China Piracy and Counterfeiting: Do They Even Matter?

China IP protection

Of course they do, but not always and not for every company doing business in China or with China.

Let me explain.

I just read an article on Engadget, EU withheld a study that shows piracy doesn’t hurt sales, with the subtitle: “The $430,000 study’s conclusions perhaps didn’t fit what it wanted to hear.” To grossly summarize, the study indicates that of books, movies, music and games, only blockbuster movies were negatively impacted by piracy. The study indicated piracy may actually increase game sales.

The most commonly cited number is that U.S. companies lose $600 billion a year to counterfeiting. But the problem with this number is that it is based at least in part on an analysis that says every counterfeit purchased gives rise to a dollar loss equivalent to the real item that was counterfeited. This is pretty much always true when the buyer does not realize it is buying a counterfeit, but is this really true when someone buys a fake Rolex watch for $55 or a fake Gucci purse for $15? I don’t think so.

I am not condoning or minimizing piracy or counterfeiting, as both of those things are not only economically damaging, they can reduce innovation and be downright dangerous. Do you want fake brakes in your car? How does counterfeit medicine sound to you? I am though saying that the extent and the damages caused by these things — as a whole — is sometimes exaggerated. And that, as I will explain below, can have real-world business consequences.

Piracy and counterfeiting and the lack of strong IP protection in China are huge issues. They are a huge issue for some companies, a big issue for some companies, an issue for some companies, and really not much of an issue at all for other companies. Nonetheless, for most (not all) companies they are not a valid reason for ignoring China entirely.

Only a small percentage of companies need to worry much about IP theft in China. It exists, of course, but how much impact does it really have on your business? With very few exceptions, my law firm’s China clients have either not been hit with piracy/counterfeiting or are too focused on making money from their own products to worry about it much. It is not nearly as much of an impediment to profits as believed.

I have dealt with companies that are so afraid of being copied they fail to do things they should be doing. I can tell you that far more of my law firm clients have expressed the wish they had gone into China to manufacture or sell their products sooner than have suffered negative IP consequences from having done so.

And on the flip side, every few months a company will come to one of our China lawyers overly concerned with their China IP protections after having read our blog. Oftentimes, they will believe they are too late and other times they will give us a long list of the IP protections they are convinced they need, usually including one or more of the following:

  1. NNN Agreement
  2. Product Development Agreement
  3. Contract Manufacturing Agreement
  4. Trademark Registration
  5. Trademark Registration with China Customs
  6. Design Patent Registration
  7. Copyright Registration

And maybe 10 percent of the time they are coming to us with an astronomical quote from some other law firm for all of the above contracts and IP registrations. But here’s the kicker. Well under 1 percent of the time does a company need all of the above, and even less than that does it need all of the above immediately. The typical company doing a typical China deal or transaction usually needs less than half of these. And guess what? Probably 20 percent of the time none of the above makes sense for the company either because none of these things will be effective or because the company is too early or too late or because the company would simply be better off spending its money elsewhere, at least in the short term.

So the point of this winding post is simply this: there is no one size fits all when it comes to best practices for protecting your IP from China and you should not let scare tactics and big numbers scare you into believing otherwise. You should instead treat China and China IP protection the way you treat the rest of your business and weigh the costs and the benefits of your IP actions accordingly.

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