Is Your IP China-Ready?

By Kristin Casler, featuring Randall Lewis of ConAgra Foods and Dan Harris of Harris Moure

 

Doing business and protecting your intellectual property in China is about knowing the laws and regulations and the culture and politics. It is also about developing good relationships with good companies. This may surprise attorneys new to the international business game. But of course, this does not mean you can neglect to have valid IP registrations and carefully crafted contracts.

 

“It’s about learning to communicate and really embracing a new way to view the world,” said Randall Lewis, vice president and international counsel for ConAgra Foods.

 

In the 15 years Lewis lived and worked in China, he saw tremendous change. Doing business after 1978, when China first agreed to open to foreign direct investment, was pretty easy. China needed investors. Rapid, massive growth, though, capped by the 2008 Olympics, changed China from a needy country to a powerhouse bent on national pride and protecting its citizens. Today, Lewis said, China can be very hostile toward foreigners and foreign business.

 

“It’s a much more challenging place to do business, to structure a deal, to play in this new world where the Chinese frankly could not care less,” Lewis said.

 

China’s economy is political. The Party is always behind the scenes. Most decisions are vetted through the Party and are not necessarily adjudicated by judges based on the facts. Lewis said many people believe the Chinese are not trustworthy. The reality is that they think differently and abide by a different set of rules, so foreign companies need a different playbook.

 

Start With a Sound Structure

There’s more to protecting your IP than having a good registration and contract, said Dan Harris of Harris Moure. You want the whole panoply of structural protection. Follow rules such as, don’t let employees leave with software or show your trade secrets to anyone who does not need to see them.

 

“This may seem obvious, but American companies handle these things differently,” Harris said. “In China, it’s a lot more likely to get stolen. Big companies in China want to steal your IP. Small companies in China want to steal your IP. Government-owned companies want to steal it. Privately held companies want to steal it. And even that company that is run by someone who invited you to his daughter’s wedding—that company also wants to steal your IP.”

 

Why? Harris said it is a lot easier to do it and get away with it in China.

 

It is critical to structure a deal that leaves your Chinese partner believing it will make more money with you than without you. It’s very important to understand Chinese business and economy and write your contract accordingly, Harris said. “Once a Chinese company decides it doesn’t need you, the odds that it will run wild with your IP go way, way up.”

 

Your chance of losing your IP also greatly increases if the person or company you are partnering with is not legitimate. Choose a good partner, Harris said. Do your due diligence. Make sure the company is a real, registered organization. You need to distrust all information, since pretty much any document can and will be faked—insurance, IP registrations, contracts and on and on. Scrutinize the documents for discrepancies, but Harris said you need to do more than just look at the paper. Look around and ask around; visit the company. In one deal, the people negotiating the sale didn’t even own the company.

 

“How often does this happen? It happens pretty much every time,” Harris said. “We haven’t ever done a deal where we haven’t had to go through at least two sets of books, with one of them being fake.” Delegate your due diligence to the right people, Harris said.

 

Registration

Having a patent or trademark in the United States does not mean that you have them in China. Harris said that if you want to protect them in China, register them in China.

 

He provided a few tips:

 

Trademarks. “The rule is, if you’re going to be selling anything in China or manufacturing anything in China for sale outside of China, you want to register that trademark,” Harris said. Chinese courts consider manufacturing a use of the trademark. If someone besides you registers your trademark and uses it in China, it is very difficult to challenge that. If you are the first to register a trademark in China, it belongs to you. Your factory might register your trademark through an unknown third party, and you won’t know until it is too late.

 

Harris said he has seen imported products held in port by Chinese Customs because they violated someone’s trademark already registered and being used in China.

 

How do you challenge a trademark registration in China? It’s extremely difficult to prevail on a claim of bad faith filing, Harris said. A company’s failure to use a trademark for three years is often a more successful basis for a claim.

 

Licensing agreements. Register your trademark before you license it. Then, you should register the license. Your Chinese partner may promise to do it and then not follow through. You also want to make sure you get paid. It’s very common in a three-year agreement to get paid for the first year and then nothing the next two, Harris cautioned. It’s best to front-load the payments.

 

Patents. The number of design patent filings in China has surged. You can register anything as a design patent. Chinese authorities don’t really examine it. Consequently, Chinese companies register design patents and then use them offensively against American companies.

 

Copyrights. The law on copyrights in China is similar to U.S. law. Technically, you don’t need to register, but Harris said it’s a good idea.

 

Protect with a Solid Contract

In the United States, companies live and die by the contract. But the Chinese view a contract as being merely what you agreed to on a particular day, Lewis said. If you later have a dispute, the Chinese don’t look at the contract, they look at the relationship that has evolved.

 

In fact, older generations of Chinese don’t even bother to read the contract. When ConAgra bought a potato processing facility, the owner did not give a hoot about the contract. He cared only about how much he would be paid and how much would be placed in escrow, Lewis said.

 

That said, you do need a contract. First, for clarity in a land of cultural and language differences, and second for prevention. Just having a well-written contract that intimidates the Chinese company can help you achieve what you want to achieve in China, Harris said.

 

The contract should be in writing—an old-style contract signed and sealed by both parties.

 

Choose one official language. The language should be based on where any dispute will be resolved. You can still translate the document into another language, but a dual-language contract is not a good idea, Harris said, because it makes it more susceptible to dispute.

 

Watch your terminology. Americans put “reasonable” into a contract. This has no meaning in China, Harris said. A contract might say that a T-shirt should be made of reasonable quality. But what is reasonable for a 25-cent T-shirt? If it’s not described in excruciating detail in the contract, it doesn’t exist. Harris cited an executive who rented a fully furnished apartment. He repeatedly asked the landlord to replace a broken desk chair. He even added the demand to his lease renewal. The next day, the landlord provided a $5 folding chair.

 

Consider dispute resolution as you draft the contract. Most companies’ primary goal is protecting their IP in China. But Harris said you won’t protect it in China if your dispute resolution jurisdiction clause states Chicago. The Chinese company won’t show up. So, you’ll get a default judgment. If they do show up, and you win, you get an Illinois state court judgment. In either case, Harris said, you have nothing.

 

“China has not ever nor will it ever enforce a U.S. judgment,” he said. “We get calls from U.S. attorneys all the time who want to enforce a U.S. judgment.” They wonder if they can sue again in a Chinese court. Harris said that Chinese courts won’t hear a case with another jurisdictional provision. Res judicata also prevents a second lawsuit.

 

Have a liquidated damages provision. Chinese courts love this type of contract damages provision, Harris said. Most Chinese judges are not familiar with the business world, and a liquidated damages provision helps them determine damages. You can even seek damages in excess of the provision, if needed.

 

“Chinese courts are very reluctant to grant injunctive relief,” Harris said. “You should not count on it. But, with liquidated damages, you can go to a Chinese court and start freezing a Chinese company’s assets up to the amount of your liquidated damages provision.

 

“Chinese companies know this and they live in fear of it. They are a lot less likely to breach your contract because of this.”

 

Most foreign companies don’t want to use the Chinese court system, yet they want partners to adhere to the contract. Liquidated damages are a key way to achieve that, Harris said.

 

Employee contracts are a very good way to protect your IP in China, Harris said. Employees are starting to care more about them, and Chinese courts are enforcing them. You should almost always have a confidentiality/trade secret provision. Companies should also put in writing who owns the IP that the employee works on. “If you don’t put in that it belongs to you, there’s a pretty good chance that it won’t,” Harris said.

 

Non-compete provisions can be strange in China. If you want to enforce a non-compete, you need to keep paying the employee 30% to 50% of their salary. If you stop, then that employee can compete. Non-solicitation provisions, however, are enforceable, and you typically don’t have to pay, Harris said.

 

Dispute Resolution Provisions

The day after you sign a contract, or perhaps the day before, you should be anticipating what kind of lawsuits you might get involved in, particularly with respect to IP, Harris said. China’s legal system does not have discovery and its courts tend to focus more on equity than law. When drafting a contract, always be cognizant of that, Lewis said.

 

Harris said that his firm recently had a case involving an American company with an incredibly profitable product that had used a China manufacturer without any IP protections. The manufacturer registered the client’s design patent and then sought to require the American only use the manufacturer for its widgets or be pursued for violating the patent. Harris said that there were some difficulties in gathering evidence showing that the client’s product was in the public realm before the China manufacturer filed for the patent, because even though the client had paid for an ad for the product before the patent filing, that ad didn’t run until after the filing.

 

“If our client had started preparing for litigation from day one, it would have had all sorts of documents showing exactly when it made things public, but they had no idea that they would be involved in this lawsuit. That’s the sort of thing you can do to prepare for a lawsuit from the very first day. And doing so means you can move a lot faster.”

 

“Sometimes, it makes more sense to negotiate a dispute resolution privately,” Lewis said. In other instances, an off-shore arbitration provision using a foreign law, in a place such as the Hong Kong or Singapore International Arbitration Centre makes sense.

 

Lewis said a number of large companies arbitrate outside of China, and China is required to enforce formal arbitrations. International arbitrators say 95 percent of awards are enforced in China, but the reality is that Chinese courts will sometimes quash cases they don’t like. They just let them sit for multiple years, and the cases just go away.

 

Harris said China does have good arbitrating bodies. But it is important to get certain details right when drafting an arbitration clause. If you want the hearing to be in English, put it in the contract. Do you want a non-Chinese arbitrator? Or two or three of them? Put it in the contract. He often uses a highly respected law professor to be a fair and influential chair in the arbitration. Companies should also think about third parties, discovery and how service and notice will be given.

 

“The Chinese system is not better or worse, but different,” Lewis said. “If you think it’s the same, you’re just going to make mistakes.”

 

This article is a based on a LexisNexis^® webinar, Is Your IP China-Ready? available on demand.