Best Practices: Intellectual Property Protection in China
May 2007
Few executives in China would be shocked to stumble across a knock-off version of their product in China or abroad. This sobering reality is, however, tempered by some good news: Companies can take steps to prevent intellectual property (IP) theft in China and, increasingly, can pressure the PRC government to enforce the rules of China's burgeoning IP rights regime.
Over the past 20 years, China has created IP laws that generally adhere to international standards. Weaker implementing regulations and judicial interpretations, procedural barriers, and poor enforcement, however, continue to frustrate the efforts of companies to protect their IP in China.
Two decades in the trenches have equipped multinational corporations and their IP protection providers with hard-won experience and a set of strong preventive best practices. At the same time, counterfeiters and infringers in China are more sophisticated and increasingly deploy advanced reverse-engineering techniques, adopt legal measures such as preemptive filing and patent challenges, and find new ways to infiltrate legitimate distribution networks and developed markets.
While the old saying "an ounce of prevention is worth a pound of cure" still rings true, much more than an ounce of prevention is necessary today. Even the best internal IP protection systems face challenges from counterfeiters. Any successful China IP protection strategy needs to encompass both offensive and defensive elements.
Craft a Corporate IP Protection Strategy
- Companies should make IP protection a core responsibility of the entire China management team, not merely a function of the legal counsel's office.
- The level of "IP consciousness" among Chinese citizens and employees remains quite low. Companies need to play a strong educational role in communicating the value of protecting IP to all employees, business partners, and customers. Especially vital is instilling a sense of "ownership" of company IP in staff.
- Companies should also conduct an "IP audit" of internal controls, combined with an "IP survey" of external problems and issues.
Go on the Defense...
- Employ legal measures
If a company does not file its copyrights, patents, and trademarks in China, it has no rights in China. Companies should register their works in China as early as possible.
- Copyrights: Though registration is not required, entities should consider registering their works with the National Copyright Administration (NCA), since registration provides a public record and serves as useful evidence in court.
- Patents: Companies should file applications for both their core and fringe technologies and make certain their patents are properly translated.
- Trademarks: Companies should register their brands' English and Chinese names, carefully select the product categories and sub-categories in which to file, and check sub-categories for similar trademarks filed by competitors and infringers.
- Trade secrets: A trade secret in China must be technical or operational information that is unknown to the public, economically beneficial to the owner, and reasonably protected by the owner. China also requires that the secret have "practical applicability." Trade secrets are often difficult to enforce because of the high burden of proof placed on plaintiffs.
- Control the production process
Companies should
- Compartmentalize the production process and design products--and the equipment that produces them--so that they are difficult to copy;
- Keep vital designs or latest-generation technologies in their home countries;
- Classify information according to IP sensitivity, laying out which employees have what level of access to the information;
- Consider incorporating into the production process technologies and techniques that are difficult to copy, such as chemicals, foils, inks, labels, papers, and threads;
- Establish an internal fraud hotline.
- Focus on human resources
Companies should
- Run background checks on key hires and include non-compete and non-disclosure agreements in contracts;
- Share IP information with their employees on a "need-to-know" basis;
- Educate employees about the firm's confidentiality requirements;
- Track data flows and file transfers and closely monitor the entry and exit of flash disks, portable hard drives, and laptops.
- Carefully select suppliers and distributors
Companies should
- Conduct comprehensive due diligence on suppliers and distributors;
- Select partners with brand images and reputations of their own to protect;
- Include IP protection clauses in all contracts and agreements;
- Manage supplier, vendor, and distributor relationships through multiple personnel to prevent local staff from cultivating personal networks.
...And the Offense
- Civil actions
- The civil suit is a relatively inexpensive method of halting patent, trademark, and copyright infringement.
- Civil suits are often used in cases of "look-alike" infringement or in complex cases when administrative authorities are unable to make a determination of infringement.
- Companies bear the responsibility of collecting evidence and packaging cases.
- Litigation can take up to two years, and infringers can halt a civil suit for patent infringement by filing an administrative challenge to the patent with the State Intellectual Property Office.
- Administrative actions
- Companies may ask administrative agencies to undertake investigations and impose penalties, but companies often do significant preparatory work before submitting requests to authorities.
- Administrative actions--particularly raids by the local administrations of industry and commerce--are easier and faster than civil or criminal suits.
- Administrative actions are often used in cases of clear infringement or pure counterfeiting.
- Administrative bodies cannot jail offenders.
- Criminal prosecutions
- Cases of egregious infringement can be transferred from administrative authorities to China's police, the Public Security Bureau (PSB).
- Criminal actions are often much harder to set in motion than administrative actions and civil suits.
- The IP rights holder must generally do all of the investigative work and package the case for the local PSB, which may not have the resources to conduct a thorough investigation.
- Surveillance of suppliers and distributors
Companies should
- Send representatives to visit the Chinese Export Commodities Fair (Canton Fair) and industry trade shows to look for counterfeiters;
- Check distribution networks at all levels for possible counterfeit product entry points and weak links;
- Work with other industry firms to identify and boycott repeat offenders.
- Engage IP enforcement bodies
Companies should
- Build relationships with officials in IP-specific bodies, ministries, commissions, and bureaus under the State Council specific to the company's industry
- Educate local officials responsible for allocating the resources for and enforcing IP protection about the company's IP protection needs
For more details on how to protect your company's IP, see the January-February 2006 China Business Review
IP Contacts
Click here to learn more about US and PRC government IPR contacts as well as business association contacts.
China Business Review Articles on IP
IP Protection Best Practice Tips
Counterfeiting in China: A Blueprint for Change (USCBC members/CBR subscribers only)
Silk Market Fakes--Light at the End of the Tunnel? (USCBC members/CBR subscribers only)
Sports Marketing in China: An IP Perspective
How to Protect Trade Secrets (USCBC members/CBR subscribers only)
Intellectual Property Litigation in China (USCBC members/CBR subscribers only)
Using PRC Customs to Protect IPR, November-December 2004 CBR