Over the last decade, businesses have been clambering over each other to get a foot-hold in China. But going it alone is very difficult. The sheer size and complexity of the market, the need for local connections, and cultural differences, mean that many businesses are now seeking a local business partner in China - particularly those looking to manufacture for the New Zealand market. This makes sense, but failing to adequately deal with intellectual property issues can lead to headaches for the unprepared.
Trade marks in China - Friend or Foe?
There are a number of widely held misconceptions about IP protection in China. At the top of the list is the myth that trade mark protection for brand owners is not strong in China. Actually, the opposite is true. China's trade mark enforcement regime is swift and well resourced. There are also mechanisms for hefty fines against offenders.
China also has a surprisingly effective customs regime. In New Zealand, trade mark owners are able to file notices with Customs requesting counterfeit goods bearing their marks to be seized at the border. China, being a net exporter, goes further, allowing trade mark owners to file notices requesting seizure of outgoing counterfeit goods bearing their trade mark. This is a cheap, efficient process - and one that is surprisingly overlooked by many businesses.
This all sounds very positive. And it is - as long as you make sure you 'own' the trade mark.
Sadly, this is where most foreign entities make their first, critical mistake. China is a so-called "first to file" country. Put simply, the first entity to file for a trade mark will get registration and can prevent others from using it. However, unlike New Zealand, there is no requirement to have a bona fide intention to use that trade mark - meaning that wily competitors could register your trade mark simply to disrupt your business. Numerous naïve foreign companies have turned up in China only to find that not only does someone else own their core brand, but to be slapped with fines for attempting to manufacture using that brand.
The answer is blindingly simple - register your trade mark in China before you do anything else. And that includes negotiating joint ventures or manufacturing agreements - where the risk is just as great. A number of New Zealand businesses have made the mistake of allowing their brand to be registered in the name of their manufacturer or joint venture partner in China. When the business relationship breaks down they find themselves without a brand in China. An inability to manufacture under the brand for export from China can cripple a business throughout the world.
It's a similar story for other forms of intellectual property, including patents. The practical reality is that the Chinese legal regime strongly favours the registered owner - meaning that you need to be that registered owner. Placing intellectual property in the hands of a local business partner or joint venture partner is not great business sense in any foreign country. But it probably applies more so to China.
Many businesses rely on confidentiality or non-disclosure agreements when dealing with Chinese companies. Confidentiality agreements are important, but the fact is that such agreements generally bind only the signatories. If information leaks occur, confidentiality agreements provide little assistance against third party recipients of the information. This means it's all about self-interest and self-help.
- Register your intellectual property at the first possible opportunity (preferably before entering any joint venture - meaning that you can license into the joint venture and maintain control of your IP).
- Accept that IP registration costs are part of doing business in China. Getting a local entity to own the marks is not a cost-saving, it's a potential liability.
- Use confidentiality agreements, but also try to keep key information and brands secret as much as possible while you obtain registration.
- Seek local advice - the IP regime in China is effective and powerful but, as shown above, not without its dangers.
This article was originally published in the New Zealand Herald on 11 April 2010.