McNamee Hosea News & Press


Doing Business in China

During recent years, manufacturing of technology-related products has largely shifted into China due to cost-savings. However, the risk of Intellectual Property Rights ("IP Rights") infringement is an unintended byproduct depriving from such arrangements. For businesses looking at manufacturing in China, a well-developed IP Rights protection strategy should be considered a major part of the business plan. Every legal means available should be engaged early in the process to prevent potential IP Rights infringement.


IP rights are typically territorial. To claim the ownership of and enjoy an exclusive right to use a trademark or a patent, one must register such trademarks or patents in China. While a company based in the United States may conduct an international filing with the World Intellectual Property Organization ("WIPO") under the Madrid Agreement, of which both the United States and China are the contracting parties; Chinese trademark officials still have the authority to conduct a trademark examination and entertain opposition proceedings under the national law after China receives a request for trademark protection from WIPO. Registering trademarks and patents in China is a long process that may take years. It is recommended that a United States based company should start the registration process well in advance of any plans to manufacture in China.

Unlike patent and trademark protection, it is not necessary to register to obtain copyright protection in China. However, copyright registration is very helpful in proving ownership if a company wants to enforce its IP Rights in China. Chinese courts have a strong tendency to rely on formally registered copyright evidence. Any business or individual can apply to register copyright, however, businesses without a registered office in China will need to provide a copy of their business license (both in the original language and translated into Chinese) authorized by the Embassy of the P.R.C in the United States. For individuals, a copy of the passport and its Chinese translation is required.

That being said, registering software as a copyright can be tricky. A big concern is that at least some parts of the work become available for public inspection since they are public records. After registration, others will have the opportunity to examine the work. [However, such risks are manageable because one can maneuver the information one is required to deposit to the copyright registration office.] Similar to the copyright law in the United States, Chinese Copyright Law allows a person to deposit a partial source code with confidential portions concealed. Disclosure of the source code is dangerous because it could conceivably be studied by a competitor and reproduced.

Under Chinese law, software application can be submitted in either the form of ordinary deposition or exceptional deposition. Ordinary deposition requirements are "first and last 30 pages "of: 1) source code and 2) specification/operation manual or entire documents if these have less than 60 pages each. Exceptional deposition requirements are (any one of the following):

  1. First and last 30 pages of source code with confidential portions concealed, but the total concealed portions not exceeding 50% of the submitted source code;
  2. First 10 pages of source code, plus any consecutive 50 pages of any other portion of the source code; or
  3. First and last 30 pages of object code, plus any consecutive 50 pages of any other portion of the source code.

Thus, exceptional deposition is preferable. Further, the first 10 pages, preferably the first 30 pages of the source code, should contain as little important information as possible. Another tip is to apply for 'sealing up' of the source code programming, a situation where only the copyright holder and judicial departments are permitted to open the sealed material.

Entering into an enforceable contract to protect IP rights.

While "hand shaking" deals are still common among parties who have good business relationship, a well-drafted technology manufacturing contract incorporating airtight IP protection language will serve the business marriage well. Such IP protection language should, among other things, include: 1) restrict access to key technology to certain key personnel of the other party and these employees shall all be required to sign nondisclosure agreements; 2) prohibition on improving upon, or claiming an ownership interest in the improvement to technology; 3) non competition both during and after the termination of the contract for a certain period of time and 4) language addressing parties' post termination obligations as to the use of the technology.

When drafting such contracts, one should bear in mind that provisions copied from a U.S. model contract may be against the public policy in China and thus might be deemed unenforceable. However, if a contract is deemed a "foreign-related" contract, the parties have a right to choose a governing law and forum for dispute resolution of a jurisdiction other than China. Therefore, such provisions may be interpreted under applicable U.S. law. Article 304 of the several opinions of the Supreme People's Court concerning the Implementation of the Civil Procedure Law (1992) provides that "foreign-related" refers to a situation where either one or both parties are of foreign nationality or a company or organization is located in a foreign country. However, Chinese-foreign cooperative joint venture contracts are not considered contracts of "foreign related."

Trade Secret Protection

For technology that the owner wants to claim as trade secret, Chinese Contract law also provides levels of protection. It provides that a party cannot disclose or improperly use any trade secret which it has knowledge of during the course of contract negotiation, regardless of whether a contract is ultimately entered into. For technology contracts (i.e. technology development contracts, technology transfer contracts, technical consulting contracts and technical service contracts), the law requires parties to comply with their confidential obligations in regards to the trade secret portions. The old Contract Law limited confidentiality obligations to the duration of the contract. However, the new Contract Law states that such confidential obligations may extend beyond the contract term.

To conclude, the best weapon is prevention. To protect its IP Rights, one should have an effective IP Rights protection plan. There are many technical or practical control methods such as security IC signature, cloud server and secured loading system to protect IP Rights. However, if such efforts fail, the aggrieved party needs to prove the ownership, the violation of contractual obligations and the confidentiality nature of the technology. There is not a Chinese counterpart to the U.S. concept of discovery. In China, each party is responsible for presenting evidence to support its claims. Therefore, registration and contractual protection will protect the aggrieved party's interests when the happy business relationship falls apart.

This article is for information only. It is not legal advice and is not intended to create, and receipt of it does not constitute a lawyer-client relationship.