What Every Startup Needs to Know about IP in China

We’re often asked: how do we protect our intellectual property in China? It’s usually phrased rhetorically, implying that by going China-first, we’ll be betrayed by our own manufacturers. Maybe. But not without a fight.

 

We’d be the first to admit how little we know about law in general and Chinese intellectual property law in particular, but the main thing we’ve learnt is to seek professional help. This article collects some advice we’ve received which might be helpful to others — whether their startup’s plans include China or not. While we hope it’s useful, it should go without saying that you can’t treat this post as professional advice. It was originally published on the Minut blog.

Engagement

If you achieve success, Chinese companies will develop competing products. Some will be outright copies, others will be adaptions for the Chinese market and a few will subtly remix your product for a different audience.

The Pacific won’t protect your nascent company. Chinese versed in reverse-engineering won’t need access to your source code or your product. They can duplicate your idea from your launch video alone.

Crowdfunded companies which stayed well away from China have still been beaten to market by Chinese competitors. Some of them were even large, like Xiaomi and Pressy.

While visiting Shenzhen and Haxlr8r, Joi Ito observed that the hardware ecosystem here has reached critical mass. Much like for software in the Bay Area, he concluded that it’s better to build bridges rather than to try to compete head-on.

Ignoring China isn’t going to make the issues go away, and the same talents that makes Chinese companies formidable competitors are strengths you can make your own by partnering with reliable vendors. These advantages far outweigh the risks of having a trusted vendor directly steal your IP.

The most effective way to protect your company against imitators is to find ways to leverage network effects or to build something hard to replicate. This could be a brand, a community or excellent customer service. Things that can’t be copied, only built.

Product features alone are very difficult to protect. Patents were made for this purpose, but from the standpoint of a consumer-facing hardware startup, they are unappealing. Costs are prohibitive and lawsuits can be unpredictable. Patents might still have their place when dealing with litigation from western competitors but they won’t help you in China.

Another option is to keep your features secret but it’s difficult when you need partners to understand your product. Contracts covering confidentiality are beyond the scope of this article but can help mitigate some of the risk associated with sharing your plans. Still: Trademarks are left as the best legal option for protecting your IP in China. After reading this article you should understand why and be on your way to file yours.

Trademarks in China

Reading western media, it’s easy to get the impression that China has no trademark laws or at least that its judges favour Chinese companies. The truth is more nuanced. China’s long legal tradition has many European influences. It’s not more unpredictable than in other emerging markets, and enforcement is not as arbitrary as it might seem.

It is important to understand that trademarks in China are given on a first-to-file basis. With few exceptions, whoever first applies for a trademark is given the right to use it. The majority of countries works like this, including the UK, Germany and Japan. In the US, trademarks are given on a first-to-use basis instead. Misunderstanding this difference is the root of many US firms’ legal issues in China.

Furthermore, prior art does not apply to trademarks: publicised products do not invalidate trademark applications made by other parties. This enables trademark squatting, in which someone registers your product’s trademark before you so that they can sue you for infringement. This is like people who registered domain names associated with large companies in the early days of the internet in order to sell them back to those companies. These practices are unethical, but not illegal.

Trademark squatters are behind the horror stories you have heard about companies like Apple and Tesla being sued for infringement when selling their products in China. The only way to protect oneself is to file for a trademark in China.

Even if you don’t plan to sell your products in China, you should still register your trademark. If you’re manufacturing your product in China, and someone else owns your trademark, they can sue to close your factory. Regardless of your industry, it would be short-sighted to shut yourself out of both China’s manufacturing facilities and its markets.

Changes underfoot

A new and widely touted trademark law came to effect in 2014. It remains to be seen how it will be enforced but it is clearly meant to deal with problems like the ones Tesla and Apple had. In theory, one can no longer register a trademark with no intention of using it which should prevent trademark squatting.

The new trademark law also intends to accelerate new applications. Processing could take years in the past, but the new law brings China within the 9 months deadline mandated by the World Trade Organization.

Currently the trademark office is struggling to handle the shortened deadlines. This has led to some trademarks being denied that should have been issued and vice versa. Until practices around the new law solidify, expect trademark applications to be less predictable.

Defending your turf

A US trademark lawyer might advise you to register your trademark with the international Madrid system to protect it in China. Don’t do this. Applying through Madrid will only forward your American trademark application to the China Trademark Office (CTMO). The mismatch between the systems make it likely that your application will be overly broad — and hence, denied.

Chinese trademark registration costs are typical internationally. The true price will depend on your situation, but costs shouldn’t overwhelm unless you require protection across every product category. Since processing times can be long, don’t file until your branding is final. Only small changes can be expedited, large ones will require a re-application. Applying too early is definitely better than applying too late. At minimum, file before your crowdfunding campaign gets noticed, and someone else beats you to it.

The primary reason to own your trademark in China is to defend yourself against trademark squatters, but it can also combat copycats. We’ll cover copycats in a different post, so for now, go register your trademark in China. And while you’re at it, do it Europe and the US too.