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Trump calls out Chinese IP practices

29 November 2017

Although Donald Trump implicitly calling Kim-Jong Un 'short and fat' might have stolen the headlines, the President's first official visit to Asia has also indicated that he is serious about his 'America First' policy, and protecting intellectual property.

When Western companies began looking to the East as a cheaper source of manufacturing, they also initiated the dissemination of their valuable IP to an ever larger group of people. For decades this 'technology transfer' has been reluctantly accepted by international businesses as the price of operating in China. But at the APEC (Asia-Pacific Economic Cooperation) summit in Vietnam this month, Trump railed against 'the audacious theft of intellectual property' by Asian companies against Western ones; 'we are not going to let the United States be taken advantage of any more', he proclaimed. This follows on from the Section 301 trade probe launched by the US into Chinese IP practices earlier this year.

Whether Trump is the right man to solve the problem or not, protecting IP rights in Asia, and particularly in China, is an ongoing challenge for Western companies. The NY Times calculates that IP theft costs the US an eye-watering $600 billion a year.

A tale of two factories

Within China,
more than 40% of goods sold online are counterfeit. These range from amusing rip-offs, like McRonalds, Dolce & Banana and Michaelsoft Binbows, to believable fakes of expensive goods, such as Apple and Ralph Lauren. This is perpetrated broadly by two groups:

The first are competitors who release imitations of a product under their own brand, having discovered the design online or through reverse engineering. Ideas like StikBox, a smartphone case with a built-in selfie stick, or the Fidget Cube, a focus-inducing desk toy, were poached from Kickstarter campaigns and put on Amazon and eBay at huge discounts before the originals had even been made. This demonstrates how developed some counterfeiters' supply chains are.

The second group, more problematically, are the Chinese factories that contract with international companies. Some stay running after hours, selling on their surplus or creating derivative products which cut out the original IP right-holder. The problem for Western companies is that they are essentially teaching their Chinese factories the intricacies of their product and how to compete against them. Some copies of luxury goods, called yuanduan, are reputedly better than the originals.

Enforcing IP rights in China

China has always strongly denied any accusations of IP theft. However, their government is tacitly addressing the problem: it has increased the number of specialist IP courts and raised the damages available for infringement and the fines applicable to counterfeiters. The Commerce Ministry also recently announced a four-month crackdown on IP theft.

China has traditionally been seen as a difficult jurisdiction to enforce IP rights in. When Jaguar Land Rover tried to challenge an almost-identical copycat of their Range Rover Evoque called 'Land Wing', they had their design patent cancelled and their copyright claim dismissed. Apple last year infamously lost a trademark fight with Xintong Tiandi over the use of the mark 'IPHONE' on leather goods. General Motors only reached an out-of-court settlement with Chery after they proved that the infringing vehicle had interchangeable doors with their product, and that they had ordered identical parts.

However, there are signs that this is also changing. Foreign companies had an 81% success rate against domestic firms in patent cases in 2015 (Chinese patents are more wide-ranging than in England, and also cover design rights). New Balance were recently awarded a record sum in China of almost $1.5 million after a successful trade mark claim, whilst Michael Jordan was able to stop the unauthorised use of his name on products by a Chinese company.

So what next?

A recurrent issue for foreign companies is that Chinese law compels them to enter into a joint venture with a local company to do business in the country. Chinese cybersecurity law also requires foreign companies in China to disclose critical intellectual property to the government and store their data locally. These laws inevitably lead to serious confidentiality problems.

As well as proactively registering all rights locally and internationally, companies operating in China should therefore also push for 'NNN agreements'. These not only include non-disclosure agreements, but also non-circumvention and non-competition. An NNN agreement would help prevent their Chinese manufacturing partners from using a company's intellectual property as a weapon should they try to go into business against them. Experience shows that it is better to be over-zealous with contractual obligations and registrations than the alternative, which can lead to foreign companies being caught out.

China's attitude to protecting IP rights has already improved in recent years. There is a kernel of hope that Trump's idiosyncratic attacks on China and his apparent chumminess with Xi Jingping may cause this trend to continue. In any case, the growth of home-grown IP means it will increasingly be in China's self-interest to protect IP more rigorously.