Protect your IP in China

Often companies in developed economies are sitting on gold but do not realize it. They forget that yesterday’s technology, while not useful in one market, can be of great value in another.

Technology advances everyday and competitive pressure to adopt the latest can lead many to assume that what they have has no value. In developing economies, that which is old to you may be new to them. As we head into the last quarter and think about next year, you should also cast an eye towards any existing values which are being overlooked. In some cases, it could provide a windfall which will help next year’s bottom line more than that new marketing plan if the economy continues to be soft.

It also represents a potentially great low-cost, high-return springboard into developing markets like China.
As opposed to trying to set up a new operation in an unknown foreign market, licensing existing intellectual property is a simpler alternative.

The main concern is how to control and profit from your IP. This article will discuss some of the issues you need to be aware of and possible strategies to deal with them. While this article may give you an idea, remember you will need assistance in such an endeavor; assessing the market, finding the right partner, negotiating  the licensing agreement and verifying compliance are crucial to a successful licensing strategy.

Take a good look at the IP you have and find someone who can evaluate it in terms of the markets. Be careful you use professional, ethical people, as you will be relying on both their honesty and advice. If possible, it is best to do this yourself. Go online and see what is selling in emerging markets and if your IP is relevant. If it looks good, visit the market and tour the major manufacturers and distributors and test your hypothesis. As a foreigner, you can schedule a tour of most Chinese companies if they sense an interest. It might be best to be vague about your intentions and just say you are looking for a cooperative joint venture.

When you have a choice, try to first license older IP that has follow-on IP which you can license latter. This will give you more leverage with your licensing partner because you can start dangling the additional IP as the relationship and the licensing agreement matures. Regardless of what the future may bring, one hard and fast rule is get as much up front as possible and try to stay away royalty agreements if you can. A one-time lump sum paid in advance is a bird in hand. Royalty payments are birds in the bush.

This is crucial, you must not only control the rights in the United States, but in the market you will be entering. In China, it is advisable to seek legal advice as IP laws and enforcement is still developing and what and when you register can be crucial. Proper registration is essential.

Finding a good partner is as much an art as a science. Do not come to China, wander around and do a deal with the first person who speaks English. Look at the market players, see who would benefit most and plan your moves carefully. Come to China, set up meetings with the best potential candidates; tour their factories, look at their product lines, inspect their distribution network, study their growth strategy and history get a complete rundown on the owners and the history of the company. Then check everything again. Do not disclose the IP or what you are going to propose, just say you are interested in making an investment. If nothing else, you quickly get a sense of the market; what is selling and the price points. This will give you a better handle on what to charge for your IP or whether this is a market you might want to explore in other ways.

Contrary to conventional wisdom, a well-written contract in China is worth more than its weight in gold. China is now one of the world leaders in intellectual property filings. As a result, the government and the courts in China are more interested in the topic and are becoming stricter about infringements. It is a stark contrast to the days when the developed world held 80 percent of the world’s intellectual property, and the Chinese seemed indifferent to protecting foreign rights.

Keep in mind a few of things when the contract is being drawn up (more on this in a moment): where you hold your intellectual property, foreign exchange issues, jurisdiction, dispute resolution, penalty clauses, physical and financial inspection rights. Note: beware of trying to be too aggressive in your pricing. If you try to take all the money, it is an open invitation to the Chinese to do what they can to make a profit. Like the story of the motor company who got a terrific price from a Chinese OEM, only to discover that the company had set up a mirror factory which was producing the same product for a different brand. It never occurred to the CEO why the price was so cheap, that in a heavily competitive environment these companies have to be creative to make a profit. Patting yourself on the back because you got a deal that seems too good to be true often ends in a pain rather than profits.

IP that is considered obsolete can be sold for a small amount to an offshore entity which then owns the IP and can license it to other entries. Consult your tax and legal advisors about the advantages to this type of strategy.

Understand the issues you are facing when receiving funds in foreign denominations, especially if payments are to be made over time. If you are concerned, there are various ways to hedge your risks.

Shop for the most favorable jurisdiction and make sure you can make it stick. Consult someone who knows the area and make sure you factor in the costs of enforcement. If you choose to have an arbitration clause, make sure you understand what it means in terms of process, costs and enforceability. You do not need expensive toilet paper.

IP is not something you can wrap and run. You can bet that the Chinese company will use your name in its product marketing, so you have to make sure the IP is being used per your contract and specifications. This means that you will have to budget in physical inspection of products at the factory and on the shelves so you know what is being sold. This means hiring a company or individual who will do the auditing for you. There is no substitution for this, as it can be a potential make-or-break issue. The last thing you want to be is the “foreigner” in a product liability suit.
Financially, you must do the same thing and insist on access to the company’s books, as it applies to your IP, especially if you intend to receive royalty payments. With some random auditing of the store shelves and some phantom orders to known suppliers you will have a good sense if you are getting a straight deal.

Do some fall house cleaning and take a look at what you have. It could be well worth your while.