China IPR SME Helpdesk

IP Protection Strategies for Original Equipment Manufacturing in China

Deanna Wong

31 July 2013

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Today’s Speaker • Deanna Wong • Partner of Hogan Lovells • Director of Hogan Lovells IP Agency, Beijing • Deanna has been in Hong Kong and China since 1999. She

qualified in New Zealand with a law and biochemistry degrees and focuses on international IP asset management, commercial exploitation and enforcement.

• Deanna.Wong@hoganlovells.com • +86-10-6582 9419

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Agenda: • IP and OEM

– Vocabulary – Common IP issues in OEM

• Keys to preventing issues – Identify – Prepare and Protect – Register

• Case studies • OEM-related contracts • Enforcement • Take-aways

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Intellectual Property and OEM

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Vocabulary 1:

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IP= Intellectual Property

Intellectual Property= intangible assets= • Trade marks (logos, product names, brands) • Copyrights (photos, web content, publications, software) • Domain names • Company name (good-will) • Patents (utility models, designs, inventions) • Trade secrets

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IPR

Small and Medium

Enterprises

Multi-nationals

Citizens Organi-sations

Universities (R&D)

Across all industries, geographies and company sizes

International

National

IP – the big picture

Vocabulary 2:

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OEM= • Original Equipment Manufacturer

In its basic form= • EurCo agrees with a Chinese manufacturer to

produce chairs using EurCo's design • The products are then shipped back to EurCo

and sold in various markets

Vocabulary 3:

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Non-Disclosure Agreement= NDA= • Contract outlining confidential information that parties

wish to share but restrict access to by third parties

Injunction= • Order from a court that requests a party to do/not do

something – such as stop infringing on another party's IP

Dispute resolution= • Ways to sort out problems with business partners, i.e.

mediation, going to court, arbitration

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• IP Ownership • IP Protection • Use and

handling of trademarks/IP

IP

• Unauthorised sale of products

• Unaccounted profits

Supplier does back-door sales

• Unknown third party

• Quality problems

• Lack of NDA

Supplier outsources production

• Liability for product quality

• Lack of detailed agreement

Product quality

IP and OEM – common issues: need good supplier, contracts, and IP Protection

IP and OEM – common issues

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Counterfeiting Copy/knock-off

Trade secret theft IPR “hijacking”

Keys to Preventing Issues

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Identify Prepare (and Protect) Register………….Enforce

Preventing issues: Identify • Every company should do a regular IP audit and

inventory • If there is no IP inventory – create one - If there is

one – keep it up to date Which trade marks, design patents do we own? Do we have a right to use the trademarks? Which product names are unregistered? Which countries have we registered in? Copyrights? Trade dress? Packaging?

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You can only protect what you know you have

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Protect brand, technology, copyrights • Trade mark registration • Register Utility models • Design registration • Register copyrights

Protect trade secrets: Sign Non-disclosure agreement

Preventing issues: Prepare

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China Trade marks FIRST-TO-FILE

Trade mark system is based on (45) International classes

of goods/services – you choose the ones you want to file in

• Plus in China: Each International Class is divided into groups which are called "Sub-classes" – Sub-classes are a narrower definition of

products/services within a (main) class

• Why is this important?? See next slide…

Preventing Issues: Register

Preventing issues: Register There can exist multiple companies with:

“If you don't want someone in that space,

… it means you have to hog it FIRST!”

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L&M

L&M L&M

A.Co Class 9

B.Co Class 35

C.Co Class 9

D.Co Class 18

0901 0913

0921

0904

0915 0922

• Same international class

• Different sub-classes

Same mark

• Different international classes

Same mark

Preventing issues: Register Chinese character trade marks • Mainland Chinese identify companies/products almost solely

by Chinese trade names and trade marks (brands) • Many possible transliterations opportunities for

brand/Trade mark hi-jacking

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Chinese character trade marks: Examples

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麦当劳 (Mai Dang Lao)

普拉达 (Pu La Da) 宝马 (Bao Ma)

雪碧 (Xue Bi)

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Published Trade marks – Country Comparison

Preventing issues:

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Register IP with customs

IP rights holders may register IP rights with China Customs

Seize inbound and outbound shipments of suspected infringing goods at any port of entry/exit in China

Customs protection is cost-effective for protecting IP not just in China, but in other markets

There are two ways to obtain customs seizures:

Ad hoc seizures by individual application

Recordation of IP rights with Customs

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"China continued to be the main source country from where goods suspected of infringing IPR entered the EU (73% of the total amount of articles)." Source: European Commission Taxation and Customs http://ec.europa.eu/taxation_customs/resources/documents/customs/customs_controls/counterfeit_piracy/statistics/2012_ipr_statistics_en.pdf

Preventing issues: register IP with customs

Case study 1 • Background: EurCo, a chair manufacturer, has decided to start

cooperation with ZhongCo, a Chinese manufacturer. EurCo does not want to loose out on the market opportunity and has decided to start production immediately. There are no contracts between the parties and EurCo does not have any trade mark registrations in China or in Europe.

• When EurCo files for a trade mark in China, they discover that ZhongCo has already applied to register the EurCo mark and is exporting products with that trade mark.

• Now what?

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• Yes, EurCo gets angry. • Issues: EurCo's trade mark is owned by

ZhongCo. ZhongCo now has the power to stop any products in customs bearing the EurCo trade mark… effectively EurCo could be become an infringer of its own IP

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What can they do? 1. File opposition (takes time) 2. Register trade marks defensively in other classes in China 3. Act fast and register trade marks in Chinese characters in

several classes 4. Buy back the trade mark from ZhongCo (unpredictable,

no set prices)

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In hindsight, EurCo should have: 1. Carried out due diligence on ZhongCo – incl. trade- mark searches to reveal prior ownership status 2. Done an inventory of their own trade marks (and other IP) long before entering China 3. Registered trade marks (and other IP) at home, China, and other relevant markets 4. Registered trade marks with customs 5. Signed an OEM Contract and Non-Disclosure Agreement – to be discussed later on

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Lessons

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OEM manufacturing should not be rushed into – Due diligence is key

Register trade marks, both Latin and Chinese character ones as early as possible

Defensively register in several classes and sub-classes

Sign contracts to protect your rights and strengthen your position

OEM related Contracts

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Relevant agreements in OEM relationships – OEM Contract (i.e. Production/manufacturing

agreement – Non-Disclosure Agreement (NDA) – Licensing Agreement (if EurCo plans to allow its

OEM to produce AND sell the products) If the company you want to work with in China

refuses to sign all or any of the above… ask yourself… Why?

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Company IP and Trade

Secrets

Employees

Customers Suppliers

NDA Agreement – used to protect IP and trade secrets

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Risks Misappropriation

- Theft, coercion - Disclosure or use of information improperly obtained or in breach of contract or against confidentiality request

Reverse engineering

- Molds, designs etc.

Disputes

- Suppliers - Ex-employee - Disgruntled employees - Competitor

NDA protects IP and Trade secrets

Recommendations for NDAs

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An NDA should : Should include limitations on:

• Be signed BEFORE exchanging designs

• Be in Chinese (and English --- at the very least accurately translated

• Disclosure of confidential information to third parties, including closely related companies

• Have Chinese courts appointed for dispute resolution or CIETAC arbitration

• Outsourcing production without authorization

• Be signed and sealed by the OEM • Sharing molds/other IP/know-how with third parties

• Include liquidated damages • Using the designs provided

• Have Chinese law as applicable to the agreement

OEM Contract – An OEM agreement spells out the rules that manage

the relationship between EurCo and the Chinese OEM

Purpose: PREVENTing issues and disputes

• Note: A Purchase Order is not the same as a contract

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Recommendations for OEM Contracts

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An OEM Contract should : Should include:

• Be in Chinese (and English --- at the very least accurately translated

• Prohibition for OEM to deal directly with EurCo's customers

• Have Chinese courts appointed for dispute resolution or at least CIETAC arbitration

• Who owns the product molds • Which molds, how many etc. • That the molds must be returned

• Be signed and sealed by the OEM • Penalties for non-return of molds • Penalties for other breaches of contract

• Include liquidated damages • Prohibition against back-door sales • Use and ownership of trademarks/other

IP

• Have Chinese law applicable to the agreement (as to at least leave the possibility open for injunctions)

• Product quality rules

Case study 2: • Despite the rough start, EurCo decides to go ahead and sign

an OEM Contract to manufacture the plastic chairs with another company called BeiCo. The contract is English with a translation provided by BeiCo, specifying arbitration in HK. EurCo also provides BeiCo with molds and designs for the chairs to ensure quality. After EurCo decides to terminate the agreement: BeiCo refuses to return the molds and it appears that BeiCo is:

i) sub-contracting some of the manufacturing to another company in China ii) carrying out back-door sales

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• Yes, EurCo gets angry…. Again…

Issues: As per the OEM contract, EurCo wants its molds back and that BeiCo stops selling and sub-contracting production

• What can they do? 1. File a case in People's Court 2. Get an injunction against BeiCo to force return

of the molds and stop unauthorized sales 3. Attempt to freeze BeiCo's assets

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But can they? The Chinese translation does not match the English version The dispute resolution clause specifies Hong Kong

arbitration

• In hindsight, EurCo should have: 1. Had control over the Chinese translation 2. Ensured that the OEM Contract included the following

minimum: penalties, quality control, ownership of molds, tooling, supplies

3. Prohibition against sub-contracting manufacturing 4. Chinese law and dispute resolution (People's Court)

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Lessons:

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Include protection and usage of trade marks, molds and other IP in the agreement

Control the Chinese translation of any agreement

Choose Chinese courts for dispute resolution to have a fighting chance at an injunction

Sign Non-Disclosure Agreement early on

Enforcement

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Enforcement options

Common brand owner concerns and reasons against enforcing:

• We can't win anyway! • There are no damages • The courts protect the local

companies

NOT TRUE!

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Take Away Messages • Register trade marks early on (at a minimum) • Sign an NDA early on • Sign an OEM Contract • Monitor compliance with the contracts • Stay in control of your IP registrations • Do not let your supplier register for you

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IP Keys wrap-up

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Q&A • Deanna Wong • Partner of Hogan Lovells • Director of Hogan Lovells IP Agency, Beijing • Deanna.Wong@hoganlovells.com • +86-10-6582 9419

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