IP in China: What to know before you go

An economic giant, China is a market that most companies can’t ignore. But when considering expanding to China, many companies worry about intellectual property (IP) protection. Will their product be copied in China?

I interviewed Dr. Sean Zhang of Blake, Cassels & Graydon LLP for insights into the IP landscape in China. If you decide on expanding to China, read my tips below for protecting your IP.

There is no grace period in China

In China, IP laws are essentially the same as those in North America, with a few slight differences. For example, in the US and Canada, technology inventors have a one-year “grace period” within which to apply for patents. This means that they are entitled to patent rights over their technologies as long as they file the patent application within one year of going public (e.g., promoting their technology in a journal or at a conference).

In China, there is no “grace period” policy. Once the technology is made public, the inventor automatically loses the right to patent it. In this way, the Chinese patent system resembles the European model.

Biggest IP infringement cases

So why the reputation for IP infringement? A look at the biggest such cases in China in 2009 covers everything from counterfeit mosquito coils and brand name cosmetics to high-end watches and even medicine (source: State Intellectual Property Office of the People’s Republic of China; for details, see the Google translation). Based on this small sample, it seems that the most commonly counterfeited products are either low-tech, focused on interface design, or targeted for mass consumption. In other words, they’re easy to reproduce, even in a family workshop.

The more targeted these products are at mass consumption, the more they represent easy, quick profits with few hurdles to reach product distribution channels. And given their mass market target, they’re difficult for law enforcement to trace and thus, catch the copiers. Due to these types of counterfeit products, China gained notoriety for lack of IP protection.

Are high-tech products safe from infringement?

In comparison, products targeted at the high-tech industry are seldom copied because they’re more difficult to replicate (since the manufacturing usually involves complicated industrial processes). This isn’t the main reason why industrial products aren’t commonly copied, however. The main reason is connected to the market.

Much more effort is required to get these products into the proper distribution channels to reach industrial users (i.e., a limited base of customers). Marketing industrial products usually takes time and money, which precludes a quick profit. And by exposing well-known customers to fake industrial products, manufacturers risk being caught for IP infringement and sabotaging their own business. Using the technology legally, such as via a licensing agreement, affords a more sustainable, long-term option.

Being familiar with the IP landscape will help Western companies make informed business decisions about whether to pursue the Chinese market. The environment for IP protection has significantly improved in China in the past 10 years and the risks of IP infringement have decreased dramatically. However, as in any market, IP protection strategies are warranted to prevent potential IP loss.

The following IP strategies are commonly used by Western companies to succeed in China:

1. Keep secrets to yourself.

China established its IP system in the 1980s. Ensure that your Chinese employees understand IP protection and how to avoid infringement from competitors. Disclose trade secrets only on a “need-to-know” basis and ask employees to sign a non-disclosure agreement (NDA).

2. Conduct manufacturing in different areas.

Your contracted manufacturers may become your competitors once they learn all the technologies related to a product. Consider using separate manufacturers to produce different parts of a product and/or to assemble it. In this way, no one manufacturer will be able to master or replicate the technology as a whole.

3. Keep the core technology in North America.

To protect the IP of key technologies, some companies manufacture core parts in North America while contracting auxiliary parts to local manufacturers in China.

4. Consider licensing the technology.

Licensing the technology to Chinese companies not only generates immediate revenue for the licensor, but it also supports IP protection as it motivates licensees to guard the IP and avoid losses themselves due to counterfeiting. Licensing out technology also saves Western companies time and money they would otherwise spend penetrating a market with cultural and linguistic barriers.

Technology licensing benefits Chinese companies since they can hire locally to keep costs low and increase the products’ competitive advantage. Increased product sales, in turn, further benefit the licensors who can claim royalty commissions.

More and more European and American companies are licensing out technology rather than trying to conquer Chinese markets themselves―and this approach is offering a new independent business model (e.g., a company can survive by licensing a hundred patents, with just a few employees needed to manage the revenue).

5. Adjust licensing agreements to fit the legal system.

Keep in mind that translating a licensing agreement directly from one language to another won’t work well―particularly as certain clauses may be considered invalid by the Chinese legal system. Consult a local lawyer to ensure the legal framework is effective to protect your IP.

6. Don’t give up―even if your IP has been infringed!

In China, if your IP is infringed, you can sue to gain monetary compensation, and in most lawsuits involving Western companies, the technology owners win. For example, in Zhejiang province in 2010, of the 456 IP cases related to foreign companies, nearly 97% were decided in their favour. (See the Google translation.) Also, compared with the average of 10 years to conclude an IP lawsuit in Canada, cases proceed much faster in China (on average, two to three years―comparable to the “rocket docket” district in Texas).

So, it seems that even if your IP has been infringed in China, it is 97% likely that you will be compensated quickly! Of course, as Dr. Zhang points out, the underlying condition to win any IP case is to first register your IP in China.