The best offense is a good defense …and vice versa

Few executives in China, at either Chinese or foreign companies, would be shocked to stumble across a knock-off version of their product somewhere in that country. As China's trade links to the outside world expand rapidly, fewer and fewer foreign companies are surprised to find a China-produced **** in their home market as well. 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 developing 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.

Below are some practical measures firms can take to protect their IP in China. The specific measures a company adopts will vary depending on the company's industry and level of involvement in the China market.

Craft a corporate IP protection strategy

The most effective strategies require firms to make internal changes.

Make IP protection a **** responsibility of the entire China management team, not merely a function of the legal counsel's office. An effective IP rights strategy should encompass all company departments, including production, human resources, sales and distribution, finance, and legal. The intensive interdepartmental coordination required for a company-wide IP rights initiative makes leadership from top management and support from headquarters critical.

Create, communicate, and enforce a clear IP protection strategy throughout the organization. Though awareness has improved over the past 20 years, 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. Constant visual reminders of IP policies, whether on office walls or elsewhere, help to reinforce the message. Finally, employees who violate IP policies or procedures should be warned and, in egregious cases, dismissed. Like China's IP laws, any corporate IP policy without enforcement teeth will be easily and rapidly disregarded.

Conduct an "IP audit" of internal controls, combined with an "IP survey" of external problems and issues. The audit should be a comprehensive, top-to-bottom review of existing company policies and procedures concerning IP rights and the company's current patent and trademark portfolio. The survey should include a thorough review of supply chains and distribution channels, visits to points-of-sale and trade fairs, and checks on patent and trademark filings by competitors and infringers.

Go on the defense...

Though catching and prosecuting IP violators is critical, companies should first focus on preventing IP violations. Companies can use several means to protect themselves.

Employ legal measures
Since China follows a first-to-file instead of a first-to-use principle, companies should register their works in China as early as possible. This is, in part, because China does not recognize international patents; if a company does not file in China, it has no rights in China. Wise companies file early.

• Trademarks
  When registering trademarks, companies should register their brands' English and Chinese names, carefully select the product categories and subcategories in which to file, and check subcategories for similar trademarks filed by competitors and infringers.
• Patents
  China offers design, invention, and utility model patents. (Design patents are used to register a new design of a shape or pattern; invention patents are used to register new technical solutions for a product or process; utility patents are used to register new technical solutions related to shape or structure.) Generally, companies should file both utility and invention patents for the same item, since utility patents receive little substantive review and are usually easier to acquire. Once an invention patent is granted, the utility patent can generally be dropped, as utility patents last only for 10 years from the date of application, compared to 20 years for invention patents. Companies should file applications for both their **** and fringe technologies and make certain their patents are properly translated.
• Copyright
  China recognizes copyrights at the time of their creation. 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. For software companies, registering for copyrights may be quite sensitive, since it may require providing some source code to NCA.
• Trade secrets
  As in the United States, 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 (see the CBR May-June 2005, p.36). 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 (see Counterfeiting in China). At a minimum, companies should mark confidential items, restrict access to trade secrets, and implement confidentiality policies and other agreements with employees.

Control the production process
First, companies should design products—and the equipment that produces them—so that they are difficult to copy. Second, companies should compartmentalize the production process so that no single unit can produce a complete product. Firms should also outsource different parts of a process to different companies to minimize the risk of inadvertently creating a new competitor. When possible, firms are advised to secure key technologies and procedures and keep vital designs or latest-generation technologies in their home countries.

Focus on human resources
From the start of the hiring process, personnel departments should run background checks on key hires. Firms should include non-compete and non-disclosure agreements in contracts because IP leaks commonly occur after an employee leaves a company. Once such agreements are in place, it is critical for companies to educate their employees about the firm's confidentiality requirements—maintaining clear rules and enforcing them. Firms should share information with their employees on a "need-to-know" basis only. It is also good policy to separate engineers from the sales force; when employees who possess knowledge of a firm's production process mingle with those who have access to clients, new competitors often emerge.

Be choosy when selecting suppliers and distributors
Before selecting a partner, firms should conduct comprehensive due diligence on suppliers and distributors, researching their networks and identifying weak points through which **** products could enter the distribution network. Companies should also select partners with brand images and reputations of their own to protect. When a selection has been made, firms should include IP protection clauses in all contracts and agreements and clearly explain their policies and procedures to the contractual partners.

Keep a close eye on competitors
Companies should monitor the patents that their competitors file by reviewing the State Intellectual Property Office's (SIPO) Design Patent Gazette and by conducting preliminary, focused searches for invention and utility patents based on the company names of Chinese and foreign competitors.

To research trademarks, companies can request an inexpensive search from the State Administration of Industry and Commerce (SAIC) Trademark Office. Results are usually available within 24 hours. These reviews can help companies prevent the registration of copycat trademarks and patents; firms should be especially alert to design and utility patents filed for infringing products.

...And the offense

Even after implementing all necessary preventive measures, companies must devote time and resources to detecting violations and taking legal action. A company's legal rights mean little in China unless the company chooses to protect them.

Take legal action
Companies must use China's legal system to enforce their patents, trademarks, and copyrights. They must also decide which battles to fight. Companies can choose from several routes to enforce their IP rights, including civil, administrative, and criminal actions.

• Civil actions
  The civil suit is becoming increasingly popular among foreign enterprises in China as 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. The civil suit is also particularly useful in cases when the defendant is an established enterprise from which damages can be collected.

Civil suits have their drawbacks, however. Companies bear the responsibility of collecting evidence and packaging cases for the courts, and litigation can take up to two years if defendants use all available appeal options. Moreover, infringers can halt a civil suit for patent infringement by filing an administrative challenge to the patent with SIPO. Though civil cases are generally decided fairly, judges are not bound by precedents set in other courts.

While civil (and criminal) lawsuits for patent, copyright, and trademark infringement are being adjudicated, companies can also seek injunctive relief from courts. Preliminary injunctive relief can usually be acquired in clear-cut cases, although the plaintiff must be willing to post a substantial bond and demonstrate a strong likelihood of success in the case. Injunctive relief is easiest to acquire in trademark cases, but it can also be useful in copyright and patent cases. Though courts generally grant petitions for injunctive relief, China lacks methods and penalties for enforcing preliminary injunctions—a major flaw in the system. But when plaintiffs win IP-related court cases, permanent injunctive relief is often granted as part of the verdict, and these injunctions are generally enforced.

• Administrative actions
  When infringing products are found in China, companies may ask administrative agencies to undertake their own investigations and impose penalties. In these cases, companies often do significant preparatory work before submitting requests to authorities.
  
  Companies should be aware that warehouse raids do not always mean a company is successfully stemming the tide of fake goods.
  
  Often used in cases of clear infringement or pure counterfeiting, such as exact copies of trademarks or brand names, many companies find administrative actions—particularly raids by the local administrations of industry and commerce—easier and faster than civil or criminal suits (see the CBR November-December 2000, p.28). Administrative actions are useful for halting production lines and seizing large quantities of product, and local administrative bodies have the authority to impose fines and destroy infringing goods. Companies should be aware that warehouse raids do not always mean a company is successfully stemming the tide of fake goods. The "raid and pillage" mentality ignores the importance of tracking fakes to their ultimate source. And because administrative penalties are generally low, they are an ineffective deterrent to repeat offenders. Companies should also be wary of the possibility that raids may be faked and that goods seized in raids may find their way back to the market. If a product that infringes a US copyright, trademark, or patent enters the United States, the IP rights owner can follow Section 337 of the US Tariff Act, which authorizes the International Trade Commission (ITC) to investigate the case. Though ITC actions do not lead to fines, the agency can stop the import of infringing goods at the dock, vital for firms seeking fast relief. The US Court of International Trade also does not require a jury, enabling the court to issue decisions quickly.

• Criminal prosecutions
  Companies can request that cases of egregious infringement be transferred from administrative authorities to China's police, the **** (***). (The thresholds for criminal prosecutions are high, however.) When implemented, criminal investigations and prosecutions can be effective deterrents, particularly since administrative bodies cannot jail offenders and administrative fines are often inadequate. But criminal actions are often much harder to set in motion than administrative actions and civil suits. In cases involving public safety issues, such as **** food products and pharmaceuticals, or state monopolies, such as tobacco, PSBs will often devote significant resources to investigate infringement and bring criminal actions. In most other cases, however, the IP rights holder must generally do all of the investigative work and package the case for the local ***, which may not have the resources to conduct a thorough investigation. Companies should pick their targets carefully and work with the local PSBs in key provinces or cities. A good strategy is to seek criminal actions against key infringers or syndicates and to piggy-back on PRC government IP rights protection campaigns.

Conduct surveillance of suppliers and distributors
To gain a better understanding of the counterfeiters that may be operating in their sector, companies should send representatives to visit the Chinese Export Commodities Fair (Canton Fair) and industry trade shows and conduct Internet searches for their products on Chinese e-commerce websites, such as Alibaba.com, and industry association websites. Manufacturers should also check distribution networks at all levels for possible **** product entry points and weak links, and design and implement vendor integrity programs. Furthermore, companies should work with other industry firms to identify and boycott repeat offenders.

Control what walks out of your door with departing staff
Most firms should expect and plan for significant employee turnover. Companies must be prepared to spend resources to enforce their non-compete agreements against employees who leave for competitors.

Firms should also use information technology to carefully track data flows and file transfers and closely monitor the entry and exit of flash disks, portable hard drives, and laptops.

Advocate aggressively
To exert collective pressure on the PRC government to better enforce IP rights laws, firms should consider joining external groups, such as the US-China Business Council (publisher of the CBR), the Quality Brands Protection Committee (see Business Association Contacts below), or other relevant business associations.

Firms should also develop a consistent and constructive IP rights message across the organization and repeat it to PRC government bodies and the public. Many companies have built customer awareness about **** products through product hotlines, seminars, and public relations campaigns. Firms can use an array of US government resources as well, such as the US Commercial Service, the US Patent and Trademark Office, the US International Trade Commission, and other bodies (see US Government IP Contacts below).

- Godfrey Firth

Source: This is an excerpt from an article originally published in the Jan, 2006 issue of the China Business Review.