RSM Resources

Is your intellectual property in danger?

The scale and scope of counterfeit and pirated goods inside China isalarmingly high. And a substantial proportion of these fake productsare sold on the domestic market.

Clearly, any company looking to set up anoperation in China should be fully aware of such commercial danger andtake all possible steps to reduce the risk of intellectual property(IP) infringement.

Currently, an estimated 15 to20 percent of all branded products sold in China are phonies. Almostevery conceivable product is in danger of being counterfeited orinfringed — patents, trademarks, design, copyrights or related rights —even business locations. There are even reports of patent violations onitems such as pharmaceutical products, electrical domestic appliancesand industrial machinery.

IP Protection Strategy
Failure to put a solid IP protection strategy in place can gravelythreaten the transfer of confidential information, adaptation ofpatents, taking over of “know-how,” abuse of copyrights and trademarkcounterfeiting. Other problems involve overproduction by a licensedfactory, Chinese partners setting-up their own distribution firms andfactories shipping into unauthorized territories (“the
grey market”).

Notshielding your business from these threats will likely result in marketshare erosion and revenue loss. But first, a company needs tounderstand which aspects of a product are vulnerable to IP violations.Management should ask relevant questions such as “Does the product orthe brand need to be protected?” “Is the end-product or certaincomponents of it vulnerable to copying?” and “What makes the productunique and stand out from competing products and copies?” You shouldalso know the players and potential threats — internal and external —from IP violations. Start by developing risk scenarios. Then ask, forexample, “Who is involved in the development, production, import andexport distribution and marketing of the product?” and “Where is thepotential for theft, overproduction, copying and grey market sales?”

Preventitive and Reactive Measures
It’s vital to assess the product design and counterfeiting technology.Make the design and production of items as difficult as possible tocopy and use anti-counterfeiting technology (i.e., holograms, specialseals, inks, paper, film, threads, print techniques and trackingdevices).

Theright sales, marketing, advertising, public relations and lobbying plancan offer support and strategies. For example, moderate advertisingbefore the product enters the market. Or consider whether to advertisethe launch, teach customers how to recognize the real thing, and choosethe right pricing strategy to make the purchase of counterfeitsunattractive to customers.

Your company’sinvestment structure is crucial so make sure you’ve made the bestchoice in Chinese partners as well as distribution channels. Lastly,management should have recovery and retaliation measures coveringinvestigation, raids and court action in place.

Beaware of the legal measures available to you. First and foremost,register with the relevant authorities. Preferably, this should bearranged prior to market entry and should cover: trademarks, patents,copyrights, software, license contracts, technology transfer contractsand Web sites (even if they aren’t yet online).

Butan effective and comprehensive IP protection strategy involves a lotmore than just a legal plan. So involve your entire organizationincluding research and development, procurement, production, financeand IT.

Before entering the Chinese market, thinkabout possible consequences of the investment structure on intellectualproperty rights (IPR) protection. While a wholly foreign owned companyhas maximum control and minimum risk of IP infringement, a jointventure can lead to problems if an unknown Chinese partner is selected.Experience shows that many IPR offenses are caused by Chinese partnerdisloyalty. Therefore, have a well-prepared selection process ready andperform due diligence on short-listed partners. Consider alternativeforms of cooperation and choose the most suitable. Relationships aregenerally best built starting with a less binding agreement which canthen gradually develop with trust.

When decidingon Chinese partners, personnel and distribution channels, ask questionssuch as: “How can the joint venture contract be drafted to minimizerisk?” “What role could your own personnel and management play inenabling counterfeiting and how can this be mitigated?” and “Whatdistribution channels should
be used?“

Inaddition, make certain you carefully select investment locations. Ifyou target undeveloped regions, your company may be confronted by anumber of problems including difficulty in monitoring production, lesssupport from Chinese officials and courts, and poor legal awarenessconcerning IPR among the population.

Appropriatepeople management is fundamental to protecting IP. A strong initialpresence of your personnel is essential — it can help reduce the riskof information leaks. Keep information on a need-to-know basis. Ensureemployment contracts are watertight and include a declaration ofconfidentiality and secrecy, prohibition of copying, anticompetitionprovisions after contract expiry, and clear provisions as employees’intentions.

Protecting IP in China is no easytask, but by putting in place the right strategy to combat potentialthreats and surrounding yourself with the right professional advisorsincluding lawyers and accountants, you can help prevent it.