Wednesday, March 29, 2006

China-Alliance's Peter Theut on Protection of Technology and Secrets in China

C.Peter Theut is a shareholder practicing in Butzel Long’s Detroit office, that focuses on the automotive industry. Theut is chairman of the firm's Global Trade and Transactions Practice and heads the Butzel Long China Initiative.

Butzel Long has joined forces with Armstrong Teasdale LLP, Michael Best & Friedrich LLP of the U.S., and Blake, Cassels & Graydon LLP of Canada to collaborate in the development of their respective China practices in an arrangement called China-Alliance, which have now an office in Beijing and Shanghai.

At the site of GlobalAutoIndustry there is a streaming video interview with Peter Theut. Watch it here. Here is a summary of the parts that might be relevant for IP in China.

When doing business in China, you should, according to Theut, use a multicultural management team, know where you want to be in and last but not least do due dilligence. Theut says that in China there is no sanctity of contract and no way to enforce it, but the Chinese culture is such that what you put into writing is binding, even if you put on the letter not binding. You always should think of an exit strategy. When deciding what kind of business entity to take in China, Theut says that you should consider that a representative of office, is limited, since you cannot conduct business in China, you will quickly outgrow this listening post. The good thing of the joint-venture, is also the bad thing: a Chinese partner. He can help you to get to know the market, but can have different interests. Wholly Owned Foreign Enterprise (WOFE), are teh best solution according to Theut. They can be owned by an offshore company, give a good exit-strategy that is governed by the law of the offshore company, can repatriate dividends. You can own it for 100 percent, so you can better monitor and protect your Intellectual Property.
Theut heeds companies to get an arbitrage clause in contracts.

Best ways to protect your technology and secrets
"Any automotive company or any manufacturing company for that matter should definitely fear sharing any kind of technology with the Chinese." The Chinese are much more proficient and the Chinese culture is more adept at reversed engineering, according to Theut.

"About 10 percent of your products will traditionally go out the back door. Some of that is pirated and some of it goes to the black market. But I can guarantee you that on some point in this year and age you will to confront the fact that the Chinese or someone associated with them is going to be pirating your technology. What are do you do about it?"

The laws in China, seem great and like any other country. However Theut thinks the problem is that there is little or no enforcement of those laws and little monitoring and policing. Theut estimates that it will take 6 to 8 10 years before the law is effectively enforced.

In the mean time what to do? Theut: "The best way is planning, I mean you really have to take a look at your patent portfolio very carefully, use the assistant of a patent lawyer, who can tell you what kind of technology you should you take over there, if you have choice, for example if you have a formula in it and you can remove a portion of it so that what they manufacture in China and it’s 80 to 90 percent of the product, that’s a good thing to do."

Obsolette technology
Theut has an interesting solution to get something out of the piracing situataion. To take over technology that is about to become obsolete. Then you will be in a great position when you catch them stealing it, and chances are you can enter into a license with them. Because they want to save face. But the Chinese, more recently, don't fall for that anymore, according to Theut.

"The other thing is monitoring. There are now agencies in China that will very faithfully work with you that monitor. Who is messing with your technology." In order to solve a problem, you have to know what it is.

Live and let live?
About these agencies Luke Minford and Connie Carnabuci at the IPR in China Conference in London made an remark. These so called Chinese spawned enforcement can have conflicting interests. Minford, who can speak fluently Mandarin, told the anecdote of such an agency that he overheard. The manager of the agency was asking somebody else why Minford cared so much about effective enforcement of infringements. If the manager's agency could monitor and give the infringed company a signal that his IPR were infringed and give a warning that the infringer should decrease his activities, the company is happy, the infringer is happy and we are happy. In other words, the problem stays, but it is livable.

Theut says finally that you need to be prepared to enforce you rights. "Even if the court may not give you an injunction, if you send the right kind of letters from a Chinese lawyer, threatening action it often can shut down the problem."

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