Changes in China’s Intellectual Property Story

I was speaking to an M&A lawyer today from a large Italian law firm, and one of the many interesting topics that came up was the gigantic improvements in intellectual property protection in China. I have heard this message from a few other lawyers recently, but he threw out a few interesting reasons for this change that I hadn’t heard before.

First, Chinese companies are beginning to have intellectual property. He cited two cases recently, both in the machinery sector, where Chinese companies have taken Western companies to court, and won, over some intellectual property issue. He sees this as an increasing trend, and expects the levels of cases coming and going from China to end up about 50/50 in the relatively near future.

Second, Enforcement has gotten quite strict in the larger cities. He’s quick to acknowledge that this is probably not the case outside the main jurisdictions, but he says in Beijing and Shanghai, and probably even the second tier cities, you can be readily expect to get a reasonable outcome to your case… Unless the person you’re bringing to court is well connected politically, then its up in the air. Or if you failed to register your patents and trademarks before entering the country.

Then, most interestingly, the changing structure of Chinese-foreign joint ventures. Intellectual property/trademark rights are now often included in the joint ventures assets, and thus belong to the Chinese partner at the beginning of the agreement.There are a few reasons why JVs have begun to be structured this way.

Part of it is improvement in Chinese financial markets: often when Chinese companies join a JV with the explicit goal of taking the company public, if the company does not control the brand then the market value of the listed vehicle is not going to be much.

A second part is simply the increased financial clout of both Chinese companies and Chinese consumers. A lot of the companies he represented were luxury goods/clothing brands who have suddenly found their largest markets are in China, and that their Chinese partners are stuffed with cash, while they are short of it due to the financial crisis. In this case it often simply makes more sense to have the brand located in China (though often only the Chinese distribution rights). Whereas on the Chinese side, they don’t see the point in building someone else’s brand when the market is Chinese.*

Then third, and the lawyer didn’t explicitly say this but I’ve heard other people say it, Westerners are often selling the brand/technology right away to give all the IP risk to the Chinese partner. Something like an assumption that its going to happen anyways, so you might as well get ahead of it. Every lawyer I’ve spoken to about IP says its not nearly as bad as it once was or the existing reputation makes it seem. But it still happens, and this is an effective way to mitigate risk.

I think China is going to keep its reputation as an IP sinkhole for some time now though. As before, there are a few reasons: Manufacturing is moving away from cities with strong judiciaries, Chinese companies have been horrible at branding their intellectual property outside of China (most people wouldn’t know what IP there is to steal in China), and most of all, because all the major exceptions to the “strict IP enforcement” rule are politically motivated. The lawyer had worked somewhat tangentially on, the Danone-Wahaha case, about which he said “Danone was unfortunately going against one of the most powerful men in China.” (referring to the political connections of Wahaha’s founder). BYD of course has been sued by at least three large companies for IP violations, but has yet to be convicted in a Chinese court.

Intellectual property protection seems to be one of the many areas where China is changing for the better. Its also one of the areas that, when I worked at a chinese business magazine, we weren’t allowed to write about. The reason is clear, improved enforcement of IP rights might be a political victory, but its politics that also allows some of the largest culprits to get away with it.

*Interesting side note here. There’s supposedly a market for fake Italian brands in China. Chinese entrepreneurs will go to Italy, set up a company, then go back to China and sell the company with its “brand” to some Chinese clothing factory. The lawyer said that Chinese companies are now protecting against this by buying brands solely based on how long ago they were registered.