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While Chinese authorities have made progress promoting the concept and value of intellectual property at home, there’s still a myriad of traps for Kiwi exporters. Exporter spoke to leading IP practitioners to highlight the issues and solutions. 

For exporters and consultants alike, China still remains a formidable prospect – particularly when it comes to IP. It’s not enough that the whole idea of IP was traditionally a foreign concept to most Chinese business people, but more recently, the issue of trade mark squatting has also raised its ugly head.

Trade mark squatting is where an opportunist sees a brand offshore and registers the trade mark for that brand in China. It costs next to nothing and some squatters are sitting on more than 200-plus Chinese trade marks.

So when the original brand owner decides to start selling product into China, explains AJ Park partner Anton Blijlevens, they’re faced with trade mark infringement threats accompanied by an offer to sell the Chinese trade mark for a significant sum.

“I’ve never heard of an asking price of less than US$100k,” says Blijlevens. “Many New Zealand wine labels have faced this; some deciding to rebrand just for the Chinese market rather than pay to buy the Chinese trade mark. The other solution is to fight the squatters in court and although the law has recently changed to make this easier, the costs are high.”

The best solution, advises Blijlevens, is to file your trade mark in China early and beat the squatters. “First to file is best dressed. The cost of securing a Chinese trade mark is a lot cheaper than taking it to court or rebranding.”

Increasing exports in the high tech sector is seeing more exporters facing IP infringement risks too, says Blijlevens. “Companies that’ve been successful in making and selling product in New Zealand for years and decide to pursue export opportunities are seeing more and more infringement risks arise in offshore markets. The solution is understanding the infringement risks before committing to export”, he says. “Low cost approaches such as soft release of product to try and flush out IP rights holders is one way of doing this.”

Although the problem in Asia of these so-called “trade mark trolls” and potential distributors stealing a Kiwi company’s brand is often reported in the media, many exporters think it won’t happen to them; they’ve not fully comprehended the threat and remain unprepared.

And, according to Johnathan Chen, head of division-Asia at James & Wells, New Zealand exporters who’re starting to register trade marks in China often do a half-pie job.
“There’re hundreds of largely Internet-based businesses in China offering to register trade marks for Westerners. We’ve noticed more Kiwi companies using them to save costs. However, often these trade mark filing businesses don’t actually have an office and sometimes ‘disappear’; or they lack appropriate qualifications, or can’t adequately deal with adverse examination reports,” says Chen. “They certainly can’t provide the strategic trade mark advice New Zealand exporters need.”

Chen knows of New Zealand companies registering the English version of their brands, and not thinking about a Chinese equivalent. “This opens the door for distributors and opportunists to register and control their Chinese equivalent brand,” he says, “which is the brand Chinese consumers will normally use when buying the goods. In a recent famous case this cost New Balance $22 million in damages.”

Chen says the key is to understand the market; develop a Chinese equivalent brand and fully understand/appreciate what the Chinese brand means. “Then ensure that you’ve full control over this brand, including advising your distributors that this is your official Chinese brand. Be prepared to get feedback, and understand that any brand is subjective. Not everyone will share the same opinion/perception of a particular brand.

“However, as long as you are comfortable with what it is, and you have done a disaster check and relevant market research, then you should feel confident about sticking to your guns.”

Watch your documentation
Charlotte Henley, partner at Kensington Swan, says a common trap Kiwi businesses experience in China is having loose, non-documented arrangements with their Chinese manufacturers – who, in turn, may seek trade mark protection for the exporter’s key brand in their own name.

“We’ve also seen instances where the Chinese manufacturer makes inappropriate use of a business’s IP – for example, moulds or designs – to make product for other businesses.

“Both of these issues can be reduced with carefully worded contracts in place with the manufacturers, combined with IP protection for the trade marks/designs in the Chinese market. “There can often be misunderstandings at a cultural level over the difference between a licence for a fixed term, and a complete assignment of IP rights,” adds Henley.

Counterfeiting remains a major problem for many brand owners entering or operating in China too. The efforts of interest groups such as the IACC (www.iacc.org) have done much to raise awareness and improve matters in recent times – one example being the collaboration between IACC and Internet platform Alibaba Group.

“Working with experienced lawyers and investigators is essential to combat counterfeiting and piracy in China,” says Henley’s colleague Jenni Rutter, another partner at Kensington Swan.

“We also recommend networking with other businesses in your market – you may be surprised how much knowhow they’re willing to share in terms of enforcement options.”

Rutter says exporters still underestimate the intense focus of Chinese consumers on the safety and provenance of imported food and health supplements. So don’t maximise the ‘confidence factor’ in marketing and branding and appreciate the deep network of family and friend recommendations and research that goes on prior to purchase.

“This is equally applicable at home,” she says. “Chinese visitors are desperate to match up their research on the most reliable brands with the actual products on our supermarket shelves. Yet most products don’t contain basic Chinese language labelling or trade marks that would give any producer a head start with these consumers.”

Variable enforcement
While it’s true China has started to get its act together on enforcing IP rights, Anton Blijlevens cautions that enforcement varies from region to region. “At its best, it’s better than we have in New Zealand. IP help-desks at trade fairs can enforce your IP rights on the spot against infringing brands and products on display at the trade fair. Administrative route IP enforcement is cheap and can be effective.”

But in certain parts of China, IP is still a very new concept, he says. “In addition to the sheer difficulty in trying to identify who the infringers are, to issue infringement notices or execute search and seizure warrants, in some industries IP enforcement is impossible because of corruption and criminal elements.

“I’ve a client manufacturing consumer products in Shenzhen that cannot get officials to enforce their IP rights in a nearby town where counterfeit product is made, because of personal safety concerns.”

Johnathan Chen, who travels frequently to China, says the government is pushing hard to educate the public and businesses on the concept and value of IP. “It has recognised that in order to be a world leader, China must develop, own and control its own technology – rather than licensing, or even worse, replicating, others.

“With a stated aim of being a technology and IP ownership leader, China cannot expect other countries to respect Chinese IP rights if it doesn’t reciprocate,” adds Chen. “As a consequence there’ve been significant improvements in the Chinese IP system, including clamping down on infringement and setting up specialist IP courts and enforcement groups.”

Chen believes the biggest trap for New Zealanders with the China IP system is failing to understand the culture of the people within these systems.

“Unlike New Zealand’s system, there’s no room for discussion, and this won’t change. The China Trademark Office handles well in excess of one million applications every year; they’re not going to listen to anyone from little New Zealand whine about the fact that their trade mark should be accepted because it’s sufficiently different.”

Forward planning and checking your brand for use in China is therefore critical, he says, and it takes a lot of work on the ground and relationship building to develop this knowledge.

“Just like everything else in China, relationships take you a long way – and yes, relationships and contacts are even important when trying to get a result from the legal system.”

Chen increasingly hears of distributors not handling products from overseas that do not have registered trade marks, or relevant IP rights in China.

“Legitimate Chinese businesses know what the market’s like. They want to avoid being involved with counterfeit product, especially products for human consumption, and are therefore looking for assurances of authenticity.”

Lingering myths
Myths and misconceptions still abound around applying trade marks, patents and trade secrets in China. Anton Blijlevens comments on the main ones:

  • Myth 1. ‘I don’t need to register my trade mark in China because it will be ripped off regardless’. “Registering your trade mark in China means you own it. If someone else registers your trade mark ahead of you, then you will be stopped from making or selling your branded product in China. So registering creates certainty of use for your brand in China,” he says. 
  • Myth 2: ‘I don’t need to worry about seeing if someone else has a patent that can stop my product or technology being made or sold in China’. “China ranked number one in the world in 2013 for patent filings. Over 1.1 million patents were filed there by Chinese and foreign companies. That is nearly twice as many as in the US. IP infringement risks in China cannot be ignored.” 
  • Myth 3: ‘I can trust my Chinese agent or contract manufacturer to register my trade mark for me’. “You may be right but I’ve heard of too many cases were the agent ends up owning the trade mark and making it difficult, if not impossible, for you to change agents or manufacturers without abandoning your brand.” 
  • Myth 4: ‘I can trust that my trade secrets will be kept confidential by my factory in China’. “No you can’t. Unless the secret sauce in your product is made by you (preferably here in New Zealand) don’t expect to be able to keep your trade secrets as a secret. IP theft is a worldwide problem. A trusting Kiwi approach to sharing your secret sauce is not recommended.” 
  • Myth 5: ‘It is expensive to get Chinese IP protection’. “The costs and the procedures are no different to other countries.”

Johnathan Chen believes some Kiwi businesses may still think IP is a tool used for protection only. “This is a very old-school mindset. IP is, in fact, more effectively used as a leveraging tool. For example, when negotiating prices the distributor may ask ‘why is your product $10, when company B does it for $7.50?’ Wouldn’t it be nice to be able to say ‘well that’s because they can’t do what we do, and here’s the certificate to prove that’.

“It sounds trivial, but surprisingly not many Kiwi companies think this way about IP, let alone the more advanced, subtle ways IP can be used to advantage,” says Chen. “Like making deals more attractive to Chinese investors by transferring the IP to holding companies in tax attractive jurisdictions; or by setting up a sale or licence of IP in a way which enables Chinese businesses to get their money out of China.”

Traps in other markets
Of course, China is not the only market constantly adjusting its IP legislation. Blijlevens reports challenges, particularly for their ICT clients, associated with rapidly changing case law around the protection of software and app inventions, particularly in the US.

“Knowing the current state of play is vital. But because the process from filing to grant can take a number of years, anticipating what new case law will surface during that time is impossible.”

Some patent offices around the world now take a long time to examine patent applications, he adds, “which does not marry up well to short lifecycle products such as toys and software”.

European patent law in particular has become very complex in the past eight years, he adds.

And, regarding the new Madrid Protocol trade mark system for securing international trade mark protection, Blijlevens says it’s not well suited for securing trade mark protection in China. “It is better to file a separate Chinese trade mark application to ensure it provides the best coverage possible.”

The Middle East, too, can be an IP minefield. Ceri Wells, co-founder of James & Wells, says some Arab countries will not register a trade mark if it has been registered in Israel. And many Middle Eastern countries have a first-to-file system like China, which makes it easy for foreign trade marks to be stolen.

Wells describes Russia’s trade mark laws as “draconian”. “It is essential that one’s trade mark in Russia is used in exactly the same format as it’s registered, and trade mark owners must prove the mark is in use at short notice by producing original receipts/invoices.”

First mover advantage
Because of the low number of patents and trade marks being filed in New Zealand, Blijlevens believes Kiwi companies can be lulled into a false sense of security
over IP.

One reason is that the ‘first mover advantage’ for a successful launch of a new product in the New Zealand market does not translate into success in export.

“To get a first mover advantage in a larger offshore market takes a lot of capital, something that New Zealand companies generally don’t have. Aside from the fact that modern technology, such as 3D scanning and printing, can now let competitors be up and competing in a matter of days, offshore markets are way more competitive than in New Zealand.

“So if you can get them, IP rights help maintain the first mover advantage, and with broad IP protection, that advantage can be many steps ahead. The cost of securing IP rights does not need to be high. Be strategic and ensure that the cost/benefit ratio is right.”

Blijlevens final word of advice is to get professional advice early. “A lot more can be done at a cheaper price and without costly and time consuming backtracking if you know what IP you can get early.

“For example, if your brand and secret sauce are the value drivers of product and your biggest market opportunity is in China, you may not be spending more than $3k to get well protected.

“But leaving it too late may mean a trade mark squatter owns your Chinese trade mark and your trade secrets have been sold by your contract manufacturer.”  

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