Doing Business in China While Protecting Your Innovations

It is on the minds of everyone in the business world, regardless of the subject matter of the business or technology involved. How exactly do you do business in China while maintaining a firm grasp on the intellectual property rights associated with your most valuable innovations? With over 1.3 billion people in China the market is quite attractive to many — if not all — businesses. At the same time it makes no sense to turn over the keys to your kingdom in order to only have a variety of Chinese companies competing with you domestically in China, as well as around the globe.

1.3 billion people simply cannot be ignored, that much is certainly true. In my experience, however, when potentially ridiculous sums of money are at issue people, including otherwise shrewd business executives, suddenly seem to lose double digit points off their IQ.  Believing that you can successfully navigate the potentially treacherous waters of doing business with China without careful planning and competent, experienced counsel is simply naive.

Life lessons can so frequently be boiled down to a Flintstones episode it seems, and while there are several that readily jump to mind when discussing being blinded by potential riches, one stands out among the pack.  Do you remember The Gravelberry Pie King?  Episode 9 from season 6 in 1965? Fred Flintstone is fired by Mr. Slate and decides to turn entrepreneur, seeing big dollar signs in his eyes (literally). Fred decides to sell Wilma’s famous gravelberry pies, which goes splendidly good right up until he realizes that they are spending more on ingredients than they are making in profit. Hardly a shrewd business move! But Fred getting caught up with the excitement of being an entrepreneur is extremely typical. It happens to inventors, entrepreneurs and Fortune 500 CEO’s who seem all to willing to naively rush into doing business in China so they can access a market of 1.3 billion people.

On December 8, 2011, Inovia will be hosting a free event in Chicago, Illinois from 2:00 pm to 4:30 pm at 70 West Madison Street. The title of the event is “Doing Business in China While Protecting Your Valuable Innovations.” It will focus on the “Dos and Don’ts,” exploring best practices for intellectual property strategy in China. If you are in the neighborhood and have the time to attend you will be a couple hours further along with your understanding of China and how to proceed to create an effective China strategy.  The “free” price tag is also quite attractive, and there is a networking reception to follow.

Realizing that many readers won’t be able to attend in person I reached out to one of the panel members presenting at the Inovia event,  Dr. D’vorah Graeser.  Dr. Graeser holds a B.A. in chemistry from Harvard University, a Ph.D. in pharmacology from the University of Michigan, is a registered U.S. patent agent and founder of Graeser Associates International, a global healthcare IP strategy and solutions provider. Dr. Graeser has a good deal of experience working with clients on developing a China strategy, and she agreed to answer a few questions about doing business in China.

As a long time law professor and patent bar lecturer I know that questions asked by more than one student are typically held by many others.  I also know that when readers ask the same or similar questions there is a need for an article that anticipates the issues and provides some actionable information.  That is why I  started by asking Dr. Graeser to identify the top question she receives from businesses contemplating doing business in China, and what advice she gives? She explained:

The top question that I receive is “Will my IP be enforceable in China?” My answer is “it depends.” First it is important to file for as many types of IP protection as possible. Second, it is important to have partners who can assist with enforcement of your company’s IP. Third, it is important to have contracts written in such a manner that they are enforceable, particularly with regard to potential IP issues with partners and suppliers – a good lawyer in China is very important in this case.

But how does one walk the tight-rope between doing business in China and protecting their own IP from theft?  Graeser explains:

First, it is very important to file for patent applications and/or utility model applications in China, as well as designs, trademarks and domain names.  The Chinese government, unlike many other countries, does not grant automatic deference to trademark owners when handling domain name disputes. Utility model applications are like patent applications in that they have a written description, drawings and claims; unlike a patent application, they are not examined. They are granted quite quickly — usually within 9 months to 1 year from the filing date — and can be useful to provide rapid protection, particularly if a company plans to enter into negotiations in China. If a company does not file for such protection, then it is not possible for the company to defend its IP in court.

Second, it is also important to conduct proper due diligence on potential partners and suppliers. As much as relationships are important, “buyer beware” is also a very important concept to consider, to avoid problematic relationships with partners and suppliers.

So what is the most important thing for U.S. businesses to keep in mind when they are doing business in China?  Graeser says:

Actually the most important aspect of doing business in China is relationships – your relationship with your partners, suppliers and clients, but also your relationship with individual executives and with local government officials. These relationships take time to develop but are very valuable over the long term. To some extent, these relationships will also assist US businesses when enforcing their IP, depending of course on the identity of the other side – if the infringing party is a state owned Chinese company, enforcing your IP is likely to be more difficult.

This last reality, regarding who is the infringing party, harkens back to something that Michael Lin of Marks & Clerk in Hong Kong wrote in a guest article here on IPWatchdog.com.  Lin explained:

Certainly if you are trying to enforce your patent against a company in the boondocks far west of Chengdu, and that company happens to be the largest employer in the district, then you are going to have problems. No one can / should tell you differently. However, can you tell me with a straight face that these same problems would not occur in the US if the situation was reversed – where a foreigner is asserting a patent against a local, respected employer in a rural area of the US?

Lin went on to concluded that things probably aren’t as bad as you expect in China, although they are far from perfect. What this means is that those seeking to do business in China and those seeking to obtain patents in China need to be armed with the facts.  Doing your own due diligence and laying the foundation for a long term relationship while taking advantage of the rights available in China makes for a well rounded approach.

With a China strategy being nearly a prerequisite for most businesses  it makes a lot of sense to contemplate the variety of issues that can and likely will arise.  Doing business half-way around the globe is challenging enough.  The fact that IP rights do not have a long history of enforcement in China, at least to the extent we have grown accustomed to in the U.S. and other western countries, should make most cautious businesses tread lightly.  But no business has ever succeeded on a big level playing it ultra-conservative.  So arm yourself with knowledge, and if you happen to be in the Chicago area stop by the Inovia free event, which you can register for by clicking here.

For more information on this topic please also see Key Considerations for Patent Strategies in China.