The ultimate guide to protecting intellectual property in China – Part 2

Welcome to part two of ‘The ultimate guide to protecting intellectual property in China‘.

In my last post I walked you through registering your IP and some ways on how to limit the exposure of your products to keep everything under wraps and protected.

This time around I’m going to go into more detail about what you can do to limit your exposure, how to go about monitoring the safety of your IP, and enforcing it. Let’s get right to it.

Limit your exposure by having some leverage over your supplier

You definitely need to have a balance here. If you have too much leverage, the ups and downs in your product cycle could really affect them adversely. My rule is to represent 20 to 35 percent a factory’s output. If you can become that volume for a factory’s output, so you represent 30% of their output, you’re not too big and not too small, they would really have to think twice before compromising your intellectual property.

Be cautious of a low price

If you get a price from a really professional factory that’s low, there may be a reason that the factory wants to entice you to do business with them. Sometimes they really want to get your business, and sometimes they want to learn about your new design or product so they can make it on their own.  It is important that you do your homework and that you are paying a reasonable price, not too low and not too high.

Monitoring the safety of your IP

You might have a great contract, you might get the factory ownership to sign up that they will never do business with your three competitors, the factory owner that signed it may actually believe that he wants to follow the agreement, but what about the other 15 people on the sales department or the engineering team?

Inevitably, if you have a really cool product being made at the factory, somebody from the sales department may scheme that they have access to a really cool product, decide to put it in their suitcase and take it to a trade show, or take pictures of it and put it on their website. Even if you have the greatest contract explaining ‘DO NOT SHOWCASE MY PRODUCT’ clearly under the contract of the supplier, there’s still a likelihood that your product will find its way into the public domain. 

Whenever I have that type of relationship with the factory where there’s an agreement in place, I monitor it. Ask any supplier, “Hey, which trade shows are you going to?” They’ll be so happy to tell you because they think that you’re going to come to their booth. You can write this information down, then you or your friends can walk by the booth to see if your product is for sale.

If you’re visiting the factory, look in their showrooms, look on their website, check out their tool room, look in their stock room. You can learn a lot in a warehouse of a factory, because on most boxes it will say the end customers’ location and brand name. So say you have exclusivity where you tell the factory “You better not be dealing with any other American customers Mr. factory. I don’t care if you sell to Canada, or Australia or UK, but I’m your only American customer per contract,” and then you go in the store room and you see Walmart USA all over the boxes that they’re shipping, it’s a red flag that somebody in the organization is disrespecting you.

You don’t necessarily want it to appear that you distrust the supplier or you’re snooping around, so you can do what I like to do, which is tell them “Thanks for the tour. While we go through the warehouse do you mind if I take some pictures? I’d also like to test the thickness of your cardboard. Do you mind if I take these samples of cardboard and do a little stress test?” I use this all the time!

In reality my co-worker is taking a picture of me by the boxes that says Walmart USA while I’m pretending to do a stress test to get a close up where it exactly it’s shipping. So get yourself in the show room, the stock room and the tool room and look around diplomatically. So trust, but verify.

Tackling Taobao

Taobao is like the number one back door channel where factories sell product without you knowing. It’s all in Chinese, but you can do a keyword search on taobao.com and have someone that is Chinese do a search and find out easily if they’re an approved vendor of  selling your product out of the back door.

When I had my second child, I used taobao and I saved so much money buying the European and Japanese brands of cribs and really high end stuff like clothing for children and everything. It was all from the actual factories in English packaging and no Chinese on it. It was literally from the authorized factory, but someone decided to make a few bucks off of the factory by selling excess stock out of the back door. Now you might say no harm no foul, but what if I decided to buy 5000 units of the product that you just made with the factory of off taobao, and now I’m going to sell it pre channel into your market, that could really hurt! So keep an eye on taobao.

Who is the dummy

?

Another way to keep an eye on the factory’s honesty is to pretend to have a friend of yours  play the dummy customer where you write, email or call the factory and you say, “Hey, I heard you are making xyz product, I don’t know if you’ve done it before, but do you think you could make this watch for me?” If your friend is actually asking them to make your watch, and they say yes, that’s a very bad sign.

I don’t want to scare you away, the vast majority of suppliers are honest to deal with, as I have said before some of these suppliers are like family members to me, but you have to assume the worst and monitor them accordingly. They are under so much pressure to make money, the sales person works on 100% commission so they are so aggressive when it comes to getting new business, and this concept of respecting intellectual property, I don’t know if it is Confucianism, communism or a lot of people crammed into a small place with a lot of energy to make money, but the concept of what it’s in  personal space and what’s in a public domain is very much blurred in China, so even if you think it’s clear that you own this technology, a lot of supplier may have different impression on what is in the public domain.

Lawfully enforcing contracts

If you monitor your IP and you find that there is a breach of contract, don’t just say, “Whatever, it’s China, there’s nothing I can do about it.” 15 years ago, that’s what I said, but things have changed so much after China joined the WTO. The courts are becoming much more of a level playing field. You can issue a demand letter, just don’t issue a demand letter in English from your lawyer in New York, the suppliers are going to laugh at that, but if you get a local Chinese attorney (they are becoming more and more affordable) to issue a demand letter politely explaining that if they don’t come correct there might be a litigation you will see that we can litigate in china. Foreigners can even investigate, so things have changed a lot, it’s a level playing field in terms of our ability to enforce contracts.

To show you how level of a playing field it is, I was involved in a case where it wasn’t IP infringement, but it was like a wrongful termination of employment situation or something like that, where clearly the employee did a bad job and should have been fired, and the employee said that I needed to pay him severance.

I wanted to know what we were getting into so I went to the court just to see how this process works. I was kind of in the neighborhood so I didn’t even bring a lawyer with me. It was all in Chinese, and I think they were surprised that some foreigner showed up and asked how the Chinese court system works. The girl at the front desk asked if I wanted to meet the judge that was handling my case? I said yes and sat down with them and the judge let me explain the case. After having my say the judge called up the defendant and said he thinks the defendant would lose the case if it came to court, and that he should settle right now. I don’t think that will be legal in the US, and it certainly doesn’t happen in the West, but in china that judge had so many cases on his docket that he just wanted to get things moving.

I had good contracts, they were bilingual, I was a nice guy, and he went out on his way to make sure I was protected as a foreigner in China. Don’t think that the courts are biased against you, they may say that because they didn’t have their contracts in place, they didn’t have their contracts in Chinese, they tried to enforce their intellectual property after it was ripped off, and they didn’t bother to register it in the first place.

In those cases you will find yourself fighting an incredible uphill battle, but if you apply the tips that I’ve shared with you in terms of having proper bilingual contracts, a contract stating a penalty if its broken, you’ll make it really easy for the judge to lean in your favor.

That brings us to the end of this ultimate guide to protecting intellectual property in China. If you have any questions pertaining to anything I’ve said above, please feel free to drop me a comment below.