Depending on your product, it may make a lot of sense to manufacture in China (for example, for complex products that need to be developed fast). But the risks of China IP theft haven’t gone away. I wanted to share a few examples here.
As many manufacturers there start to feel the pinch due to orders slowing down, as their customers tighten their belts during the global coronavirus pandemic, it’s only likely to get worse as some unscrupulous characters try to make a quick buck out of unwary importers.
Real Examples of China IP Theft from importers working with Chinese manufacturers
Many of the following examples came from our own readers. No identifying information is provided, but their stories should really resonate with the risk-averse importer as you will see the importance of protecting your IP adequately with China-enforceable contracts and also performing due diligence on potential suppliers.
A Watch Manufacturer has brand name stolen
We are in the quartz watches industry. Our brand name was registered in the EU, but not in China.
Some companies related to our supplier (we don’t know which supplier) saw our growing orders and decided to register our brand name in China as their own trademark without our knowledge.
A Chinese IP Law firm approached us with this information and asked if we want to escalate any protest or take any other legal action against the Chinese company who ‘owned’ our brand name.
After the consultation with my local Europe-based IP Law firm, we decided to buy out our brand name from that Chinese company who applied for registration of it. So we “saved” 1,000 USD for not registering our trademark ourselves in China, on time, but later had to buy it out at a total expense rate of almost 5,000 USD.
So, the issue here was not registering the trademark in China. It’s important to note that even if you hold trademarks in other regions, these usually do not apply in China. One of the first things importers should do is register their Chinese trademark as this will protect against flagrant trademark-squatting as seen in this example. This is discussed in this blog post, along with several other tips for avoiding IP being copied in China.
Construction industry company has a lucky escape
We are in the construction industry and had great interest from China for our innovative insulated house wrap that forms a vacuum enclosure. Negotiations with our potential manufacturer in China were going well until our hosts insisted that we “share” the technology in order to move forward. This ended our negotiations since we are not making the same error as other firms that previously set-up shop in China and forfeited technology rights for access to the Chinese marketplace. We are not so desperate that we will sabotage our future for short term gain.
Chinese manufacturing partners insisting on shared ownership of foreign IP is not uncommon, so importers need to be cautious and closely examine what is being demanded by manufacturers in China. You should be in control of your IP which is why it’s so important to create and sign an NNN agreement (non-disclosure, non-use, non-circumvention) which is watertight in China before disclosing any technical information to would-be suppliers.
Electric device manufacturer loses IP to its supplier by failing to create contracts
An importer producing a range of electric mobility solutions was introduced to a Chinese manufacturer about 2 years ago. They made the first mistake of asking a single factory to make a complete product. They signed an English NDA, which was the second mistake.
The factory then offered to finalise the CAD drawings, firmware development and PCB layout designs. Initial prototypes were produced and first shot production engaged. Everything was looking good. Then the importer wanted to have some changes made and asked for the CAD, firmware source code files and PCB layout files, but were told that they could not get copies of these design files. Not enforcing ownership of their IP and source files was the third mistake made. There was a falling out as the business relationship crashed.
At that point, the factory had everything they needed to go ahead and start producing the product themselves and there was nothing the importer could do to stop them as their fourth mistake was to never have created a Chinese language contract, made subject to Chinese law agreed and stamped. No Chinese contract means no recourse to Chinese law courts.
This is a typical case that can often happen when using an ODM factory to produce your product in China. The supplier sees that you have not adequately protected yourself or your IP and works with you, developing your product up until the point that they have gained all/enough of your IP and can produce and sell it themselves in existing distribution channels. How to combat this? Again, signing a China-enforceable NNN agreement with the supplier before starting work.
An NDA in English, and calling for enforcement in the USA, is a green light for IP infringement
An importer designed and prototyped a robotic drinks cabinet. Unfortunately, they only got an English-language NDA signed and no Chinese contract stamped.
Subsequently, after obtaining the IP, the factory they worked with made minor modifications to the CAD, firmware and PCB layout source files and then refused to provide copies to the importer and from that point they had lost control of their production project with no ability to stop the manufacturer from creating and selling their product.
Some Chinese suppliers will see a foreign NDA as an opportunity to take the IP for themselves as it is often not enforceable under Chinese law. Not signing a legal-binding manufacturing contract with the supplier simply compounds the issue.
Thanks and credit to Roger Lewis for sharing the above 2 stories with us.
An importer falls into the trap of ‘gifting’ their IP to a supplier who then takes advantage
We have already provided the designs for our molds to our Chinese manufacturer and the manufacturer has already fabricated the molds.
We have been working with the manufacturer for months to fabricate a production prototype. The manufacturer agreed to engage its own engineers and designers for this process. We now have two prototypes and we are ready to begin production. The only issue now is how to pay for the work on the prototypes.
The only documentation we have in place is a simple purchase order for the molds. There is no documentation at all relating to the prototype. We were told that using purchase orders at this stage is standard so we did not think about it.
By providing your design data to your Chinese manufacturer with no documentation and by allowing the Chinese side to design and fabricate molds and prototypes, you have effectively given your IP to the Chinese manufacturer. The issue now is to determine whether or not the manufacturer will agree to return this gift. Usually, they will not!
Story courtesy of China Law Blog.
The coronavirus has led to higher risks for importers, especially when using new suppliers
My regular Chinese supplier of widgets never re-opened after the coronavirus. So I then placed an order for 50,000 pieces and they are of the wrong material and they are warped and the sections that are supposed to open freely do not operate correctly because of the wrong material. I spent hundreds of thousands on developing this product and they will not give that back to me even though they told me they were going to rework the products because they knew there was an issue. Now I have all this product that is useless that I cannot sell and am paying storage for because I expected I would be able to return it.
I’m out so much money and yet still trying to get a new product to market but that is proving really difficult because I have been hurt so badly financially. And then last week I learned that they are selling the product we worked on developing together and that product does not have any of the problems with the ones they sent me.
Also courtesy of China Law Blog.
Molds causing more trouble once again…
The Chinese manufacturer has produced a series of molds for a product for its foreign buyer. Now that the product has become commercially successful, we often see the following three basic problems arise:
- The Chinese manufacturer announces a substantial increase in the price of the product. This is often a surprise to the foreign buyer, who had expected the per unit price of the product to go down as production increased.
- The Chinese manufacturer is not able to keep up with increased production requirements. This is often a surprise to the foreign buyer, who had been assured by the manufacturer that it has ample capacity for any scale of orders.
- The stress of increased production demand causes the quality level from the Chinese manufacturer to progressively decline, reaching unacceptable levels. This is often a surprise to the foreign buyer, who had expected quality to improve over time.
In response to these issues, the foreign buyer gives notice to its Chinese manufacturer that it intends to move production to a different manufacturer, often a direct competitor of the current manufacturer. In the past, the issues that arose at this stage mostly focused on ownership of the physical molds. This issue can be resolved by a relatively simple mold ownership agreement.
When that happens the foreign designer is forced to face reality and decide whether manufacturing its new and innovative product in a setting where it is hostage to a Chinese factory makes economic sense or not.
Courtesy of China Law Blog.
Some examples where high profile companies also suffered from China IP theft in their own countries
These news articles show that the theft of IP by Chinese entities isn’t only limited to unwitting startups and SMEs.
American Superconductor Corp. has software code and IP for wind turbines stolen by a Chinese rival
In 2013, China-based Sinovel and two of its employees were charged with stealing the IP of American competitor AMSC after the protected IP was found in use in four Sinovel turbines which had been placed near to AMSC’s headquarters.
An AMSC spokesperson stated:
“The fact that Sinovel has exported stolen American intellectual property from China back into the United States – less than 40 miles from our global headquarters – shows not only a blatant disrespect for intellectual property but a disregard for international trade law. These criminal acts have led to significant financial harm to AMSC, its employees and their families as well as its shareholders.”
This story is courtesy of: https://www.bizjournals.com/boston/blog/techflash/2013/06/doj-charges-former-sinovel-employees.html
Dupont chemical company has its white pigment’s recipe stolen
Dupont’s TiO2 (titanium dioxide) white pigment production secrets (used to colour oreo filling, car paint, etc) don’t sound very glamorous, but China was especially keen to gain access to the development of chloride-route TiO2 technology as this production method was superior to others and was protected.
A naturalized American citizen, business owner, and technology consultant named Walter Liew stole DuPont’s protocols for producing its superior titanium white from 1997 through 2011. He even took blueprints for a factory and used the information to win contracts worth almost $30 million.
Story courtesy of this post: https://www.bloomberg.com/features/2016-stealing-dupont-white/
Agricultural secrets stolen from an Iowa cornfield
A Chinese national in the USA admitted to participating in a long-term conspiracy to steal trade secrets from DuPont Pioneer and Monsanto. Mo Hailong participated in the theft of inbred corn seeds from fields in the Southern District of Iowa and elsewhere for the purpose of transporting the seeds to DBN (Beijing Dabeinong Technology Group Company) a Chinese conglomerate with agricultural interests. The stolen inbred, or parent, seeds were the valuable trade secrets of DuPont Pioneer and Monsanto.
The prosecuting US attorney said:
“Mo Hailong stole valuable proprietary information in the form of seed corn from DuPont Pioneer and Monsanto in an effort to transport such trade secrets to China. Theft of trade secrets is a serious federal crime, as it harms victim companies that have invested millions of dollars and years of work toward the development of propriety technology. The theft of agricultural trade secrets, and other intellectual property, poses a grave threat to our national economic security.”
Story courtesy of this post: https://www.justice.gov/opa/pr/chinese-national-sentenced-prison-conspiracy-steal-trade-secrets
There are many more tales of China IP theft that should worry importers, but the common thread running through the examples where importers fell foul of IP infringement by their Chinese suppliers is the lack of preparation.
This can be put down to inexperience in many cases, for instance, thinking that a regular NDA would hold water in China where in fact it does not. Mistakes can happen, for sure, but this just reinforces the need for due diligence and caution when dealing with Chinese suppliers.
As we discussed in this episode of our podcast, it is especially possible to go into working with an OEM or ODM thinking that everything will go smoothly, only to find out that you either lose your IP to them (as they claim it due to developing designs, mold, etc, for example) or that you have no ownership of your product as you are merely a distributor of someone else’s.
Have you had any trouble with China IP theft by suppliers like this? What was the outcome? Let me know by leaving a comment, please.