Intellectual Property Concerns

Part
01
of five
Part
01

IP Challenges: Businesses in China

Some key IP challenges faced by companies that move their development activities to China include trade secret theft, online piracy and counterfeiting, adverse IP transfer requirements, in bad-faith trademark registration, and R&D localization requirement

#1. Trade Secret Theft

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

Overcoming the Challenge


Part
02
of five
Part
02

IP Challenges: Open Innovation in China

Beijing mandates that all foreign companies in certain sectors such as energy, telecommunications, and the automotive industry must form joint ventures (JVs) with local partners. Because of this rule and others, along with China's history of lax IP enforcement, US companies have been very wary of starting open innovation programs in the country. Some of these issues are discussed below.

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.


Part
03
of five
Part
03

Case Studies: IP Rights Protection in China (Part 1)

Companies that moved their development activities and production to China have adopted various ways to protect their intellectual property (IP) rights. This includes the use of local law firms with expertise in intellectual property in China to inform and assist in the application process, as adopted by Lauterbach Development Solutions. Companies also protected their IP rights by registering trademark names in Chinese characters, as done by companies such as Coca Cola and Toyota.

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

We located two case studies of what companies are doing to protect their IP rights in China. However, there was insufficient information on case studies from the packaging and labeling industry.


Part
04
of five
Part
04

Case Studies: IP Rights Protection in China (Part 2)

Many Chinese companies sell their goods through an online platform. The online platform, as the host has the responsibility to ensure that IP rights are upheld and appropriate measures are taken. Therefore, information relating to IP rights protection for individual companies takes us to the e-commerce platform. In addition, many Chinese companies do not have their own website but rely solely on the e-commerce platform. Two of such companies that are engaged in the protection of IP rights for various industries (including packaging and labeling) are China Suppliers and Alibaba Group. China Suppliers protect IP rights by removing listed commodities and terminating seller accounts. Alibaba Group on the other hand, uses various strategies to protect IP rights, which are discussed below.

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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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

In order to determine companies that are engaged in IP rights protection we investigated through China Statistical Yearbook, Business Insider Reports, academic journals (Journal of Chinese Economic and Business Studies), China Business Review, and Thomson Reuter’s Data Stream. We considered all major industries (cosmetics, electronics, stationery, textiles, raw materials, wine, machinery, vehicles, and agriculture) and gave special attention to the packaging and labeling industry as requested. We found that many Chinese companies from these industries do not have individual websites but rather rely on the e-commerce platform to be their host. The e-commerce company who they relied upon to enforce IP rights, hosted the company details. An alternative strategy used the e-commerce store to redirect us to the individual companies to no avail. There was no website linking such companies. The two prominent online retailers were China Suppliers and Alibaba Group who use different strategies to enforce IP rights. For these reasons, we used them in this study.

Part
05
of five
Part
05

IP Rights Challenges in China: Government Actions

The Office of the US Trade Representative in a 2018 investigation concluded that Chinese intellectual property (IP) theft costs the US between $225 billion and $600 billion annually. China's IP problems have been a major concern made by President Trump during the trade talks between the US and China. Even though China has rejected some suggestions made by the US to confront this problem, they have been very active in reforming IP protections recently. These are some actions the Chinese government has taken to strengthen IP rights protections for businesses.

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

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

Reforms to the State Intellectual Property Office

Sources
Sources

From Part 03
Quotes
  • "Coca Cola didn’t get it right the first time though – initially, it used the name Ke Dou Ken La, which translated into something along the lines of ‘bite a wax tadpole’ (蝌蚪啃蜡)."
From Part 04
Quotes
  • "Voluntary daily review and removal by China Suppliers of listings that appear to offer infringing items."
  • "Prompt removal of such listings where an appropriate intellectual property infringement claim is filed by intellectual property rights owners against the user of China Suppliers' service who submitted such listings."
  • "Written notification to users submitting infringing listings that the items are prohibited on the China Suppliers website and are thereby removed. "
Quotes
  • "If you have a good faith belief that a listing on China Suppliers infringes your copyright, trademark, patent or other intellectual property rights, please contact our Customer services team: kitty@mail.china.cn"
  • "Upon receipt of your contact, we will promptly evaluate your complaint, and in cases where it is appropriate, we will expeditiously take down the listing referred to in the communication."
  • "We will notify the advertiser in writing of the removal of the claimed infringing listing and provide the advertiser with your contact information so that the advertiser can contact you directly and with an opportunity to respond."
Quotes
  • "Alibaba proactively removes many times more listings annually than those flagged by rights holders."
  • "Through the use of real-time scanning technology, 96% of the listings proactively removed by Alibabain 2018 were eliminated before a single sale took place."
  • "Alibaba’s proactive efforts to identify and remove potentially problematic listings in 2018 contributed to a 32% decline, compared to 2017, in the number of notice and takedown requests submitted by rights holders"
Quotes
  • "Intellectual property registration and protection can be complex, especially in overseas markets."
  • "We recommend you seek advice from an IP professional regarding your specific circumstances."
  • "While China remains a challenging market, IP protection has been improving."
Quotes
  • "Unfair use of trademark rights, copyrights or other rights in product descriptions, store names or hyperlinks"
  • "Publishing product descriptions or other information that may cause confusion, misrepresentation, or other circumstances. And"
  • "Without the authorization of the copyright owner, reproduce his/ her work for offering for sale or sale, including printed materials, audio and visual recordings or software etc.; or"
Quotes
  • "Journal of Chinese Economic and Business Studies is a peer-reviewed journal aiming to publish current and relevant findings from cutting edge research in Chinese economic, business and related issues. "
  • "All research articles in this journal have undergone editorial screening and double-blind peer review."
  • "The journal specialises in both theoretical and empirical research on the Chinese economy, business and related issues including economic theories and policies for transition economies, economic reforms in the agricultural sector, state-owned enterprises, financial and fiscal systems and management styles, R&D and technology, marketing, human resources, business strategy, business culture and ethics, foreign trade and direct investment, similar issues for Hong Kong and Taiwan, and their relevance to other parts of the world."
Quotes
  • "There is a widespread misconception that 2020 is the year in which some kind of master switch will be flipped, and the SCS will suddenly come to life. "
Quotes
  • "Why choose Datastream?"
  • "The foundations for building your own macroeconomic analysis, creating market scenarios, and testing investment strategies should be deep and rock-solid."
  • "Welcome to Datastream, our historical financial database with over 35 million individual instruments or indicators across all major asset classes, including 8.5 million active economic indicators."
Quotes
  • "2018 Statistical Monitoring Report on the Implementation of China National Program for Child Development (2011–2020)"
  • "Purchasing Managers Index for December 2019"
  • "Market Prices of Important Means of Production in Circulation, December 11-20, 2019"