United States media has been frequently writing of how China forces foreign companies to relinquish their intellectual property to Chinese companies to be able to do business in China. This issue has been getting a ton of press lately because President Trump has been using this to justify increasing tariffs on imports from China. It really isn’t this simple though. Many stories make it seem foreign companies must always relinquish their IP or at least must always do a joint venture to do business in China and doing a joint venture will mean losing your intellectual property.
Truth is that for most industries doing a joint venture is voluntary on the part of the foreign party and doing a joint venture need not include relinquishing your intellectual property. Much of the time foreign companies lose their IP to Chinese companies by falling prey to what the China lawyers in my firm call “the joint venture scam.” This scam is quite old — old enough for many Chinese companies to have thoroughly mastered it by now — and it usually works as follows:
- The foreign company seeks to sell its complex and expensive technology to a Chinese company on a standard technology licensing basis.
- After much discussion, the Chinese company asserts that the price is too high for an untested technology. The Chinese company then offers to establish a China joint venture company with the foreign company owning a percentage of the China Joint Venture.
- The foreign company contributes its technical system in exchange for its ownership interest in the China Joint Venture and the China company contributes the rest. The IP contribution by the foreign company means the China JV now owns the technology for China. The China JV agrees to purchase more technology from the foreign company at full prices after the Joint Venture is up and running.
- The foreign company then delivers and fully trains the Chinese side in how to operate the foreign company’s technology.
- The China JV never purchases anything from the foreign company claiming that the foreign company’s technology does not work properly or as claimed. The foreign company eventually discovers that its technology has been cloned and is being used by a facially unrelated company in China. Since the China JV owns the technology, this unauthorized use probably infringes on the Joint Venture’s intellectual property rights, but so what? The JV must sue to defend its rights but because it is controlled by the Chinese company its management refuses to take any legal action.
- The JV then disappears, sometimes with the Chinese side buying out the foreign company at a substantial discount.
This system in various forms is still being actively used in China. And foreign companies still sometimes fall for it.
For more on China Joint Ventures, check out China Joint Ventures, the 101.