At a recent industry conference in the Middle East, CEOs of both Western and Chinese chemical companies spoke in glowing terms about their business operations in China.  The country has, after all, become the world's largest market for chemical sales, and foreign investment continues to gush into new projects supplying China's industrial base.

In private, however, business leaders fret about an all-too-familiar problem of doing business in China: intellectual property (IP) theft.  The biotechnology, pharmaceutical and a host of other high-tech industries are in the same predicament.  China is a market they cannot afford to miss, but they also cannot afford to lose their technological edge.

Companies that fall victim to IP theft and seek to restore their rights must negotiate their way through the local court system, deal with a labor laws designed mainly to protect the employee's rights and often have to challenge entrenched state-owned enterprises.

The challenges of reacting to IP theft have driven companies to develop a number of proactive, “standard” IP practices: reviewing IP portfolios on a regular basis, training employees about protecting IP and ensuring that IP around key aspects of their business is registered and their rights are enforceable in China.  Those ahead of the curve organize outreach programs to train Chinese enforcement officers about their brands and products.

Despite taking these proactive and sensible steps, many companies in China do not see the connection between IP protection and their broader compliance programs.  Several policies considered best practices in traditional compliance can actually play a dual role in protecting IP.

Adapting Compliance Activities to Support IP Protection

WHISTLEBLOWER HOTLINES

Non-Chinese managers might be astonished at how often Chinese staff use whistleblower hotline systems to report commercial kickbacks, conflicts of interest and harassment in the work place.  Staff should be encouraged to use the same systems to report suspected trade secret theft and infringement; employees are the first line of defense against IP theft.  When cases are reported through these systems, investigations managers can organize and keep track of the cases in the same way they monitor fraud cases, and make sure they receive the appropriate level of attention inside and outside China.

Moreover, those who cut corners on compliance may have few qualms about stealing IP.  Having names and identifiers in a single database allows investigations managers to cross-reference between cases and weed out troublemakers.

ANNUAL COMPLIANCE TRAINING

Companies often require staff and vendors to take part in annual compliance training.  Companies with valuable IP in China should consider adding an IP training component to these sessions.

Such training programs can be very effective in tearing down barriers between business departments and starting company-wide conversations about the potential misuse of IP and practical steps to protect it.

Research and development technicians, plant operators and even summer interns who suspect a colleague is leaving the office with confidential files, photos or other data will begin to feel an obligation to report it.  Sales managers who see possible knock-offs in the marketplace will better appreciate the importance of alerting their senior managers.  Security guards, logistics managers and cleaners who discover missing product prototypes, or notice visits to access-restricted labs at odd hours, might likewise understand the significant role they can play in protecting their companies.

DUE DILIGENCE

The need to “know your customer,” to conduct employee background screening and to perform compliance-based due diligence during M&A activity have become well known to companies operating in China.  These same types of reviews, particularly when they include litigation searches, can identify companies and individuals with track records that include troubling IP disputes.  By identifying IP risks at the outset of compliance-based diligence, companies can better protect their most valuable assets without significant cost increases.

As an example, we recently participated in due diligence involving a Chinese high-tech company’s potential arrangement with a prominent foreign scientist who would be providing specialized technology in the relevant field.  A background investigation revealed that the scientist had worked for a well-known multinational company that owned a number of patents vital to the specialized technology.  Within months of starting his own consultancy, he was offering his technological expertise in China.  By flagging the IP risks during a compliance-based review, the Chinese company was able to assess any potentially adverse consequences of relying on the scientist’s technology while simultaneously allowing him access to the company’s own IP.  Conventional background searches to identify concerns such as criminal convictions or adverse media reports would not have revealed these issues.

ANNUAL AUDITS

Annual audits can help identify suspicious payments to travel agencies, marketing companies and other possible middlemen as pay-off schemes.  The same audits can identify gaps in processes and procedures that reduce IP security.

EXIT INTERVIEWS

Recruiting talent is a key means for competitors to syphon away IP.  Departing employees are normally reminded of confidentiality obligations and required to return company property as part of an exit process.  In many instances, companies should consider creating and preserving mirror images of hard drives of computers used by departing employees.  Such images can be key evidence in investigating potential IP theft that later comes to the company’s attention.

Nick Blank is director of investigations at Blackpeak and heads their chemical sector practice. He specializes in handling complex due diligence, fraud and intellectual property investigations. He is the former head of Kroll's Shanghai, Guangzhou and Seoul offices.