a similar product and compete with their previous partner.
• This can be solved by finding a trustworthy partner.
• Companies can find the right partner by conducting thorough due diligence through taking certain steps such as verifying the partner's business license and operational status, checking financial reports, and checking the partner's land use rights. The last point is important in order not to force intrusion by the Chinese government, as illegal land acquisition is a common problem in China.
• Also, making the official version of the contract in the joint venture in Chinese provides a better chance for IP issues to be solved by Chinese arbitrators and courts.

Government Intrusions

• When a product from a joint venture is making it to market, Chinese government authorities will sometimes demand information into what the foreign company intends to sell.
• The government not only asks for product information in joint ventures, but they may ask for extra documents and clarifications or changes if they see something they do not like.
• Many foreign governments have accused China of implementing bureaucratic restrictions and methods in order for them to do overly intrusive inspections.
• Some Chinese laws and regulations compel the revealing of intellectual property. One example of this is a law that requires that a specific temperature at which a manufacturing process operates must be disclosed, whereas in the US regulations only ask for a range of temperatures.
• The way companies can fight back against this problem is to work with IP service providers and industry associations, plus contacting infringers through cease-and-desist letters. Companies will have to actively monitor for instances of infringement by Chinese companies and even by the government itself.
• A high-profile case of this problem and possible solutions involved Kawasaki Heavy Industries Ltd., which set up a joint venture with local manufacturers in 2004. However, they received reports in 2011 that China was filing for international patents on high-speed trains, which forced Kawasaki to issue a warning letter to the nation not to sell this technology overseas.

Technology Transfer

• A major disadvantage in Chinese joint ventures is the risks associated with technology transfer and IP management.
• Technology transfer is often where the foreign company's IP is most exposed.
• Before China joined the WTO, technology transfers were an explicit requirement for companies to enter into China. To get around this, companies would bring outdated technology such as old-line sewing machines that were about to be phased out.
• However, as China continues to require technology transfers in their JVs which some argue is against WTO rules, companies continue to bring older technology to the JV. These technologies are commonplace in developed countries but are competitive in a country like China. Some of these technologies include certain motor engines, bacteria streams for fermentation, and vaccine-producing technology.
• To solve this, the manufacturing process has to be designed and compartmentalized in a way to protect IP. A best practice is to only bring technology that is basic enough to support the business in the country.
• Another best practice is for the foreign company to retain ownership over improvements to the technology and the company should have a right to reclaim the technology once the JV contract is terminated. Non-compete clauses should be signed with all employees who come in contact with the technology.

Using Local Law Firms Specialized in IP

•  Lauterbach Development Solutions was founded in Munich and moved to China in 2005, where it operates a manufacturing plant in Suzhou. The company is the largest manufacturer of microprocessor development tools in the world. To protect its intellectual property rights, the company used a local law firm specialized in China intellectual property to inform and assist in the registration process.
• The firm advised and assisted the company to register its name, logo, and the copyright for its hardware and software in the right classes to keep away any copycats and infringers.
• A few years after the company started operating in China, it realized that another company was copying and selling its product on the Chinese market. The infringer also used an identical website. Lauterbach used a top-class lawyer from Beijing to send a cease and desist letter, which made the culprit withdraw from using the website domain name for a short while, but then started using it again.
• Lauterbach Development Solutions contracted the services of a local law firm that specialized in China intellectual property, which register all intellectual property owned by the company, including its name, logo, and the copyright for its hardware and software in the right classes This led to a stop of the infringement.
• The company's revenue increased by 20-25% as a result and it got rid of 95% of the counterfeit products, and now makes a profit.

Registering Trademarks in Chinese Characters

• Some companies that moved their development activities or production to China have registered their trademark names in Chinese characters to protect their IP rights.
• China only accepts trademarks registered in its jurisdiction and subscribes to the first-to-file system. It is important for companies that are well-known and have plans to move into and operate in China to register their trademarks in Chinese characters first before anyone else does.
• Trademarks in Roman characters cannot completely protect a company against infringement. This is because another company can register the same trademark in Chinese characters and steal customers.
• A Chinese trademark can be chosen by creating a literal translation, a phonetic translation, or a combination of the two. For example, Apple Computers trademarked ‘Ping Guo’ which means apple in Chinese, while Audi trademarked a phonetic translation known as ‘Ao Di.’
• Coca Cola, which has established 45 production factories in China, uses the Chinese word ‘delicious happiness’, which is effective in giving the company a good brand reputation, even though it is not a direct transliteration. Coca Cola initially chose Ke Dou Ken La as its Chinese name, but this did not work as the name translated to ‘bite a wax tadpole.’

•  Toyota also registered its trademark in Chinese which translates to ‘thriving.’
• Caution should be taken when registering a trademark in Chinese as it may be counterproductive if not done right. For example, Mercedes-Benz had a problem when it entered the Chinese market as people translated its name ‘Bensi’ as ‘rush to die.’

Research Strategy

1. China Suppliers

• China Suppliers is a Chinese online trading company, which began in 2006. It aims to promote international trade and host a variety of packaging companies such as Shandong Qihang Packaging, Xuzhou Hanhua Glass Products, and Guangzhou Winly Packaging Products.

• While IP rights protection remains a challenge in China, China Suppliers promotes and respects IP rights of others and have set guidelines to followed.

• China Suppliers performs daily review of listings and promptly removes all vendors who offer products that infringe on other’s IP rights.

• Companies not following these guidelines can have their accounts terminated and will no longer be able to sell on China Suppliers.

• The process of settling disputes over listings that infringe IP rights commences with the victim contacting the customer services team.

• Then the analyst evaluates the complaint, and if appropriate, the listed commodity will be removed from the listings.

• The company suspected of the breach of IP rights will be informed about the removal of the product from the listings.

• The suspected vendor can submit a counter-notice to dispute the claim, which may result in the product being listed again on China Suppliers.

• In addition, the company which claims their IP rights have been violated, can further take the matter to an appropriate court of law to resolve the matter.

• We were not able to find which companies exactly were removed based on IP rights, as it is private and confidential information of China Suppliers.

2. Alibaba Group

• Alibaba Group is an e-commerce retail company that promotes international trade between vendors and buyers of various sectors. It hosts packaging companies such as Shenzhen Changfeng Plastic Packing Products and Guangzhou Teamwell Packing.

• Alibaba Group protects IP rights by using various strategies. These are product take downs; use of monitoring technology; collaborations with law enforcement and stakeholders; aiming for high consumer satisfaction and seeking the best and fair commercial practices.

• Alibaba Group together with IP stakeholders aim to promote IP rights protection every year.

• In 2018, Alibaba removed 96% of suspicious listings using real-time scanning technology. This process of removing listings led to a decline in take down requests by 32%.

• Still in 2018, the number of suspicious listings removed in response to consumer goods dropped by 70%, which also improved consumer satisfaction.

• Vendors who sell counterfeit goods are subject to platform penalties. Penalties are enforced depending on the number of violations. They include restrictions on sales and account terminations for repeated IP rights violations.

• The take downs of suspected commodities, was the result of technology improvements and collaborations with the government and industry associations.

• The Alibaba Anti-Counterfeiting Alliance (AACA) membership increased from 30 to 121 rights holders globally, which shows the recognition and importance of IP rights protection.

• Alibaba Group has provided vital information on IP rights infringement to the local police in 31 provinces. The company reported 1,634 cases of IP infringement to the police, which resulted in 1,953 arrests, and closure of 1,542 facilities.

Research Methodology

Sword Net

• On April 26, 2019, President Xi Jinping gave a speech detailing China's intentions to strengthen IP protection in the country for all countries that do business there.
• The next day, four government agencies — China's National Intellectual Property Administration, the Cyberspace Administration of China, China's Ministry of Industry and Information Technology, and China's Ministry of Public Security — oversaw the launch of a "Strike Hard" program called Sword Net that ran from April to October.
• This program focused on three areas that affect copyright in China's internet and social media: media outlet news story plagiarism, making and distributing pirated videos, and illegally selling photos from online picture agencies.
• A similar program was conducted in the previous year which aimed to enforce copyright protections on short videos, books and other printed works, music, cloud storage, animation, and others.

Opening of Specialized IP Courts

• Starting in 2014, China has opened specialized IP courts and tribunals in Beijing, Shanghai, and Guangzhou.
• In 2015, 109,386 civil IP cases were accepted, which was an increase of about 6% over the previous year.
• Foreign plaintiffs suing Chinese companies have won about 81% of their patent cases, which is about the same rate as domestic plaintiffs.
• Since this launch, these courts have become a preferred arbitrator for patent litigation between non-Chinese companies.
• In 2017, specialized IP tribunals opened across China.

New Foreign Investment Law

• A law that was passed in March 2019 and which took effect in January 2020 was made to ensure foreign businesses could operate more easily in the country.
• One draft rule for implementing this law is the requirement of the removal of trade secrets when official documents are exchanged internally.
• The three areas this new foreign investment law was made to improve are intellectual property protection, forced technology transfer protection, and making local players equal to overseas ones.

New Guidelines in Trade Talks

• Even though these plans are not yet concrete, China unveiled new guidelines for IP protections during the trade talks with the United States.
• In these new guidelines, China is to study how necessary and feasible it is to draw up a basic law for IP protections. Penalties for stealing IP will also be increased.

Reforms to the State Intellectual Property Office

• Realizing that better management of patents, designs, trademark, etc., has resulted in improved management of intellectual property, China has been reforming its State Intellectual Property Office (SIPO).
• On August 29, 2018, this office was renamed to the China National Intellectual Property Administration (CNIPA). This change put into motion a series of improvements to measures and policies regarding IP protection.
• The charging of some fees, including patent registration fee, publication printing fee, and fee for biographical data change, has been suspended or adjusted for some Chinese patent applications. Other changes include lessening the frequency of renewal fees for some patent holders and refunding of fees in some cases.
• Another change is the shortening of the examination period for patents and the addition of IP protection centers for the rapid approval of applications and more effective enforcement.
• These changes were made to make it easier for patents to be filed by anyone in China which in turn makes IP protection easier.