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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
- 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.