Cover Your Bases. Cover Your Patents…

Wednesday, August 23, 2006 10:10

Ask anyone who has worked in China, traveled to a trade show, or is in an industry that has seen a rise in the quality of Chinese competitors, and they will all tell you a story…. a story about a patent infringed, a tradmark stolen, or a brand diminished

Corporate espionage is something that has been a problem since the inventions of the cotton gin and the formula for Coke. Stories of P&G employees stealing ideas while listening to Unilever employees discuss product development over a drink (and vice versa), microphones implanted in the fist class cabins of airplanes, and Japanese reverse engineering were the stories passed around in the 90s. Now it is of Chinese manufacturers who are out to steal corporate secrets, operations managers setting up competitive operations, and other unfair practices that advance their capabilities.

A manufacturer recently told me their story. As a leader in their industry, they once were selling well into China with several million USD in equipment sales each year. Their manufacturing base was 100% offshore, and the equipment was sold into China as a finished unit. Then, 3 years ago, it started when sales started to slide to the point that in the last 2 years they have not sold a single unit. Now 80% of the world’s sales for this product is either their’s or a copied product. One can only imagine the losses.

Another story was much the same. A manufacturer had two products that had different levels of technological capabilities and engineering. where they once had the market leader position for both, now they are taking defensive measures (i.e. move to China to reduce manufacturing costs) so as to protect the second product (the first product is now at a less than 30% market position after Chinese competitors began to offer products that were of a similar quality and lower price). Again, their products were manufactured offshore and imported per the needs of the China market.

Finally, while visiting the Canton fair a year ago, the China Sourcing Director (they were contract manufacturing in China) of a kitchen counter-top electronics manufacturer noticed that there were several booths with their multi-patented product on display. Their patents had clearly been infringed, and to add insult to injury, the Chinese manufacturers were advertising the patents to be theirs. A bold, but not uncommon practice say some….

What all of these manufacturers have in common is that these China based manufacturers were threatening their core business units, were stealing market share away from them, and for one in particular manufcturer, was threatening the ongoing concern of the whole business.

However, where the last company was different from the first two is that they were prepared.

Not only were there patents filed properly in their home country, but they had also been registered in China. The sourcing direct, as part of his trip, was mandated as a matter of course to seek out manufacturers who may have products violating their patents, identify them, and with documents in hand get production stopped (or at least begin that process).

For many manufacturers, their IP and investment in R&D is what leads them to develop unique products and product portfolios. It is a large reason why customers purchase one item over another, even if the price of that item comes at a premium. However, too often companies do not take the necessary steps to protect those assets. Maybe it is a feeling that the bar is too high, or that without the product being sold or manufactured outside of their market, that they are safe. Unfortunately, that just is not true anymore.

Patenting products, regardless of a companies intent to source, manufacture, promote, or sell needs to be debated within each company. Believing that a Chinese manufacturer (or a international manufacturer operating in China) will not infringe your products because your products have yet to enter the borders of China could lead a company to experience one or more of the scenarios above.

With internet technologies, trade fairs, and other means of gathering operations, gaining access to competitive intellignce has never been so easy, and that is why it is so critical that executives begin to realize the threats that do exist, the tools available to protect themselves, and the resources that are available.

Some of the steps that executives should take are:

1) Learn more about patents and patent laws in China (your U.S. patent does not apply). There is a lot of information on the web that is free, unbiased, and can offer valuable advice on why you need to worry about copyright, patent, or trademark infringement.
a – Visit websites: U.S. Department of Commerce; U.S. China Business Council, IP Protection in China
b – Blogs: China Law Blog; China IP Law Blog; IP Council Blog; J. Douglas Millar
c – Attend events hosted by: U.S. Commercial Service, World Trade Centers, industry associations, and others

2) Identify and speak with law firms, security consultants, and other manufacturers who are well versed in Chinese patent law
a – Law firms: Morrison & Foerster; Squire, Dempsey, and Sanders; King and Wood; Harris & Moure; and Others
b – Security Consultants: Control Risks, Hill & Associates, or Kroll

3) Develop a proactive strategy for protecting your patents:
a – Visit the Canton Fair or other trade shows in China to see whow your competitors are, and what they are selling
b – Search for competitors and competitive products online using Global Sources and Alibaba
c – conduct competitive intelligence research using market research firms and other consultants

4) Implement and follow through on that strategy!

5) Revisit, Review, and Revise your strategy as event and time dictate.

Quite often we can take for granted the work that has gone into building a product, the relationships necessary to sell it, and the infrastructure necessary to ensure after sales service. Years, if not decades, can go into the development of a product, by becoming complacent and thinking “it won’t happen to me”, manufacturers are inviting the fox into the den.

Taking proactive steps to protect one’s assets in the global economy is essential for the successful ongoing concerns of operations for companies of all size, not matter where they are based, and no matter where their products are sold.

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2 Responses to “Cover Your Bases. Cover Your Patents…”

  1. All Roads Lead To China » China Law Blog post: Outsourcing in China - 5 Legal Basics says:

    October 8th, 2006 at 11:20 am

    […] This is a topic that we have previously discussed from operational and investigational angles in Cover Your Bases.. Cover your Patents. […]

  2. All Roads Lead To China » Pfizer and Disney Take Their Lumps says:

    February 6th, 2007 at 10:06 am

    […] For those who are looking to manufacture a product in china and export to the E.U. or U.S. don’t think that you are safe either. this place is FIRST TO FILE and that means you need to be FIRST TO FILE. Please see Cover your Bases.. Cover Your Patents for more as many of the lessons there as just as applicable to trademark protection as they are to patents. […]