- Understanding IP
- Assess your IP
- Managing IP
- Business Partners
- Business Promotion
- Dealing with Counterfeiting
- Research & Development
- Sales and Distribution
The principle issues surrounding intellectual property development, its protection and enforcement are the same for all SMEs, however, the specifics of how they should be approached will be unique to each. The approach to IPR protection outlined is relevant to all SMEs and not only those dealing with China. As with many other issues, a few basic actions can go a long way and IP is no exception.
Helpdesk customers fall into broad customer profile. There are around 23 million small and medium-sized enterprises (SMEs) in the European Union – that is 99% of all enterprises. SMEs provide over 100 million jobs in Europe and in some sectors account for more than three-quarters of all jobs. SMEs therefore make up the backbone of Europe’s economy.
Hundreds of thousands of these European SMEs covering a wide range of business sectors engage in business with China either through exports, imports or investments. Most of these SMEs do not currently have, or are at least not aware of, IPR infringement problems in relation to their China business.
In targeting these SMEs an important objective of the China IPR SME Helpdesk will be to raise the collective awareness and capacity for developing IP value and its protection and IPR enforcement particularly within the China context. The overriding objective will be to instill the importance of PREVENTATIVE measures to IP protection and IPR enforcement. Practical and tailored training guidelines will help empower SMEs to understand the importance of IP value and also to make business decisions which reduce risks.
A second important customer profile of the Helpdesk will include those SMEs already encountering IPR problems in relation to their China business. In targeting these SMEs an important objective will be to provide relevant information and practical options for the resolution of current IP issues.
Within both broad groups there will be sub-groups, which will be categorised either by industry or service sector, by IP asset type or by the type of IPR enforcement challenges encountered.
In all correspondence with the Helpdesk it will be important for SMEs to provide details of their particular characteristics so that the Helpdesk services can be tailored as much as possible. We encourage you to ask a question and provide relevant company information which will remain confidential. The Helpdesk provides common information services relevant to each customer profile. If you have specific questions or queries you are encouraged to use our website to ask a question.
IPR - The Basics
The first step in developing the value of IP in your business and managing risk is to build awareness within your company, particularly amongst senior management and the board, about what is IPR. Intellectual Property Rights are legally enforceable rights over the use of inventions or other creative works. They confer a right to exclude others from their use. This includes patents and utility models, industrial designs (or design registrations), trade secrets, trademarks, Geographical indications and copyrights. This will help you to answer an important strategic business issue of why to protect IPR. Intellectual property (IP) comprises as much as 75% of the market value of many SMEs yet the recourses required for both its realisation and protection are often significantly underestimated by these companies. IP value is derived from its unique characteristics and the right which excludes others from its use. IP and its protection can generate a financial return by better assuring the revenue streams of products and service sales, reducing future risks associated with business loss and increasing the value for the company.
During the due diligence stage of a company acquisition it is increasingly common to include an IP audit. This is designed to evaluate the effectiveness of the IP strategy and the value of IP assets of the target company. In this way, not only the value of IP but the in-house knowledge is considered an integral asset of the SME valuation. A company with a poorly managed IP system therefore will be considered to have a lower market value.
Finally, given the importance of IP in ensuring an innovative society and business growth, many governments promote and stimulate the application of scientific knowledge and the process of IP registration. Building IP will incur a cost on your business but if designed through an effective strategy it will add value. It is true that many companies have developed valuable IP without recognising it, and risk it as a result. Both questions require ongoing review as your business evolves, and are key to understanding how to protect IPR. IPR protection requires the registration of IP and its effective enforcement. This is best achieved with an IPR strategy. The first priority of your company is to build awareness about the IP and future value of IP development and IP asset creation.
The Board of Directors is responsible for the company strategy and ultimately they must take ownership of the overall IPR approach by making IPR a board level concern. There is a need to designate an IP Manager or IP champion and make resources available to them. IP will then be more easily recognised in the company’s HR strategy and awareness more easily increased through IP training. In most cases the IP managers or IP champions can be identified from amongst those in the company with the most passion and knowledge of the issue.
The IPR champion will be tasked to engage with employees on IPR issues in order to build the importance of IP and its inclusion in day to day business processes. Having in-house competence is important when deciding on the development of IP. The in-house expertise will also ensure cost-effective liaison and follow-up implementation with contracted IP specialists regarding IP protection and enforcement.
The implications for the company of IP development and the values and risks associated with IP need to be understood as part of the innovation process. By building awareness around IP development and protection you will create the building blocks necessary to implement an effective strategy.
No SME capable of engaging in China business is too small to develop an approach to protect its IPR.
IPR to suit you
Developing a tailored IPR approach will depend on your company´s sector of operation, your market positioning, your size and your stage of development, particularly with regards to your business with China. These issues will determine the value of IP within your company. By this stage, IP protection must already have been understood at both board and management levels so that IP enters the mainstream business process.
Developing an IPR Strategy
You wouldn´t think of starting a business without an HR strategy, market strategy or financing strategy, and for many SMEs an IP strategy is just as important for planning growth and minimising risk. Regardless of the stage of your business with China; be it in early planning or well-developed over many years, it is important to have in place an IP Strategy. As is the case with other company strategies, an IP strategy should be established within your company´s corporate structure as a strategic priority and should integrate with other aspects of your organisation. It will likely affect staff positions, roles and responsibilities and business systems and procedures.
An effective IP strategy can more easily be achieved when ensuring that the strategy reflects your overall company business strategy which will take into account the level of importance of China business. At a commercial level this might be achieved by linking the IP strategy with technology commercialisation. In this way, it will be possible to link investments related to IP to the returns generated by the business through its alignment with IP.
An important priority for the strategy will be to identify the most critical IP assets of your company and ensure that procedures are in place to develop and protect them. Similarly, the strategy should ensure a dynamic approach for how to convert new ideas into future IP assets, how IPR is to be distributed in cooperation with external parties and how the company will best respond to any infringements of its existing assets.
To support the effective implementation of an IP strategy there are a number of commercially available management systems. These might be used for example to review the status of filing and IP asset portfolios through a spreadsheet format. The key elements of a strategy are outlined in the following sections but are generally underpinned by an IP Audit. This will require you to put in place a series of steps including:
- IP Audit. An IP audit is an important element and starting position for your IP strategy. Even successful companies do not always realise what makes them unique and competitive and may not prioritise IP development and protection to reflect its real value. The IP audit is designed to highlight both the risks and opportunities IP represents to the company. This approach will identify gaps in IP portfolios as indicators of opportunity.
The objective of the audit is to determine the IP assets of your company, which future potential IP assets it might generate and the levels of risks faced, for example, through any gaps in protection. Generally the audit will be carried out across product and service ranges and for each department of the company. This will determine internal IP assets such as business processes or patented approaches and even the details of protection of company logos and branding. From the analysis of this audited picture you will be able to prioritise issues for resolution through a plan of action. The plan then requires the development of policies to ensure their effective implementation.
- Having completed an IP Audit you can put in place effective IPR Policy and processes. When the IP audit is complete a spreadsheet should be generated which outlines the IP asset types, classes and values using a ranking system. This will indicate registered and non-registered IP and those IP assets which offer the greatest potential and the associated risks within the portfolio. The analysis of this data will allow priority actions to be set once the mechanisms for calculating the cost of a patent or trademark registration have been developed. The implementation of priority actions requires procedures to be put in place. The cost of registration in multiple countries can be quite complex and professional online tools are available for this task. Other IP procedures will include, for example, ensuring that IP protection procedures or ones for the development of a project cycle for IP identification, development and protection are in place. Procedures for building employee awareness through IP training will also need to be established. Procedures will be enforced through effective quality control procedures as part of the business process and IPR quality control. Establishing effective quality control of the IP process will require a constant monitoring of the China market place for violations and ensuring that action is taken in an effective and systematic manner as soon as IP violations are discovered.
Quality control measures will help ensure the implementation of procedures for reviewing employee contracts, Non-Disclosure Agreements, publications, licenses and the management of trade secrets. The quality control procedures would ideally be included as part of the job responsibilities of the IP officer.
Just as in the same way your company would ask a potential employee for references and carry out background checks, the same due diligence should be applied to new business partners in China, for example, suppliers and distributors. Checking the legitimacy of a potential business partner in China might extend to requiring them to provide a copy of the Chinese business licence. Inconsistencies between the trading name and the name on the licence might raise a red flag and would require further clarification.
Quality control will be made easier when your organisation has access to tools and data sources from the IP field. The World Intellectual Property Organisation for example has a website targeting SMEs and their protection and enforcement of IPR. In the early stages of developing the IP strategy, it may appear complicated and time consuming; however, to grow value in your IP assets this must become routine business practice.
- Implementing IP protection must be incorporated into your relationships with all of your stakeholder groups. SME stakeholders groups include SMEs’ employees, suppliers, distributors and other business partners. In order to reduce the risks of IPR infringement through key stakeholder relationships, protection procedures should be established. Due diligence is the first form of risk management in dealing with trading partners and can be supplemented by Non-Disclosure Agreements in order to manage exchanges between companies. Written IPR policies and non-disclosure clauses should be included in all employee contracts. When engaging in China related business with patent or trademark products which have been registered in Europe, your company must seek protection in China by registering in China, which broadly includes suppliers, distributors, cooperation partners, customers and your employees, particularly where these relationships relate to technology transfer. Technology transfer is the process of developing practical and commercial applications for the results of scientific research. As technology transfer is an important priority for many Chinese companies it is often transacted without adequate protection of IP within the agreement and subsequent counterfeiting has often resulted. If you choose transfer licensing as the preferred technology commercialisation model then you must build-in effective IP enforcement procedures or transfer of business knowledge.
- Business to business promotion must be reviewed to ensure effective risk management.
- At the same time, you need to understand the procedures and investments related to the registration of your IP rights. Registration of Trademarks and Patents in Europe does not provide protection in China. China is a ‘first to file’ country. There has been an increase in the number of bad faith filings (identity theft) by Chinese companies of foreign trademarks as well as their registration as company trading names, occurring before the foreign party has registered their marks in China. As the system in China follows the ‘first to file’ rule then identity theft is becoming a significant problem. After following the ‘first to file rule’ the Chinese firm has the legal right to block the legitimate right owner from operating in the market. Not only can this stop the legitimate right owner from selling, manufacturing or exporting from China they can also flood their home markets with pirated goods. In these circumstances it is very difficult for the foreign party to prove its case without years of enforcement action. The most effective way to counter this problem is to file your trademarks and patents as early as possible in the China market. This is a good example of where prevention is more important than cure and the monitoring of their enforcement.
What if your IP is infringed?
It is recommended that a standard operating procedure be put in place when you encounter an IP enforcement. Enforcement of IP protection is problematic in China because it is difficult to catch pirates and serial pirates are not deterred because the penalties and fines are so low. Therefore, you should assume that piracy is the norm rather than the exception. Register your rights in China early, monitor the market to see if you have enforcement issues but enforcement action is tough given burden of proof requirements. When you do have an enforcement problem you are welcome to bring your enquiry to the Helpdesk. For more information contact the Helpdesk at firstname.lastname@example.org. In the event that you wish to choose a lawyer you should accept quotations and conduct initial meetings with at least 3 candidate IP firms. All the elements described here should be considered as an ongoing cycle of development which will be more manageable when your senior team actively builds an awareness and understanding of external factors, such as technological advances or competitive trends.
Assess Your IP
What is an IP Audit?
An IP Audit gives you an overview of the IP owned and/or used by your company.
Why do you need an IP Audit?
An overview of your IP will enable you to determine how important your IP is for your business and what is the value to your business. An IP audit is especially important when deciding to expand the business outside your home market.
- Once you have audited what your IP is it will enable you to manage your IP to maximise value and competitiveness by enabling you to create an IP strategy that works for your company in the short and long term.
- Such a strategy would include determining the extent to which your IP should be registered. Your IP filing strategy should reflect your business needs and take into account both domestic and worldwide strategies. Depending on your company's products and business plan, as well as financial constraints, it may be worth considering also filing certain IP outside of your core markets, taking into account the increasing spread of piracy and counterfeit production of goods.
- Registration ensures legal protection and the ability to enforce as well as reap the financial benefits of licensing your IP to others.
What would be included in an IP Audit?
IP assets you need to consider include any registered and unregistered trademarks, copyrights, designs or patents as well as licenses to third parties, and licenses from third parties. For more information about the types of IP please go to the 'Finding your way around IP in China' section. You may also consider elements such as work manuals, databases, recipes, franchise agreements, publications, product/process know-how, marketing materials and more. For an example of issues to include in an IP audit please visit the following website: https://www.wipo.int/sme/en/ip_audit/ .
How do I carry out an IP Audit?
The first question to be answered is whether your company has IP. No matter the line of business that your SME is in, it is almost certainly in the possession of, or generating, some kind of intellectual property, whether it is a trade name, confidential information or other type.
To carry out an IP audit consider the following aim to create an overview of all IP used in your business, acquired, used and owned in your business by:
Outlining all of your company's business activities, including areas such as sales, marketing, manufacturing and any other activities.
For each of those business activities, make an overview of all types of products delivered by your company, including not just the products themselves but also which types of printed material, designs, logos, trade names, product names etc. that you use in your marketing, consumer and other communications.
List all known specific technology that goes into making your product, whether the technology is yours or licensed to you by someone else. Make a list of all affiliated companies and business partners that you are currently working with and who may be using your technology to produce your company's products either by license or otherwise.
Examples of questions to ask during your IP Audit
Does your business use a name or logo?
Do you use any information in your business that you regard confidential (for example, product formulas, pricing information, financial data etc.)?
Do you use product names in your sales process?
Does your company create processes or design tools, machines, graphics, advertising?
Are your products or packaging unique in some way compared to competitive products?
Does your company have a website and do you use flyers, catalogues and similar materials?
What is the value of my IP?
Issues to consider include: the contribution the asset makes to the business, the license value and the amount invested to develop the asset. Also consider how much you would be willing to invest to enforce against infringement. To come up with an accurate assessment of value, you may also consider discussing with an experienced financial advisor or IP lawyer.
Consider if you need professional help
Once you have an overview of the various IP assets in your company, in order to decide on the appropriate way to protect it, consider enlisting the support of an IP professional. It is advisable to ensure that the IP professional you choose possesses knowledge of your technical field and is willing to take into account the resource constraints that are often faced by SMEs.
Businesses that actively manage their IP outperform their peers by up to 30%. They do so by maximising the effectiveness of investment in the business, driving performance in areas that produce the best return, managing operational risk and minimising tax risk.
Difference in cultural background has often shown to be one of the most important issues in any business partnership. There is a great difference in how Chinese and Europeans view a partnership. Below are some of the issues which can pose an IP risk...
Contracts in China
When looking to identify your supplier, you should consider how you want the relationship to work and what controls you need to put in place to secure your rights. These issues need to be spelt out in a written agreement which can form the basis of a contract. It is not advisable to start any business partnership in China without a signed contract. It is important to keep in mind, that a contract could be viewed as a "guideline for cooperation" in China, whereas in Europe a signed contract is viewed as legally binding. Contracts should not be rushed through, but should instead be a process where the contract can work more as a relationship manual.
As an SME you should ensure that the potential business partner really is who they say they are. This can be done in a number of ways, but initially check whether the company is legally registered, and whether it is trading under the registered name. Helpdesk team leader Simon Cheetham from ERINYES INTERNATIONAL, a firm used to performing background checks, says:
"Often we find that we can save SMEs a great deal of trouble and expenditure by doing a simple background check prior to negotiations with a potential supplier. In this way we can ensure that the legal entity that the SME is to enter a sourcing contract with is also the company that can be held responsible for any wrong doing. It pays to know who you are dealing with."
In the contract, it is advisable to clearly state what Intellectual Property Rights are owned in respect of the items to be supplied and to clearly state that any know-how, discovery, invention (whether patentable or not), design, drawing, computer program, photograph, plan or record relating to the development of prototypes and the subsequent final version of products or any future developments to products which are made, created, developed or acquired by the supplier (together with all Intellectual Property Rights and any future rights in respect of any such matter) will belong to the SME absolutely.
Preventing disclosure of valuable information
When handing over material to another company or individual in any business matter, it is important to use confidentiality, non-competition and non-disclosure agreements to minimise the risk that the company or individual will disclose such information to third parties or use the information to compete against your company.
Employee contracts in China
Especially when conducting R&D in China, Chinese lawyers should be appointed to prepare employee contracts.
Learning about the Chinese culture before entering into a business negotiation with a Chinese partner is beneficial. If you understand who you are dealing with you will have a better chance of success. Chinese culture is best learned by living in or visiting the country.
As China´s purchasing power continues to increase, many SMEs are experiencing increasing demand for their products in China. When promoting your products in China, there are certain IP risks that should be kept in mind.
You need to consider the following IPR issues when doing business promotion in China:
Check whether you protected your main assets in the Chinese market?
Prior to any engagement with China your company needs to consider what know-how that is valuable for your business and how this is protected in China. The first step is to:
identify what IPR and know-how is embedded in the component or product to be sold in China;
ensure that correct IP protection is in place in China. By merely showing your products in China you increase the IP risks.
A Chinese name?
It is often a necessity to have a Chinese name for your product introduced in the Chinese market. However, as opposed to other countries, not having a Chinese name entails an IP risk. If a brands Chinese name has not been decided and registered in China prior to starting promotion the following IP risks occurs, as China IPR SME Helpdesk IP Business Advisor Matias Zubimendi explains:
"When it comes to creating Chinese trade marks, there are several different ways where things sometimes go wrong for SMEs. For example, that the name that is invented by the Chinese consumers has negative connotations; that the Chinese name which is developed at a later stage by a retailer or an agent is not of the SME’s liking; and most importantly, that the unregistered Chinese name, which the SME has started to use on the market is registered by third parties, leaving the SME with suboptimal choices of either changing all promotion materials and creating a new Chinese trade mark or buying the trade mark back – this can often be very expensive."
The solution is to find out which Chinese trade marks your company wants to use for the Chinese market and at the same time explore whether the chosen trademarks are available for registration.
Attending trade fairs
Trade fairs are known as a location where infringers get inspired. Therefore, when attending trade fairs certain precautions should be initiated. Avoid showcasing important know-how and ensure that visitors to your stand aren´t allowed to take photos. Some companies even restrict who has access to the exhibition stand to ensure that they have control over who can be introduced to certain products. Restriction can also be done by following all visitors to your exhibition stand closely.
Before getting engaged in marketing campaigns in China, ensure the registration of trade marks. In China, it is often the fact that trade marks are squatted.
Dealing with Counterfeiting
Unfortunately counterfeiting is a problem experienced by most SMEs and it is not an easy issue to resolve. If your company experiences counterfeit products, there is an array of options your company can choose to implement.
Overall factors to consider when choosing to fight counterfeit products
Taking action against a counterfeiting manufacturer and/or distributor is a complex matter, which in general contains three elements:
- In depth knowledge of the SME´s product and the counterfeiting product
- In depth knowledge of IPR-legislation in China, and which legislation to be considered in a given case and
- An analysis of what effect the counterfeit product has on your business, both in the short term as well as the long term.
Gathering the facts
When dealing with counterfeiters, the first step is to identify the infringer and gather intelligence. Helpdesk team leader Simon Cheetham of ERINYES INTERNATIONAL, an expert in securing evidence and taking administrative actions in China explains:
"There are several issues to consider when securing evidence in China. We have found that counterfeit manufacturers close down and open up again if they find out that we are investigating them. It therefore becomes an issue of securing evidence the first time you have the chance, and making sure they are not aware of you being there, until you have the case ready."
Resources are needed
Anti-counterfeiting is a task which takes up resources. A well prepared plan heightens your chances of a positive outcome for any given case. Often when no action is taken, the counterfeiting problem and the counterfeiting company grow.
Question whether you have the internal expertise
If you do not have an internal resource which is used to being engaged in anti-counterfeit preparations in China, it is an option to contact external IPR consultants that can take care of the SMEs needs in a given case in China. China IPR SME Helpdesk IP Business Advisor Matias Zubimendi explains:
"European SMEs often do not think that they can do anything against Chinese counterfeiters, but this is not true. In China the IPR legislation provides many options to deal with counterfeiters. For example, an SME can take civil action, an administrative action or use the PSB to take criminal action. In addition, major e-commerce platforms all have a complaint mechanism to assist SMEs in taking down infringing material. It is best to consult with IP professionals to determine which route of action would be best in specific cases. For example, administrative actions tend to be faster and more cost effective, but administrative authorities cannot award damages."
IPR experts in the field getting acquainted with IPR
For an SME it is important to consider the type of IPR expert needed in order to take the next step. Here, can find a description of the IPR services available in the market, and how to get in contact with the different experts.
If your company has experienced counterfeit products, and has no previous knowledge on anti-counterfeit actions in China, you should start by learning more about IPR is about. Furthermore, the options you have when dealing with counterfeiting is very much dictated by the preventive measures that have already been implemented in your business model in China.
To get an idea of what lessons have been learned by others, read the following case stories:
Licensing is often regarded by SMEs as a cost effective way of entering the Chinese market. Licensing is also often seen as a way to work with local people who have the know-how to enter the market and an opportunity to tap into a local network. While licensing can offer a great opportunity, there are also risks with licensing that should be considered. You should ensure that the potential licensee really is who they say they are and has the experience, resources and market reach to match your expectations.
Just as important as identifying the right licensee, is developing a well thought out and robust licensing agreement. This is a complex area and should be undertaken by a competent lawyer.
Some of the IPR issues you need to consider in relation to licensing in China include:
Identify your IP rights - what is to be licensed
A thorough study of your company´s IPR situation is needed to ensure that the IP rights and the related know-how to be licensed are identified. From this assessment you should be able to answer the following questions:
- What is already registered?
- What needs to be registered?
- Who is currently responsible?
Make sure that everything that needs to be registered, is registered. In this way your company can ensure that the right IP protection is in place before entering a licensing agreement in China. To get an idea of how to perform an IP audit see the 'IP Audit' section above.
Ensure you can end the agreement without losing your market
Sometimes, an exit plan from an agreement is forgotten. It is very important to have a plan for terminating an agreement when signing the contract with a Chinese partner. The actual content of the exit plan is very dependent on what you are licensing, it is important to keep in mind that the licensing partner can become a future potential competitor and/or infringer if not considered appropriately.
Keep the most important know-how to yourself
Often the licensing partner does not need to know all the details of your product. It is imperative that you keep the most important information to yourself (if possible).
How should the licensee handle your know-how and IP rights?
When working with a licensee it is important to ensure that the licensee is guided on how to utilise your company´s IP rights. A guideline to handle IP rights should be developed to ensure that the licensee can handle your assets with care.
In the licensing agreement it is a good idea to clearly state the Intellectual Property Rights owned in respect of the items to be supplied and to clearly state that any know-how, discovery, invention (whether patentable or not), design, drawing, computer program, photograph, plan or record relating to the development of prototypes and the subsequent final version of products, the licensing agreement should also clearly state any future developments of products which are made, created, developed or acquired by the supplier (together with all Intellectual Property Rights and any future rights in respect of any such matter) will belong to the SME absolutely. See the 'Research and Development' section to read more.
Monitoring the licensee
Always monitor what goes on. In China precedence means a great deal. One way to do this is by having external persons to inspect whether the licensee lives up to the agreement.
Research and Development
Doing research and development in China has become more commonplace for the SMEs. As there are a great many engineers qualifying in China every year it has become an attractive country to consider for R&D. Moving this function to China does entail exposure to extensive IP risks which need to be considered and minimised if success is to be attained.
There are a variety of different IP risks to be considered and these include:
Having the right IP protection in place
A thorough assessment of the company's IPR situation is needed. If your SME does not have an internal resource to carry out the IP assessment, consider bringing in experts with specific knowledge on securing IPR in China. Performing such an assessment without having experience in both IPR and China-issues is not recommended.
IP risks and business set-up
Physically relocating or establishing R&D in China is a significant business decision. Consider the status or type of entity you plan to establish or work with. There are different issues to consider depending on the type of business entity and how it is owned; for example, a Wholly Foreign Owned Enterprise (WOFE) operated by your own trained employees will be very different to the issues involved in performing R&D in a Joint Venture or by contracting to a domestic enterprise.
Make sure, if you are planning to work with an existing company, it is a properly registered, legitimate business. If you are at the stage of discussing an R&D agreement with a prospective partner make use of confidentiality agreements and non-disclosure agreements to preserve your proprietary information and trade secrets (see the 'Business Partners' section).
Minimising IP risks is largely dependent on who and how you choose to handle the R&D in China. No matter how you choose to resolve the business set-up, it is important that technology transfer back to the SME is ensured. Steps to ensure this should be made prior to engaging in R&D in China.
Contractual issues in China
When looking to identify a potential R&D partners in China, you should consider how you want the relationship to work and what controls are needed to secure your rights. These issues need to be spelt out in a written agreement which can form the basis of a contract. It is NOT advisable to start R&D in China without a signed contract. However, it is important to keep in mind that a contract could be viewed as a "guideline for cooperation" in China, whereas in Europe a signed contract is viewed as legally binding. Contracts should not be rushed through, but should instead be a process where the contract can work more as a relationship manual.
In the contract, it is advisable to clearly state what Intellectual Property Rights are owned in respect of the items to be supplied and to clearly state that any know-how, discovery, invention (whether patentable or not), design, drawing, computer program, photograph, plan or record relating to the development of prototypes and the subsequent final version of products or any future developments to products which are made, created, developed or acquired by the supplier (together with all Intellectual Property Rights and any future rights in respect of any such matter) will belong to the SME absolutely. It is advisable to have a Chinese specialist forming the contract as there are certain China specific issues that should be considered.
Discovering and protecting IP rights - building a systematic approach
When R&D is conducted in China, there is a need for implementing structures which ensure that IP rights are discovered, evaluated and that an internal strategy for exploitation is made.
China IPR SME Helpdesk IP Business Advisor, Matias Zubimendi explains
"SMEs often lack internal structures to manage IP in R&D Collaborations. The business implication of this is that the SME does not get its IP rights secured, which eventually means that the innovation can be used by everybody in China and not only the SME. It is therefore recommended to put in place a structure that allows the SME to discover the potential IP rights and realise the value of these rights as well as manage the rights."
Restricting access - preserving trade secrets
Trade secrets can be defined as "Technological information and business information that is not known to the public, derives economic value for the holder, is of practical applicability, and has been subject to steps by the holder to maintain its secrecy". In practice the R&D department needs to be physically isolated and demonstrably secure, and visitors should be monitored closely (if having access at all). Furthermore, consideration should be given to the secure storage of important information.
Monitoring - IPR Security Audits
Always take a practical approach to securing valuable know-how and IP rights. Monitoring is therefore an option to check whether the current system in place is actually minimising the risk of leakages.
China IPR SME Helpdesk IP Business Advisor Matias Zubimendi explains the process of audit sourcing partners for SMEs
"An IPR Security Audit is designed to determine to what extent the IPR area and the IPR processes within the SME’s organisation are secure. IPR Security Audit helps to secure data for further optimisation of the SME’s IPR security platform and eventually develop a list of potential IPR risks for the company in question."
R&D departments which know they must adhere to controls, procedures and standards will do so if they are subject to checks; those departments which are not subject to checks will rapidly deviate from procedures and standards.
It is imperative that SMEs consider how inventions made belong to the SME. IPR-transfer obligations should be included in all employee contracts. At the same time it is imperative to educate the R&D staff how to handle valuable information to ensure that they are aware of confidentiality details.
Sales and Distribution
Purchasing power is increasing in China and many SMEs are now experiencing increasing demand for their products in China. Both selling and distributing to the Chinese market entails IP risks.
Below are some initial issues you need to consider in relation to IPR when selling and distributing products in China.
Make sure IP rights are in place
A thorough study of the company´s IPR situation is needed to ensure that IP rights and related know-how to be licensed are identified. From this assessment you should be able to answer the following questions:
- What is already registered?
- What needs to be registered?
- Who is currently responsible?
Make sure that everything that needs to be registered, is registered. In this way your company can ensure that the right IP protection is in place before entering a licensing agreement in China. To find out how to perform an IP audit, see the 'IP Audit' section above.
A Chinese trade mark
A Chinese name for your product to be introduced in the Chinese market is often a necessity – especially considering products sold to consumers. However, unlike other countries, not having a Chinese name entails an IP risk.
Prevent loss of IPR through misuse
When working with sales and distribution, it is very important to ensure that the sales employees (or external partners if that is the case) understand how to use the company´s trade marks. The way in which a trade mark is registered is very specific and it will only be protectable if it is used in the form that it is registered. Wrong usage can eventually mean that you lose your trade mark. A systematic approach and guidelines should be developed to ensure that the sales and distribution team are able to comply.
Sales personnel & conflicts of interest
One of the issues that SMEs have experienced in China is that their own sales personnel also work for a competitor or infringer. It has been experienced that the sales personnel carry two sets of sales material, one from the original producer and one from an infringer. It is therefore important that the SME make proper agreements with the sales representatives and distributors in China, as well as prepare educational material to minimise this risk.
Sales staff are the first to identify a problem
Sales personnel are often the first to become aware of counterfeiting and are a useful resource for the early detection of a counterfeiting problem. They should therefore be informed of how to act when they discover counterfeit products and ⁄ or counterfeit manufacturers in the market place, in order for your company to be able to react quickly and effectively.