Chinese Manufacturing Overseas Intellectual Property Risk Control
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Chinese Manufacturing Overseas Intellectual Property Risk Control

Since the "Twelfth Five-Year Plan", China's manufacturing industry has entered a new stage of industrial transformation and innovation and upgrading. With the launch and landing of the "One Belt, One Road" initiative, China's manufacturing industry has gone abroad at an unprecedented speed. However, the road to manufacturing abroad is not smooth. Faced with different markets and legal environments in different countries, China's manufacturing industry needs to adapt while protecting itself and strive to improve its international competitiveness and further enhance China's manufacturing. The position in the global industrial chain.


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Intellectual property is the core property of modern enterprises, especially for manufacturing. Many of the challenges Chinese companies face overseas are related to intellectual property issues. Depending on whether the country chosen by the company is a developing country or a developed country, the risks it faces are also very different.


Intellectual Property Risk Control in Developing Countries


The investment of manufacturing enterprises in developing countries is dominated by enterprise OEM projects (OEM, ODM). The advantages of developing countries are reflected in two aspects: on the one hand, the human and land costs in developing countries are low, on the other hand, many Developing countries have huge market potential.


For example, in terms of labor costs and land costs, the total cost of wages for workers in Cambodia in 2017 is about 1,300 yuan per person per month, while the cost of workers in the Pearl River Delta and Yangtze River Delta in China needs more than 3,000 yuan per month; The estimated land price for the coastal area is $90 per square meter, while Shanghai is nearly $180 per square meter. In terms of market potential, South Asia, Southeast Asia and some African countries have a population of nearly 3 billion, and many of them, such as India, Indonesia, the Philippines and Ethiopia, have achieved GDP growth rates of 5% per year in recent years. 7%.


Compared with the two advantages mentioned above, investment in developing countries will also encounter problems that will not be encountered in developed countries. Especially in the aspect of intellectual property protection, there are widespread problems in developing countries such as inadequate legal systems, low awareness of employees' intellectual property rights and low government enforcement capacity. If you don't make serious preparations in advance, even a strong company may make yourself squandered.


For example, in Southeast Asian countries, one of the main objectives of Chinese corporate investment, according to the US Department of Commerce's 2018 Intellectual Property Index Report, Southeast Asian countries (excluding Singapore) has reached 50 statistical targets in legislation on copyright and trademark protection. The average level, but significantly behind the patent legislation and government law enforcement power, and the protection of corporate secrets, many Southeast Asian countries only got the lowest rating.


It can be seen that Chinese manufacturing enterprises should pay special attention to the protection of their intellectual property rights through various means when conducting business in developing countries. The available means include:


NNN protocol


The first step in starting a foundry project is to find a good partner in the local area. In order to protect the product as soon as possible, Chinese companies must ask the other party to sign a confidentiality agreement that can produce legal effects locally before disclosing any information to the other party. There are two points to note about the confidentiality agreement: first, do not use the Non-Disclosure Agreement commonly used in developed countries; second, sign the NNN Agreement (Non-disclosure, Non-use, Non-circumvention).


The NDA non-disclosure agreement is not used because the main objective of the NDA non-disclosure agreement is to protect trade secrets, and in order to meet legal protection requirements, companies must keep the information confidential. Therefore, NDA secrecy agreements are often used to avoid the disclosure of information that prevents information from meeting the secret requirements of trade secrets. NDA confidentiality agreements are frequently used in developed countries such as the United States, Japan, and the European Union. However, companies in developing countries generally do not disclose the information they obtain but use it for their own benefit. NDA cannot protect trade secrets in advance.


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The NNN protocol consists of three layers of meaning: Non-use means that the local factory agrees not to use the Chinese company's ideas or product concepts and compete as a disclosing party for Chinese companies. The significance of this approach is that it protects the disclosure party with explicit contractual conventions rather than abstract concepts in the definition of intellectual property law. Non-Disclosure means that confidential information is not disclosed. This is generally not a concern in developing countries because local factories are generally not interested in deliberately disclosing such confidential information. However, due to the general legal awareness of enterprises in developing countries, it is still necessary to make corresponding restrictions in the contract. Non-circumvention is especially important for some industries. It can prevent local cooperative enterprises from using this information to infringe on the interests of Chinese companies after they have learned important customer information about Chinese companies. Imagine if the local companies were informed of the quotations of customers and Chinese companies, the consequences of privately quoting customers at 30% below the price of Chinese companies.


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When negotiating the NNN agreement, you must work with a lawyer who understands the local law to ensure that the agreement meets the requirements of the local judicial system. In foreign investment, because the cooperation matters occur abroad, it is impossible to apply Chinese law. Even if the Chinese law is stipulated in the contract, the judgment of the Chinese court is difficult to enforce effectively in foreign countries. 


Therefore, the court that has the ability to execute the investment project is selected. Inevitable choice. Many countries have specific requirements for confidentiality agreements between companies, and courts also require contracts to be written in the local official language. Finding lawyers who are familiar with local languages and laws can ensure that the agreements signed by both parties can be effectively implemented locally.


Mold/Tool Protection Agreement


It should be clearly stated in the Mold/Tool Protection Agreement that all special molds and tools manufactured by Chinese companies and local companies in the cooperation are owned by Chinese companies, and these molds and tools cannot be used to manufacture products other than those supplied to Chinese companies. Any product is other than that. It is particularly important to clearly define the products developed and produced, the technologies that Chinese companies should provide, the sharing of product development costs, and the ownership of the final products. Ownership of the product shall include ownership of the intellectual property contained in the product, which is used to ensure that the Chinese company has all the rights contained in the product being sold. If product ownership is not clearly defined, local partner companies may face previous refusal to return these molds and tools when they are looking for new partners and continue to use them to manufacture products to compete with Chinese companies.


Product Development Agreement and Product Manufacturing Agreement


Intellectual property rights claim that when a product development agreement or product manufacturing agreement is not signed, or the ownership of the product is not specified in the agreement, then a separate product ownership agreement may be selected.


Registered trademarks and patents locally


Regardless of the country in which a Chinese company attempts to develop or produce a product, the company should first register the patent and any patents contained in the product locally. Because trademark protection is limited to the territory of the country of registration, the company should also register the trademark in any country where the product may be sold.


Intellectual Property Risk Control in Developed Countries


The labor costs in developed countries are much higher than in developing countries, but the advantages of consumption power, logistics costs and R&D capabilities have attracted many powerful Chinese companies to enter developed countries. Developed countries have mature markets and a sound legal environment. The development strategies and risks faced by Chinese companies are completely different in developing countries.


Many large manufacturing companies have entered the local market through mergers and acquisitions and acquired the technology and experience of the acquisition to achieve the goal of reshaping their global business. In 2015, Chinese companies invested US$15 billion in the United States, and more than doubled to US$46.2 billion in 2016. In 2017, despite the US government’s policy, Chinese companies’ investment has fallen by a large margin, but it is still close to US$30 billion. A large part of these investments is completed by mergers and acquisitions in manufacturing-related industries.


In terms of intellectual property rights, Chinese companies mainly face two types of risks. The first type of risk is policy risk. The policy risk comes from the Western government's prejudice against China and the wariness of China's economic and innovation capacity growth. Especially since 2016, with the election of President Trump of the United States as a symbol, the conservatism of Western countries has risen, and anti-international trade has become a huge trend. Intellectual property rights are the focus of conservative forces attacking China.


The second type of risk is the commercial and legal risk. Chinese companies often use acquisitions, mergers and acquisitions to obtain market access rights and market share of acquired companies, as well as the technology, experience and intellectual property rights of these companies. Due to the unfamiliarity of foreign markets and legal systems, and the lack of experience in foreign investment, Chinese companies are likely to fall into the trading trap. In contrast to being able to respond passively to the first type of risk, companies can reduce or even avoid the second type of risk through IP due diligence.


Intellectual property due diligence


The Harvard Business Review commented: "The deal is fascinating, but due diligence is not." The article also said, "This simple comment explains why so many companies have made so many acquisitions but only gained so little value. According to a report released by KPMG after 15 years of investigation, more than 80% of acquisitions are a failed transaction with no commercial value, as measured by corporate valuation. The report further shows that IP due diligence is one of the three main factors driving the acquisition success before the transaction is determined (the other two are the collaborative assessment and the overall project plan).


Poor due diligence can have disastrous consequences. In 1998, the German automaker Volkswagen Group acquired Rolls-Royce and Bentley Motors for $900 million. Until the transaction was completed, the Volkswagen Group failed to discover that the acquired intellectual property did not include the use of Rolls-Royce. The right to a trademark. According to an earlier contract, the trademark was owned by BMW, another German car group. As a result, although the Volkswagen Group acquired all the technology and rights that could be used to produce Rolls-Royce cars, it could not hang the Rolls-Royce logo for the cars it produced. This story reminds companies of mergers and acquisitions, the importance of IP due diligence in acquisition transactions.


Intellectual property due diligence is carried out by companies, lawyers and intellectual property consultants who are aware of related technologies, who define, examine and analyze the intellectual property portfolio of the target company from both offensive (acquisition or acquisition authorization) and defense (sale or authorization). An investigation report provides company management personnel with the help of the company to make the right decisions. Due diligence should reveal the value of the intangible assets involved in the transaction by examining the strength, scope and enforceability of the intellectual property.


Intellectual property due diligence should include at least the following: confirming the commercial and intellectual property objectives of the transaction in question; discussing with the intellectual property professionals of both companies what the business can get from the transaction; details of the copyrights involved in the transaction, such as The ownership of documents, manuals, pamphlets, etc.; the details of the trademarks involved in the relevant transactions, such as the registration of trademarks in various countries, the stability and use of key trademarks; the details of patents involved in the relevant transactions, and the evaluation of patent quality, Confirm the time limit for the use of patent licenses and authorizations, confirm the stability of key patents, and prejudge technical barriers that may be faced in the future; protection measures for trade secrets, such as whether employee confidentiality agreements, workplaces and offices are signed Whether the product has adopted confidentiality measures, etc.; understand and request details such as all important time arrangements related to intellectual property rights (such as the duration of the license); confirm whether intellectual property rights have any collateral, or involve any litigation or infringement case; Independent search to understand all of the intellectual property, history and maintenance or renewal fees to ensure that the rights remain valid; please ask the owner of the intellectual property to provide details of other intellectual property rights that may affect or limit the use of the intellectual property in question; The party holds intellectual property rights and the seller has the right to sell its intellectual property rights.


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The scope and depth of the investigation should correspond to the importance of the intellectual property involved and the possible impact on the transaction. Ideally, IP due diligence should be synchronized with the transaction. Reasonable and timely due diligence can not only determine the value of the intellectual property more reasonably but also take the initiative to take action when it finds problems that may affect the value of the intellectual property.


Considerations after the transaction are completed


Chinese companies should be aware that the intellectual property risks faced by overseas investments will not disappear because of the completion of mergers and acquisitions. There are still some important issues that need to be dealt with after the signing of M&A transactions. The acquirer shall register the ownership of the intellectual property and the change of ownership of the owner after completing the transaction as soon as possible; when the intellectual property license is involved, the acquirer may need to attach a license contract or issue a transfer notice to the licensee.


The registration of ownership and ownership is particularly important for the following reasons: First, in the United States and most developed countries, buyers (ie, acquirers) must register before they can exercise intellectual property rights to others; second, in many National registration is also a condition for the use of intellectual property rights; third, registration defects or unnecessary difficulties for the sale of intellectual property in the future. The follow-up work of mergers and acquisitions may also include: obtaining the waiver of the inventor and potential inventors, strengthening the protection of the business secrets of the enterprise, and the intellectual property claims that have been proposed by the enterprise (if it does not constitute infringement or invalidation of patents, trademarks and copyrights) Advocate) to make corrections, etc..


Going global is the ultimate goal of China's manufacturing industry. If the intellectual property rights of enterprises are not handled well, this goal will be difficult to achieve.



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