One of our Internet of Things hardware clients recently told me how none of what he has learned about the need to protect his intellectual property from China had ever been even hinted at in any of the many IoT seminars he had attended nor in the Indiegogo Hardware Handbook he had “religiously consulted” before he did his first IoT product.
I am about halfway through Marshall Goldsmith’s truly stellar book, What Got You Here Won’t Get You There, so I was quickly able to provide a compelling exclamation for why this was the case:
Everything in an organization is designed to demonstrate commitment to positive action — and couched in terms of doing something.
Likewise, the recognition and reward systems in most organizations are totally geared to acknowledge the doing of something. We get credit for doing something good. We rarely get credit for ceasing to do something bad.
CEOs don’t proudly announce their decision not to acquire another company or go into another country or that they just went another month without having their IP ripped off by China. Those at seminars and at Indiegogo (and I have no reason to believe Kickstarter is any different) are essentially boosters encouraging their troops. Talking about the need to protect IP is just too negative.
A lawyer’s role is different. Our job is to figure out and minimize risks. And these days, the biggest risk our China lawyers see is losing IP to China — especially for tech companies and even more especially for Internet of Things companies.
Less than a month ago, in China and the Internet of Things and How to Destroy your Own Company, I wrote how our China IP lawyers are getting inundated with hardware and technology companies coming to us after they have lost or badly compromised their intellectual property and their hardware product and their company. To use farm-speak, they are asking us to close the barn door after at least some of the pigs have already left the farm.
Last week, in Worthless China Contracts: First, Let’s Sue All the Lawyers, I wrote how the lawyers for these companies deserve a large chunk of the blame. I am now adding the crowdfunding companies and the hardware consultants as also being complicit in ignoring the intellectual property risks inherent in giving IP to Chinese companies with nothing more than an essentially worthless US-Style NDA.
In China and the Internet of Things and How to Destroy your Own Company, I wrote about the China attorneys at my firm having been contacted by companies with the following issues:
- A European company with a highly profitable product is being threatened with a patent infringement claim by its Chinese manufacturer angry about the European company’s plans to diversify its manufacturing risk by finding an additional manufacturer.
- An American company with high profitable technology came to us with an illegal joint venture arrangement such that we have our doubts that there is anything that can be done to fix it or, more importantly, fix the various problems the joint venture is inflicting on this American company.
- A few more instances of American companies having signed what they believed to be non-binding MOUs with their Chinese manufacturers that are actually binding contracts that give their manufacturers all or some rights in the American companies IP.
We recently took on two new matters where sourcing agents shopped our clients’ products around China and then signed up less than reputable Chinese manufacturers, all without any IP protection in place. Our clients are now scrambling to try to save what they have. In my post calling out lawyers for failing to protect their clients I suggested companies that lose their IP to China consider suing their lawyers for the damages caused. I am not suggesting anyone sue Indiegogo for its handbook but it has reached the stage where we have suggested to our clients they consider suing their sourcing agents. Nearly a decade ago (yes, you read that right), in China Consultant, Protect Thyself [link no longer exists], I wrote about the “huge liabilities” China consultants were inadvertently taking upon themselves by doing the following:
If you take a sample to China and start showing it to potential manufacturers without FIRST putting in place various safeguards, you are courting disaster. The sample could be used for counterfeiting. We had a consultant call one of our China lawyers in a panic after returning from China to learn that one of the manufacturers to which he had shown a sample had already started manufacturing the product for someone else using the consultant’s trademark which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the Chinese manufacturer sign a China-centric NNN Agreement (essentially a hopped up NDA that protects against competition, circumvention and disclosure). Chinese manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in Chinese, they will sign it.
You the consultant must do more than simply negotiate the price and delivery dates or you should make clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China expert” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better.
The Solution: Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own lawyer to draft the OEM agreement with the Chinese manufacturer. Put in writing that it is your client’s responsibility to protect its intellectual property in China and that to do so, it must register its IP in China, either through a lawyer with whom you connect them or independently.
Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit.
As China and its companies seek to move up the product and innovation value chain, things are only going to keep getting worse. It is as bad as we have ever seen it out there and there is plenty of blame to go around. Or as lawyers might better put it, let the lawsuits begin.