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China's Lack Of IP Protection: Overrated. Overrated.

By Dan Harris and Steve Dickinson

Many years ago, I attended a Roosevelt High School versus Juanita High School basketball game. The big matchup was between two top 100 high school prospects, Marcus Williams for Roosevelt and Micah Downs for Juanita. By that point, both Micah Downs and his father had already made clear they thought Micah was already NBA caliber (which he clearly was not) and that high school (he was now on his fifth one) ball was pretty much a waste of time for him. Roosevelt won the game, Downs played like a very good high school senior (not an NBA'er) and every single time he would touch the ball, the crowd would chant "overrated, overrated" and every time he would do something wrong, we would chant, "NBA, NBA." Though I have nowhere to shout it (except maybe here), I am often tempted to shout "overrated" when my clients or others make it seem as though one cannot do business in China because of its rampant lack of intellectual property (IP) protection. That excuse is overrated. The reason it is overrated is because so many of the companies worried about protecting their IP in China do not really possess any IP in the nature of patents or copyrights. The issues they are concerned about fall more into the category of cutthroat competition than IP protection and those issues are usually best handled not through IP registration, but through Non Disclosure Agreements (NDAs) and trade secret provisions, both of which China is not all that bad in enforcing....at least when they are done correctly. And I am not being naive here because even before the Google thing, I have told clients they should operate under the assumption that someone in their organization will be passing on company information. I am not trying to make light of the very real IP protection issues in China, but I am saying that for most companies, that is not a good enough reason for ignoring China. The Conference Board Review, which very rightly describes itself as "Ideas and Opinions for the World's Business Leaders" just published an excellent article, entitled, "Is It the Real Thing?" making a very strong case that counterfeiting is an even bigger issue than believed and setting out some best practices for dealing with it. And as a sort of sideline issue to the main one, it published one by me, entitled, "In China, Piracy is no Excuse," [go to the bottom of your screen for my article] in which I argue that China's lack of IP protection is usually not a good excuse for not going into China. And I do not even believe our two articles are contradictory. Piracy and the lack of IP protection in China are huge issues. They are a huge issue for some companies, a big issue for some companies, an issue for some companies, and really not much of an issue at all for other companies. Nonetheless, for most (not all) companies they are not a valid reason for ignoring China entirely. Here are some excerpts from my article, explaining why: I mention all this because companies? anxieties about blown secrets resembles their fear of Chinese piracy: Everyone is afraid of it, but really only a small percentage of companies need worry much. It exists, of course, but how much impact does it really have on your business? With very few exceptions, my firm?s China clients have either not been hit with piracy or are too focused on making money from their own products to worry about it much. It is not nearly as much of an impediment to profits as believed. * * * * Foreign companies seeking to sell their products into China need to understand the role of wealth and price their products accordingly, if they can. If you are selling a product in China and it is always getting copied, you should consider reducing your prices there to better compete, assuming you can do so without angering customers elsewhere. Companies doing business in China should also consider piracy prevention measures peculiar to their own products. For instance, my firm?s gaming clients, which typically sell their games on CDs here in the United States, overwhelmingly sell their games online in China, using all sorts of anti-piracy measures to do so. Can these security measures be hacked? I am sure they can. Are these companies making good money nonetheless? They are. U.S. product manufacturers are sometimes so obsessed with piracy in China that they ignore what I see as an even greater threat: their own manufacturers. My experience convinces me that the most likely candidate to abuse your product is the company you are paying to manufacture it. This company is best positioned to send out ?extras? of your product into China on its own, and this happens more often than you might imagine. The best way to prevent these ?second shift? products from being produced and sold is to make sure your contract with your Chinese manufacturer expressly forbids this and then monitor, monitor, monitor. What do you think?

Full post as published by China Law Blog on January 19, 2010 (boomark / email).