China IP Risks are Rising
Earlier this week, in my blog post, Protecting Your IP from an Increasingly Rapacious China, I discussed the growing threats to intellectual property (IP) posed by deteriorating relations between China and the West I highlighted how these strained relations, coupled with China's struggling economy, have led to an alarming increase in Chinese companies seizing IP from their foreign business partners.
Since that post, the following have occurred:
- Political Developments: Donald Trump announced that, if elected, he plans to impose a 60 percent tariff (yes, SIXTY percent) on nearly all products from China. This statement has caused considerable anxiety among numerous companies and their Chinese manufacturers. Trump's choice of JD Vance as his running mate has only increased the likelihood of these tariffs becoming a reality.
- IP Theft Incidents: Three companies have contacted our law firm for help regarding IP stolen in China.
- Sinosure Actions: Two companies have contacted us for help in fighting against Sinosure, China's export credit insurance agency, and one company stated that Sinosure had seized their China trademarks.
Our China dispute resolution lawyers have recently been handling an unusually high number of disputes between Chinese factories and their foreign product buyers. In many of these cases, the foreign companies have come to our law firm after their Chinese factory claimed they owed money for bad products. In none of these cases did our client have a good Manufacturing Agreement in place, and the Chinese companies had at least some legal basis for their claims.
These events have prompted me to write this follow-up blog post, focusing on additional strategies to protect your IP from China, with a particular emphasis on protecting your IP from being seized in China by Sinosure or others.
1. Your China IP is at Risk of Being Seized
Chinese companies are increasingly using aggressive tactics to pressure foreign businesses. Nearly every case we handle involves threats from Chinese companies to sue our clients. The smarter Chinese companies often will seek to seize or seize our client's China trademarks, China copyrights, and/or China patents. In many instances, our client's only assets in China were its registered intellectual property, making the threats of seizure very real, and the actual seizures painful and expensive.
Case Study: The Castel Decision
In a well-known 2011 Chinese court case, the court allowed a Chinese plaintiff to "freeze" a Chinese trademark belonging to a foreign company, Castel. This decision is particularly noteworthy for foreign entities without significant assets in China. Typically, such entities consider themselves insulated from the risk of litigation in China due to their lack of assets in China. However, foreign entities often have trademarks (or other IP) in China, and those trademarks are now vulnerable if a Chinese company or Sinosure (China's export insurance company) claims that the foreign company owes it money.
The Role of Sinosure
Our law firm has handled at least a hundred cases where Sinosure has sought to aggressively pressure our clients to pay off Chinese factories for allegedly owed money. For more on how Sinosure mistreats foreign companies, check out China Sinosure as Existential Threat and Fighting Back Against Fake (and Real) Sinosure Claims: A Primer.
In these cases, one of the first actions our dispute resolution lawyers take is to figure out the best way to protect our client's assets in China from seizure, particularly their IP. This is more complicated than it may seem, as illustrated by the following example:
Example: Company X and Trademark Registration
Company X came to our law firm with a Sinosure problem. We asked if they had registered their brand names as China trademarks. They had not, so we advised them to do so immediately. If they didn't, the Chinese factory involved in their dispute or Sinosure would likely register the trademarks and use them as leverage. See Manufacturing in China: Trademark Registration Should be the First Thing You Do.
Company X chose not to retain our firm and decided to negotiate independently with the Chinese factory and Sinosure. About two years later, Company X contacted us again with a significant China trademark problem. They had taken our advice and registered their Chinese trademarks, but since they did not retain us, they failed to secure ownership of those trademarks in the name of a separate company. The Chinese factory sued Company X in China, won, seized Company X's Chinese trademarks, and then seized their products for violating those trademarks. This entirely shut down Company X's ability to secure products from China and pushed them to the verge of bankruptcy.
Had Company X registered its China trademarks under a separate company, this situation could have been avoided. Our advice to Company X was to consider one of the following options:
- Buy back the trademarks: Attempt to negotiate and repurchase the seized trademarks from the Chinese factory.
- Modify their manufacturing process: Continue to have their products made in China but add their brand name to the products only after they had left China.
- Relocate manufacturing: Move their manufacturing operations outside of China to avoid any further IP issues.
Unfortunately, they did not believe any of these options would be viable for their business model, and it appears they are no longer operating.
2. How to Prevent Your Chinese IP from Being Taken from You
Establish a Special Purpose Entity
One of the most effective strategies to protect your IP in China is to register it under a company that does not engage directly in business with China. Here's how you can achieve this:
Create a New Entity: Establish a new company outside of China, such as in the United States or the European Union. This entity will own the IP assets in China. For added safety, the name of this company should not resemble the name of the company that purchases products in China. You might also consider creating a third entity dedicated solely to importing your products from China.
Licensing Arrangements: The new entity can then license the IP to the company that conducts business with China. This structure ensures that the IP is legally owned by an entity not directly involved in business operations within China.
Maintain Confidentiality: Ensure that the licensing agreement remains confidential to prevent Chinese authorities or adversaries from discovering the ownership structure. This confidentiality helps shield the IP from being targeted in legal disputes. It is also beneficial to set up these companies in jurisdictions where ownership information is not easily accessible through a quick internet search.
By structuring your IP ownership in this way, you create a layer of protection that can prevent Chinese companies from easily seizing your valuable intellectual property.
Assign Your Existing China IP
If your IP is currently registered under a company that conducts business in or with China, consider the following steps to enhance its protection:
Assignment of IP: Transfer the ownership of your IP to a new, separate entity that does not engage in business with China. This relatively inexpensive and straightforward assignment can help insulate the IP from legal actions targeting the business operations in China.
Licensing Back the IP: After the reassignment, the new entity can license the IP back to the original business. This arrangement allows the business to continue using the IP while the ownership remains protected.
Address Complications: Be aware that reassigning and licensing IP involves legal complexities and costs. However, these measures are usually a worthwhile investment compared to the potential loss of your IP rights.
Set Up an Importing Entity: Consider establishing a dedicated importing entity to handle the importation of your products from China, providing an additional layer of separation between your operational business and your IP assets. By doing so, you further isolate your IP from potential legal entanglements related to your business operations in China. This entity should be set up in a jurisdiction where ownership information is not easily accessible through a quick internet search, further protecting the confidentiality and security of your IP ownership structure.
Practical Steps to Implement Protection
Here are practical steps you can take to ensure your IP remains protected:
- Legal Structuring: Consult with legal experts to establish the appropriate structure for IP ownership and licensing. Ensure that all legal documents are meticulously drafted to provide maximum protection.
- Confidentiality Measures: Implement strict confidentiality measures to keep the ownership and licensing arrangements private. This includes confidentiality agreements with employees, partners, and other stakeholders.
- Regular Audits: Conduct regular audits of your IP portfolio and the associated legal structures to ensure ongoing compliance and protection.
Note that Chinese law provides that if a Chinese factory registers a trademark used by one of its product buyers, it cannot retain that trademark. China instituted this law to prevent Chinese companies from registering trademarks to gain leverage against their product buyers, mostly to prevent them from choosing another company to manufacture their products. However, Chinese companies have adapted by having someone else, like an employee or relative, register the trademark, circumventing this law.
Conclusion
By proactively implementing the above strategies, you can reduce the risk of your IP being seized in China. Protecting your intellectual property requires careful planning and specialized legal assistance, but the benefits of safeguarding your IP assets will invariably prove to be time and money well spent.
UPDATE: Within an hour of publishing this post, I received an email from a company asking whether they should bother going through any of the above steps if they will be out of China within a year. I wrote back to emphasize that it is absolutely crucial to protect your China IP before you leave China. Once it appears that you will be leaving China, you are at huge risk of your IP being stolen. See e.g., How to Leave China and Survive.
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