Agreements, registrations and practical tips on how to protect your brands.
In this webinar, the following is discussed:
3 keys to protect your intellectual property in China
How to make a good contract in China?
The danger of entering a joint venture with a Chinese company
How to register your trademark in China
Tips on licensing in China
The following is part of the transcript of the webinar, featuring a conversation between Dan Harris, Founder of Harris Bricken and The China Law Blog, and Conrado Lamas, Marketing & Communications Manager at Red Points.
Dan Harris 09:45
There are three keys to protecting your intellectual property in China: structural protections, having a good contract and having good registrations.
Structural protection generally means doing business with the right people, if you’re going to go to China to have your product made, and you’re going to turn over your plans for that product, you should at least check out the company to whom you’re turning over the plants. Conduct a little bit of due diligence, confirm the existence of the company.
Have a contract with the companies you’re dealing with in China. Get that contract before you reveal anything. There’s this idea that China’s the wild wild west, the World Bank rates China number five, in terms of enforcing contracts.
China is not the best country in the world to enforce contracts, particularly when they’re dealing with intellectual property. But it is way better than people realize, your contract can be very effective. And it can be effective not just for enforcement, which is the third reason here.
But for clarity, clarifying what you expect out of your Chinese counterparty, and most importantly, for prevention, put something in your contract about your intellectual property, put in a provision making very clear the penalty the Chinese company is going to have to pay for violating your intellectual property and the odds of that company violating your intellectual property just went way down.
What is a good contract with a Chinese company? It should be in writing. That’s what the Chinese courts want. That’s probably where you’re going to have to go if you want to stop a Chinese company from violating your intellectual property.
Make the contract in one language, the language depends mostly on where you’re going to sue. If you’re going to try and stop somebody from running off with your intellectual property in China, you’re probably going to need to take it to China. And if you’re going to need to take your case to China, you’re going to want your language to be Chinese, you’re not going to want to walk into a Chinese court with an English language contract. Even though technically, you can do so.
But that rarely works well, you’re going to want your contract to be in excruciating detail. And just like the old days in the United States, and in Europe, you’re going to want that contract to be sealed or chopped.
What else goes into a good contract? Liquidated damages, what are liquidated damages? That’s a provision saying, if our IP squirts out whether you’re done it deliberately or not, you have to pay us $100,000. Why is that so important? Because courts in China are not very sophisticated. They’re not sophisticated about intellectual property. And they’re not sophisticated about lost profits. They love these damages provisions.
And Chinese companies know it, they know that if you go to a Chinese court with a contract that says, if our product is out in the market, and it’s not being sold by us, you owe us $100,000. That’s not a complicated intellectual property issue. If you describe your product, sufficiently $100,000 is not a complicated profit issue. You can pick a different amount, obviously, depending on the risks to your business.
And you can go to a court and say, I want damages against this Chinese company for $100,000. Because my products are now online on Alibaba, for example. And not only will the court almost certainly grant you that $100,000, they will grant it in what’s called a prejudgment remedy, meaning you don’t even have to go to court.
You don’t even have to go through a trial. We have done these and gotten assets of Chinese companies frozen in as little as one week. And you’re saying, well, that doesn’t stop the product from being sold? Well yes, it does. Because now you’ve frozen the bank account of the Chinese company. They will intend to call you up and say, what can we do to get this unfrozen? And of course you tell them stop doing that with our product.
What else should be in a good contract? Think about where the best place is for you to resolve your dispute? American companies, European companies, they always think: wow, the best place is going to be Chicago, or the best place is going to be Barcelona. But what power does a court in Barcelona have over a company in China? What power does the court and Barcelona have to stop a company from China from selling your product?
Not a lot. So at least think about it. You can also arbitrate outside China. A lot of lawyers believe, all the contracts that are done internationally should have arbitration. That’s not going to stop a Chinese company very quickly from selling your product. And also, those cases tend to move slowly in that you have to first win an arbitration outside of China, then you have to take it back into China to get it enforced.
Dan Harris 18:44
Another option is arbitration in China, that can be better than arbitration outside China, it oftentimes is not as good as a court in China in terms of quickly stopping the products from being sold, but it too has its advantages. And why would you ever want to arbitrate in China?
In CIETAC there are other arbitration panels in China that are very well run, tend to be very fair, and you get to make a lot of choices about how that arbitration is going to go down. You can say that the arbitration should be in English, you can call for a non Chinese arbitrator or two non Chinese arbitrators or even all three. There’s a lot you can do with arbitration. Don’t just say no to that.
Dan Harris 19:49
What kind of contracts are we talking about? Where should you be thinking about how to protect your intellectual property? Distribution contracts, reseller agreements. If you’re going to let somebody in China sell your product, you have got to be clear about what’s going to happen with your intellectual property.
Otherwise, you could be handing over your intellectual property to your distributor without realizing it. And then a year or two later, they’re making your product in China and they’re selling it and there’s nothing you can do. So you need to be very careful there.
Franchising agreements, they’re very similar distribution and reseller agreements, joint venture agreements. I don’t know how many of you are Americans in this webinar right now, but joint ventures have become a big issue in the United States.
A lot of companies, European and American, both have lost their intellectual property by going into a joint venture. The truth is, in most industries, you’re not required to go into a joint venture, Chinese companies will often tell you that you are, you should check it out, because most of the time, you’re not.
You’re also not required to assign your intellectual property to the joint venture, even if the joint ventures are going to be using your intellectual property. But the Chinese companies will often tell you that you are required to assign your intellectual property to the joint venture, you can license your intellectual property to the joint venture, or not even give your intellectual property to the joint venture at all.
There is no such requirement in most instances. And yet companies fall for that. The truth is that a lot of companies do lose their intellectual property to joint ventures, employment contracts. I don’t know what the percentages are, I’ve seen different quotes, I think they’re all somewhat inaccurate.
All I know is that our lawyers see a lot of instances where companies lose their intellectual property through their own employees. And we also see a lot of instances where they did not do enough to prevent it. And we see that in China a lot. Also put in your employment contracts, who’s going to own what intellectual property, if it’s developed by your employees, put in what’s called the rules and regulations. That’s why I’ve got the number two there.
That’s sort of your broad employment rules for your company put in there who’s going to own what, there’s a lot more you can do with your employees to protect yourself. And I’ll touch on that in a little bit.
Dan Harris 23:59
What happens is, the foreign company will be told that they will enter into a joint venture with a Chinese company. And the foreign company might say something like, look, you know, I’m really concerned about transferring ownership of this intellectual property to the joint venture here in China. And the joint venture, the Chinese company will say, well, we need to use this intellectual property in China, we need to be able to protect it. Therefore, the joint venture needs to own it.
And the foreign company will have oftentimes a Chinese law firm, which will not tell them otherwise. And they will transfer the ownership believing that if there’s ever a problem in the joint venture, they can get it back out. Well, they never do. And then there is a problem in the joint venture, the American or European company walks away, and they leave their intellectual property, essentially belonging to somebody else in China.
Where it really goes bad is, we’ll get a call from a company, and they’ll say: look, it was bad enough, when this joint venture, which we haven’t heard from in five years, and never made a euro off of it, that was bad enough. But now, we’ve learned that not only are they selling what we believe to be our product in China, they’re now shipping it to many other places around the world with that intellectual property protection, and there’s nothing they can do at that point. So yeah, it’s, it’s a big problem.
Dan Harris 25:58
Licensing agreement is a solution for a lot of things. It’s a solution for not doing a joint venture in the first place. A lot of times companies come to us and say, Look, we need to sell our product in China, we need to do a joint venture. And I’ll say, No, you don’t. Why don’t you just license your ice cream sandwiches?
Which is a deal we did. Why don’t you just license that to a company in China? They can make it there, put your name on it, you can be very clear about the standards they need to meet, and if they don’t meet them, it can be very easy to just shut them down and get your IP back.
But it’s not even really getting your IP back, because you never really relinquished it, you just let someone else temporarily use it. And licensing agreements with China are actually very similar to licensing agreements in the EU and licensing agreements in the United States. The only difference is, you need to make sure you get paid.
And you should register your licensing agreement with the proper Chinese governmental agency. And the idea of needing to get paid, where we see that as a problem is with high tech cutting edge hardware.
And what we’re seeing happening is Chinese companies will go to US or European companies and say, look, I’ll give you $20 million, if you will license me your technology for the next 10 years. And the American or European companies will say that’s great. Then we start drafting the contract and the Chinese company says: well, I didn’t mean $20 right up front, I mean $20 million, right up front, I meant $20 million over the next five years or whatever.
And we tell our clients “No, don’t go for that”, because in, you know, years, four or five, you’ll probably never get paid, which is very common for the last one or two payments not to come. Unless you know the first one, two or three payments are enough for you.
The other trick that they use is they’ll say: “Okay, how about we pay you overtime, and you just slowly give us more and more of the technology”. And the American companies, European companies, too, they tend to think well, until I give them eight parts of this technology, they’re not going to really have anything.
And what ends up happening is the American or European company greatly overestimates the Chinese need to get to stage eight, and the Chinese company will stop it, let’s say stage five, and then hire a bunch of people in China to get them to stage seven, and then start making and selling the product, even though the American company doesn’t think it’s a good product until it’s at stage eight. The Chinese company is fine with that.
But what is really insidious about this trick is that Chinese company will make payment number one, and then be really slow on payment number two, and then brow breed or pressure the American or European company to give them stage two, before they paid for stage two, oftentimes stage three they’ll get as well.
Then they’ll pay for stage two, then they’ll get stage four or five, and then they’ll stop paying. And so they’ve gotten to stage five, they’ve only paid for two stages and then they use that getting to stage five to get the rest of the way. And now they’ve got your technology for a lot less than you thought you would get. So you’ve got to be very careful about that.
Dan Harris 30:17
How can you protect your IP with employee contracts? Put in confidentiality and trade secret provisions, that’s one way, put in a non compete provision saying that they can’t compete with you. Now I put maybe here, because in China, after an employee leaves your company, if you want that non compete provision requirement to stay in place, you have to keep paying your employee, you don’t have to pay them their full salary, and how much you have to keep paying them depends on where you are, but it’s typically 40 to 60%.
And we have found that a lot of companies really do not like paying an ex-employee money. So a lot of times they just don’t pay it, and then their ex employee can compete. You can put in a non solicitation provision saying you can’t go to our clients after you leave. IP ownership can be seen very clearly, if your employee makes something who’s it going to belong to?
Dan Harris 31:24
Last but not least IP registrations, patents, trademarks, copyrights licensing agreements, register them in China, registering them in France, or the United States or Spain, that is not China. And we’ll get calls all the time from companies who say that so and so and China is stealing our trademark, and I’ll say, “Okay, do you have a trademark in China?” They’ll say no, but I have one in the United States. And I’ll say, “well, then they’re not stealing”.
China trademarks use the first-to-file system. That’s the way it is in most of Europe. But not in the United States. What that means is whoever files first for the trademark gets it. That’s where American and British and Canadians and Australians make their mistakes, they think it’s the first to use, so they don’t go file, you need to file it.
Even if you are only manufacturing in China for export, you need to file your trademark. Because if you don’t, someone else will. Oftentimes it’ll be the Chinese company that’s manufacturing your product, they will do that to gain leverage over you. Two, three years down the road, you decide to move to a new manufacturer, your old manufacturer says that’s fine. But you can’t use this trademark. So you can’t use what you think is your own trademark.
This was so common in China, that China may institute a law saying that your agent, that would include your manufacturer, cannot do that anymore. They cannot register your trademark and not give it to you. Well, sounds great, the problem is everybody in China knows about that. And they’re not stupid.
So what your manufacturer will do, if you’ve got a manufacturer in Shenzhen, they’re not going to register your trademark in quotes. They’re not going to register it under their name. They’ll have their cause in Suzhou registered, and you can’t prove a thing. So don’t count on that.
If you’re selling your product in China, you should apply for both English, French, Spanish, whatever trademark and a Chinese language trademark, because if you don’t file for the Chinese language trademark, and I don’t know what that trademark is going to be, because sometimes it’s a direct translation.
Oftentimes it’s not the famous story of Gucci. Someone took Gucci’s name, the name that everyone gave to Gucci, the Chinese name and registered it about 30 years ago, and Gucci has been trying to get it ever since and I don’t think they’ll ever succeed. So you’ve got to think about the Chinese name as well. Also for China trademarks purposes, Hong Kong, Macau and Taiwan are not a part of the PRC.
So those are all separate countries for purposes of trademarks. Don’t make that mistake, filing a trademark through Madrid, the Madrid convention, can be risky. The classes aren’t exactly the same. We’ve had companies come to us with major, major problems because they didn’t file in China, they filed through Madrid, you have three years to use your China trademark, if you don’t, someone can challenge it and take it from you. Trademark registrations are valid for 10 years plus another 10 years.
Big brands make these mistakes, medium size and small. A lot of times it’s the medium sized companies that surprised me the most. The big companies have in-house lawyers. And though they may not be experts in China, they know that not every country is the same.
So they’re not going to do something in China without making sure they’re protected first. But there are a lot of midsize companies that have gone international, and don’t have anyone in house who really understands these issues. And almost because they are already in five countries, they think they know what they’re doing. And China’s just so different. An example I will give is for European companies that together have about 90% of a particular industry.
And all four of these companies were having their products made in China, and none of them registered their trademarks in China. One of the companies that was making the products for two of these companies went off and registered the trademarks for all four of these European companies. And what they did is they waited till they got the trademarks, and then they stopped the product of those four companies from leaving China.
So now all of a sudden, these four companies cannot get their product out of all their products being made in China, those four companies are freaking out, because they cannot provide anyone with their products. And this Chinese company ended up getting about 50% of the market because the buyers of these four companies couldn’t wait around for these four companies to go off to other countries to have their products made. It was a brilliant maneuver by this Chinese company. And it really changed the industry, it was unbelievable. Players, I don’t, I don’t know what they were thinking,
Dan Harris 41:18
One practical tip make sure you get paid. And that’s difficult a lot of times for Chinese companies to get money out of China, because of the capital controls in China. And so a lot of times what we recommend for our clients is that they require the Chinese company to make a payment, initially, before any intellectual property is turned over.
And that payment should be more than $50,000. Because under $50,000, it’s easy to get the money out. So make the first payment $100,000 before anything else happens. And that will show proof of concept. It will show that that Chinese company has the ability to get money out of China, because there have been cases where Chinese companies have believed they could get money out they they’re totally acting in good faith and the Chinese government says no, we don’t like this deal. No money’s leaving.
If you are not working with contracts, not working on early liquidation damage clauses, it’s not too late. Because a lot of times, companies will come to us. And they’ll say, I’ve been working with this manufacturer in China for 10 years, everything’s gone great. I really liked them. But now our business is 10 times bigger than it was when we started. We feel like we need contracts. And we’ll say Okay, and we’ll draft contracts with that manufacturer, we’ll even put in things like, hey, these molds that our client bought five years ago will put in the contract. These molds belong to our contract, I’m sorry, belong to our client. And in a lot of respects, it’s almost easier at that point, then when you’re just starting out with a manufacturer in China, because there is that good relationship.
Founder of Harris Bricken and The China Law Blog
Marketing & Communications Manager at Red Points